Eye on Hedge Funds

 | Sep 11, 2012 | 2:50 PM EDT
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We track 13D and 13G forms that hedge funds and other notable investors file with the SEC when they increase or decrease a large position in a stock. These filings occur more closely to the date of a transaction than any purchases or sales that hedge funds report on 13Fs 45 days after the close of a quarter, and so they are very timely indicators of what hedge fund managers are thinking. Let's review three 13D and 13G filings.

York Capital Management, managed by James Dinan, reported a position of about 3.1 million shares in Dollar Thrifty Automotive Group (DTG), down from 3.8 million in its last filing in late August. Dollar Thrifty is being pursued by Hertz Global Holdings (HTZ), which has announced a tender offer to purchase shares of its fellow rental company at $87.50 per share; as of this writing, the stock trades slightly above $87. York is thus engaged in merger arbitrage, which is a common hedge fund strategy, as returns tend to be uncorrelated with movements in the stock market (read more about merger arbitrage strategies here). But York seems to think that the potential returns from a completed merger are no longer worth the risk or tying up its capital.

The industry has experienced quite a bit of consolidation in recent years -- Dollar Thrifty itself is a combination of formerly independent Dollar and Thrifty -- and now the market is dominated by four companies: these two, Enterprise (which also owns the National and Alamo brands), and Avis Budget Group (CAR). This transaction has been in the works for some time, with Hertz making its initial offer in early 2010 and then battling Avis for the right to purchase the company. But there have been questions as to whether federal regulators will approve the deal or decide there has been enough consolidation in the market and block the merger to preserve competition. As a standalone business, