In this piece, we will take a look at the top 10 stock picks of Naval Khera’s Brightline Capital.
Brightline Capital Managment LLC is an investment advisory firm that is based out of Greenwich, Connecticut, United States. It is run by Naval Khera, also known as Nick Khera, who is its chief executive officer. The investment firm has a relatively ‘modest’ portfolio of $145 million when compared to some of the investment fund heavyweights out there who run portfolios worth billions of dollars.
Mr. Khera has a strong academic profile, after having attended two of the most prestigious business schools in America. He has received his Bachelor’s in Economics from the University of Pennsylvania’s renowned Wharton Business School. He then went on to complete his Master’s in Business Administration from Harvard University’s Harvard Business School.
The executive has been at the helm of affairs at Brightline Capital since 2005, and over the years the investment firm has built out its portfolio to include shares of several companies. This list includes companies ranging from the agricultural sector to chemical companies and the media and entertainment sector.
Some of the biggest positions in Mr. Khera’s portfolio are in Darling Ingredients Inc. (NYSE:DAR), Arconic Corporation (NYSE:ARNC) and The Chemours Company (NYSE:CC).
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Our Methodology
To determine which stocks are on Naval ‘Nick’ Khera and Brightline Management’s list, we sifted through the investment firm’s quarterly 13-F filings. These filings, made to the Securities and Exchange Commission (SEC), list down the stocks that a hedge fund has holdings in, and it lets us determine which are favorites and which are falling out of favor. By combining these with investor letters, analyst ratings, quarterly earnings and Insider Monkey’s survey of 873 hedge funds, we can sift out the top stock picks of Naval Khera.
Why pay attention to hedge fund holdings? Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 86 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 86 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Top 10 Stock Picks of Naval Khera’s Brightline Capital
10. Sunrun Inc. (NASDAQ:RUN)
Mr. Khera’s Stake Value: $558,000
Percentage of Mr. Khera’s 13F Portfolio: 0.37%
Number of Hedge Fund Holders: 45
Sunrun Inc. (NASDAQ:RUN) is an American company that deals with solar energy products and is headquartered in San Francisco, California. It primarily targets the residential sector and deals in several areas such as services, installation, maintenance and the provision of solar energy products such as panels and racking.
In its third quarter 2021 earnings report, Sunrun Inc. (NASDAQ:RUN) revealed that it had earned $438 million in revenue and $0.11 in GAAP EPS, beating analyst estimates on both counts. GLJ Research reduced the company’s share price target to $28.10 in an October 2021 note, citing the risks of high housing default rates as impacting the company.
Mr. Khera’s Brightline Capital held 10,000 shares of Sunrun Inc. (NASDAQ:RUN) during the second quarter of this year, in a stake that equaled $558,000 and represented 0.37% of the overall portfolio. During the same time, 45 of the 873 hedge funds polled by Insider Monkey had holdings in the solar company.
Sunrun Inc. (NASDAQ:RUN)’s largest shareholder is Philippe Laffont’s Coatue Management who owns $953 million of equity through 17 million shares.
In a first quarter 2021 investor letter, Horizon Kinetics mentioned Nexstar Media Group, Inc. (NASDAQ:NXST) and stated that:
“What this table did not cover is valuation. What’s expensive, what’s cheap? A good business that is too expensive is not a good investment. The most expensive business in the table is Sunrun. Sunrun is the nation’s largest residential rooftop solar panel system seller/installer. Sunrun’s valuation might also shed Thumbnail valuation.
To start at the top of the income statement, Sunrun shares trade at 10.3x revenues. The most profitable company in the S&P 500, Microsoft, trades at 13x revenues. Sunrun operates at a loss. Obviously, not only is tremendous growth anticipated, but tremendous profitability, too.
Let’s simply accept that investors have correctly anticipated Sunrun’s future success and make that the starting point for a valuation exercise.
If, 10 years from now, Sunrun is ultimately valued at 25x net income, and if today’s $9.5 billion valuation is appropriate, that would require $380 million of net income ($9,500 million ÷ 25).
Let’s say Sunrun will have the same net profit margin as the average S&P 500 company, which is 10%. That means it would need $3,800 million of sales to generate that level of earnings ($380 mill ÷ 10%).
