Corvex Management’s Keith Meister thinks that American Realty Capital Properties Inc (NASDAQ:ARCP) is one of the best stocks to own right now and a slew of other hedge funds have similar attitudes towards American Realty Capital Properties Inc according to their latest filings. In addition to Corvex’s 8% interest in American Realty Capital Properties Inc, owning over 70.6 million of its shares; Glenview Capital, Pentwater Capital, and Twin Capital all had significant positions of over 10 million shares each as well. Glenview held about 17.2 million shares, Pentwater had 12.4 million, and Twin Capital controlled close to 11.8 million shares. Moreover, Owl Creek Asset Management added a new position in American Realty Capital Properties Inc of a little over 8.5 million shares, placing it in the top ten shareholders of American Realty Capital Properties Inc’s stock among hedge funds.
We track Corvex Management and other hedge funds because we found that their stock picks historically managed to generate alpha even though the filings are up to 45-days delayed. We even used a 60-day delay in our back tests to be on the safe side and our research showed that the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Total Return Index by an average of 95 basis points per month between 1999 and 2012. After adjusting for risk, our calculations revealed that these stocks’ monthly alpha was 80 basis points. We have also been sharing and tracking the performance of these stocks since the end of August 2012, during which time they have returned 139% – outperforming the S&P 500 ETF by 81 percentage points (see more details here). Given American Realty Capital Properties Inc’s popularity among hedge funds and Meister echoing his bullish stance on the stock, we wanted to take a closer look to see if American Realty Capital Properties Inc was worth an investment.
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Corvex believes that American Realty Capital Properties Inc (NASDAQ:ARCP) is worth $13 per share, representing 50% upside from its current price. Meister described American Realty Capital Properties Inc’s investment characteristics as delivering equity-like returns with minimal bond-like risk. American Realty Capital Properties Inc previously had an accounting scandal, which led to a fall in its share price, but Meister and Corvex believe that the company is on the right track and that the accounting issues are behind it. On the financial side, the company has increased adjusted funds from operations (AFFO) considerably since 2011, when AFFO was only $2.1 million compared to $750.7 million in 2014.
On a per share basis, AFFO was $0.90 in 2014, giving American Realty Capital Properties Inc a trailing P/AFFO of only 9.7 at its current trading price even after the 2% bump from the Corvex news. Although not exactly an apples-to-apples comparison, REITs in general trade at an average P/FFO of about 17 according to Lazard. Thus, American Realty Capital Properties Inc could have significant upside if it traded nearer to that 17 number or even below it at 12 or 15. Further, the company will announce whether it will reinstate its dividend on its common stock in August along with its second quarter results. The announcement could be a catalyst for American Realty Capital Properties Inc to trade higher and for investors to collect income on par with American Realty Capital Properties Inc’s preferred investors, who currently collect a yield of about 7% on their shares.
American Realty Capital Properties Inc (NASDAQ:ARCP) trades at about 1x its tangible book value, while many other REITs trade at multiples ranging from 1.5x to 4.5x according to a list of comparable companies on S&P Capital IQ. American Realty Capital Properties Inc is also in a good position in terms of liquidity with current and quick ratios of 5 and 4.2, respectively. The company has also generated cash flow from operations in excess of its current liabilities on a magnitude of 3.5 times. American Realty Capital Properties Inc seems like a company poised to break out and could be propelled higher with the reinstatement of its dividend and its stock reaching a fuller valuation compared to other REITs. Thus, it seems like a good idea to follow Corvex and other funds into American Realty Capital Properties Inc.
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