Distressed Securities-Focused Investor Bought These Five Stocks; Should You Follow?

Contrarian Capital was founded in 1995 by Jon Bauer, Janice Stanton and Gil Tenzer after enjoying great success investing in distressed companies while working at Oppenheimer & Co. At the end of the second quarter, the fund’s equity portfolio carried a market value of $145.7 million. Transportation stocks accounted for 30% of the portfolio, while 25% of the funds were invested in technology stocks. Contrarian Capital’s top positions have not suffered significant changes, so, in this article, we’ll take a look at the fund’s top new positions established during the quarter.

Insider Monkey measures a hedge fund’s performance by calculating the weighted average returns of each fund’s long stock positions in companies with over $1 billion in market cap. According to this methodology, Contrarian Capital is currently down 35.7% for the year. The same metric shows the fund registered a negative 22.8% return in the second quarter, one of the worst results among the funds in our database.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see more details here).

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Jon Bauer
Jon Bauer
Contrarian Capital

Big Bet On Air Transportation

First up is Gol Linhas Aereas Inteligentes SA (ADR) (NYSE:GOL), a Brazilian company that offers air transportation services. During the second quarter, Contrarian Capital acquired 190,550 shares worth $2.02 million at the end of June. Only four of the funds followed by Insider Monkey reported a stake in the company, unchanged from the previous quarter. Jim Simons‘ Renaissance Technologies had its stake increased by 124% to 195,840 shares valued at $2.07 million. Gol Linhas Aereas Inteligentes SA (ADR) (NYSE:GOL) established an all-time low of $2.40 in February 2016 and has been in an uptrend since then, currently up 228% for the year. The company swung to a profit in the second quarter, posting a net income of 309.5 million Brazilian reais ($98 million). Cost reductions and gains from currency swings were the main drivers. Gol Linhas Aereas Inteligentes SA (ADR) (NYSE:GOL) said costs fell by 5% in the period, while a 9.8% appreciation of the Real against the US Dollar has helped it pocket 778.8 million reais ($246 million). Although the results are promising, the current economic climate in Brazil is still hurting demand for air transportation.

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Merger Play

Another important addition is Amaya Inc. (NASDAQ:AYA), a Canadian provider of online gaming and gambling services. By the end of the second quarter, Jon Bauer and his team had amassed 135,615 shares valued at $2.08 million according to the fund’s latest 13F filing. At the end of June, roughly 31% of Amaya Inc. (NASDAQ:AYA)’s common stock was held by 17 of the funds in our database, unchanged from the end of June. Crispin Odey has also made a big bullish bet on this stock, with his fund, Odey Asset Management Group, having reported a fresh stake that amounted to 9.98 million shares worth approximately $153 million. Amaya Inc. (NASDAQ:AYA) has recently appointed Rafi Ashkenazi as its new CEO, after founder David Baazov stepped down amid allegations of insider trading. Baazov planned to take the company private, but Canadian regulators brought charges against him two months after he made an offer for the company. Amaya is currently reviewing its strategic options and has engaged in talks with a number of entities. “While these discussions are advancing, there remains no guarantee that this process will result in a transaction of any kind,” Amaya said.

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Turn the page to learn about the fund’s top 3 new additions.

Gerdau SA (ADR) (NYSE:GGB) also managed to get Jon Bauer’s attention, as Contrarian Capital bought some 3.22 million shares over the course of the quarter, a position worth $5.86 million at the end of June. Hedge fund interest in Gerdau SA (ADR) (NYSE:GGB) picked up during the quarter, as the number of long positions increased to 13 at the end of June from 10 registered three months earlier. Jim Simons’ Renaissance Technologies held the largest stake in the company among the funds tracked by Insider Monkey, having indicated ownership of 17.3 million shares, up 77% from the previous quarter. Analysts are also optimistic about the prospects of Gerdau SA (ADR) (NYSE:GGB), as the stock carries a forward Price to Earnings (P/E) ratio of 20. Morgan Stanley has recently upgraded the stock to ‘Overweight’ from ‘Equal Weight’ and has assigned a price target of $3.77 per share. Given Monday’s closing price of $2.84 per share, this implies an upside potential of roughly 33%. The firm said it expects Brazil’s economy to register a modest 0.9% growth in 2017 but believes it will be enough to trigger a double-digit growth in demand for steel. “Gerdau has the strongest balance sheet in the Brazilian steel industry. Strong free cash flow generation (R$4.5 billion in 2016-18e), combined with solid cash position (R$4.9 billion as of 2Q16), should allow the company to comfortably meet debt maturities in coming years,” wrote Morgan Stanley, as quoted by Barron’s.

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Commodities Recovery

Jon Bauer and his team are betting big on Vale SA (ADR) (NYSE:VALE), the world’s largest producer of iron ore based in Brazil. According to its latest 13F filing, Contrarian Capital held 3.35 million shares at the end of the second quarter, worth a little over $16.2 million. Hedge fund sentiment towards Vale SA (ADR) (NYSE:VALE) worsened during the quarter, with the number of funds invested in the company having dropped to 24 by the end of June from 26 at the end of March. Ken Heebner is also optimistic about the prospects of this stock, with his fund, Capital Growth Management, reportedly holding 7 million shares, up 126% during the quarter. Vale SA (ADR) (NYSE:VALE) has found itself in hot water at the end of 2015, after one of its co-ventures, Samarco Mineração SA, was shut down in November after a dam burst, causing a major environmental disaster. In a recent presentation, Vale SA said it is not clear when operations at Samarco Mineração will resume and it plans to work in improving efficiency and cash flow to offset the losses. After trading close to all-time lows at the end of January, the stock turned around and headed north, currently up by 75% for the year.

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Oil Recovery To Boost Demand For Tankers

Jumping straight to number 2 is Overseas Shipholding Group, Inc. Class A (NYSE:OSG). Contrarian Capital has reported a $23.7 million stake in its latest 13F filing, as it gathered roughly 2.15 million shares of the oil tanker operator. In general, the hedge funds followed by Insider Monkey tended to stay away from this stock, as the number of long positions fell to 15 by the end of the second quarter, from 19 registered a quarter before. Billionaire Ken Griffin is also betting on the comeback of Overseas Shipholding Group, Inc. Class A (NYSE:OSG). His fund, Citadel Investment Group, also reported a new position, having amassed 1.37 million shares worth $15.1 million according to its latest regulatory filing. For the second quarter, the company reported an 8% decrease in Time Charter Equivalent (TCE) revenues to $216 million and $0.31 in earnings per share, down from $0.60 per share reported a year before. Overseas Shipholding Group, Inc. Class A (NYSE:OSG) is planning to separate its international operations from the domestic ones, as it believes it will help increase shareholder value. Of the 79 vessels it currently owns, 55 are operating in the international flag market, while the remaining 24 are focusing on the US market.

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Disclosure: none