Gates Capital Loves Material Stocks, Especially These Five

Well-known event-driven hedge fund Gates Capital Management recently disclosed its long US equity portfolio worth $2.95 billion at the end of June via a 13F filing submitted with SEC. The New York-based fund was founded in 1996 by Jeffrey Gates, who holds an MBA from the Wharton School of the University of Pennsylvania and prior to starting Gates Capital served as a Director at Schroder & Co. According to the fund’s latest filing, its equity portfolio had a quarterly turnover of 25.93% during the second quarter and was considerably top-heavy at the end of that period, with its  top -10 equity holdings alone amassing almost 72% of the value of its portfolio. The filing also revealed that the fund had a significant exposure towards the materials sector, stocks from which accounted for 21% of its equity portfolio’s value at the end of June. In this post, we will take a look at Gates Capital Management’s top-five stocks picks from the materials sector and will discuss how those stocks have performed this year.

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#5 Olin Corporation (NYSE:OLN)

– Shares Owned by Gates Capital Management (as of June 30): 2.77 Million

– Value of The Holding (as of June  30): $68.91 Million

Let’s start with Olin Corporation (NYSE:OLN), in which Gates Capital Management reduced its stake by 21% during the second quarter. Shares of the chemical manufacturer and distributor are trading up by 6.7% for 2016 currently, despite witnessing a significant decline since July 22, when the company lowered its second quarter and full-year guidance. For its second quarter, the company reported EPS of $0.24 on revenue of $1.36 billion versus analysts’ expectation of EPS of $0.31 on revenue of $1.47 billion. Olin Corporation (NYSE:OLN) currently pays a quarterly dividend of $0.20 per share, which translates into a forward yield of 4.25%. During the second quarter, the number of hedge funds covered by us that were long Olin Corporation increased by three to 28 and the aggregate value of their holdings in the company jumped by 128% to $1.29 billion.

#4 Flotek Industries Inc (NYSE:FTK)

– Shares Owned by Gates Capital Management (as of June 30): 6.03 Million

– Value of The Holding (as of June  30): $79.64 Million

Flotek Industries Inc (NYSE:FTK) was another materials stock in which Gates Capital Management lowered its stake during the second quarter, by 26%. Flotek Industries Inc (NYSE:FTK)’s stock has appreciated by 15% so far in 2016, but is still down more than 60% from the high it made in mid-2014. For its fiscal 2016 third quarter, analysts are expecting the company to report a loss of $0.02 per share on revenue of $78.1 million. For the same quarter of the previous year, Flotek Industries reported EPS of $0.04 on revenue of $87.94 million. The ownership of the company among hedge funds covered by us remained unchanged at 11 during the second quarter, but the aggregate value of their holdings grew by 24.7% to $1.28 billion.

#3 Mercer International Inc. (NASDAQ:MERC)

– Shares Owned by Gates Capital Management (as of June 30): 10.96 Million

– Value of The Holding (as of June  30): $87.46 Million

Moving on, Gates Capital Management inched up its stake in Mercer International Inc. (NASDAQ:MERC) by a meager 1% during the second quarter. Shares of the pulp manufacturer have been on a downward path since April last year and have lost 8.84% of their value so far this year. The company started paying quarterly dividends from the second-half of 2015. The $0.12 per share quarterly dividend it currently pays, amounts to a lucrative forward yield of 5.51%. For its most recent quarter, Mercer International Inc. (NASDAQ:MERC) declared a per share loss of $0.07 on revenue of $218.15 million, considerably below analysts’ expectation of EPS of $0.03 on revenue $233.01. Though the number of hedge funds covered by us that reported being long in the stock increased by three to 21 during the second quarter, the aggregate value of their holdings in it declined by $29 million to $166.23 million during that time.

#2 Axalta Coating Systems Ltd (NYSE:AXTA)

– Shares Owned by Gates Capital Management (as of June 30): 3.89 Million

– Value of The Holding (as of June  30): $103.18 Million

Axalta Coating Systems Ltd (NYSE:AXTA) was a new position in Gates Capital Management’s equity portfolio. The company had its IPO in November 2014 at 19.50 per share and its stock has appreciated by over 43% since going public, but several analysts think that it can see further upside. According to them, the company’s recent financial numbers have been negatively impacted by currency fluctuations, but on a constant-currency basis it has been performing well and will continue to do so going forward. On September 8, analysts at Credit Suisse Group AG reiterated their ‘Overweight’ rating and $34 price target on the stock. At the end of June, there were 43 funds tracked by us that were long Axalta Coating Systems Ltd (NYSE:AXTA) with the aggregate value of their holdings in it amounting to $2.16 billion.

#1 GCP Applied Technologies Inc (NYSE:GCP)

– Shares Owned by Gates Capital Management (as of June 30): 4.41 Million

– Value of The Holding (as of June  30): $114.96 Million

Despite Gates Capital Management reducing its stake in the company by 15% during the second quarter, GCP Applied Technologies Inc (NYSE:GCP) continued to remain the fund’s top pick from the materials sector at the end of June. GCP Applied Technologies Inc (NYSE:GCP) has returned 38% since it started trading as a separate publicly traded entity earlier this year after it was spun-off from W. R. Grace & Co. (NYSE:GRA). Last month, the company reported its second-quarter earnings, declaring net income of $30.1 million on revenue of $366.3 million for the period, compared to a net income of $27.2 million on revenue of $373.15 million registered a year earlier. The popularity of GCP Applied Technologies Inc (NYSE:GCP) among investors covered by us increased marginally during the second quarter with its ownership among them increasing by the three to 30 and the aggregate value of their holdings in it rising by 16% to $757 million.

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