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General Motors Company (GM), MGM Resorts International (MGM), Citigroup Inc (C): Covalent Capital Partners’ Top Picks Heading Into 2015

Robert Hockett’s Covalent Capital Partners has filed a 13F with the SEC, declaring its long equity positions at the end of 2014. Save for their ordering amongst the top 5, there is no change in Covalent’s top 5 positions from the end of the previous quarter, showing a clear belief in the long term prospects of these five stocks. In fact, three of those five stocks have been held by Covalent since its very first 13F was filed three years ago. Most notable amongst those three (and the overall five) are General Motors Company (NYSE:GM) and MGM Resorts International (NYSE:MGM), two brands renowned on the global stage. Let’s take a look at those and Covalent’s three other prominent holdings, after a little introduction to this fund.

Covalent Capital

Dallas, Texas-based Covalent Capital was co-founded by Hockett, formerly one of three principals at DDJ Capital Management, in 2005. Hockett has also worked with Keystone Investments, Salomon Brothers, and Trammell Crow Company. While Hockett previously served on the Board of Directors of several companies and helped negotiate restructurings and mergers, Covalent is non-activist in nature, and has rarely taken large ownership positions in companies. Despite its two largest holdings being large-cap companies in General Motors and MGM Resorts, the fund focuses primarily on middle-market companies in the consumer services industry.

General Motors Company (NYSE:GM) moves to the top of Covalent’s portfolio in terms of value, with the fund adding 71,931 shares to their position during the fourth quarter for a total of 1.22 million. General Motors of course needs little introduction, being a $60.58 billion market cap automobile manufacturer, and once the top-selling automaker in the world before being overtaken by Toyota Motor Corp (ADR) (NYSE:TM) in 2012.

General Motors Company (NYSE:GM) has suffered through a disastrous year, despite remaining the third best-selling automaker in the world. The company suffered through 79 recalls through early December 2014, involving more than 30 million vehicles, and had to set aside billions of dollars to pay out potential compensation claims involving faulty ignition switches on older-model vehicles. The overwhelming pressure led to shares sliding 14.29% for the year.

With the pressure now lifting, it appears General Motors Company (NYSE:GM) may be a solid candidate for a bounce-back in 2015, and following a strong earnings report on February 4, shares are doing just that, up 7.71% for the year. Also of the note is the fact that David Tepper’s Appaloosa Management is among a group of hedge funds that also includes Parag Vora’s HG Vora Capital Management, and Kyle Bass’ Hayman Advisors, that are putting their support behind Harry J. Wilson, who recently sent a letter to General Motors’ Board seeking election, and further proposed an $8 billion buyback of shares.

MGM Resorts International (NYSE:MGM) is now the second most valuable of Covalent’s holdings, and one of the fund’s most bullish picks of the quarter, as it increased its position in the Paradise, Nevada-based casino and resort operator by 37%, to 1.96 million shares after adding 529,402 shares during the fourth quarter. As mentioned, MGM is a long-held position for Covalent, dating back to its first 13F filing, and the company’s shares are up nearly 100% since then, thanks to an especially robust 2013.

MGM Resorts International (NYSE:MGM) has been on a downswing over the past half a year however, dipping 14.3% during that time as it failed to meet estimates for the first time in several quarters, during the third quarter of 2014. Some of those lagging revenues have come from their operations in Macau, which have suffered from less VIP gamblers in the region as the Chinese economy has begun to cool. However MGM’s refocused efforts in Las Vegas should bear fruit in 2015, as it completes an 1,100-room hotel addition to the Mandalay Bay Resort, and builds upon its standing as a leading convention host in the city, which is becoming a hub for such events.

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