Forestar Group Inc., American Capital Ltd., Axalta Coating Systems Ltd: Gratia Capital’s Top Picks

Steve Pei’s Gratia Capital has revealed their top picks to close out 2014, and they include a couple of old favorites and an IPO which has taken off since its fourth quarter launch. Gratia’s new top pick is Forestar Group Inc. (NYSE:FOR), with ownership of 864,541 shares, representing 7.15% of the value of their equity portfolio as of December 31. American Capital Ltd. (NASDAQ:ACAS) remains their second best bet, mostly unchanged from the last quarter at 793,239 shares. Their new third choice is Axalta Coating Systems Ltd (NYSE:AXTA), which they’ve taken a strong interest in since that company’s November IPO, scooping up 440,799 of their shares.

Gratia Capital

A former Vice President at Joshua Friedman and Mitchell Julis’ Canyon Capital Advisors, Steve Pei started Gratia Capital in 2012, after landing a $25 million seed deal from Geoffrey Raynor’s Q Investments. The Los Angeles-based fund is a multistrategy, value/event-driven hedge fund, which seeks to capitalize on opportunistic investing in its three focal sectors: consumer, industrial, and real estate. Pei, also a former associate at Bain Capital, graduated from the University of Pennsylvania in 2000. Gratia Capital has assets under management of $500 million, and an equity portfolio valued at $186 million at the end of 2014. 

Previously the fifth most valuable holding in their portfolio, Gratia Capital added another 355,410 shares of Forestar Group Inc. (NYSE:FOR) during the fourth quarter, becoming one of that company’s largest shareholders among funds we track in the process. That title still belongs to Jeffrey Bronchick’s Cove Street Capital, which successfully shook up the Forestar board this week as part of an investor group that included Andrew Wallach and Jason Ader‘s SpringOwl Associates. SpringOwl’s President Daniel B. Silvers will take a seat on Forestar’s board.

The mounting activist pressure on Forestar Group Inc. (NYSE:FOR) was the result of underperformance relative to its peers, and poor corporate governance. Shares slid 26.53% in 2014, and have failed to mount a comeback thus far in 2015, sliding another 9.94%. Forestar has taken the first steps to try and correct some of their excessive expenditures, especially in the oil and gas sectors, by announcing at the end of January that they would close their North Texas oil and gas operations office in Fort Worth. Shares are up 4.52% since that announcement, signalling that investors are pleased in the direction of the company.

In addition to Cove Street’s large holding of 2.13 million shares in Forestar Group Inc. (NYSE:FOR), Q Investments and Martin Whitman’s Third Avenue Management were other large shareholders among our tracked funds, with 555,122 and 472,831 shares respectively, as of September 30.

American Capital Ltd. (NASDAQ:ACAS) remains Gratia Capital’s second choice, with the addition of 11,124 shares to their holding during the fourth quarter. American Capital has proven to be a volatile stock of late, with a beta of 1.66, though it proved a wise choice to hold onto in the fourth quarter, as it rose 3.18%. Short interest in American Capital dropped by 30% heading into February, and the stock is up 3.07% thus far during the month, after a rocky January.

American Capital Ltd. (NASDAQ:ACAS)

The private equity firm, based in Bethesda, Maryland, and with offices in cities such as Singapore, London, and Paris, manages $21 billion in assets, and has $80 billion in total assets under management. In addition to their asset management portfolio, they also manage three other publicly-traded companies with a book value of approximately $11 billion: American Capital Agency Corp. (NASDAQ:AGNC), American Capital Mortgage Investment Corp. (NASDAQ:MTGE) and American Capital Senior Floating, Ltd. (NASDAQ:ACSF).

Jeffrey Tannenbaum’s Fir Tree, and Barry Rosenstein’s JANA Partners are two large investors in American Capital Ltd. (NASDAQ:ACAS), with ownership of 12.28 million and 12.13 million shares respectively.

Lastly is Gratia Capital’s strong play on the newly listed Axalta Coating Systems Ltd (NYSE:AXTA). The liquid and powder coatings business was formerly a division of  E I Du Pont De Nemours And Co (NYSE:DD) dubbed DuPont Performance Coatings, before being sold to The Carlyle Group LP (NASDAQ:CG) in February 2013 and being rebranded as Axalta.

In November 2014, The Carlyle Group took Axalta public, offering 50 million shares of the company at $19.50 a piece.  NASCAR driver Jeff Gordon, whose car is painted and sponsored by Axalta, as well as being prominently adorned with their logo, was on hand at the NYSE for the company’s IPO. Since then, the stock has soared more than 25% from the IPO offering price, to $25.07, giving the company a market cap of $5.72 billion.

Benjamin A. Smith’s Laurion Capital Management is another one of our funds that has declared early ownership in Axalta Coating Systems Ltd (NYSE:AXTA), with 75,000 shares at the end of 2014.

Disclosure: None