Gallogly and his team’s favorite stock at the end of June was CIT Group Inc. (NYSE:CIT). The fund owned 8.8 million shares of the commercial lender, unchanged from the beginning of April. CIT trades just under the book value of its equity at a P/B ratio of 0.9. It is unprofitable on a trailing basis, but analyst consensus for earnings per share next year is $3.58, which implies a forward P/E multiple of 11; if the business can turn around to this degree, it could make for a good value. Mason Capital Management, managed by Kenneth Garschina, increased its own stake in CIT by 38% during the second quarter and closed June with 9.4 million shares.
Centerbridge also liked BankUnited (NYSE:BKU) with its 10.8 million shares being even from the beginning of the second quarter. BankUnited, based in Florida, is primarily a commercial bank though it does have individual customers. It trades at a premium relative to its book value (P/B ratio of 1.4) and at higher P/E multiples than many other banks: its trailing P/E is 14 and its forward P/E is 16. Between these two banks, we’d prefer the lower-valued and less Florida-focused CIT. Wilbur Ross’s Invesco Private Capital owned 13.7 million shares of BankUnited at the end of June, making it that fund’s largest holding.
Visteon Corporation (NYSE:VC), a $2.4 billion market cap auto parts company which provides components such as heating, air conditioning, and ventilation systems, was another of the fund’s top picks. It reported ownership of 2.1 million shares. Visteon has held up surprisingly well for an auto related company in the past few quarters, with its earnings per share last quarter well up from the same period in 2011. However, the stock has only risen about 5% the last year, underperforming the S&P 500. It also looks expensive at 39 times trailing earnings. The sell-side expects large increases in EPS, pulling the forward earnings multiple down to 13.
Centerbridge owned 2.3 million shares of Quad/Graphics, Inc. (NYSE:QUAD) at the end of June. The company prints publications such as business catalogs and has been in that business for over 40 years. Its business has not been doing well, with revenue declining last quarter compared to the same period in the previous year and the stock trading at about two-thirds its book value as investors turn a skeptical eye on the printing industry (the stock price is flat compared to a year ago). Wall Street analysts expect a recovery, and the forward P/E is only 10. The fund apparently believes that they are about right.
Finally, the fifth slot in Centerbridge’s 13F portfolio consisted of 4 million shares of iStar Financial Inc. (NYSE:SFI). iStar is a real estate investment trust which invests in commercial real estate using instruments such as senior and mezzanine loans. Given its commercial real estate business, the company is highly dependent on macroeconomic activity and posts a beta of 2.8. It is also highly levered, with a total of $5.6 billion in debt on its most recent balance sheet compared to a market capitalization of less than $700 million. While this market cap is only about half the book value of iStar’s equity, the effect of small decreases in asset value would be magnified by this leverage.
