Charles Davidson co-founded Wexford Capital in 1994. Today he serves as the fund’s Chairman and Chief Investment Officer. He is responsible for the fund’s overall strategy. He also serves as the senior portfolio manager for Wexford Spectrum Funds and Wexford Catalyst funds. Before co-founding Wexford Capital, Davidson cut his teeth working for ten years (1984-1994) in fixed income arbitrage, risk arbitrage, private equity, distressed/bankruptcy and special situation investments as General Partner for Steinhardt Partners. Before that, Davidson spent seven years (1977-1984) as head of domestic corporate bond trading and proprietary trading at Goldman Sachs. Davidson’s experience shows through in Wexford Capital’s investment style, which the firm itself describes as contrarian and opportunistic.
According to a 13F filed on February 14, at the end of the fourth quarter, Charles Davidson’s Wexford Capital had 470 positions in its portfolio, with a total value of $855.07 million. The largest of these positions, by far, is Wexford’s stake in Rhino Resource Partners (RNO). The fund had over $150.99 million in the company (or 8.55 million shares) at the end of December. Then, in early January, Wexford upped its stake in Rhino Resource Partners to 19.98 million shares, representing a 72.1% activist stake in the company. As of the open of trading on February 14, Rhino Resource Partners was trading at $19.79 a share on a one-year target estimate of $24.83 a share (range $20 to $29). In addition to the upside, Rhino Resource Partners pays a high dividend of $1.92 a share (9.80% yield) – and it is priced low, at just 9.98 times its forward earnings.
Rhino Resource Partners’ forward P/E sounds even better when compared to its competitors. Alpha Natural Resources (ANR), for instance, is priced at 23.47 times its forward earnings. And, while the company may have a more projected upside in its stock price – the company opened trading on February 14 at $20.49 a share on a mean one-year target estimate of $30.84 – it doesn’t pay any dividends. The combination of these factors indicates clearly that Rhino Resource Partners is the better deal. We recommend the stock for risk-averse investors, looking for moderate growth and high dividends.
Charles Davidson’s Wexford Capital is also bullish about Energy Partners LP (EPL). The fund had $82.76 million, or just under 7.09 million shares, in the company at the end of the fourth quarter, up from a value of $62.74 million (roughly the same number of shares) at the end of the third quarter. Davidson is in good company with this stock – both David Einhorn’s Greenlight Capital and Clint Carlson’s Carlson Capital like this stock. The company is small, with a market cap of just $652.59 million but it is a great investment. When the company opened trading on February 14, it was priced at $16.59 a share and it carries a mean one-year target estimate of $21.15 a share (range $17 to $23). It is also priced at just 8.71 times its forward earnings – a real bargain considering that the stock has returned 10.63% over the last 52 weeks, versus 1.79% for the S%P 500, and its earnings are expected to grow by 368% this year and 61.50% next year.
The outlook for Energy Partners doesn’t fade by looking at its competitors either. Forest Oil (FST) is a close competitor with its $1.51 billion market cap, compared to Energy Partners’ $652.59 million – but Energy Partners has much higher growth. It reports quarterly revenue growth of 50.80%, compared to Forest Oil’s -0.60%. Energy Partners is also the winner with regard to its pricing. Forest Oil has a much higher forward P/E of 13.11. We like Energy Partners and expect good things for the little company, especially over the next couple years.
Charles Davidson is bullish about United Continental Holdings (UAL). His Wexford Capital had a stake of 2.33 million shares, worth roughly $43.90 million, in the company at the end of the fourth quarter. United Continental was trading at $23.79 at the open of trading on February 14, on a mean one-year target estimate of $33.58 a share. The company is priced extremely low, with a forward P/E of just 3.83. In comparison, rival Delta (DAL) has a forward P/E of 4.07 and considerably less expected upside. The stock opened February 14 at $11.10 a share on a one-year target estimate of $14.69. We prefer UAL over Delta however airlines stocks historically have been a very efficient value destruction machine. They are highly cyclical and analyst estimates aren’t always accurate. That’s why we don’t recommend them to risk-averse investors.