Jon Bauer co-founded Contrarian Capital with Janice Stanton and Gil Tenzer in 1995. The trio had worked together managing funds and capturing opportunities in distressed companies at Oppenheimer & Co. Bauer was actually the founder and head of the Distressed Securities Group there. Today, Contrarian Capital still keeps its focus on distressed investing. Contrarian Capital has more than $3 billion in AUM but it’s 13F portfolio is smaller – in its latest 13F filed on February 14, Jon Bauer reported that Contrarian Capital had 30 positions in its portfolio, collectively valued at $160.82 million – but we think that Bauer has a good eye for distressed investing and is worth watching, particularly his larger positions.
The largest of Contrarian Capital’s holdings is a stake in Charter Communications (CHTR) worth $51.52 million, or 904,861 shares. Bauer had reduced Contrarian Capital’s position in the company from 915,361 shares at the end of the third quarter, but the total value moved up from $42.88 million at the end of September. Charter Communications opened trading on February 14 at $59.40 a share. Analysts give the company a mean one-year target estimate of $66.83 (range $57 to $80). Charter Communications, which is a top pick for Howard Marks’ Oaktree Capital Management, is a very low risk stock – it has a beta of just 0.29. It has gained 27.32% over the last 52 weeks, compared to the S&P 500’s 1.79% for the same period. But, we have our misgivings.
Charter Communications is priced high relative to its future earnings, with a forward P/E of 115.42, and it doesn’t have nearly the quarterly revenue growth that its competitors do. Take its rival Comcast (CMCSA) for instance. It has quarterly revenue growth of 51.10% compared to Charter Communications’ 2.30%. It also has a considerably lower forward P/E, at 14.57. Also, Comcast pays a dividend of 45 cents (1.70%) while Charter doesn’t pay anything. We think Comcast is a better bet for conservative investors.
Contrarian Capital is also bullish about Bank of America (BAC). Bruce Berkowitz returned 18% in 2012 party because of its huge position in the stock. Contrarian Capital also had a large percentage of its portfolio in BAC. It had $12.13 million or 2.18 million shares in the company at the end of the fourth quarter. The volume of Contrarian’s shares in Bank of America did not change from the third quarter when the fund initiated its position in the company. Bank of America opened trading on February 14 at $8.15 a share, on a mean one-year target estimate of $9.00 a share (range $6 to $14.50). Bank of America also pays a small 4 cents dividend (0.50% yield) and is priced at 7.32 times its forward earnings. This may not seem to be the best time to buy financials but we think mega-cap banks like Bank of America, Citigroup (C), and JP Morgan (JPM) are extremely undervalued. All of these stocks have similar forward PE ratios and will see large increases in their earnings once the economy picks up some momentum. We expect a portfolio of these three stocks return 60% over the next three years.
Contrarian Capital likes LyondellBasell Industries (LYB) as well. The fund had $32.32 million or 994,779 shares in the company at the end of the fourth quarter. Other top picks for Contrarian Capital at the end of the fourth quarter include the New York Times (NYT), General Motors (GM), Rock-Tenn Co (RKT) and Delta Airlines (DAL). Even though we have a position in New York Times we think General Motors has the highest upside potential. The stock’s PE ratio is only 6 and has been experiencing robust results in North America. We believe auto sales will pick up over the next couple of years as the economy improves and General Motors can go up north of $40 per share.
