Jonathan Laing writes about the proposed Fannie/Freddie takeover proposed by Bruce Berkowitz and friends. The group owns sizable positions in the preferred stock of both entities. The only problem is that the companies were destined for complete bankruptcy and the US government sunk in $187 billion to save them. So the common and the preferred should have been wiped out, but the preferred remained trading, and now that F/F are both making money again, Berkowitz wants to either take them over or get the preferred back to par for huge gains. Laing writes “In the long history of bailout deals, no heist of the U.S. taxpayer would approach this one in cynicism and chutzpah.
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Capital One Financial (COF) might be a bargain. Up 24% this year but this trails S&P and the KRE as well as competitors DFS and AXP. P=$71.63, 10x. BV=$71.70. 1.7% yield and stock buy backs. $100 three years out per Lisa Dong of Westwood Management. $8.50/sh by 2016 at a 12 multiple to get there.
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Turnaround candidates – DAL, GM, HPQ, OI, PBI, SWY
How to profit from today’s shareholder activisim – Darden, priced at $53.33 but activists think it is worth $76. Group led by Barrington Capital wants to split into two companies.
Chico’s (CHS) – Price down 1% in 2013, eps to $0.99 from $1.09 this year, $1.18 next year. Company has $250m cash and no debt. Blue Harbour Group (Clifton Robbins) wants them to use a portion of the $200m in cash flow to buy back stock. Company announced a $300m buyback which could cut share count by 10%. Expand the Soma Intimates chain. “A growth stock trading like a value stock”, says Robbins. Pe is 16x.
Activist investors to watch: Clifton Robbins of Blue Harbour Group, Richard McGuire of Maracato Capital, Jeff Smith of Starboard Value, Ralph Whitworth of Relational Investors and Greg Taxin of Clinton Group.
Gundlach and Shiller have started the DoubleLine Shiller Enhanced CAPE (DSEEX) fund. Fund will invest in low CAPE (cyclically adjusted PE ratio) sectors. CAPE is currently at 25, normally 16. At 28 stocks would be unattractive. Priced for 2.5% real return now. Gundlach said that 10-year Treasuries might take out last year’s low of 1.4% based on a recession or an international problem. Also said the non-guaranteed mortgage market is the cheapest sector in the bond market. Can make 6 to 7% annual return. You can make money investing in areas that people do not want. People don’t want interest rate risk so if you go to the long end of the curve you can get 11% in the agency mortgage market. Dollar denominated emerging market debt you can 6-7% and no currency risk.
American Realty Capital Partners (ARCP) trades at a discount to peers O and NNN. After merger with COLE will have 47% investment grade tenants, 99% occupancy and average lease term of 11 years. Sells at 11x 2014 estimated AFFO. Dividend yield next year is expected to be 7.6%. Can also play the merger through COLE shares, $14.31. COLE s/h will receive1.0929 ARCP shares for each share of COLE. Risk is deal falls through.