Clint Carlson opened the doors to his Dallas-based Carlson Capital in 1993, after spending years cutting his teeth as the head of risk arbitrage for the investment arm of the Texas-based Bass Brothers. Carlson Capital uses a multi-strategy approach to investing, borrowing from risk arbitrage, convertible arbitrage, relative value arbitrage (mostly pairs trading), event-driven arbitrage, distressed/credit arbitrage, and traditional long/short strategies. As of June 30, Carlson Capital had a U.S. equity portfolio with holdings valued at over $8 billion.
In this article, we’ll examine how Mr. Carlson and his team played five prominent financial stocks during the quarter, which were Bank of America Corp (NYSE:BAC), Morgan Stanley (NYSE:MS), Citigroup Inc (NYSE:C), First Niagara Financial Group Inc. (NASDAQ:FNFG), and Citizens Financial Group Inc (NYSE:CFG). Stocks from the industry made up 19% of their equity portfolio’s value on June 30, and major adjustments were made to several of their largest finance holdings, which we’ll analyze in this article.
While there are many metrics that investors can assess in the investment process, the hedge fund sentiment is something that is often overlooked. However, hedge funds and other institutional investors allocate significant resources while making their bets and their long-term focus makes them the perfect investors to emulate. This is supported by our research, which determined that following the small-cap stocks that hedge funds are collectively bullish on can help a smaller investor to beat the S&P 500 by around 95 basis points per month (see the details here).
#5 Citizens Financial Group Inc (NYSE:CFG)
– Shares Held by Carlson Capital (as of June 30): 3.65 million
– Total Value of Holding (as of June 30): $72.89 million
Carlson Capital’s position in Citizens Financial Group Inc (NYSE:CFG) was little changed during the second quarter, being smaller by just 6,504 shares and accounting for roughly 0.91% of the value of the fund’s equity portfolio at the end of both the first and second quarters. Other smart money funds in our database collectively did the same, as 52 funds were long Citizens Financial at the end of the second quarter, up by just one fund from the end of the previous quarter. Like many other financial stocks, Citizens Financial shares fell sharply in late-June due to global economic fears and the anticipation that interest rates would stay lower for longer after Britain’s decision to leave the EU. Citizens Financial shares have recovered in recent weeks however, as more and more investors believe that the Fed will begin raising rates sooner rather than later due to the strong U.S. economy.
#4 First Niagara Financial Group Inc. (NASDAQ:FNFG)
– Shares Held by Carlson Capital (as of June 30): 7.63 million
– Total Value of Holding (as of June 30): $74.35 million
Clint Carlson’s fund raised its stake in First Niagara Financial Group Inc. (NASDAQ:FNFG) by 24% during the second quarter, as the fund bet that KeyCorp (NYSE:KEY)’s deal to acquire First Niagara would get the thumbs up from regulators. Although mergers between two relatively medium-sized banks don’t normally receive much regulatory scrutiny, the Keycorp/First Niagara deal faced some difficulties due to a two year Department of Justice investigation into First Niagara’s minority lending practices. Fortunately, Carlson’s bet paid off in late-July, as KeyCorp announced that it had officially closed the acquisition of the community bank.
We’ll study Carlson Capital’s second quarter maneuverings in its three favorite financial stocks on the next page.
#3 Citigroup Inc (NYSE:C)
– Shares Held by Carlson Capital (as of June 30): 2.75 million
– Total Value of Holding (as of June 30): $116.57 million
Of the 749 funds that we track which filed 13F’s for the June quarter, 97 of them reporting being long Citigroup Inc (NYSE:C), owning $8.5 billion worth of its shares, which accounted for 6.80% of the float on June 30. Those figures stood at 101 funds with $8.04 billion worth of Citigroup holdings on March 31. In terms of Carlson Capital’s position in the stock, the fund cut its stake in the investment bank by 33% during the three-month period ended June 30, to 2.75 million shares. Carlson may have cut its stake due to worries over the potential impact of Britain’s decision to leave the EU. Given that Citigroup is the most international of the ‘Big Four’ banks, the stock would suffer the most if a black swan event occurred due to the Brexit.
#2 Morgan Stanley (NYSE:MS)
– Shares Held by Carlson Capital (as of June 30): 4.95 million
– Total Value of Holding (as of June 30): $128.6 million
Morgan Stanley (NYSE:MS) was a favorite of Carlson Capital in the second quarter, with the fund raising its holding in the investment bank by 120% to 4.95 million shares. Sharing Carlson Capital’s bullish enthusiasm was Jeffrey Ubben‘s ValueAct Capital, which recently disclosed owning a $1.1 billion stake in the financial giant, good for control over 2% of the float. Morgan Stanley reported solid second quarter results in July, with EPS of $0.75 on revenue of $8.91 billion, beating the consensus marks by $0.16 per share and $610 million, respectively. The bank will benefit if the U.S. economy remains strong and the global economy recovers.
#1 Bank of America Corp (NYSE:BAC)
– Shares Held by Carlson Capital (as of June 30): 12.23 million
– Total Value of Holding (as of June 30): $162.35 million
Although the number of funds in our database with holdings in Bank of America Corp (NYSE:BAC) fell by eight quarter-over-quarter to 102 at the end of June, Carlson Capital went against the grain and raised its holding by 15% to 12.23 million shares. With Janet Yellen recently stating that the case for interest rate hikes has strengthened due to the robust U.S. economy, interest rates could rise sooner rather than later. If interest rates rise, Bank of America’s profits will likely trend up, as its net interest margin improves.