Kyle Bass, manager of Hayman Advisors, is famous for his bets against subprime mortgages during the last financial crisis. His Dallas-based fund manages just over $1 billion in assets under management and has investments in a variety of asset classes. Hayman’s U.S. stock portfolio is relatively small in comparison to its AUM, as it reported just $87 million on its latest 13F filing with the SEC. Interestingly, Bass’s top two stock picks account for nearly two-thirds of his portfolio, and the manager holds just ten equity positions in total. Let’s take a look at numero uno of this duo; empirical studies have proven that individual investors who mimic or “monkey” top-notch hedge funds can beat the market by 7% a year. Check out Bass’s full portfolio here.
Six Flags Entertainment Corp (NYSE:SIX)
Six Flags accounts for over 35% of Hayman Advisors’ 13F portfolio, good for a $31.1 million altogether. In 2012 thus far, the theme park operator has been an astoundingly good investment for Bass, returning over 50%. The company has had many ups and downs over the past few years, but a massive dividend increase and better than expected second quarter earnings report have had investors feeling quite cheery in recent months.
In its last earnings (Q2), Six Flags reached an EPS of $1.27 a share, over four times what the company reported in Q2 of 2011, and double what the Street was expecting for the quarter. The positive surprise came as a shock for most investors, as the company missed badly in its Q1 release. The company’s execs gave this summary over the conference call, which couldn’t get any more bullish:
In summary, our second quarter performance is a reflection of execution. Two years ago we developed a strategy that would help us consistently grow revenue, increase profitability, improve guest satisfaction, strengthen innovation and build employee morale. And I really could not be more pleased with our progress to date.
Our operational performance is excellent, our financial results are stellar and our capital allocation strategy is clearly working well.
Since the news, shares of Six Flags have risen over 20%, and currently near their all-time high of $64.95. As expected, there are some valuation concerns with this stock. At its current price, Six Flags trades at an earnings multiple of 89.2X, over four times the industry average of 21.1X. In comparison to its peers in the tourism and leisure industry, a similar overvaluation can be seen: Town Sports International Holdings, Inc. (NASDAQ:CLUB) at 19.6X, Life Time Fitness, Inc. (NYSE:LTM) at 17.8X, and International Speedway, Inc. (NASDAQ:ISCA) at 21.8X. Only Vail Resorts, Inc. (NYSE:MTN) at 150.3X, is more expensive.
When earnings growth is factored into the equation, a similar story is told. Analysts expect Six Flags to expand its bottom line by 10-11% a year over the next half-decade, which is below Life Time Fitness (15.5%) and Vail Resorts (14.1%) and at parity with Town Sports. International Speedway, meanwhile, is expected to see annual EPS growth of 7.1% over this time period. Despite the fact that Six Flags isn’t in an envious position in this regard, investors are still valuing it like an industry leader. The stock sports a massive PEG ratio of 8.92; typically any figure above 2.0 signals overvaluation. Town Sports (1.96), Life Time Fitness (1.15) and International Speedway (3.06) are all far more fairly valued.
As mentioned above, Six Flags has increased its dividend significantly this year. The company currently pays a yield of 3.74%, but a payout ratio above 150% indicates trouble may be on the horizon, as it is counting on future earnings to cover its exorbitantly high dividend.
Aside from Bass, other money managers that are willing to bet against these overvaluation warnings are Rehan Jaffer, Amy Minella and Matthew Halbower. Click here for a full look at the hedge fund sentiment surrounding Six Flags.