Since sales are now $920 million, they would have to rise by 4.1x in the next 10 years. That would require annual sales growth of 15.2%.
You see how neatly that all works: investors accept the company’s 10-year, 15% annual sales growth projections, and if a 10% net profit margin and a P/E of 25x earnings are reasonable, then the company will have a $9.5 billion market cap at that time. Except that is the current price. That means a 10-year
return of zero.In order to get a 10% annualized return from the stock, Sunrun would need to be priced at a P/E of 65x its earnings 10 years from now, if at a 10% net margin. Or it would have to have some combination of lower P/E and higher growth and/or higher profit margin.
In the meantime, this is Sunrun’s recent pattern of revenue growth and profitability (the company did recently increase its estimate of installed-capacity growth in 2021 from 20-25% to a new estimate of 25% to 30%).
For the time being, Sunrun loses an extraordinary amount of money, an amount that has been getting larger. Perhaps there are scale economies that will manifest in the future,so that it will attain profitability. Perhaps from the roughly one-half of Sunrun’s revenues that are from long-term customer service agreements that run up to 25 years. For now, though, the company would seem to require a lot of external financing, and that is one of the greatest of business risks.”
Therefore, one of Mr. Khera’s favorite stocks is Sunrun Inc. (NASDAQ:RUN), just like The Chemours Company (NYSE:CC), Darling Ingredients Inc. (NYSE:DAR) and Arconic Corporation (NYSE:ARNC).
9. Resolute Forest Products Inc. (NYSE:RFP)
Mr. Khera’s Stake Value: $10.4 million
Percentage of Mr. Khera’s 13F Portfolio: 7.06%
Number of Hedge Fund Holders: 15
Resolute Forest Products Inc. (NYSE:RFP), as its name suggests, is a forestry company. It operates in the United States, Mexico, Canada and other countries, and it is headquartered in Montreal, Canada. The company has four segments, which are market pulp, tissue, wood products and paper.
Mr. Khera’s Brightline Capital held 860,000 Resolute Forest Products Inc. (NYSE:RFP) shares by the end of the second quarter of this year. These were worth $10.4 million and represented 7.06% of the investment company’s portfolio. Similarly, in the second quarter, out of the 873 hedge funds polled by Insider Monkey, 15 had held a stake in the company.
CIBC kept the company’s price target unchanged at $15 in an October 2021 investor note, outlining that lumber price increases have already taken place and housing demand is uncertain. Resolute Forest Products Inc. (NYSE:RFP) earned $1.14 billion in revenue and $3.74 in non-GAAP EPS in its Q2, beating analyst estimates for EPS.
Prem Watsa’s Fairfax Financial Holdings is Resolute Forest Products Inc. (NYSE:RFP)’s biggest investor, with a stake of $372 million through 30.5 million shares.
Resolute Forest Products Inc. (NYSE:RFP) joins the list of Mr. Khera’s top stock picks, with some of the others being The Chemours Company (NYSE:CC), Darling Ingredients Inc. (NYSE:DAR) and Arconic Corporation (NYSE:ARNC).
8. Nexstar Media Group, Inc. (NASDAQ:NXST)
Mr. Khera’s Stake Value: $11.8 million
Percentage of Mr. Khera’s 13F Portfolio: 7.96%
Number of Hedge Fund Holders: 34
Nexstar Media Group, Inc. (NASDAQ:NXST) is an American broadcast and media company headquartered in Irving, Texas. It is the largest American television station owner, with close to 200 stations in its portfolio.
Nexstar Media Group, Inc. (NASDAQ:NXST) is a part Mr. Khera’s elite stock picks, joining the likes of Darling Ingredients Inc. (NYSE:DAR), Arconic Corporation (NYSE:ARNC) and The Chemours Company (NYSE:CC).
In its earnings report for the third quarter, Nexstar Media Group, Inc. (NASDAQ:NXST) posted $1.6 billion revenue and $3.90 in GAAP EPS, as it beat analyst estimates for EPS. The company’s price target was raised to $200 by Loop Capital in an October 2021 note, with the firm citing healthy advertisement trends.
Mr. Khera and his Brightline Capital held 80,000 Nexstar Media Group, Inc. (NASDAQ:NXST) shares during the second quarter, in a stake worth $11.8 million and representing 7.96% of the firm’s portfolio. During the same time, 34 of the 873 hedge funds polled by Insider Monkey had invested in the company.
