AltaRock Partners 13F: Scott Bradford and Mark Massey Value These Stocks

Altarock Partners was founded by Mark Massey in 2002 and managed to return 12% per year since its inception until 2015, according to BeyondProxy, which conducted an interview with Massey. Massey and his partner Scott Bradford are proponents of value investing, more specifically targeting wide moat companies – those that have and can maintain a sustained competitive advantage. In his interview with BeyondProxy, Massey said that they are looking to acquire great businesses at rational prices betting that their earnings are most probably be much higher in one or two decades.

Massey and Bradford’s fund seeks out investment opportunities through qualitative analysis, focusing, among other things, on buybacks. They believe that companies that buy back high amounts of their own stocks may indicate that the management is well-aligned and is convinced in “the durability of its competitive moat.” In a letter to investors, AltaRock outlined some of its other principles, such as strong profitability, global diversity, strong free cash flow, cheap valuation, and historical context, among others.

AltaRock holds a very concentrated portfolio, which usually contains between five and ten holdings at a time. It prefers to treat its positions as actual ownership stakes in businesses and even refer to them as a “conglomerate” drawing inspiration from Warren Buffett and Ben Graham. Massey said that a lot of its investment philosophy was inspired by Warren Buffett and Charlie Munger’s Berkshire Hathaway.

AltaRock also has a fundamental approach to holding cash. While many investors don’t like to hold large amounts of cash because it does not earn them anything, AltaRock prefers to hold cash, because it can always be used to snap up a potential investment at a bargain prices. “We find ourselves equally convinced to hold more or less cash as we focus alternatively on the potentially poor macroeconomic environment on the one hand, and the cheap prices of the very high quality companies we currently own on the other hand,” AltaRock said in its 2011 mid-year letter to investors.

In its latest 13F filing, the Beverly, Massachusetts-based fund disclosed an equity portfolio worth $710.06 million held as of the end of June, up from $674.24 million a quarter earlier. As stated earlier, AltaRock prefers to hold a concentrated portfolio and currently has only seven holdings, after having closed its stake in Liberty Global plc – Class C Ordinary Shares (NASDAQ:LBTYK) between April and June. The largest chunk of AltaRock’s portfolio is amassed by its top four holdings, which collectively represent 75% of its 13F value.

Following market-beating funds like AltaRock can allow smaller investors to save some time on research and not only outperform the market but even the funds they are replicating due to the lack of fees. Another way to generate solid returns over the long run is to follow the collective stock-picking skills of smart money investors. That’s what we do at Insider Monkey. We analyze 13F portfolios of over 600 hedge funds and other large institutional investors and identify the best picks to replicate. Our strategy, the picks from which we share with subscribers to our premium newsletters (see more details), has returned 45% since February 2016.

With this in mind, let’s take a closer look at the top five holdings from AltaRock Partners’ latest 13F filing.

1. TransDigm Group Incorporated (NYSE:TDG)

During the second quarter, AltaRock Partners inched up its stake in TransDigm Group Incorporated (NYSE:TDG) by 6% to 572,164 shares worth $154.84 million; the position amassed 21.70% of the fund’s equity portfolio at the end of June. Other shareholders of TransDigm Group Incorporated (NYSE:TDG) include billionaire Chase Coleman’s Tiger Global Management, Sharlyn C. Heslam’s Stockbridge Partners, and Robert Joseph Caruso’s Select Equity Group.

AltaRock has held shares of TransDigm Group Incorporated (NYSE:TDG) since the fourth quarter of 2014 and has seen the stock advance by more than 39%. During this time, the company managed to increase its revenue every quarter, and even though it missed the consensus in several of them, the revenue has mostly grown by double-digits on a year-over-year basis. TransDigm Group Incorporated (NYSE:TDG) is highly diversified, holding over 30 different businesses in the aerospace businesses. In addition, the company has a long product cycle, as it initially supplies parts to airplane makers, such as Boeing and Airbus and then supplies the aftermarket parts to airline operators. This allows TransDigm to retain its customers and generate stable revenues over long periods of time. The industry in which TransDigm operates is highly regulated, which creates barriers to entry, but also makes sure that TransDigm Group Incorporated (NYSE:TDG) supplies the aftermarket parts if it was the original supplier to the airplane maker.

