Several famous hedge fund managers pitched their favorite ideas at the Sohn Canada Investment Conference 2015 on Thursday. Clifton Robbins of the Blue Harbour Group pitched his long thesis on agricultural equipment manufacturer AGCO Corporation (NYSE:AGCO), while John Khoury of Long Pond Capital pitched his long thesis on Forest City Enterprises, Inc. (NYSE:FCE.A). Let’s take a closer look at the two companies and the hedge fund managers’ reasoning.
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 118% since then and outperformed the S&P 500 Index by around 60 percentage points (see more details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
Clifton Robbins‘ Blue Harbour Group currently holds a 7.5% stake in AGCO Corporation (NYSE:AGCO). Robbins thinks investors are overlooking AGCO’s 24% ownership of TAFE, which is a hidden gem on the balance sheet. He notes the agricultural equipment sector is highly concentrated, giving producers such as pricing power. Robbins also likes AGCO’s valuation. AGCO currently trades at 14.2 times forward earnings and yields 9% free cash flow yield based on trough earnings. The hedge fund manager likes how management bought back 13% of the float over the last six quarters, and notes the company has unused debt capacity on its balance sheet to buy as much as 17% more. Robbins thinks AGCO could trade for $75-95 based on historic multiples, giving shares an 78% upside.
Like Robbins, hedge funds are bullish on AGCO Corporation (NYSE:AGCO). Of the around 730 elite funds we track, 16 funds held stakes with an aggregate value of $591.23 million (representing 11.80% of the company) at the end of June, versus 20 funds and $408.73 million respectively a quarter earlier. As of the end of the second quarter, Robert Rodriguez and Steven Romick’s First Pacific Advisors holds 1.12 million shares, while Ken Griffin’s Citadel Investment Group owns 905,772 shares. Martin Whitman’s Third Avenue Management owns 1.9 million shares too.
While hedge funds are bullish, the market and investment bank analysts have gone the other way. Shares of AGCO are down 2.4% year to date after UBS lowered its rating on AGCO Corporation (NYSE:AGCO) to ‘Sell’ from ‘Neutral’ and cut its price target to $39 from $59. UBS believes AGCO’s 2016 earnings will be weaker than expected and likely less than the consensus expectation of $3.09 per share.
John Khoury notes that Forest City Enterprises, Inc. (NYSE:FCE.A) trades at a 40% discount to its net asset value. Khoury thinks the discount to net asset value will narrow after the company becomes a REIT in 2016 and sells off its non-core assets. Forest City’s stock should also rise because REIT exchange traded funds will buy the security once Forest City is included in various REIT indexes. Khoury thinks Forest City shares have upside potential of 70% and should trade for $35 per share.