Highfields
Capital Management was co-founded by Jonathon Jacobson and Richard Grubman in
1998. About a third of the fund’s initial capital of $1.5 billion came from Harvard Management; Jacobson had previously worked
at the endowment. Grubman has since retired, but Jacobson is still managing the
fund which has since grown to over $10 billion in assets under management.
Jacobson
has admitted that the holy grail of value investing- a good company trading at
a cheap price- is very elusive in the modern financial markets, even with the
resources of a hedge fund research team. As a result he claims that Highfields
end up looking at unattractive businesses which carry low valuations because
the market expects that poor performance to continue. If the price is low
enough, or if the company’s struggles have been due to problems which are
getting weaker, then it might be a buy.
Considering
that the hedge fund tends to manage a moderately concentrated portfolio- in its
most recent 13F filing, the six largest positions were responsible for about
40% of the reported investments- it seems to us that the fund doesn’t need to
find too many “close enough” picks to match its large size as long as it can
invest high amounts of capital. The smallest of these six largest positions was
over $350 million. In turn, the large size of the positions and the concentration
of the portfolio generally results in fairly long holding periods for
Highfields; Jacobson has claimed that a holding period can be two to three
years. Between September 2011 and September 2012 the same three stocks have
held the top three slots in the fund’s 13F portfolio according to our database
of filings, and two more of the most recent top six had Highfields report a
position of at least $200 million a year earlier. Read on for a quick
discussion of the five largest holdings in Jacobson’s most recent reported
portfolio or see the full list of stock picks:
News
Corp (NWSA) Highfields owned about 32 million shares of News Corp, which is
planning to split its business into two next year. Partly because of the
opportunities inherent in this special situation- management of spun out or
broken up companies can sometimes create shareholder value by being more
focused on operations- News Corp was one of the most popular services stocks
among hedge funds.
The stock trades at 23 times trailing earnings, suggesting that the market
currently expects it to improve.
SLM
Corp (SLM) Student loan manager Sallie Mae, which is also a favorite of
billionaire Leon Cooperman’s Omega Advisors (check out Cooperman's stock
picks), was
another of Jacobson’s top stock picks with a position of 46 million shares. The
stock is cheap at trailing and forward P/Es of 8 and 7, respectively, but
investors have at least some reason to worry about student loan debt- this is a
classic case of an unattractive business at a low price.
DIRECTV
(DTV) The fund cut its stake in DirecTV by 16% but still owned about 11
million shares at the end of September. Revenue and earnings growth was
moderate last quarter compared to the third quarter of 2011, and the trailing
P/E is 12. It might be a value candidate. DirecTV was one of Warren Buffett’s
top ten stocks last quarter as Berkshire Hathaway reported owning almost 30
million shares (find more of Buffett's favorite
stocks).
JPMorgan
Chase & Co. (JPM). Jacobson increased the fund’s holdings of the megabank
by 41% between July and September to more than 10 million shares. JPMorgan
Chase trades at a small discount to book value and at 8 times consensus
earnings for 2013, which we think is quite cheap. JPMorgan Chase joined fellow
big banks Wells Fargo (WFC), Bank of America Corp (BAC), and Citigroup (C)
in our list of the ten most popular stocks among
hedge funds.
Canadian
Natural Resource Ltd (CNQ). The $31 billion market cap integrated oil and gas
company rounded out Highfields’ top five picks, and was the only one of the
five where the fund had not had a position worth over $200 million a year ago.
The stock has fallen 23% in the last year, and earnings were down strongly last
quarter versus a year earlier. It is valued at 12 times forward earnings
estimates.
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