2. Priceline Group Inc (NASDAQ:PCLN)

In Priceline Group Inc (NASDAQ:PCLN), AltaRock held 72,413 shares worth $148.54 million at the end of the second quarter, which represented 21% of its portfolio value. Priceline Group Inc (NASDAQ:PCLN) has managed to establish itself as the leader in online travel market as the company built a strong network of hotel properties and services. In turn, this leads to a strong network effect, as customers are drawn to its platforms that contain more offerings. Priceline Group Inc (NASDAQ:PCLN) currently has around 600,000 hotel properties across its platforms, which include Booking.com, Kayak, OpenTable, and Momondo. The company controls around 30% of the online travel agencies (OTA) market, competing closely with Expedia, which has another 30%. Basically, these two companies have created a duopoly in the OTA market, which allows them both to sustain their competitive advantages for at least a couple of years. However, while competing with Priceline Group Inc (NASDAQ:PCLN) would require a lot of capital, there are companies that have the capabilities to build similarly-strong networks, such as Alphabet Inc (NASDAQ:GOOGL), Facebook Inc (NASDAQ:FB), and Amazon.com, Inc. (NASDAQ:AMZN).

3. Charter Communications, Inc. (NASDAQ:CHTR)

Then there is Charter Communications, Inc. (NASDAQ:CHTR), in which AltaRock disclosed a $138.29 million stake containing 410,537 shares, up by 25,000 shares over the quarter. On the other hand, billionaire Dan Loeb’s Third Point, cut its stake in Charter Communications, Inc. (NASDAQ:CHTR) by 37% to 500,000 shares during the second quarter. AltaRock initiated its stake in Charter Communications, Inc. (NASDAQ:CHTR) during the first quarter of 2015, right before the company announced that it would merge with Time Warner Cable and acquire Bright House Networks. The deals completed in 2016 created the second-largest cable provider with over 25 million customers. In addition, earlier this year it was reported that Sprint Corp (NYSE:S) might be interested in a merger with Charter Communications, Inc. (NASDAQ:CHTR). If the deal goes through, it would create a media and telecom behemoth, although Bloomberg has reported that Charter is not interested.

4. Moody’s Corporation (NYSE:MCO)

AltaRock’s position in Moody’s Corporation (NYSE:MCO) amassed 18.60% of its equity portfolio at the end of June, as the fund held 1.08 million shares worth $131.71 million. In the interview, Massey said that AltaRock held Moody’s since the company was spun off from Dan & Bradstreet in 2000, but sold their stake in 2007 on the back of concerns that rating agencies might be blamed for the financial crisis. The fund bought back shares in the fourth quarter of 2014. Massey and Bradford believe that Moody’s has one of the best business moats in the world, as the company alongside its peer S&P are the global referees of debt capital markets. Both companies enjoy a strong networking effect as executives prefer to engage the services of these two companies and keep a close relationship with them, which in turn leads to debt investors subscribing to Moody’s and S&P data products. In addition, AltaRock likes that Moody’s Corporation (NYSE:MCO) is still growing its revenue organically at a double-digit rate, despite being over 100 years old (it was founded in 1909), and this trend can be sustained for at least another 10 years. One of the largest shareholders of Moody’s Corporation (NYSE:MCO) is Berkshire Hathaway, which owns over 24.60 million shares of the company.

5. Westinghouse Air Brake Technologies Corp (NYSE:WAB)

In Westinghouse Air Brake Technologies Corp (NYSE:WAB), AltaRock owns 686,426 shares valued at $62.81 million as of the end of June. Another shareholder of the company is Thomas Steyer’s Farallon Capital, which disclosed holding 3.21 million shares in its latest 13F filing. Westinghouse Air Brake Technologies Corp (NYSE:WAB), also known as Wabtec, provides equipment and services to the global freight and transit rail industries. The company has a strong market position in its core products markets and because the industries in which it operates are highly regulated, there are significant entry barriers for new companies. Wabtec also has a well-established base of customers, such as railroad operators and passenger transit authorities, which provides it with an advantage to supply aftermarket products, since its buyers are usually looking for products that they are familiar with and seek to replace the parts from the supplier of the original components.

Disclosure: none