Billionaire Tom Sandell’s Top Picks in Q3

Thomas SandellTom Sandell might just be the world’s most under-appreciated billionaire. He doesn’t have the name of a Buffett or Soros, but the manager of hedge fund Sandell Asset Management has amassed quite a fortune, as Forbes estimates Sandell’s net worth is close to $1.1 billion. Officially the eleventh richest man in Sweden, the sheer size of Sandell’s fund has shrunk over the years, and now totals just $750 million in assets, but that hasn’t stopped him from generating top notch returns. His 13F portfolio, which can be seen in its entirety here, returned 0.58% in the second quarter, and held some pretty solid stocks over the last quarter as well.

In terms of market value, Sandell’s top holding at the end of the third quarter was Dollar Thrifty Automotive Group, Inc. (NYSE:DTG), which accounted for close to $46 million worth of the vehicle rental company’s common stock. Over the quarter, Sandell increased his position in Dollar Thrifty by more than 25%, as the company entered a merger agreement with Hertz. The acquisition is still waiting on approval from the FTC, but the outlook looks rosy despite the fact that a similar deal fell apart last year. Hertz’s latest offer rests at $87.50, and Dollar Thrifty still trades at a 3% discount to this price, so there’s still some upside to be had here. From a valuation standpoint, the company’s trailing P/E (14.1X) and PEG (0.94) are also on the cheap. If you’re optimistic on the merger, now wouldn’t be a bad time to “monkey” Sandell here.

At $45.3 million, the hedge fund manager’s second largest holding at the end of Q3 was TPC Group Inc (NASDAQ:TPCG), a small cap petrochemical manufacturer. Since the start of 2012, shares of TPC are up more than 96%, as a number of firms have been bidding for the company. Bloomberg has said that Sandell’s fund desired “an auction to allow the previous counter bidder Innospec to weigh a new offer” against SK Capital and First Reserve Corp. TPC blew it’s earnings quite badly in the quarter, as top and bottom lines were down more than 20% year over year, but that hasn’t meant much for the company’s stock price. Now in the $45 range, merger arbitrage bulls expect a takeover price that is higher than today’s levels; Oppenheimer holds a $49 price target on TPC.

Next up on Sandell’s 13F we have two tech companies, Cooper Industries plc (NYSE:CBE) and Ariba, Inc. (NASDAQ:ARBA), each position is currently worth between $38 million and $40 million. Cooper is an electrical component company that is up nearly 30% in the last six months, as it was acquired by Eaton Corporation (NYSE:ETN) in May. The deal, which is expected to be complete by the end of the year, will create Eaton Global Corporation Plc in its wake, and will give Cooper shareholders $39.15 in cash per share and 0.77479 shares of Eaton Global per share of Cooper. While Cooper looks to be fairly valued, Eaton, which will account for nearly three quarters of this new enterprise, is trading at discounted trailing (11.9X) and forward (11.2X) earnings multiples.

Last but certainly not least, Ariba is the fund manager’s fourth largest holding, and was acquired by SAP AG (NYSE:SAP) in early October. The deal, which was set at $45 a share – a $4.3 billion enterprise value – gives SAP a major boost in cloud computing. Ariba’s acquisition price represented a premium of more than 15% for the company’s shareholders, which had already seen the stock rise by more than 35% since the start of 2012.

Assuming that Sandell still holds SAP – the deal was concluded in late Q3 – he now holds shares of a software company that trading at a 23.8% discount to its industry’s average in terms of earnings valuation. Sell-side analysts expect SAP to grow EPS by 11-12% a year over the next half-decade, which is in line with main competitor Oracle (11.9%). With its acquisition of Ariba, SAP is now in a better position to compete with Oracle over the long term, and actually pays a healthier dividend yield (1.32%) than that of its chief peer (0.80%). Barclays did downgrade the stock to ‘equal weight’ on October 10th, citing “limited near-term upgrade potential,” but it still wouldn’t be a bad idea to consider adding SAP if a modest sell-off occurs in the next few months.

For the sake of brevity, we’ll leave the discussion of Sandell’s portfolio at that, but his entire fund profile can be seen here at Insider Monkey.