Lakewood Capital Management recently released its Q2 2020 Investor Letter, a copy of which you can download here. In the letter, among other things, the fund reported a net profit of 10.7% for Q2 2020. You should check out Lakewood Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the said letter, Lakewood Capital highlighted a few stocks and Athene Holding Ltd (NYSE:ATH) is one of them. Athene Holding Ltd (NYSE:ATH) operates as an insurance holding company. Year-to-date, Athene Holding Ltd (NYSE:ATH) stock lost 30.2% and on August 3rd it had a closing price of $32.90. Here is what Lakewood Capital said:
“We previously discussed our long position in Athene Holding in our third quarter 2019 letter, and the stock performed well over the next several months as management continued to execute on its competitively advantaged strategy in retirement services. However, Athene’s stock was punished by the pandemic-related sell-off, and at 60% of tangible book value, we believe it has the potential to double over the next 18 months.
While investors are justifiably concerned about future credit impairments, we think they are unlikely to amount to more than 10% of its tangible book value of $10 billion. Given that Athene typically generates pre-tax profits of nearly $1.5 billion, the company should still grow tangible book value in 2020. Athene has also capitalized on the significant disruption in the marketplace to improve its competitive position and increase its return profile. In June, the company, along with its co-investment vehicle ACRA, announced an accretive transaction with Prudential’s Jackson business, whereby it would reinsure $27 billion of fixed annuity and fixed indexed annuity reserves and acquire an 11% stake in Jackson’s remaining business. This deal will increase Athene’s earnings by nearly 10% and add 100bps to overall returns on equity by 2022. We estimate that Athene is paying just 3x pro forma earnings for this business, underscoring its unique ability to acquire complex assets at incredibly attractive prices. Furthermore, Athene continues to have significant dry powder to do additional deals, comprised of over $3 billion of excess equity capital on its balance sheet and nearly $2 billion of excess third-party capital in ACRA.
We are also encouraged to see KKR (a previous Lakewood long) recently announce that it is acquiring Global Atlantic, an Athene competitor (that is more levered but generates similar returns on equity) for 1x tangible book value. Applying the same valuation to our estimate of Athene’s book value at the end of 2021 yields nearly 100% upside in the shares over the next 18 months. At that level, the shares would be trading at just 6x forward earnings.”
In Q1 2020, the number of bullish hedge fund positions on Athene Holding Ltd (NYSE:ATH) stock decreased by about 9% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with Athene’s growth potential. Our calculations showed that Athene Holding Ltd (NYSE:ATH) isn’t ranked among the 30 most popular stocks among hedge funds.
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Video: Top 5 Stocks Among Hedge Funds
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