Force Capital, managed by Robert Jaffe, is a mid-sized hedge fund with more than $600 million in assets under management. Located in New York, Jaffe’s fund focuses primarily on U.S. equities, choosing to employ the traditional mixture of long/short strategies that many of its peers use. Force Capital uses a bottom-up approach when choosing its investments, and has a penchant for the financial, consumer, and industrial sectors of the economy.
At the end of last quarter, Jaffe’s 13F filings with the SEC indicated a few interesting moves, including: a major downsizing in one of world’s largest insurance companies, a bullish bet in the mortgage REIT sector, and a pessimistic move in one of the railroad industry’s largest players. While individual investors may think that it is impossible to accurately trade off of hedge fund sentiment, empirical studies have proven that mimickers can beat the market by up to 7 percentage points a year. Here’s a better look at this strategy in Insider Monkey’s Hedge Fund Education Center. Without further ado, let’s take a look at what Jaffe’s top four long positions were at the end of last quarter.
iStar Financial Inc. (NYSE:SFI)
iStar Financial is a commercial mortgage REIT, and accounts for 5.3% of Force Capital’s total 13F holdings. Since the recession, this mREIT has had to alter its business model rather drastically, as commercial real estate has been a far from ideal investment strategy. While it used to focus on short-term debt for property development projects, iStar has diversified its portfolio of assets quite significantly, now holding: (1) condo and hotel projects, (2) land, (3) leases, (4) direct investments in loan servicing companies, (5) foreclosed real estate, and (6) traditional loans.
Due to these restructuring efforts, iStar has seen its funds from operations decline by more than 25% a year over the past half-decade, though it has recently announced a 7.5-8% dividend on shares of its preferred stock. When valuing the mREIT’s FFO growth, we can see that it sports a price-to-FFO growth ratio of 8.02, far below Brookfield Office Properties Inc. (NYSE:BPO) at 26.36, and RAIT Financial Trust (NYSE:RAS) at 59.76. In short, a new dividend shows that iStar is headed in the right direction, and it looks to have one of the most diversified portfolios in its industry, which investors are significantly undervaluing.
First Industrial Realty Trust, Inc. (NYSE:FR)
Another REIT, First Industrial has seen its shares rise by 29.3% in 2012 thus far, outpacing the real estate sector as a whole, which has returned 22.4%. As its name suggests, First Industrial’s portfolio is comprised of assets primarily related to industrials, such as warehouses, research and development facilities, and manufacturing plants. Over the past three years, the company has grown its funds from operations by an average of 6.9% a year. First Industrial has financed this expansion through the sale of older real estate.
According to Zacks, one of the REIT’s most recent transactions is a $5.3 million sale of an Ohio property to Continental Real Estate. This comes on the heels of ten other industrial property sales last month, the majority of which were in the warehousing marketplace. KeyBanc Capital Markets upgraded First Industrial to a “buy” after this news broke, and has a price target of $15 a share. The REIT currently trades in the low $13 range, and declared a 7.25% dividend yield on its preferred stock early last month.
American International Group, Inc. (NYSE:AIG)
AIG has been rather active in buying back its shares from the U.S. Treasury lately, as the federal government is a minority shareholder for the first time since September 2008. Over the past month, the government has sold $20.7 billion in AIG shares to the company, and currently holds a 15.9% stake. Federal officials have reportedly notified the insurance company that it may be subject to additional Dodd-Frank oversight, specifically regarding its capital reserve requirements, though the Financial Stability Oversight Council has yet to reach a conclusion. Notably, shares of AIG are up close to 9% over the past week, as the company announced a four-year $4 billion credit facility on October 5th. Aside from Jaffe, it is currently held by other prominent hedge fund managers like Bruce Berkowitz, Dan Loeb, and John Griffin.
CSX Corporation (NYSE:CSX)
At the end of the second quarter, Robert Jaffe’s 13F filings indicated that he had decreased his position in CSX by a whopping 61%. The stock still accounts for a little over 3% of the money manager’s portfolio, good for $9.9 million. Over the past month shares of the railroad transportation company have fallen by 3.2%.
CSX reports will release its third quarter earnings early next week. Average analyst estimates are expecting earnings of 44 cents a share, up a penny from 2011’s Q3 EPS. It’s worth noting that peer Norfolk Southern Corp. (NYSE:NSC) lowered its own Q3 guidance late last month, as it now expects to underwhelm analyst estimates by around 25%. Norfolk says a decline in coal and merchandise shipments are primarily responsible, so CSX investors will have to be aware of any potential shortcomings in next week’s release.
CSX currently trades at a trailing P/E of 12.0X, which is below the railroad industry’s average (14.6X), but more expensive than Norfolk Southern, which sports a P/E of 11.5X. Despite its recent guidance cut, long range estimates predict that Norfolk will still have the edge when it comes to EPS, with early forecasts predicting annual growth of 13.7% over the next five years. CSX’s expected EPS growth over the next half-decade is nearly five full percentage points lower, at 8.8% a year. While CSX sports a moderately attractive PEG of 1.37, Norfolk trades at an earnings growth multiple below 1.0, signaling that it may be the better value play at the moment.
For a complete look at Robert Jaffe’s 13F portfolio, continue reading on the hedge fund manager’s Insider Monkey profile page.