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Shakeups From This Growth Hedge Fund: Delta Air Lines, Inc. (DAL), United Continental Holdings Inc (UAL)

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Ken Heebner is the co-founder of Capital Growth Management, a money management firm with more than $6 billion under management. The hedge fund is growth-oriented and was founded by Heebner in 1990. Capital Growth, on an average, has a 17.2% return as against the 12.8% return of the index, and of late the fund has been been making bets on airlines.

Capital Growth’s new picks

Delta Airlines (DAL)

A couple of Capital Growth’s new picks includes those from the airline industry, Delta Air Lines, Inc. (NYSE:DAL) and United Continental Holdings Inc (NYSE:UAL). Delta is now Capital Growth’s ninth largest holding, and United Continental is the 19th (see Jim Cramer’s thoughts on airlines). The recent consolidation of the industry, with the merger of U.S. Airways and American, leaves three major airlines, which should bode well for the remaining operators. In particular, the consolidation should lead to pricingpower and higher revenue per seat.

Delta has managed to see impressive operating efficiencies, and expects margin expansion of 2.5% to 4.5% for the March-ending quarter. Delta has been performing well across the board, with luggage misses falling 25% and customer complaints down 40% last quarter on a year over year basis. As far as longer-term growth is concerned, one of Delta Air Lines, Inc. (NYSE:DAL)’s key moves has been the acquisition of a 49% stake in the British carrier Virgin Atlantic.

The big “win” for Delta, related to the acquisition, includes the fact that Delta Air Lines, Inc. (NYSE:DAL) will now have greater access to the New York to London route. London’s Heathrow airport is one of the busiest in the world, and Delta only has 0.3% of the slots at the airport, but Virgin has 3.3%.

United Continental Holdings Inc (NYSE:UAL) was another one of Capital Growth’s airline picks. United has some of the top unit revenue growth, and has been focusing on improving its products and in-flight features to help with differentiation. This includes having already installed economy plus seats on 91% of its fleet, and embarking on new initiatives that include expanding its global routes. The airline plans to add international destinations that include Taiwan, Ireland, Paris, and various Canadian locations, not to mention the first ever nonstop Denver to Tokyo service.

Both Delta Air Lines, Inc. (NYSE:DAL) and United Continental Holdings Inc (NYSE:UAL) are also the cheapest airlines in the industry:

Price to earnings (forward estimates)

Delta 5 times

United Continental 6 times

Southwest Airlines 10 times

Jetblue 10 times

Alaska Air 10 times

Weyerhaeuser Company (NYSE:WY) was also another new position, with Capital Growth buying 2.6 million shares, and putting the timber REIT as its 22nd largest holding (read about the timber outlook). Weyerhaeuser is a somewhat diversified REIT, deriving 43% of revenue from wood products (lumber, plywood, etc.), 26% from fibers (pulp), 15% from timberlands (land), and 15% from real estate (housing and residential development).

The timber REIT has an impressive asset base, and driving future performance should be a turnaround in the U.S. housing market, and a greater demand for timber exports. Related to the U.S turnaround, S&P expects residential construction to recover nicely in 2013, with housing starts expected to be up 27%.

Capital Growth’s selloffs

As far as bearish signs are concerned, Capital Growth sold off shares of two major car makers, Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM). The firm sold off all of its GM shares, and downsized its Ford shares by 32%. I don’t necessarily agree with Capital Growth’s sell offs, and believe there are reasons to buy both stocks.

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