Generally speaking, activist hedge funds usually receive wider media coverage than their passive peers. One of the activist hedge funds we track is Richard Breeden’s Breeden Capital Management, who, unlike the Carl Icahn’s or the David Einhorn’s of the world, does not get as much press. Still, he’s an investor with an activist history worth watching. The hedge fund has recently filed its first quarter 13F form with the SEC, which discloses its long equity positions for the three-month period. Because it’s important to pay attention to the smart money’s sentiment, let’s take a closer look; discover the secrets of piggyback investing.
The hedge fund reported a $47 million stake in STERIS Corp (NYSE:STE), a healthcare company with its fingers in surgical products related to infection prevention. Sterilizers and surgical tables are two of its most commonly used products. Breeden slightly cut its stake in the $2.6 billion company by market cap, although with a year-to-date return north of 30%, it was likely just profit taking.
Moving forward, STERIS Corp (NYSE:STE) trades at a forward earnings multiple near 16.0, with the sell-side expecting annual EPS growth of 10% over the next five years. This forecast is about level with the medical appliances and equipment industry norms, though it’s worth noting that Wall Street’s average price target predicts another 8-9% appreciation in STERIS Corp (NYSE:STE)’s shares.
Much of this expected growth is synergistically related to the residual effects from its $270 million United States Endoscopy Group acquisition last year, paid in cash. STERIS Corp (NYSE:STE)’s CEO has called the move “a natural extension of our presence in the GI (gastrointestinal) market,” and US Endoscopy—as its name suggests—should give STERIS Corp (NYSE:STE) a much better hold on the endoscopy device market moving forward; this is likely one of the primary reasons why Breeden is bullish.
Flowserve
The second most valuable equity in the 13F portfolio of Breeden is the $6.7 million stake in Flowserve Corporation (NYSE:FLS). The position fell to 40,000 shares, from 144,497 shares, worth $21.2 million at the end of December. With a year-to-date return of around 13.4%, Flowserve Corporation (NYSE:FLS)’s stock is trading at a forward P/E of 14, and represents a nice value play moving forward.
From a qualitative standpoint, the bullish thesis behind Flowserve Corporation (NYSE:FLS) seems to be its relationship to the U.S. natural gas boom, as its pumping and seal products are used in everything from LNG export terminals to well drilling. The company’s automated technologies, such as decoking, offer additional growth potential, and it is a space we’ll be watching very closely.
S&P holds a positive outlook on Flowserve Corporation (NYSE:FLS)’s sub-industry, citing that they “expect manufacturing and machinery usage in the U.S. to gradually expand later in 2013 and during 2014,” adding that demand in China should be enough to offset a slower Europe. All in all, the LNG terminal marketplace looks brighter and brighter as the months pass—just see this map—and the recent approval of the Freeport LNG operation should only help hasten this momentum.
Helmerich & Payne
Helmerich & Payne, Inc. (NYSE:HP) is the next on the list, being represented in the Breeden’s 13F by a $6.4 million stake, which involves 105,951 shares. Up 12% since the start of the year, this contract oil and gas drilling rig operator still trades at a forward P/E below 12, and this is another play on U.S. energy—specifically fracking—but there’s also a bit of a twist.
On the trading floors, there is chatter that Helmerich & Payne, Inc. (NYSE:HP) might perform a share repurchase program this summer, due to its curious sale of some of its long-time 28% stake in Atwood Oceanics, Inc. (NYSE:ATW). This analyst sums up this potentially bullish scenario quite nicely, surmising, “the company appears to be under pressure to have a special payout or, probably better from the Street’s perspective, initiate a share repurchase program.”
Though nothing is certain, shareholder value stimulation is a perfect reason for anyone to be bullish, including Breeden, and the overall expansion that’s occurring in Helmerich & Payne, Inc. (NYSE:HP)’s industry is a nice fallback option to have as an investor.
The best of the rest
In Zale Corporation (NYSE:ZLC), Richard Breeden’s hedge fund posted a $566,000 holding, containing 143,968 shares. The position slumped from a $20.4 million stake of 4,959,354 shares. Zale could be found in the equity portfolios of 9 top-tier hedge funds, including Breeden, in the previous round of 13F filings. The small-cap company is engaged in retail sales of fine jewelry, and its stock sports a year to date return above 24%, while still trading at a forward P/E of 15.9x.
Final thoughts
Breeden Capital is one of the 500 elite hedge funds we track at Insider Monkey, and its involvement in key domestic energy input companies, Helmerich & Payne, Inc. (NYSE:HP) and Flowserve Corporation (NYSE:FLS), in addition to its bet on STERIS Corp (NYSE:STE) are worth watching. The hedgie’s Zale investment looks more like a value bet on a continuing economic recovery, so we’ll be paying attention to it as well.
Disclosure: none
