First Bancorp (FBP), EXCO Resources Inc (XCO): What’s Oaktree Capital Buying?

At Insider Monkey, we track 500 of the world’s most elite hedge funds, and Howard Marks’ Oaktree Capital Management is one of the best of the best. Based in Los Angeles, Oaktree specializes in distressed debt, corporate debt and convertible securities, with an eye for contrarian, lesser-known investments. Because it can pay to watch hedge fund sentiment—discover why here—we’re going to take a look at Oaktree’s favorite picks heading into this quarter.

Number one

In Oaktree’s first quarter 13F filing with the SEC, its largest equity holding was in First Bancorp (NYSE:FBP) Puerto Rico, worth approximately $315.8 million. In Oaktree’s Q4 filing, the fund held the same number of shares in First Bancorp (NYSE:FBP) PR, but the stake was valued at $232.1 million. Up more than 34% year-to-date, shares of the bank holding company have benefited from above-average gross margins (89.0%) and solid revenue growth.

First Bancorp PR expects to come in this quarter with a $60+ million write-down related to Lehman Brothers, but shareholders are still optimistic on its ability to recover in Puerto Rico while expanding in Florida. At 5.6 times forward earnings and a book multiple below parity, there’s clear value here that Oaktree is betting on.

Exco

The second largest equity listed in the fund’s 13F portfolio is EXCO Resources Inc (NYSE:XCO), worth $262.2 million, up from $249 million reported at the end of last year. Up close to 19% since the start of 2013, EXCO Resources Inc (NYSE:XCO) has been another good investment for Oaktree, and the energy company’s latest earnings weren’t remarkable, but they were solid enough. Exco beat the Street’s estimates by five cents (EPS), and this is a play on higher natural gas prices in the future. Exco has a major presence in the shale gas arena, particularly in East Texas and North Louisiana.

Unlike some of its peers, which have been shedding assets, Exco has been building its resource base, establishing one key partnership with Harbinger earlier this year. At 22 times forward earnings, shares aren’t overwhelmingly cheap, but a dividend yield of 2.5% is enough to tide Oaktree over until higher LNG prices hit over the next few years.