Shares of bookseller Barnes and Noble (BKS) jumped on news that Barry Rosenstein’s Jana Partners initiated a 12% stake in the company. The news, which was announced late April 20, caused Barnes and Noble’s share price to swell over 21% – clearly the market is behind the event driven fund, and with good reason.
Though Jana Partners lost 23.4% during the 2008 financial crisis, it recovered in the following years, returning 23.9% in 2009 and 8.4% in 2010. By 2011, the fund was up about 200% since its inception. So far in 2012, Jana is doing quite well. The largest 10 positions in its 13F portfolio have returned 15% so far this year, versus 9.5% for the S&P 500 index during the same period.
Table 1: Top 10 positions of Rosenstein’s 13F portfolio as of December 31, 2011
|Company Name||Ticker||Value (*1000)||Activity||YTD Return|
|MARATHON PETE CORP||MPC||553836||New||20.85%|
|MCGRAW HILL COS INC||MHP||395465||-14%||9.79%|
|EL PASO CORP||EP||134603||-71%||9.37%|
|LIBERTY MEDIA CORP||LMCA||101636||New||7.46%|
|ANADARKO PETROLEUM CORP||APC||94462||43%||-6.89%|
|CYTEC INDUSTRIES INC||CYT||67034||New||40.90%|
|LIBERTY MEDIA CORP||LINTA||63228||-28%||13.32%|
Marathon Petroleum Corporation (MPC) was the largest position in Rosenstein’s 13F portfolio at the end of 2011. It was also a new position. Rosenstein did not report owning any shares of Marathon Petroleum at the end of September last year. During the fourth quarter, he initiated a new $554 million stake in Marathon Petroleum. The position has returned 21% so far this year, beating the market by about 11 percentage points. The stock is also quite popular amongst the other hedge funds we track. At the end of last year, there were 31 hedge funds with Marathon Petroleum positions in their 13F portfolios, including John Burbank’s Passport Capital which had over $100 million invested in this position at the end of the fourth quarter 2011. Rob Citrone and Charles Clough are also bullish about this stock.
Marathon Petroleum was separated from Marathon Oil Corporation (MRO) through a tax-free spin-off in June last year. The divestiture enabled both entities to better focus on their own core businesses. Marathon Petroleum’s refineries are mainly located in the Midwest and the Gulf Coast regions, where crude sources can be purchased at discounted prices, while petroleum products are sold at relatively higher prices. As a result, Marathon Petroleum has high margins.
In addition, we are favorable about several ongoing expansion projects of the company. Marathon Petroleum is upgrading its refinery in Detroit. It plans to increase its heavy sour crude oil refining capacity by 80,000 b/d and its crude oil refining capacity by 15,000 b/d by the end of 2012. Last but not least, the company is paying back to its shareholders through both dividends and share repurchases. Specifically, Marathon Petroleum has a decent dividend yield of 2.5% and the company announced in February that it planned to buy back up to $2 billion of its shares over the following two years.
Another new position in the Jana Partners portfolio with stunning returns so far this year is Cytec Industries Inc (CYT). During the fourth quarter last year, Rosenstein initiated a new $67 million position in Cytec. The stock is up 41% since the beginning of the year, outperforming the market by 31 percentage points. A few other hedge funds are also in favor of Cytec. John Burbank’s Passport Capital had $132 million invested in this position at the end of the fourth quarter 2011 while Ken Fisher’s Fisher Asset Management disclosed owning $81 million worth of Cytec shares at the end of 2011.
Cytec has been restructuring its businesses in recent years. Last year, it sold its Building Block Chemicals business for $176 million. More recently, the company announced that it planned to divest its Coating Resins business. We think the divestiture will lower Cytec’s earnings volatility and improve the company’s margins. Additionally, Cytec also claimed that it had an intention to purchase Umeco, a composite materials provider. The acquisition is expected to increase Cytec’s EPS by $0.20 per share in 2012 and $0.65 per share in 2013. If the transaction is completed as planned, Cytec will be well positioned to expand into automotive industries for composite materials. We think Cytec is attractive at its current valuation level. The company’s forward P/E ratio is about 13, versus the industry average of 17. It also carries a double-digit growth expectation of 11%.
Apple Inc (AAPL) and Liberty Media Corp (LINTA) also generated double-digit returns so far this year. We love Apple. We think its price has not reflected its strong growth potential despite the huge increase in its stock price this year. Its P/E ratio is around 16 and its earnings are expected to grow at 20% per year. Liberty Media, on the other hand, is somewhat less attractive. Its current P/E ratio is 20, versus its industry’s average of 15, and its earnings are expected to grow by just 0.2% annually over the next couple of years.
Overall, we think Barry Rosenstein is a great fund manager which is why we pay attention to his stock picks. Ordinary investors should do the same too.