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Taconic Capital’s Top Stock Picks

Taconic Capital Advisors is a multi-strategy hedge fund with about $9 billion in total assets under management. Taconic invests both passively and actively and is co-managed by Frank Brosens and Kenneth Brody. Brosens is a former Goldman Sachs partner where, among other positions, he served as head of risk arbitrage. He has presented at the World Economic Forum and the Council on Foreign Relations and is a graduate of Princeton University. Brody is also a Goldman alum and briefly served as President of the Export-Import Bank of the United States during the 1990s. Taconic Capital Advisors was founded in 1999. Read on to see the top five stock positions in the fund’s portfolio at the end of June according to its 13F filing with the SEC or see the full list of Taconic Capital’s favorite stocks.

Frank Brosens

It’s too late to buy Taconic’s top pick; Goodrich Corp has been acquired by United Technologies Corporation (NYSE:UTX). The fund reported a position of 5.6 million shares as it benefitted from using a merger arbitrage strategy. Hedge funds like to engage in merger arbitrage because the returns from investing in a merger, while they are uncertain and require deep analysis in order to evaluate the chance of the merger or acquisition closing, are uncorrelated with market returns. Read more about merger arbitrage strategies.

BP plc (NYSE:BP) was another large position in Taconic’s portfolio, as the fund reported owning 9.8 million shares of the oil supermajor. A number of hedge funds sold out of BP during the second quarter, but it still made our list of the ten energy stocks hedge funds are crazy about with 41 different funds in our 13F database reporting a position. BP trades at 8 times trailing earnings and forward earnings estimates as the market is cool on big oil companies. We think Taconic, which increased its position 53% last quarter, is going for value here.

The fund cut its position in CA, Inc. (NASDAQ:CA) in half, to 11.1 million shares, but still maintained a large position. Taconic had taken an activist stake in the $12.6 billion market cap earlier this year as part of a plan to influence the company to return more cash to shareholders. With the stock up 33% year to date, the fund is likely taking some profits and may have sold more shares over the course of this quarter. The IT software and solutions company trades at 14 times trailing earnings and- thanks to a big boost in its dividend early this year- pays a dividend yield of 3.7%.

The fourth largest position in Taconic’s 13F portfolio wasn’t having as good a year until recently: popular value play General Motors Company (NYSE:GM) was down 6% at the close of the second quarter, though since the beginning of July it is up 18%. GM has been holding the line in the Americas but has been hit hard by a weak auto market in Europe (as well as a rising dollar), causing earnings to fall 38% last quarter compared to the same period in the previous year. It now trades at 8 times trailing earnings and the sell-side is bullish: GM has a forward P/E of 6 and a five-year PEG ratio of 0.6. GM was one of the ten most popular stocks among hedge funds for the second quarter of the year.

Finally, the fund reported owning 3.5 million shares of $7.9 billion market cap commercial bank CIT Group Inc. (NYSE:CIT). CIT is expected to lose money this year but report earnings per share of $3.21 for 2013, giving it a forward P/E of 11. It also trades at about its book value, with returns over the last year being even with the S&P 500. We don’t know what the fund is thinking here, but we would advise investors to stay away in favor of banks which are profitable and are cheaper both on a forward basis and compared to their book value.

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