John Burbank founded Passport Capital in 2000 and the fund has been very successful on the average. Burbank became well known for predicting the collapse of the U.S. housing market in 2005 and returning a stunning 219% in 2007. Unfortunately Burbank didn’t do well in 2011. Passport Capital’s flagship Passport Global Fund lost 18.4%. Burbank is very bearish about 2012 and investing accordingly.
At the end of the fourth quarter 2011, John Burbank’s Passport Capital had a 13F portfolio worth approximately $1.25 billion. We are going to take a deeper look into Passport Capital’s top picks and see whether they are attractive to investors.
Cytec Industries Inc. (CYT) was the largest stock position in Passport Capital’s portfolio at the end of December. Passport Capital had 2.95 million shares of CYT, worth $132 million, after a slight decrease of 1.5% during Q4. Prior to the fourth quarter, Passport Capital made a smart move in CYT. The firm boosted its position in CYT by 50% in Q3 when the stock plunged to its 2-year low, at below $40. Currently CYT is approaching $60. There are some other hedge funds that were also invested CYT at the end of Q4, including David E. Shaw’s D. E. Shaw, Ervin Shindell’s Roundkeep Capital Advisors, and David Costen Haley’s HBK Investments.
We don’t recommend a buy on CYT, even though the company surprised the market by posting a $0.86 fourth quarter EPS, which is 91% higher than analysts’ expectations. The way we see it, that figure was $0.95 a year ago, so the company now has a negative EPS growth rate. CYT also offers a comparatively lower dividend yield of 0.9%. Besides, CYT has a forward PE of 14.55, meaning it is significantly overvalued compared to its peers. Huntsman Corp (HUN) has a forward PE of 7.41, an expected EPS growth rate of 9.17%, and a dividend yield of 2.9%., while Dow Chemical Co (DOW) has a forward PE of 12.77, an expected EPS of 13.53%, and a dividend yield of 2.9%. It’s possible that investors may want to bet on CYT’s price increase in its Powder Coating Resins Product Range in Europe, Middle East and Africa, but we still think CYT isn’t cheap for its 14+ forward PE and is a bit risky.
Marathon Petroleum Corp (MPC) is the second largest stock position in Passport Capital’s portfolio. Passport Capital cut its stake by 4.49% during Q4, keeping $126 million invested in MPC at the year-end. The petroleum product company was spun off from Marathon Oil Corp (MRO) on June 30, 2011, and was picked by Passport Capital during the third quarter. Passport Capital might have initiated its MPC position when the stock was trading at around $30 per share, and it’s possible that the firm has now made a nearly 40% profit in the position. Several other hedge funds also initiated positions in MPC last year. Steven Cohen’s SAC Capital Advisors invested $91 million, and Israel Englander’s Millennium Management invested $26 million in MPC, Q3 filings show. Jana Partners bought a 5.5% stake in MPC in January 2012.
We are cautiously bullish about MPC as we are looking for an undervalued stock with a double digit expected EPS growth rate for the next five years. MPC has a low forward PE of 8.68 and its EPS is expected to grow at whopping 28.25% annually for the next five years, so its forward PE for 2014 is only 5.28. Moreover, the stock provides a dividend yield of 2.3%. These figures are quite attractive even if we compare MPC with Petroleum Refining industry leaders Exxon Mobil Corp (XOM) and Hess Corp (HES). XOM and HES have similar multiples – both have forward PE rates at around 10, expected EPS grow rates at 5%+, and small dividend yields. People like XOM and HES because of their stable performances, but we recommend MPC because the stock is significantly undervalued and it has high upside potential. MPC is expected to consider an IPO for its pipeline assets as soon as the second half of 2012 and buy back about $2 billion in shares in the process. Our only concern about MPC is that the growth predictions about the stock may be inaccurate.
Another large stock position in Passport Capital’s portfolio was Liberty Interactive Corp (LINTA). The firm had $71 million invested in LINTA after a 31.61% increase during Q4. We are looking for defensive stocks with long-term returns, so we don’t recommend LINTA. The stock seems to be overvalued in the cable industry. It has a negative EPS growth rate, and a forward PE of 16.24 which is quite high for our taste.