Nexstar Media Group, Inc. (NASDAQ:NXST)’s largest shareholder is Seth Klarman’s Baupost Group, which owns 2 million shares worth $302 million.
In a first quarter 2021 investor letter, Richie Capital Group mentioned Nexstar Media Group, Inc. (NASDAQ:NXST) and stated that:
“Nexstar Media Group (NXST – up 28.9%) – The television broadcasting and digital media company reported strong Q4 earnings with revenue growing 25% over the year prior. The company set records across every key financial metric and exceeded management outlook. For the full year, the company boosted free cash flow by 191% partly as a result of the full integration of their Tribune Media acquisition. The company still trades at an attractive valuation and offers a 17% FCF yield. The Supreme Court’s recent ruling allowing the FCC to loosen local media ownership restrictions will support more consolidation within the industry. This is a positive for NXST who is well positioned to acquire strategic assets. You can find our original investment thesis here.”
7. The Mosaic Company (NYSE:MOS)
Mr. Khera’’s Stake Value: $13 million
Percentage of Mr. Khera’s 13F Portfolio: 8.8%
Number of Hedge Fund Holders: 43
The Mosaic Company (NYSE:MOS) is an American phosphate and crop nutrients producer that is headquartered in Tampa, Florida. The company produces its output primarily through operating and owning mines.
Mr. Khera’s Brightline Capital held 410,000 shares of The Mosaic Company (NYSE:MOS) by the end of the second quarter, with the stake worth $13 million and representing 8.8% of the investment firm’s portfolio. Out of the 873 hedge funds polled by Insider Monkey during the same period, 43 held a stake in the company.
The Mosaic Company (NYSE:MOS) is one of Brightline Capital’s favorite stocks, just like The Chemours Company (NYSE:CC), Darling Ingredients Inc. (NYSE:DAR) and Arconic Corporation (NYSE:ARNC).
In its third quarter 2021 earnings, The Mosaic Company (NYSE:MOS) reported $3.4 billion in revenue and $1.35 in non-GAAP EPS, missing analyst estimates on both counts. Prior to the company’s earnings report, Citi downgraded its rating to Neutral with a $46 price target, citing cyclicality.
The Mosaic Company (NYSE:MOS)’s largest shareholder is Andrew Dalrymple and Barry Mccorkell’s Aubrey Capital Management with 9,047 shares worth $288 million.
In a first quarter 2021 investor letter, Appleseed Fund mentioned The Mosaic Company (NYSE:MOS) and commented that:
“Our most significant contributors to the Fund’s equity performance during the quarter (includes) Mosaic Company (MOS). As for Mosaic, its share price has risen in sympathy with increasing grain prices, which should stimulate additional farmer investment into improving crop yields.”
6. CF Industries Holdings, Inc. (NYSE:CF)
Mr. Khera’’s Stake Value: $13.3 million
Percentage of Mr. Khera’s 13F Portfolio: 9%
Number of Hedge Fund Holders: 47
CF Industries Holdings, Inc. (NYSE:CF), headquartered in St. Louis, Missouri, United States, is the largest coal provider in the world. It is also one of the oldest companies in the U.S., after being formed during the Gilded Era of the country’s history in 1883 in the city of Chicago.
By the end of the second quarter of this year, Naval Khera’s Brightline Capital held 260,000 shares of CF Industries Holdings, Inc. (NYSE:CF). These shares are worth $13.3 million and they represent 9% of the investment firm’s overall portfolio. Furthermore, out of the 873 hedge funds polled by Insider Monkey by the end of the second quarter of this year, 47 held a stake in CF Industries Holdings, Inc. (NYSE:CF).
CF Industries Holdings, Inc. (NYSE:CF) reported $1.59 billion in revenue and $1.14 in GAAP EPS during its second quarter, missing analyst estimates on both counts. RBC Capital raised the company’s price target to $65 in an October 2021 analyst note, sharing that higher costs will affect the company’s short term performance.
CF Industries Holdings, Inc. (NYSE:CF)’s largest shareholder is Matthew Barrett’s Glendon Capital Management with 4.2 million shares worth $217 million.
