Editor’s Note: Related tickers: American International Group, Inc. (NYSE:AIG), MGM Resorts International (NYSE:MGM), Dynegy Inc. (NYSE:DYN), Sterling Financial Corporation (NASDAQ:STSA), Burger King Worldwide Inc (NYSE:BKW)
King Street Capital is one of the largest of the distressed-debt hedge funds we track at Insider Monkey. It primarily invests in equity, bonds, foreign exchange, warrants, and options. The fund was co-founded by Brian Higgins with O. Francis Biondiin 1995, and manages six accounts totalling an estimated $19.6 billion in assets under management.
The fund recently filed its 13F with the SEC, describing some of its main investments during the first quarter of 2013. A quick look at the top five equity positions held by the fund might be a good starting point for your own research, and it’s important to realize that retail investors can benefit from watching hedge fund sentiment; discover the details of this strategy.
The top five
The top spot in this multi-billion dollar fund’s 13F is held by American International Group, Inc. (NYSE:AIG). As of March 31, 2013, the fund held 1.4 million shares of AIG, worth $54.348 million, a rise of 400,000 shares from the close of the prior quarter. American International Group, Inc. (NYSE:AIG)’s valuation isn’t as attractive as it was 6 months ago, but there’s still value in this post-bailout insurer. Shares sport a sub-1.0 PEG and a book valuation below parity, but hey, hedge funds recognized the value play last year. Since the start of 2013, shares of American International Group, Inc. (NYSE:AIG) are up more than 27%, but lucky for you, there looks to be more appreciative potential left.
King Street also increased the size of its second largest equity holding, MGM Resorts International (NYSE:MGM),to 4 million shares during the quarter. The casino resort developer trades at a forward P/E of 144.18 with a beta of 3.74, but anyone invested in MGM Resorts International (NYSE:MGM) isn’t here for its value, they’re here for the momentum. A Las Vegas rebound is fueling MGM Resorts International (NYSE:MGM)’s rapid bottom line growth—the sell side expects EPS expansion of 320% next year—and Macau is fueling the bulls’ longer-range fervour. Earlier this year, the Macanese government approved MGM Resorts International (NYSE:MGM)’s request to build a second casino in the region.
The next largest holding is Dynegy Inc. (NYSE:DYN). King Street bought 2,000,000 shares of the company, worth $47.980 million, during the quarter. The companyoffers modest value at 2.4 times sales and 2.8 times book, but like MGM Resorts International (NYSE:MGM), it’s growth that’s likely the reason why King Street is bullish. Analysts’ average estimates on Dynegy Inc. (NYSE:DYN) predict EPS growth of 75% next year, before settling into a 7.6% annual average through 2017. Though this longer-term estimate doesn’t seem mind-blowing, it’s in the upper one-sixth of the entire utilities sector, an area of the economy that offers good balance to riskier plays like MGM Resorts International (NYSE:MGM) and American International Group, Inc. (NYSE:AIG).
Sterling Financial Corporation (NASDAQ:STSA) is in fourth place, with the fund substantially decreasing its holdings by 490,000 to 1,000,000 during the first quarter of 2013. Sterling Financial Corporation (NASDAQ:STSA) trades at the lowest trailing P/S in its industry grouping at 3.61, and Wall Street expects an upside of 13-14% on the high side, assuming that earnings and revenue targets can be met over the next few quarters. Like Dynegy Inc. (NYSE:DYN), Sterling Financial Corporation (NASDAQ:STSA) offers something that the rest of King Street’s top picks don’t. In this case, it is strong value, and a recent 33% dividend boost—to a yield of 3.75%—is the icing on Sterling Financial Corporation (NASDAQ:STSA)’s proverbial cake.
Lastly King Street Capital was also bullish on fast food giant Burger King Worldwide Inc (NYSE:BKW), buying 726,400 shares worth $13.874 million during the quarter. Burger King Worldwide Inc (NYSE:BKW) has the fourth highest P/E ratio in its industry grouping at 189.40,thoughthe forward P/Eis much lower at 20.96 times year-ahead EPS estimates. Up double-digit percentages year-to-date, bulls have been rewarded by broader gains in the restaurant space, but for any investor banking on a continued economic recovery, Burger King Worldwide Inc (NYSE:BKW) offers a solid play at a surprisingly cheap forward valuation.
Final thoughts
King Streetsubstantially restructured its 13F holdings during thefirst quarter, and from Burger King Worldwide Inc (NYSE:BKW) to American International Group, Inc. (NYSE:AIG), each of these plays offers a diverse look into its specific sector. Like the food operator and the insurance giant, Sterling Financial also offers solid value, while MGM Resorts International (NYSE:MGM) and Dynegy Inc. (NYSE:DYN) each offer momentum opportunities in their own right.
Disclosure: none
