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Central Pacific Financial Corp. (CPF), Cheniere Energy, Inc. (LNG) Among Anchorage Advisors’ Top Picks for Q4

Anchorage Advisors, a New York-based fund managed by Kevin Michael Ulrich (pictured) and Anthony Davis, recently filed a 13D with the U.S. Securities and Exchange Commission, in which it reiterated its stake in Central Pacific Financial Corp. (NYSE:CPF) and  announced entering into an underwriting agreement alongside Carlyle Financial Services Harbor L.P., which involves the sale of around 3.80 million shares from each party to Citigroup Global Markets Inc. at a price of $23.01 per unit. Anchorage currently owns 8.07 million shares of Central Pacific, which represent 23.2% of the company’s common stock.

Anchorage Capital 2014 Q2 Investor Letter

Central Pacific Financial Corp. (NYSE:CPF) is a $803.2 million market-cap company, which operates as the holding company for Central Pacific Bank that provides commercial banking services to businesses, professionals, and individuals in Hawaii.  It operates 36 branches and 110 ATMs in the state of Hawaii, as of December 31, 2014. Moreover, Central Pacific Financial Corp. (NYSE:CPF) has recently announced that its Board of Directors authorized an additional $75 million to its common stock repurchase program. This move will reduce the number of shares outstanding and increases its earnings per share and will elevate the market value of the remaining shares. This could explain that current quarter earnings estimates have risen to $0.27 per share from $0.26 per share, while full-year forecasts jumped to $1.17 per share from $1.13 per share.

The Hawaii-based company showed strong earnings growth in the fourth quarter of 2014 when compared to the same quarter one year prior, to $ 0.37 from $0.24. Further, compared to its closing price of one year ago, the share price has jumped by 15.11%, exceeding the performance of the market. Moreover, the company’s gross profit margin is considered high, at around 107%.

Among the funds that we track, another shareholder of Central Pacific Financial Corp. (NYSE:CPF) is Matthew Lindenbaum’s Basswood Capital, which held some 877,296 shares as of the end of 2014, down by 22% on the quarter. The position was valued at $18.86 million.

Anchorage Advisors is primarily invested in credit and special situations and illiquid investment markets of North America and Europe using an active long and short basis, with particular focus on defaulted and leveraged issuers. The firm specializes in distressed investment opportunities, as well as in fundamental analysis. The track record indicates a return of 20.9% in 2013 and 16.4% in 2012. Anchorage disclosed an equity portfolio valued at some $4.84 billion as of the end of 2014, with the fund’s capital being allocated towards the finance (54%), consumer discretionary (18%) and energy (14%) sectors.

We track the activity of Anchorage Capital Advisors alongside over 700 other investors, because we consider that imitating most popular picks among hedge funds can provide market-beating returns. However, the key of our system is to focus on most popular small-cap picks, rather than the top most popular stocks, which are primarily companies from the large- and mega-cap space. Through empirical studies of equity portfolios of hedge funds between 1999 and 2012, we determined that a portfolio consisting of 50 most popular stocks among hedge funds underperformed the market by an average of 7 basis points per month. On the other hand, imitating 15 most popular small-cap stocks beat the market by nearly one percentage point per month during the same period. Based on the results of these backtests, we have developed a strategy based on selecting most popular small-cap stock picks among hedge funds that we track. Our strategy returned 132% over the last 2.5 years, outperforming the S&P 500 ETF (SPY) by some 79 percentage points (read more details here).

With this in mind, let’s take a look at the other top picks in Anchorage’s equity portfolio, aside from Central Pacific Financial Corp. (NYSE:CPF), which represents the third-largest holding as of the end of 2014. On the first two spots are Houghton Mifflin Harcourt Co (NASDAQ:HMHC) and Cheniere Energy, Inc. (NYSEMKT:LNG).

Anchorage disclosed holding 21.39 million shares of Houghton Mifflin Harcourt Co (NASDAQ:HMHC) at the end of 2014, with no activity on the quarter, with the shares having an aggregate value of $442.98 million. The stake accounted for 9.14% of the fund’s equity portfolio. Among the funds that we track, John Paulson‘s Paulson & Co is the largest shareholder of Houghton Mifflin Harcourt Co (NASDAQ:HMHC), holding 30.91 million shares, the value of the stake amounting to $640.2 million, according to its latest 13F filing.

Houghton Mifflin Harcourt Co (NASDAQ:HMHC)’s revenue decreased by 11.37% on the year, to $265.5 million in the fourth quarter. Along with this, it reported a net loss of $83.7 million, or $0.59 per share, which represents a 29% decrease compared to the same quarter one year ago.

In Cheniere Energy, Inc. (NYSEMKT:LNG) the fund disclosed holding 5.09 million shares, the value of the stake amounting to $358.00 million. The largest shareholder of Cheniere Energy, Inc. (NYSEMKT:LNG) among the funds that we track is Seth Klarman’s Baupost Group, which upped its stake by 24% on the quarter to 13.81 million shares. Another fund that owned shares of Cheniere Energy, Inc. (NYSEMKT:LNG) is Andreas Halvorsen‘s Viking Global, holding 9.95 million shares, up by 83% on the quarter.  Cheniere Energy is an energy company, which engages in the liquefied natural gas (LNG) related business. The company’s stock is up by about 47% over the last year.

Earlier this year, the company announced an agreement with EIG Management Company, a private equity firm. Based on the funding deal, the latter will buy convertible notes from Cheniere Energy, Inc. (NYSEMKT:LNG) worth $1.5 billion and the proceeds will be used to fund a portion of the costs of developing, constructing, and placing into service the Corpus Christi liquefaction project, which are expected to cost between $11.5 and $12 billion.

Disclosure: None