By tracking the positions that hedge funds report in their 13F filings, and then calculating the changes in value of the stocks that they owned since the end of the quarter, we can make an educated guess as to what their performance has been. Of course, these funds may have bought or sold shares over the course of the quarter- meaning our figures aren’t precisely accurate- and our returns can’t include the effect of a fund’s short positions on returns. However, we still think we can get a rough outline of a fund’s performance, and by our methodology Contrarian Capital’s 13F portfolio- which is only a small portion of its assets under management- seems to be doing well. We have the portfolio, which is managed by Jon Bauer, up about 25% in the first half of the year and another 11% last quarter. See many of its holdings from the end of June or read on to learn more about some of its largest positions.
The fund had about 690,000 shares of Charter Communications, Inc. (NASDAQ:CHTR) at the end of June, even after selling some of it shares during the second quarter. Charter is a $7.7 billion market cap provider of cable TV, Internet, and telephone services and has returned 34% this year. The company is expected to have negative earnings for 2012, but next year is expected to earn 82 cents per share (giving it a forward P/E of 93). With its revenue actually only up slightly in the second quarter compared to a year earlier, we don’t think that it’s a good stock to buy right now.
LyondelBasell Industries NV (NYSE:LYB), a large chemical company, was another of Contrarian’s top picks; the fund reported a position of about 950,000 shares. This stock is up 61% so far this year, and it actually could still be a bargain at only 15 times trailing earnings and a 2.9% dividend yield. However, earnings were down modestly in the second quarter versus the same period in 2011 off of considerably lower revenue. We plan to investigate the company in depth after it has released third quarter earnings.
Contrarian also liked Bank of America Corp (NYSE:BAC), which is up 60% year to date; the fund’s position of 2.6 million shares at the end of June was unchanged from the beginning of April. There’s a case to be made that the stock can go higher: Bank of America only trades at half the book value of its equity, and at 10 times forward earnings estimates. However, the earnings multiple in particular doesn’t look too good compared to other large banks and we’d actually written last week that it’s time to take profits at Bank of America.
Bauer and his team’s next pick was contrarian, all right: about 570,000 shares of major airline United Continental Holdings Inc (NYSE:UAL). United Continental and many of its peers trade at remarkably low earnings multiples as investors shy away from the minefield that is the airline industry- in this case, a forward P/E of 5. Sell-side analysts project good growth numbers over the next several years, in fact, yielding a five-year PEG ratio of 0.6. The stock is up only 7% so far this year but we think that the industry offers good opportunities for value investors and while Delta (for example) might be a better pick we certainly like United Continental in absolute terms.
Another of the fund’s top picks was the so-contrarian-it-really-isn’t General Motors Company (NYSE:GM), which was actually one of the ten most popular stocks among hedge funds during the second quarter (see the full rankings) despite the impression that investors hate the bailed-out automaker. Contrarian owned about 370,000 shares of GM at the end of June. GM is up 13% year to date. It has attractive valuation characteristics- trailing P/E of 7, forward P/E of 5, five-year PEG ratio of 0.5- though this is the case for many auto and auto-related companies. We do think there are opportunities in the industry, and while GM might not be our favorite pick we think that it is somewhat likely to prove a good value.