Grey Owl Sees Large Upside For 3 High-Yield REITs; Bullish On 2 Other Stocks

Grey Owl Capital Management is a value-oriented investment management firm founded in May 2009. The fund, which is located in Falls Church, Virginia, deploys money using a go-anywhere, opportunistic investment process. The hedge fund has more than $117 million in assets under management (AUM) as of March 22 of this year, though its public equity portfolio has remained below $100 million in value for two years, as the fund has not been required to file a quarterly Form 13F.

In its latest letter to investors, the fund stated that asset values in general and U.S equities in particular are overvalued, with the median U.S stock trading at the highest price-to-sales ratio in the history of the S&P 500 index. Grey Owl is also pessimistic about the economic situation, with global debt levels relative to global gross domestic product being well beyond the point where they have historically led to stagnant growth. Despite this backdrop, the hedge fund continues to operate in a non-binary fashion, as it does not want to bet on a stock market collapse or massive inflation or deflation. In this article we’ll take a look at a few stocks highlighted by the fund in its third-quarter investor letter and share its thoughts on them.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively the most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs.

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Leucadia National Corporation (NYSE:LUK) is a diversified financial holding company with interests in asset management, investment banking, online foreign exchange trading, and more. The company also owns and has investments in other companies operating in a variety of areas such as beef processing, gold and silver mining, oil and gas exploration, and automobile dealerships. The two largest components are Jefferies and National Beef, the fourth-largest U.S. beef processing company. Grey Owl believes that Jefferies could start performing better after it recently divested Bache commodities group and realigned and right-sized its fixed income business. The fund also is excited that National Beef has gone from its worst year in a decade to peak performance. The fund thinks that if Jefferies can earn $370 million and National Beef can earn $340 million, those two businesses alone could drive close to 10% growth in overall firm tangible book value of ~$7.5 billion. Grey Owl thinks that the growth in book value for the first time in several years should itself provide a reasonable return, as well as act as a catalyst for shares to trade at a higher multiple. 12.2% of Leucadia National Corporation (NYSE:LUK)’s float is owned in aggregate by 29 of the hedge funds in our database as of September 30.

Express Scripts Holding Company (NASDAQ:ESRX) is the largest Pharmacy Benefits Manager (PBM) in the U.S and one of three PBMs that control over 75% of the market. Grey Owl thinks that the stock is undervalued trading at just 10x its 2017 consensus earnings, with a free cash flow yield of approximately 10%. The stock has performed poorly over the last year, falling by more than 20%. This is because Express Scripts Holding Company (NASDAQ:ESRX) and Anthem Inc. (NYSE:ANTM) are renegotiating their contract, which may lead to an adverse impact on the company’s financials. Anthem Inc. (NYSE:ANTM) represents 14% of ESRX’s revenue and has leverage to extract better terms from Express Scripts Holding Company (NASDAQ:ESRX). Grey Owl thinks that the stock is still undervalued at its current stock price of about $77, even if it loses the Anthem contract, while if it manages to retain the contract, the stock could be worth more than $100. During the third quarter, the number of hedge funds in our system holding the stock increased to 52 as of the end of the quarter from 51 at the start of it.

We’ll check out three more of the fund’s stock picks on the next page.

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