Several weeks after the end of each quarter, hedge funds such as billionaire James Dinan’s York Capital Management file 13Fs with the SEC. We track these filings as part of our work developing investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). That wasn’t enough for us, so 11 months ago we started a mock portfolio based on this strategy; this portfolio has since outperformed the S&P 500 by 33 percentage points.
It can also be useful to treat 13Fs lists of free investment ideas, and further pursue any stocks which appear to be attractive picks at first glance. We have gone through York’s most recent filing, for the end of June (see the full list of the fund’s stock picks on the SEC’s website). Here are our thoughts on the fund’s five largest positions in stocks which pay a dividend yield of at least 3.5% (or find Dinan’s favorite stocks over time):
York owned almost 17 million shares in PetroLogistics LP (NYSE:PDH) during the second quarter of 2013, making the company one of its ten largest positions. Petrologistics operates a facility which converts propane to propylene. It most recently paid a quarterly dividend of 30 cents per share; if the company was able to continue paying at that rate for a full year, the yield would be close to 10%. However, dividends do tend to fluctuate a bit. Wall Street analysts predict $1.42 in earnings per share for 2014, which implies a forward P/E of only 8, but in terms of trailing EBITDA results the stock looks considerably less cheap.
Dinan and his team reported a position of 4.2 million shares in Spectra Energy Corp. (NYSE:SE) as of the beginning of July. Spectra is a $23 billion market cap company which owns midstream natural gas assets including transportation, processing, and storage facilities. Its current dividend yield is 3.6%. However, higher costs pulled the company’s net income down in the second quarter of 2013 versus a year earlier. Midstream natural gas does have considerable prospects as more infrastructure is built to support the gas boom, though to some degree this is already accounted for in Spectra’s valuation at a trailing P/E of 24.
Northstar Realty Finance Corp. (NYSE:NRF), which invests in real estate loans, was another of the fund’s dividend picks with the filing disclosing ownership of 6.6 million shares.
Management recently increased the company’s dividend to 20 cents per share, which at current prices makes for an annual yield of 9%. However, many market players are bearish on NorthStar as shown by the fact that 18% of the float is held short; the company also operates with very high leverage, and of course its operations carry a fair amount of macro risk. NorthStar is a real estate investment trust and pays large dividends in order to maintain its tax status.
According to the filing, York owned 2 million shares of Alon USA Partners LP (NYSE:ALDW) at the beginning of this quarter. The $950 million market cap company (on average, over 350,000 shares are traded per day so at current prices of over $15 there is plenty of dollar volume) is an oil refining and marketing company. It is another popular short target, despite what have recently been quite generous dividend payments, as markets expect that Alon will not be paying nearly as much in dividends in the future. The sell-side expects $1.63 in adjusted EPS in 2014, down from predictions of $2.94 for this year.
Dinan bought 6.7 million shares of New Residential Investment Corp (NYSE:NRZ) between April and June, adding the $1.6 billion market cap investor in residential mortgage-backed securities to his portfolio. New Residential only became publicly traded in May; it is down about 10% from its levels shortly after that time, as high yield stocks generally have reacted poorly to a rise in interest rates.
Disclosure: I own no shares of any stocks mentioned in this article.
