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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