CF Industries Holdings, Inc. (NYSE:CF) joins Mr. Khera’s top stock picks, in a list with the likes of Arconic Corporation (NYSE:ARNC), Darling Ingredients Inc. (NYSE:DAR) and The Chemours Company (NYSE:CC).
5. Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW)
Mr. Khera’s Stake Value: $13.6 million
Percentage of Mr. Khera’s 13F Portfolio: 9.16%
Number of Hedge Fund Holders: 26
Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW) is an American company headquartered in Purchase, New York and founded in 1992. It primarily offers outsourced aircraft and other aviation operating services. In addition to providing aircraft, it also provides other services such as crew, maintenance and service.
In its third quarter 2021 earnings report, Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW) revealed that it had earned $1.02 billion in revenue and $4.88 in non-GAAP EPS, beating analyst estimates on both counts. Stiffel set the company’s share price target to $90 as it resumed coverage in June 2021.
Mr. Khera’s Brightline Capital held 200,000 shares of Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW) during the second quarter of this year, in a stake that equaled $13.6 million and represented 9.16% of the overall portfolio. During the same time, 26 of the 873 hedge funds polled by Insider Monkey had holdings in the company.
Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW)’s largest shareholder is David Einhorn’s Greenlight Capital who owns $103 million of equity through 1.5 million shares.
In a second quarter 2021 letter, Greenlight Capital had the following to say about Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW):
Air Freight
COVID caused a dramatic reduction in passenger aviation. Passenger planes often carry freight in their bellies. With planes grounded, capacity came out of the industry. At the same time, freight demand expanded both due to the recovering economy and growing ecommerce, which often emphasizes air shipments. While there has been some recovery in passenger aviation, airlines are emphasizing narrow-body planes, which carry less freight than wide-body planes. Compared to 2019, current air freight demand is about 10% higher and capacity is about 10% lower. The result is that cargo rates have exploded.
Supply will be slow to come on-line. Some passenger planes are being converted to freighters, but conversion capacity for wide-bodies is limited and the aggregate impact of this will be modest. Meanwhile, air freight companies trade at tiny multiples of what investors assume to be peak profits. The implied cost of equity is quite high, which makes it difficult to justify adding assets. As a result, air freight companies are in no rush to order new planes, and in any case, new orders would take several years to build. The result is rates and profits are likely to be higher than expected for quite some time.
We own Atlas Air Worldwide (AAWW), which is poised to benefit. It trades at around 5x this year’s consensus earnings estimates.”
4. Dana Incorporated (NYSE:DAN)
Mr. Khera’s Stake Value: $16 million
Percentage of Mr. Khera’s 13F Portfolio: 10.79%
Number of Hedge Fund Holders: 24
Dana Incorporated (NYSE:DAN) is an American company headquartered in Purchase, New York, and founded in 1992. It primarily offers outsourced aircraft and other aviation operating services. In addition to providing aircraft, it also provides other services such as crew, maintenance and service.
In its third quarter 2021 earnings report, Dana Incorporated (NYSE:DAN) reported $2.2 billion in revenue and $0.41 in non-GAAP EPS, beating analyst estimates for revenue. RBC Capital reduced the company’s share price target to $25 in October 2021 citing the Q3 earnings miss and reduced guidance for the fiscal year.
Mr. Khera’s Brightline Capital held 675,000 shares of Dana Incorporated (NYSE:DAN) during the second quarter of this year, in a stake worth $16 million and 9.16% of its portfolio. During the same time, 24 of the 873 hedge funds polled by Insider Monkey had holdings in the logistics company.
Dana Incorporated (NYSE:DAN)’s largest shareholder is Carl Icahn’s Icahn Capital LP who owns $285 million of equity through 12 million shares.
3. The Chemours Company (NYSE:CC)
Mr. Khera’s Stake Value: $16.1 million
Percentage of Mr. Khera’s 13F Portfolio: 10.89%
Number of Hedge Fund Holders: 24
The Chemours Company (NYSE:CC) is an American chemicals company founded in 2014 and headquartered in Wilmington, Delaware. It provides substances called performance chemicals, that allow its customers to target several sectors such as the gold industry.
Naval Khera’s Brightline Capital owned 465,000 The Chemours Company (NYSE:CC) shares that were worth $16.1 million and represented 10.89% of his total portfolio value by the end of the second quarter. During the same time period, 24 of the 873 hedge funds polled by Insider Monkey held stakes in the company.
