Why is Howard Marks Betting Big On These Stocks?

OAKTREE CAPITAL MANAGEMENTHoward Marks helped found Oaktree Capital Management in 1995 with a group of individuals who worked at TCW Group. Prior to helping form and taking the lead at Oaktree in 1995, Howard Marks worked for ten years at the TCW Group, Inc. overseeing distressed debt, high yield bonds and convertible securities investments. Oaktree is a Los Angeles based investment firm that specializes in alternative investments and maintains an emphasis on distressed debt, corporate debt and convertible securities. The company manages roughly $78 billion in investment capital for various pension funds, foundations and endowments. The primary focus of the firm is on companies that are less known by major investors and other funds, and are generally considered contrarian investments. According to Oaktree’s second quarter 13F filing, the firm has made investments that indeed adhere to Marks’ motif of investing. Below are a few of Marks’ newest picks, but you can see all of his holdings here.

Oaktree took a new equity position in Getty Realty Corp. (NYSE:GTY), a retail REIT specializing in the ownership, leasing and financing of retail motor fuel and convenience store properties. The company has a sub-$1 billion market cap and only operates in 21 states. Getty has had a positive trend in FFO year-over-year, increasing from $53 million in 2009 to $57 million in 2010 and then $61 million in 2011. The company ceased dividend payments at the end of 2011 and in August 2012 decided to reinstate its quarterly dividend at $0.125, versus the 2011 amount of $0.25. The REIT’s dividend yield is approximately 2.7%, and the company’s funds from operations payout ratio for 2012 is around 40%. The company’s dividend yield is below many of its peers, but it has managed to stockpile cash through the first half of the 2012. This should help keep the dividend relatively safe going forward. The company also had $18 million of cash on hand at the end of the second quarter, compared to only $8 million at the end of 2011. Marks’ interest in Getty is the stock’s first significant interest by a hedge fund (see all the funds that own Getty here).

Tata Motors Limited (NYSE:TTM) Is a manufacturer of commercial vehicles ranging from less than 1 ton to 40 metric tons, as well as passenger cars and utility vehicles. Tata is a top commercial automotive vehicle manufacturer in India by revenue and one of the largest manufacturer of cars in India by unit volume sold. The company is a rather volatile stock, with a 2.32 beta, and mixed earnings the past few quarters. Tata owns over 25% of the market share for four-wheel vehicles sold in India, while its Jaguar and Land Over brands have been losing market share in the U.S. The company currently trades at a trailing P/E of 6, but a forward P/E of 44, with next year’s EPS having been revised several times over the past 90 days. Other notable interest in Tata includes Ken Fisher and Fisher Asset Management, who increased their stake to 4.4 million shares in the second quarter.

The third largest new stake for Oaktree is Ternium S.A. (NYSE:TX), a manufacturing and processing company for steel products for construction, home appliances, capital goods, container, food, energy, and automotive industries. Ternium has missed earnings for the last four quarters and mixed opinions on future auto sales have lead to varying recommendations among analysts. The company trades at a trailing P/E of 11 and a forward P/E of 7. With recent quarterly earnings growth down 44% this may well be a value trap, but both Christian Leone of Luxor Capital Group and Robert Pohly of Samlyn Capital each continue to hold almost 1% of the Ternium shares outstanding.

Oaktree also added the Brazil based integrated oil and gas company Petroleo Brasileiro Petrobras SA (NYSE:PBR). The company is ramping up capital expenditures, with a plan to spend $237 billion over the next five years to help capitalize on its 2010 bill approval to explore and produce oil and natural gas equaling 5 million BOE in Brazil. Lower than expected oil prices have led to downward EPS revisions, but Petroleo still trades higher than its peers on a P/E and P/S basis. However, if investors choose to wait on Petroleo to see a positive ROI on its upcoming CapEx, it will get a 4.2% dividend yield. Sandy Nairn with Edinburg Partners, as of the second quarter, is also invested in Petroleo and has 7.5% of his portfolio concentrated in the stock.

The other Oaktree equity position worth noting is an increase in its previous stake of Vale SA (NYSE:VALE). The firm added 77% more shares of Vale during the second quarter. Vale is Brazil-based metals and mining company. The industry is capital intensive and the industry’s performance is positively correlated with steel demand. Both Vale and the S&P Steel Index are down around 10% year to date to July 31,versus the S&P 1500 index, which is up over 8%. 2012 is expected to continue to be tough for Vale and the steel industry, with Vale revenues expected to come in 17% below those of 2011. Vale sales for 2013 are expected to rebound and be up 10% on rising auto sales and increased nonresidential construction.

Oaktree’s latest picks should at least get investors’ attention, even if they do not agree. His equity portfolio with its newest additions is comprised of companies operating largely outside of the U.S. Marks is considered a contrarian and these new bets go right along with this theme.

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