News Corp (NWSA), Hess Corp. (HES): Billionaire James Dinan’s York Capital Has Been Loving Special Situations

Several weeks after the end of each quarter, hedge funds and other major investors are required to file 13Fs with the SEC, disclosing many of their long equity positions as of the end of that quarter. We process these filings in our database and use them to develop investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about imitating hedge funds’ small cap picks). We also like to look at what top managers did during the quarter and see if there are any potentially interesting ideas there. Read on for three things we noticed when comparing the most recent 13F from billionaire James Dinan’s York Capital Management to what the fund had reported owning in previous filings, or see the full 13F on the SEC’s website.

Merger arbitrage. The fund took large positions in H.J. Heinz Company (NYSE:HNZ) and Virgin Media Inc. (NASDAQ:VMED), which are currently in the process of being acquired by Warren Buffett’s Berkshire Hathaway (with an assist from a private equity fund) and Liberty Global respectively. Acquisition targets generally trade at a small discount to the proposed takeover price, with the return on investing in these stocks depends on whether or not the transaction closes as opposed to the financial performance of the company (which can be dependent on the overall economy). Particularly if leverage is used, this discount- if the transaction does close on time- can result in decent annualized returns which are uncorrelated with market indices, and so merger arbitrage is often favored by hedge funds.

Breaking companies apart. Two more big buys from Dinan’s team were News Corp (NASDAQ:NWSA), which is in the process of splitting into two, and Hess Corp. (NYSE:HES), which plans to spin out its downstream operations possibly due to pressure from activists at billionaire Paul Singer’s Elliott Management, who recently settled a proxy battle with the company at least for the time being. Breakups and spinouts often attract attention from value investors because, in theory, management of the newly independent companies should be able to improve operations by focusing on their own business rather than the larger organization as a whole. Currently Hess Corp. (NYSE:HES) trades at only 12 times forward earnings estimates (though this is actually about even, and possibly something of a premium, to other large E&P companies) and is therefore a potential value stock. News Corp (NASDAQ:NWSA) is a bit more expensive, but the media and entertainment industry has been doing quite well recently and News Corp is no exception with revenue up 14% last quarter compared to the same period in the previous fiscal year.