Editor’s Note: Related tickers: LyondellBasell Industries NV (NYSE:LYB), Charter Communications, Inc. (NASDAQ:CHTR), Liberty Media Corp (NASDAQ:LMCA), Sirius XM Radio Inc (NASDAQ:SIRI), Barnes & Noble, Inc. (NYSE:BKS), AT&T Inc. (NYSE:T), Bank of America Corp (NYSE:BAC), Resolute Forest Products Inc (NYSE:RFP), NRG Energy Inc (NYSE:NRG)
As the name implies, Contrarian Capital invests in distressed securities. The fund is managed by Jon Bauer who started the Distressed Securities Group at Oppenheimer & Co and currently has over $3 billion in total assets under management. Bauer has a smaller equity-only 13F portfolio, but it’s worth watching regardless. Clearly not every stock in this mini-portfolio is what we would consider “distressed,” but there are securities that have recently emerged from bankruptcy and others that are particularly vulnerable to the price of natural resources.
Why should we pay attention?
We’re going to take a closer look at the top five positions in the fund because empirical research has shown that it can benefit retail investors by watching hedge fund sentiment. It has been possible for the most ardent piggybackers to beat the market by 18 percentage points a year over a long-term time period. Let’s get contrarian with Contrarian Capital, shall we?
The top two
Topping the list is LyondellBasell Industries NV (NYSE:LYB) with Contrarian Capital holding the largest position of all the hedge funds tracked by InsiderMonkey. The company manufacturers chemicals and plastics including ethylene and propylene. Many of the chemicals used in manufacturing are derived from ethylene, which is made from ethane (a natural gas product) and naptha (a petroleum based product). These are referred to as “feedstocks”.
As a result of the recent boom in natural gas, the price for feedstocks has fallen and so have the profits for LyondellBasell Industries NV (NYSE:LYB). But not to worry—LyondellBasell Industries NV (NYSE:LYB) averted any setbacks with an increase in the production of ethlyene. Although LyondellBasell Industries NV (NYSE:LYB) had a 5% drop in revenue in the 4th quarter of 2012, significant reductions in cost of goods sold, R&D and SAG expenses lifted net income by 32% for the same quarter. As a result of the company’s continual generation of substantial cash flow since it came out of bankruptcy in 2009, S&P raised its rating of the company to BBB from BBB-.
At number two is Charter Communications, Inc. (NASDAQ:CHTR). Media giant, Liberty Media Corp (NASDAQ:LMCA), which owns Sirius XM Radio Inc (NASDAQ:SIRI) and Barnes & Noble, Inc. (NYSE:BKS), recently paid $2.62 billion for a 27.3% stake in Charter, currently one of the largest cable providers in the US. The pairing couldn’t have come at a more fortuitous time for both companies. Liberty clearly wants the 3.5 million Charter Internet subscribers, which are concentrated in “sheltered” areas – those without access to competing cable companies.
Charter Communications, Inc. (NASDAQ:CHTR), meanwhile, will benefit from the expertise of Liberty Media Corp (NASDAQ:LMCA) CEO John Malone, who grew and subsequently sold cable provider Telecommunications to AT&T Inc. (NYSE:T) in 1999 for $48 billion. As Charter Communications, Inc. (NASDAQ:CHTR) customers make the transition away from DSL service to broadband, the revenue potential from broadband will be magnified by those customers willing to pay more for faster internet service. News of the deal between the two drove shares of Charter Communications, Inc. (NASDAQ:CHTR) up 17% to its post-bankruptcy high of $105.77.
B of A
Third of the top five is Bank of America Corp (NYSE:BAC) with nearly 2 million shares. Bank of America fell nearly 5% in one day on disappointing Q1 earnings and a settlement for three mortgage-backed securities lawsuits tied to its Countrywide unit that will cost Bank of America $500 million. Another drag on Bank of America Corp (NYSE:BAC) and the rest of the banking sector is potential legislation that could require banks to keep 10% of their assets in cash, 15% for banks with assets more than $400 million, also known as Brown-Vitter, eponymously named for the two Senators sponsoring the bill. On the bright side, the Merrill Lynch unit of the company, which was acquired by Bank of America Corp (NYSE:BAC) during the financial crisis of 2009, reported a 7% gain in earnings for the Q1 from the same period last year. Despite these setbacks, Bank of America’s stock price is up 3.7% from the start of the year.
The best of the rest
At number four is Resolute Forest Products Inc (NYSE:RFP). With demand for newsprint and specialty paper down due to a shift in advertising and print media to the internet,Resolute is being rescued by the surge in lumber prices as the boom in new construction causes the price of building material to nearly double. Even the drop in demand for newsprint really hasn’t been much of a spoiler for Resolute Forest Products Inc (NYSE:RFP), as the company has had increased demand from Latin America and Asia, both of which account for 47% of total shipments, up 11% from Q1 2012. After refinancing much of its debt at more favorable terms, the debt burden of the company has been all but eliminated as its debt/equity ratio improves to 0.2 compared to an industry average of 0.8. All this makes for a very compelling reason for Bauer to increase his position in Resolute Forest Products Inc (NYSE:RFP) by 195% since adding the stock to his equity portfolio during the second quarter of 2012.
Last but not least is NRG Energy Inc (NYSE:NRG). NRG generates and provides energy and energy services in major markets across the company. This in itself should worry investors in that a company whose main source of revenue is ultimately tied to the price of natural gas or other energy resources faces challenges as those prices decline. But for NRG Energy Inc (NYSE:NRG), much of that risk has been mitigated by its diversification into renewable energy. And along with that comes the expansion into the electric car market in which NRG Energy Inc (NYSE:NRG) is providing charging stations. Its eVgo Network of charging stations charges commercial and residential services a fee to install these stations. As a result, net income jumped 183%for the Q4 of 2012.
Final thoughts
There are some very compelling securities in the Contrarian Capital fund and names that will certainly merit another look in the future. While not all the companies in the top five would be considered “distressed,” they have certain challenges that appear to have been addressed either through diversification or by partnerships and have very promising futures as a result of these changes.
Disclosure: none
