Taconic Capital’s Latest Top Stock Picks

Six to seven weeks after the end of every fiscal quarter, hedge funds and many other notable investors are required to file 13Fs that disclose many of their long equity positions. Taconic Capital, a hedge fund with about $9 billion under management, recently filed its own filing for the third quarter of 2012 and we have gone through its five largest reported positions by market value. Investors may not want to (or be able to) copy each of these position, but a look at what the fund owns can serve as a starting point for further analysis particularly in stocks that a market participant might not be familiar with. Read on for our quick take on each of these stocks and compare them to the fund’s previous investment activity.

The fund’s top pick was one of the stocks that we’d put on our list of five energy stocks for long term investors: BP plc (NYSE:BP). The company has never been one of the better-run oil majors, but it is making good progress in selling enough assets to build up a cash base for any legal demands, it pays a dividend yield of about 5%, and it trades at only 8 times forward earnings estimates- cheap on an absolute basis, and somewhat attractive compared to other oil majors. Taconic actually sold some shares, but thanks to the stock’s increase in price in the previous three months the market value of the position held at about $400 million.

David Einhorn

Taconic also liked General Motors Company (NYSE:GM), which like BP may be a bit undervalued as a result of poor sentiment towards the company. The fund reported owning 9 million shares; that is about half of what billionaire David Einhorn’s Greenlight Capital had reported at the end of June. Einhorn had presented GM as one of his two favorite long positions in early October. Find more stocks that Greenlight owned. GM carries trailing and forward P/E multiples of 9 and 7, respectively, though this pricing is not much lower than at other auto companies which are seeing better earnings growth. Investors should probably look at GM’s peers instead.

The fund bucked the “low, low price” theme of these two previous picks by initiating a position of 6 million shares in Nexen Inc. (NYSE:NXY); the $13 billion market cap oil and gas exploration and production company currently trades at 33 times trailing earnings. Nexen is most notable for its oil sands and shale gas operations in Canada, and while earnings have been down sharply over the last year analysts expect that it will resume strong growth. Forward estimates for 2013 imply a forward P/E of 16. We certainly expect some earnings growth as these massive opportunities are developed, but would need to look at the company more closely to judge how well it can perform against its earnings targets.

CIT Group Inc. (NYSE:CIT), a commercial bank trading at a slight discount to book value (P/B ratio of 0.9) was another stock that Taconic sold some shares of but remained one of the largest positions in the portfolio at 3.1 million shares. CIT is highly leveraged, and has not been reporting good numbers recently, yet Wall Street analysts apparently feel confident that it will improve next year as the forward P/E is only 11. On a quantitative basis, then, it could be a value but we think that we’d avoid it.

Taconic cut its stake in WPX Energy Inc (NYSE:WPX) to 6 million shares at the end of September from 6.3 million shares three months earlier. WPX is primarily a shale gas exploration and production company with acreage in plays such as the Bakken, Marcellus, and Powder River. It’s something of a speculative company: it is not expected to earn profits either this year or next year, and its market cap is only about $3 billion. With revenue actually down last quarter versus a year earlier, we think that we would avoid this stock for now.