Generally speaking, activist hedge funds usually receive wider media coverage than their passive peers. One of the activist hedge funds we track is Richard Breeden’s Breeden Capital Management, who, unlike the Carl Icahn’s or the David Einhorn’s of the world, does not get as much press. Still, he’s an investor with an activist history worth watching. The hedge fund has recently filed its first quarter 13F form with the SEC, which discloses its long equity positions for the three-month period. Because it’s important to pay attention to the smart money’s sentiment, let’s take a closer look; discover the secrets of piggyback investing.
The top dog
The hedge fund reported a $47 million stake in STERIS Corp (NYSE:STE), a healthcare company with its fingers in surgical products related to infection prevention. Sterilizers and surgical tables are two of its most commonly used products. Breeden slightly cut its stake in the $2.6 billion company by market cap, although with a year-to-date return north of 30%, it was likely just profit taking.
Moving forward, STERIS Corp (NYSE:STE) trades at a forward earnings multiple near 16.0, with the sell-side expecting annual EPS growth of 10% over the next five years. This forecast is about level with the medical appliances and equipment industry norms, though it’s worth noting that Wall Street’s average price target predicts another 8-9% appreciation in STERIS Corp (NYSE:STE)’s shares.
Much of this expected growth is synergistically related to the residual effects from its $270 million United States Endoscopy Group acquisition last year, paid in cash. STERIS Corp (NYSE:STE)’s CEO has called the move “a natural extension of our presence in the GI (gastrointestinal) market,” and US Endoscopy—as its name suggests—should give STERIS Corp (NYSE:STE) a much better hold on the endoscopy device market moving forward; this is likely one of the primary reasons why Breeden is bullish.
The second most valuable equity in the 13F portfolio of Breeden is the $6.7 million stake in Flowserve Corporation (NYSE:FLS). The position fell to 40,000 shares, from 144,497 shares, worth $21.2 million at the end of December. With a year-to-date return of around 13.4%, Flowserve Corporation (NYSE:FLS)’s stock is trading at a forward P/E of 14, and represents a nice value play moving forward.
From a qualitative standpoint, the bullish thesis behind Flowserve Corporation (NYSE:FLS) seems to be its relationship to the U.S. natural gas boom, as its pumping and seal products are used in everything from LNG export terminals to well drilling. The company’s automated technologies, such as decoking, offer additional growth potential, and it is a space we’ll be watching very closely.