Billionaire Paul Singer’s Long-Term Picks

Elliott Management is not only one of the most well known hedge funds, but also one of the oldest hedge funds under continuous management. Founded by billionaire Paul Singer in 1977, with $1.3 million borrowed from friends and family members, the fund currently manages $27 billion of investors’ money. Though Mr. Singer is considered an activist investor, he also has routinely made large bets on sovereign debt, which has gained him some notoriety in emerging countries. Due to losses suffered early in his career, Mr. Singer’s investment style is considerably risk-averse when compared to other prominent investors. He is known for rarely using leverage to boost the overall return of his fund. This risk aversion has paid off handsomely with Elliott Management reporting only two down years in the last 38 years of its existence and generating average annual returns of 14.7% in the period between 1977 to 2008 compared to S&P 500’s returns of 10.8%.

According to Elliott Management’s latest 13F filing, the firm’s US equity portfolio at the end of September was worth $5.2 billion and a large chunk of it (38%) consisted of stocks from the technology sector. The filing also revealed that Elliott’s portfolio had a high turnover of 47.69% during the third quarter and that its top 10 equity holdings at the end of September accounted for over 70% of the value of its equity portfolio.  In our previous post on Elliott Management we went through the fund’s five largest equity holding going into the fourth quarter and in this article we will be analyzing  five stocks that Elliott Management has held for a long time – hence displaying its conviction on them- and figure out what makes the fund still bet on them.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas (see more details here).

#5 FCB Financial Holdings Inc (NYSE:FCB)

– Shares Owned by Elliott Management (as of September 30): 2.18 Million

– Value of Holding (as of September 30): $71.18 Million

FCB Financial Holdings Inc (NYSE:FCB) is one of the few financial sector stock that had a phenomenal run in 2015, up by over 45%. Elliott Management initiated a stake in the company soon after its IPO in the third quarter of 2014 and solidified it in the fourth quarter of 2014 by increasing its holding to over 2.5 million shares. Although the fund reduced its stake in the company by 9% and 8% during the second and third quarter of 2015, respectively, it might be for profit-booking purposes as the stock of FCB Financial Holdings Inc (NYSE:FCB) is up by almost 60% from its IPO. On January 5, the company said that it will report its fourth-quarter earnings on January 25. Analysts expect it to report EPS of $0.50 on revenue of $65.48 million, compared to EPS of $0.30 on revenue of $61.8 million that it reported for the same quarter last year.

On January 7, analysts at Gabelli initiated coverage on FCB Financial Holdings’s stock with a ‘Buy’ rating and $39 price target. The phenomenal run of FCB Financial Holdings’ stock has  made it very popular among hedge funds. During the third quarter the ownership of the company among funds covered by Insider Monkey rose by over 45% to 22 funds. Among the funds that has increasingly become bullish on the company is billionaire Jim Simons‘ Renaissance Technologies, which more than doubled its stake in FCB Financial Holdings to 357,100 shares during the July-September period.

#4 Twenty-First Century Fox Inc (NASDAQ:FOX)

– Shares Owned by Elliott Management (as of September 30): 3.7 Million

– Value of Holding (as of September 30): $100.2 Million

Twenty-First Century Fox Inc (NASDAQ:FOX) is the only stock in this list in which Elliott Management reduced its stake significantly (by 48%) during the third quarter. However, Elliott Management was not the only fund that lost conviction on the stock during that period. The number of funds covered by Insider Monkey that reported being long in the company declined by 10 to 32 during the third quarter and the aggregate value of their holdings in the company also came down by $1 billion. Shares of Twenty-First Century Fox Inc (NASDAQ:FOX) have been on a continuous downward path since the start of 2015 and technical analyst believe that it has now entered the oversold territory. The company currently trades at forward price to earnings multiple of 11.59, which is significantly lower than its peer group.

According to recent reports the company is currently engaged in finding  buyers for its 39% stake in British broadcasting major SKY PLC. On January 6, the company announced that it has entered into a preliminary agreement to acquire a minority stake in augmented and virtual reality company ODG. On the same day analysts at Credit Suisse reiterated their ‘Outperform’ rating on the stock while upping their price target on it to $38 from $34.

On January 4, Pacific Crest analyst Andy Hargreaves published a report in which he named the firm’s top network stock picks for 2016, which included Twenty-First Century Fox. Mr. Hargreaves has a ‘Overweight’ rating on the stock and expects 2016 to be a good year for networks. Seth Klarman‘s Baupost Group initiated a stake in Twenty-First Century Fox Inc during the third quarter by purchasing over 6.5 million shares of the company.

