Paul Singer founded Elliott Associates in 1977. Now, combined with Elliott International under the Elliott Management banner, the fund has about $15 billion under management and using a number of strategies and asset types in its investment process; it is particularly noted for debt investing and taking activist minority stakes. Only some of these assets show up in 13F filings, but what we do see should allow us to identify some themes in Singer’s investing strategy. Here are some trends we see in the fund’s new 13F compared to previous filings:
Enterprise software. The fund added heavily to its positions in BMC Software Inc (NASDAQ:BMC) and Compuware Corporation (NASDAQ:CPWR). The BMC position rose 8.3 million shares to 10.4 million, and the 4.7 million shares of Compuware in Elliott’s portfolio grew to 8.6 million. BMC is expected to achieve good growth by the Street, as it trades at 19 times trailing earnings but only 11 times forward earnings estimates. So far this year the stock is up 25%. Compuware is priced a little higher relative to its business prospects, at a forward P/E of 18. While both stocks reported large decreases in earnings last quarter compared to the same period the previous year- 44% for BMC and 38% for Compuware- Singer and his team believe that something about the companies’ product offerings makes them attractive investments, and so investors should consider looking deeper at the companies to see if they can deliver on the required growth.
Delphi. The fund cut back on it stake in Delphi Automotive (NYSE:DLPH), but at 34.5 million shares it remained the largest position reported on the 13F at nearly twice the size of the second largest holding, so we would say that it still qualifies as a major investment theme for Elliott. Delphi provides a number of auto parts such as electrical, safety, and heating and cooling components. The sluggish auto market has kept Delphi’s valuation fairly low relative to its current operations as investors remain skeptical that the company can grow (similar concerns are plaguing automakers such as Ford and GM). Delphi trades at eight times trailing earnings, seven times forward earnings estimates, and a PEG ratio of 0.5; on a quantitative basis it makes for a good value stock. Delphi was also a favorite stock of John Paulson's in the first quarter of 2012.
Melco Crown. Melco Crown Entertainment (NASDAQ:MPEL) owns and operates casino resorts primarily in Macau. In its most recent quarter the company reported revenue that was slightly down from the same quarter in 2011 but earnings which were up by 23%. The stock is highly exposed to the broader market (beta of 2.3), as the strength of the U.S. economy has a magnified effect on the Chinese economy which in turn drives Macau gambling revenue. Both its trailing and forward P/E multiples are 14, but sell-side analysts tag it as a good long-term stock with a five-year PEG ratio of 0.5. It also might make a good pair trade with other casino companies. Bain Capital’s Brookside Capital was also an investor in the stock in the first quarter. At the end of April Elliott had owned 4.4 million shares and the fund increased this stake to 7.2 million shares by the end of June.
As far as Delphi goes, we think there are good value plays in the auto business but that automakers such as Ford and GM might carry better values than Delphi at this point. There is a good case for casinos as a growth industry but we worry about a number of factors including questionable U.S. (and Chinese) macro as well as competition from other casinos. However, since the competition factor in particular is likely to increase in the U.S. as gambling regulations are weakened, Melco Crown could work well if paired with short positions in highly leveraged domestic destination casinos. The intricacies of various enterprise software products aren’t something we are an expert on, but later this month we will try to dig deeper into the companies that Elliott thinks are such a good buy, and we’d suggest that investors do the same.