It always seems like the Buffetts and Einhorns of the hedge fund world capture the lion's share of media attention. However, there is an abundance of high-quality fund managers on Insider Monkey’s radar screen. One such manager is Michael Johnston of Steelhead Partners. Johnston's $1.3 billion fund primarily divides its holdings between the technology and basic materials sectors.
His equity portfolio isn’t gigantic by any means, but because it’s important to pay attention to the fundamentals of our market-beating strategy—which piggybacks hedgies—we’re going to take a look at Steelhead Partners' favorite stocks. See how investors have been beating the market here.
The largest equity position in the Steelhead Partners portfolio is Resolute Forest Products Inc (NYSE:RFP). The stock composes 12.76% of manager Michael Johnston’s portfolio, which is nearly twice as much as the next largest holding.
At year's end, a total of 21 of the hedge funds we track were bullish in this stock, a change of 24% from one quarter earlier—Steelhead Partners is in good company with their long position in the paper products company. Resolute Forest Products has made a commitment to sustainable practices and sets lofty benchmarks for its operations, which, according to recent reports, they are meeting thus far.
Additionally, the forest products company, who conducts operations in the United States, Canada, and South Korea, has a forward P/E of 13.37, suggesting future earnings growth. Further, the predicted earnings per share next year for the stock is 51.25% higher than current averages. Resolute Forest Products has some momentum, at present, and the stock has been on a steady upward climb thus far in 2013, up 22.21%.
Level 3 Communications, Inc. (NYSE:LVLT) is the second-largest position in the Steelhead Partners portfolio, with 7.66% of the fund’s resources invested in the stock. The communications services company is poised for a CEO shakeup by year's end, according to reports, which may give some investors pause. However, Level 3 Communications, Inc. (NYSE:LVLT) operates with a gross margin of nearly 60% (59.19%) and the predicted EPS next year is an astounding 833% higher than it has been of late.
Triple-digit growth is nothing to sneeze at, and with a comparatively low P/B of 3.78, the stock, which has declined in value by 25% over the past year, may be a good value for an investor who is confident (as Mr. Johnston appears to be) in the long term viability of the company. The forward P/E value (30.74) of the data transport and infrastructure company is encouraging from this perspective, as well.
Steelhead Partners’ third-favorite stock, Alpha Natural Resources, Inc. (NYSE:ANR), composes 6.74% of the portfolio. The steam and metallurgical coal company has increased sales by 31.03% over the past five years. Although the price of the stock is down by nearly 50% over the past year, its shares have increased in value by 19.85% over the past six months, up 55% from the 52-week low. A low P/B (0.36) and strong earnings per share growth predicted next year (41.3%) are reasons Mr. Johnston is attracted to the stock, although the investor’s passion for Alpha Natural Resources, Inc. (NYSE:ANR) may be cooling, as Steelhead recently decreased their position in the stock by 6%.
Coal, communications, and forest products, then, account for nearly 30% of the Steelhead Partners’ portfolio. Looking at the merits of these three stocks from across the spectrum in comparison with one another, Resolute Forest Products is the strongest equity, both in terms of the numbers mentioned and the company’s push towards sustainability.
It’s worth noting, as well, when considering investment options that of the top 10 holdings in the Steelhead Partners 13F portfolio, only three are long positions in equities. Of the top ten, then, these aren’t just Michael Johnston’s favorite stocks—they are his only ones, which raises all three boats a bit. Learn more about why you should pay attention to the smart money.