#3 Interpublic Group of Companies Inc (NYSE:IPG)

– Shares Owned by Elliott Management (as of September 30): 20 Million

– Value of Holding (as of September 30): $382.9 Million

Elliott Management initiated a stake in Interpublic Group of Companies Inc (NYSE:IPG) during the second quarter of 2014 and immediately went activist on the company. However, unlike other activist situations, things soon turned in favor of Elliott as Interpublic Group of Companies Inc (NYSE:IPG) reached a settlement with the fund in February last year by nominating three new members to its Board and forming a new finance committee to focus on margin expansion.

All these changes seem to be having a positive effect on Interpublic Group of Companies, as its stock appreciated by 23% during the final quarter of 2015. However, in addition to rising so swiftly, the stock currently sports a respectable dividend yield of over 2%. For the fourth quarter of fiscal 2015, analysts estimate the company to report EPS of $0.62 on revenue of $2.19 billion. For the same quarter last year it delivered EPS of $0.57 on revenue of $2.21 billion.

On December 18, analysts at Morgan Stanley upgraded the stock to ‘Overweight’ from ‘Equal Weight’ and also increased their price target on it to $27 from $24. Though the number of funds covered by Insider Monkey that were long in Interpublic Group of Companies Inc declined by five to 36 during the third quarter, the number of billionaire investors we track that reported owning a stake in the company increased by two to nine during the same period. With ownership of over 21.4 million shares of Interpublic Group of Companies, Jeffrey Tannenbaum‘s Fir Tree was the largest shareholder of the company at the end of September among the funds tracked by us.

#2 EMC Corporation (NYSE:EMC)

– Shares Owned by Elliott Management (as of September 30): 34 Million

– Value of Holding (as of September 30): $821.44 Million

Moving on, the changes that Elliott Management sought in EMC Corporation (NYSE:EMC) after initiating a stake in the company during the second quarter of 2014 finally yielded positive results in October last year. On October 12, 2015, Dell announced that it has agreed to buy EMC Corporation (NYSE:EMC) and its stake in VMware, Inc. (NYSE:VMW) for $67 billion, the largest acquisition in the technology sector ever. It seems other event-driven hedge funds were also anticipating this deal and that’s why 11 more hedge funds covered by Insider Monkey became bullish on the company during the third quarter and the aggregate value of hedge funds’ holdings in the company also saw a 32% jump to $3.36 billion during the same period.

In a recent regulatory filing, EMC Corporation revealed that it plans to lay-off several of its employees in 2016 and thereby intends to save $850 million in annual costs. Ahead of the merger, the stock of EMC Corporation is currently trading at a forward price-to-earnings multiple of 12.78, which is  low for a company that is about to get acquired.

On January 7, analysts at Gabelli reiterated their ‘Buy’ rating on EMC Corporation’s stock. Ken Griffin‘s Citadel Investment Group was among the funds that increased its stake in the company by 50% during the July-September period; it held 7.44 million shares of EMC Corporation at the end of September.

#1 Hess Corp. (NYSE:HES)

– Shares Owned by Elliott Management (as of September 30): 17.8 Million

– Value of Holding (as of September 30): $891.07 Million

Finally, Hess Corp. (NYSE:HES) continued to remain Elliott Management’s top stock pick for 11 quarters in a row with the fund not making any changes to its stake in the company during the third quarter of 2015. Although shares of Hess Corp. (NYSE:HES) declined by over 34% during 2015, its dividend yield stands at slightly above 2%.

A lot of analysts that cover the stock are not very optimistic about its future prospects citing the decline in crude oil prices, the weak operating cash flow of the company and its unsatisfactory return on equity. On January 7, analysts at Deutsche Bank reduced their price target on the stock to $60 from $66, which represents a potential upside of just 3% from the stock’s current levels.

Hess Corp. (NYSE:HES) is expected to report its fourth-quarter earnings at the end of this month and analysts estimate that the company is going to declare a per share loss of $1.19 on revenue of $1.56 billion for the quarter versus EPS of $0.18 on revenue of $2.53 billion that it had reported for the same quarter last year. Among the few hedge funds that became bullish on the company during the third quarter was Billionaire Israel Englander‘s Millennium Management, which initiated a stake in Hess Corp.  by acquiring 733,542 shares.

Disclosure: None