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Empyrean Capital Partners’ Top Stock Picks

Los Angeles-based Empyrean was launched in 2004 by Michael Price and Amos Meron. It uses a combination of event-driven investment strategies and fundamental analysis to identify value stocks, investing across all sectors of the market. Price was formerly a partner at Goldman Sachs with a concentration on convertible bonds. He had joined Goldman in 1986. Meron is also a Goldman alum. Empyrean reported many of its equity long positions in its 13F filing for the second quarter. Read on for our discussion of the fund’s top picks or see more of Empyrean’s stock picks.

Michael Price

The fund reported owning 2.3 million shares of Life Technologies Corp. (NASDAQ:LIFE) at the end of June, a small increase from the beginning of the quarter. Life Technologies is an $8.6 billion market cap healthcare company offering life sciences products such as DNA synthesis and cell cultures. It saw a 28% increase in earnings in its most recent quarter compared to a year ago, but more modest growth is expected in the future as the company trades at 20 times trailing earnings. John Paulson’s Paulson & Co. was another hedge fund who owned the stock in the second quarter, with a position of 5 million shares.

Liberty Interactive Corp (NASDAQ:LINTA) was another of Empyrean’s favorite stocks as it closed June with an even 5 million shares of the company in its portfolio, unchanged from the first quarter of the year. Liberty Interactive resulted from the breakup of the Liberty Media corporation and owns television and e-commerce assets such as QVC. Its business has been struggling recently, but Wall Street analysts consider it a growth stock: its trailing P/E is 17 but its five-year PEG ratio comes in at 0.9, suggesting a strong expected growth rate in earnings per share over the next several years.

Empyrean cut its stake in $2 billion market cap gaming equipment company Bally Technologies Inc. (NYSE:BYI) by 17% but still owned 1.8 million shares, meaning that it was still one of the fund’s five largest positions according to the 13F. Bally’s stock is up 66% in the last year, and delivered growth in revenue and earnings last quarter (the fourth of its fiscal year, which ended in June) over the same period in 2011. As with Liberty Interactive, Bally’s trailing earnings multiple is a bit high (at 21) but growth expectations imply a five-year PEG ratio of 0.8. Both could be candidates for “growth at a reasonable price.”

The fund increased its position in Yahoo! Inc. (NASDAQ:YHOO) by 62%, bringing its total number of shares to 5.3 million. Yahoo- which billionaire activist investor Dan Loeb’s Third Point owns 71 million shares of, a position which was worth over $1.1 billion at the end of June- trades at 18 times trailing earnings, but an investment here is a very different call than value or growth. Investors in Yahoo are getting behind new CEO Marissa Mayer’s plan to make Yahoo relevant in an environment where it has been fairly aimless for some time. The second quarter saw Yahoo’s revenue and earnings come in lower than in the same period last year.

Tyco International Ltd. (NYSE:TYC), the $25 billion conglomerate which is breaking up into three separate businesses, rounded out the top five equity holdings on Empyrean’s 13F. Tyco’s fire protection business will be bidding the other two segments of the company goodbye: valve and pipe provider Tyco Flow Control will merge with Pentair while security company ADT will become a stand-alone public company. The 1.6 million shares Empyrean owned were actually down 45% from the end of the first quarter, suggesting that it is not particularly interested in staying with the breakup.

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