Founded in 2005, Magnetar Capital is headquartered in Evanston, Illinois and also has a presence in New York, London, and Beijing. A “magnetar” is a neutron star with an extremely powerful magnetic field that produces bursts of energy resulting in the brightest objects observed in the universe. The hedge fund believes this name is fitting because they attract world-class professionals, and the company fosters an environment that brings energy and passion to investing.
While Magnetar’s 2012 second quarter 13F reported $1.4 billion in holdings, the hedge fund has quadrupled assets under management since its founding date, and managed roughly $8 billion in 2011. Magnetar incorporates a long-term investing strategy with the goal of harnessing alpha in a sustainable manner. The fund allocates capital dynamically by pursuing market inefficiencies, while staying focused on opportunities that are overlooked in areas that fall outside of traditional investments.
Alec Litowitz and Ross Laser founded Magnetar. Before the duo came together in 2005, Litowitz spent nine years as a Principal at Citadel Investment Group, where he served as Global Head of Equities (See what two stocks Ken Griffin likes). Laser, meanwhile, was formerly employed at Glennwood Capital Partners.
Breaking down Magnetar’s portfolio by sectors reveals that the hedge fund is heavily over weighted in the energy sector, which consumes nearly 40% of the portfolio’s total holdings. Industries of focus within the energy sector include: oil and gas-integrated (13%), oil and gas operations (11%), and coal (9%). Unlike Warren Buffett and Berkshire Hathaway, Magnetar is under weighted in the financial sector. The financial sector comprises just over 2% of Magnetar’s overall portfolio.
Goodrich Corporation (NYSE:GR) was the largest holding in Magnetar’s portfolio before the company was acquired by United Technologies Corporation (NYSE:UTX) on July 26, 2012. Goodrich investors received $127.50 in cash for each of their shares. The supplier of aerospace components represented 13.7% of the Magnetar portfolio, and was added to Litowitz’s and Laser’s holdings during the second quarter of 2012. Various hedge funds took notice to Goodrich before the acquisition, including John Paulson who had a $1.4 billion interest. The number of hedge funds invested in the company increased from 44 in the first quarter of 2012, to 72 in the second. The total value of hedge funds’ positions in the stock increased by $3.5 billion in the second quarter. While it may seem like a straight shot and an easy return because completed acquisition are associated with high returns, merger arbitrage is not risk free.
Rounding out Magnetar’s top five holdings are Teekay Corporation (NYSE:TK), PVR Partners LP (NYSE:PVR), Express Scripts Holding Company (NASDAQ:ESRX), and EOG Resources, Inc. (NYSE:EOG). The table listed below shows a few relevant points of data.
Looking at this data, PVR Partners LP is the cheapest of the bunch in terms of its earnings valuation, and it trades at a 22% discount in relation to its own 5-year historical average P/E (22.5). Interestingly, the company’s EV/EBITDA ratio is actually above most of its coal industry competitors, including CONSOL Energy, Alliance Resource Partners, and Arch Coal. Similarly, EOG Resources exhibits an earnings undervaluation, while sporting an attractive PEG ratio of 0.4 (not mentioned above). Despite the oil and gas company’s strong appreciation year-to-date, there is still value to be had here.
Teekay Corporation, meanwhile, has a stratospheric trailing P/E, and also trades at a similar premium when looking at its book and cash flow multiples. The shipping company does expect EPS growth of 12% a year over the next half-decade, but sports a PEG ratio of over 9.0, signaling that investors are overvaluing this expansion. The company’s EV/EBITDA ratio is also above many of its competitors like Frontline Ltd. and Overseas Shipholding Group.
Lastly, Express Scripts Holding Company has been quite the bull year-to-date, and earnings multiples indicate that it is not overbought at the moment. In August, the health care company reported that it had increased its earnings outlook on the heels of its acquisition of Medco Health Solutions earlier this April. The deal, worth nearly $30 billion, has frustrated some of the industry’s smaller companies pushing for an anti-trust suit, but it’s worth noting that a U.S. district court has already dismissed early claims, though they have been refiled.
To recap: Magnetar has always had a major focus in the energy sector, and will stick to its core competencies moving forward, while most likely keeping its portfolio over weighted in this market segment. Hedge fund mimickers may want to track this fund, as it is always on the lookout for oft overlooked investment ideas that generate impressive risk-adjusted returns.