Related tickers: Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), BP plc (ADR) (NYSE:BP)
Y/Cap Management is a business unit of Yield Capital Partners, which was founded by Richard Haydon in 2009. As might be inferred from the name of its parent, Y/Cap often invests in income stocks, on the theory that structural factors in the market will lead to return on equities coming predominantly in the form of dividends as opposed to capital gains. The fund has also taken large positions on bonds in the past. Haydon had previously worked as a portfolio manager at Neuberger Bergman and at billionaire Leon Cooperman’s Omega Advisors.
In April, Y/Cap filed its 13F with the SEC, disclosing many of its long equity positions as of the end of March. From now on we will be adding Y/Cap to our database of 13F filers whose holdings we use to develop investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (read more about imitating hedge funds’ small cap picks). We can also see individual stocks which Haydon likes. Here are Y/Cap’s five largest holdings from the 13F (or see the full filing on the SEC’s website):
The fund owned about 360,000 shares of Seadrill Ltd (NYSE:SDRL) at the end of the first quarter of 2013. It’s easy to see what an income investor would like about Seadrill Ltd (NYSE:SDRL): while the specific amount of dividend payments has fluctuated, the stock looks to pay at least 75 cents per share each quarter which would make for a yield of 7.5% (with higher payments more recently). Wall Street analysts also like the offshore drilling company, with earnings estimates implying a forward P/E of 11 and a five-year PEG ratio of 0.4.
Another energy stock with a high current yield is BP plc (ADR) (NYSE:BP), which Y/Cap disclosed ownership of about 290,000 shares of in the filing. At current prices and dividend levels, BP plc (ADR) (NYSE:BP)’s yield is about 5%. The oil major is also arguably a value play, trading at 8 times forward earnings estimates (though this isn’t too much lower than many other large oil companies). BP plc (ADR) (NYSE:BP) made our list of the most popular energy stocks among hedge funds in the fourth quarter of 2012 (find more energy stocks hedge funds loved).
Frontier Communications Corp (NASDAQ:FTR) was another of Haydon’s top stock picks. Frontier Communications Corp (NASDAQ:FTR) is a $4 billion market cap telecommunications company whose yield at this time is almost 10%; however, the company has been reducing its dividend payments significantly over the last couple of years. Despite the high yield, 23% of the float is held short as more value-oriented investors balk at the high earnings multiples and at the fact that revenue and earnings have been down at Frontier Communications Corp (NASDAQ:FTR).
Y/Cap reported a position of almost 240,000 shares in Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX). The company’s stock price had fallen in December after Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) announced an acquisition of two oil and gas exploration and production companies, and combined with a questionable macro situation (copper is often thought of as a barometer of the global economy) the stock is now down 12% in the last year against a market which is up 20%. There’s also a decent dividend yield here, at 4%.
Haydon and his team had about 160,000 shares of Realogy Holdings Corp (NYSE:RLGY), a $7.4 billion market cap operator and franchisor of real estate brokerages, in their portfolio at the beginning of April. The company, which counts Coldwell Banker and Century 21 among its brands, has been unprofitable in the past couple of quarters. Analyst consensus for 2014 values the stock at a forward P/E of 20, despite the fact that revenue grew only 9% last quarter compared to the first quarter of 2012.
We’d recommend avoiding Realogy Holdings Corp (NYSE:RLGY), and while Frontier does have an attractive dividend yield it might be safer to look at larger telecoms even those which are less generous on the income front. We aren’t a fan of Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)’s acquisition plans, but will acknowledge that it’s possible that the market has already accounted for any integration risks or other factors which could destroy shareholder value. BP plc (ADR) (NYSE:BP) and SeaDrill complement their dividends by being somewhat cheap (at least in the context of potential growth in Seadrill Ltd (NYSE:SDRL)’s case) and look worthy of further research.
Disclosure: I own no shares of any stocks mentioned in this article.
