Is InfraREIT Inc. a good stock to buy? Ken Griffin’s Citadel Investment Group recently filed a Schedule 13G form disclosing it owns nearly 2.39 million shares of InfraREIT Inc. (NYSE:HIFR). This marks an increase of 1.23 million shares from the stake Griffin reported holding as of March 31, and gives him a 5.5% passive ownership position in the company now. InfraREIT Inc. (NYSE:HIFR) is a real estate investment trust (REIT) that owns rate-regulated electricity delivery infrastructure assets in Texas.
Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 144% over the ensuing 32 months, outperforming the S&P 500 Index by nearly 85 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.
Citadel Investment Group is a Chicago-based hedge fund firm established by its current Chief Executive Officer (CEO), Kenneth Griffin, in 1990. Currently, the global multi-strategy hedge fund and asset management firm is the eleventh-largest hedge fund and the second-largest multi-strategy hedge fund in the world. Citadel is not only one of the largest hedge funds worldwide, but is also one of the most successful investment management firms in history. According to Bloomberg Markets magazine, Griffin’s fund has delivered an annualized return of 26% since its inception after subtracting its management fees. As stated by its most recent 13F filing, Citadel manages a public equity portfolio with a value of $89.81 billion. The strong financial performance of this hedge fund certainly encourages us to take a closer look at its holdings so as to identify some high-potential picks. In this article we will also discuss Citadel’s holdings in Lennar Corp. (NYSE:LEN) and DR Horton Inc. (NYSE:DHI), two other companies in the real estate business.
First though, back to InfraREIT Inc. (NYSE:HIFR). The company believes that it can fully utilize the favorable trends in the rapidly-growing transmission and distribution (T&D) sector, which include the replacement of aging assets and construction of new assets in order to meet the growing energy demand. The shares of InfraREIT have risen by 19% over the past three months, which is quite promising, as the company went public only at the beginning of the current year. On Tuesday, the global investment bank Macquarie Group initiated coverage of InfraREIT and Andrew Weisel, an analyst at the firm, published a report on the real estate investment trust, giving the stock an “Outperform” rating and indicating a price target of $36. In the meantime, InfraREIT shares are currently trading at $31.84 a share, which represents a 13% upside potential for investors. Even though the analyst’s price target might involve a bit of subjectivity, it is quite definite that InfraREIT is seeing a lot of opportunities on the horizon. Hunt Consolidated, which manages InfraREIT, is currently discussing an acquisition of Oncor, which is Texas’s largest regulated electric delivery business, with Energy Future Holdings. Therefore, it is believed that a successful deal would boost InfraREIT’s growth significantly.
Let’s now move on to the company’s financial performance during the fiscal first quarter of the year. Unsurprisingly, InfraREIT delivered very strong financial results during the quarter, which clearly indicates that the company’s activities and operations are on the right track. Specifically, the company reported lease revenue of $29.3 million, which yields an increase of roughly 19% year-over-year. InfraREIT also reported a net loss of $35.9 million for the first quarter, which includes a $44.9 million non-cash expense suffered in connection with the company’s IPO. At the same time, InfraREIT reported a net income for the same period in 2014 of $5.0 million. Therefore, considering the fact the company incurred high expenses in relation with the IPO, it is quite evident that the financial performance of the company is very strong. In the meantime, just a few days ago, InfraREIT’s board of directors announced a quarterly cash dividend of $0.225 per share that will be paid on July 23, which shows that the company is confident about its finances and cash flow. Robert Pitts’ Steadfast Capital Management is among the largest shareholders in InfraREIT Inc. (NYSE:HIFR), owning 2.01 million shares.
We will now take a glance at the other two holdings of Griffin in related companies. The billionaire disclosed selling off a large part of his stake in Lennar Corp. (NYSE:LEN) during the first quarter, 4.19 million shares in all, decreasing the overall stake to 1.19 million shares valued at $53.62 million. Lennar Corp., which is one of largest builders of homes in the U.S., is currently seen as the most promising stock in the housing building sector. The company possesses an ROE of 13.19%, which is well above the industry average of 9.25%. At the same time, the sales figures reported by the company have been continuously increasing since fiscal year 2011, which allowed Lennar to beat analysts’ estimates during the last four quarters. Within our database, Ken Heebner’s Capital Growth Management is the largest investor in Lennar Corp. (NYSE:LEN), owning 6.78 million shares.
On the other hand, Citadel Investment Group increased its holdings in DR Horton Inc. (NYSE:DHI) by 4.98 million shares to 8.74 million shares, which are valued at $248.91 million. The stock has increased by nearly 5% since the beginning of the current year despite experiencing a significant slump in mid-April. DR Horton generated revenues of $2.40 billion in the first quarter of 2015, which marks an increase of 38.2% year-over-year. The revenue growth of the company also exceeded the industry average of 7.6%. In the meantime, the debt-to-equity ratio of the company is estimated at 0.73, which is below the industry average, indicating that DR Horton has been successful in managing its debt levels. Within our database, Odey Asset Management, run by Crispin Odey, is the third-largest shareholder in DR Horton Inc. (NYSE:DHI), owning 5.24 million shares, trailing Heebner’s Capital Growth Management and Griffin’s Citadel Investment Group.