The Chemours Company (NYSE:CC)’s largest shareholder is John Petry’s Sessa Capital who owns 8.8 million shares worth $308 million.
In its second quarter 2021 investor letter, Miller Value Partners had the following to say about The Chemours Company (NYSE:CC):
“The Chemours Co (CC) rose 25.6% during the quarter. The company reported Q1 revenue of $1.436Bn, beating consensus of $1.413Bn and rising +10% Y/Y driven by positive volume contributions across all segments. Earnings Before Income Taxes Depreciation and Amortization (EBITDA) of $268M topped estimates of $265M and rose +4% Y/Y despite a $9M headwind tied to Winter Storm Uri. Better than expected results drove a Free Cash Flow (FCF) improvement of $41M Y/Y to -$21M and cash balance of $1.0Bn. Management raised Fiscal Year 2021 (FY21) guidance, including EBITDA of $1.1Bn-$1.25Bn (from $1.0Bn-$1.15Bn), Earnings Per Share (EPS) of $2.84-$3.56 (from $2.40-$3.12), and FCF greater than $450M (from >$350M). Additionally, peer Orica and private equity firms Littlejohn and One Rock are said to be among groups that submitted bids for the company’s Mining Solutions business. Binding bids are likely to come as soon as this month and are said to value the unit at over $600M (11% of the current market cap and 7% of FY20 revenue and EBITDA). Lastly, Chemours announced a CEO transition with Mark Vergnano moving to non-executive Chairman of the Board and COO Mark Newman becoming CEO effective July 1st. Mr. Newman has been with Chemours since the 2015 split from DuPont (DD), serving as CFO for four years before moving to the COO role in 2019.”
2. Arconic Corporation (NYSE:ARNC)
Mr. Khera’s Stake Value: $18.5 million
Percentage of Mr. Khera’s 13F Portfolio: 12.46%
Number of Hedge Fund Holders: 30
Arconic Corporation (NYSE:ARNC) is one of the oldest American companies founded in 1888 and headquartered in Pittsburg, Pennsylvania. It primarily deals with the construction and architecture sector, selling products such as roofing, ceiling, pipes, facades and gutters.
In its third quarter 2021 earnings report, Arconic Corporation (NYSE:ARNC) reported $1.89 billion in revenue and $0.15 in GAAP EPS, missing analyst estimates for both. Deutsche Bank, after the earnings, reduced the company’s share price target to $42 in November 2021 citing the share price drops leading to the earnings release.
Mr. Khera’s Brightline Capital held 520,000 shares of Arconic Corporation (NYSE:ARNC) during the second quarter of this year, in a stake worth $18.5 million and representing 12.46% of its portfolio. During the same time, 30 of the 873 hedge funds polled by Insider Monkey had holdings in the company.
Arconic Corporation (NYSE:ARNC)’s largest shareholder is William B. Gray’s Orbis Investment Management who owns $378 million of equity through 10 million shares.
1. Darling Ingredients Inc. (NYSE:DAR)
Mr. Khera’s Stake Value: $20 million
Percentage of Mr. Khera’s 13F Portfolio: 13.62%
Number of Hedge Fund Holders: 41
Darling Ingredients Inc. (NYSE:DAR), as its name suggests, offers ingredients and other solutions for customers in several industries such as fertilizers, animal food, industrial, fuel and bioenergy. It is also the oldest company on our list, having been founded in 1882 and is headquartered in Irving, Texas.
Mr. Khera’s Brightline Capital held 300,000 Darling Ingredients Inc. (NYSE:DAR) shares by the end of the second quarter of this year. These were worth $20 million and represented 13.62% of the investment company’s portfolio. Similarly, in the second quarter, out of the 873 hedge funds polled by Insider Monkey, 41 had held a stake in the company.
Raymond James raised the company’s price target to $105 in an August 2021 investor note, citing strong sustainability and quarterly earnings.
Ian Simm’s Impax Asset Management is Darling Ingredients Inc. (NYSE:DAR)’s biggest investor, with a stake of $190 million through 2.8 million shares.
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Disclosure. None. Top 10 Stock Picks of Naval Khera’s Brightline Capital is originally published on Insider Monkey.
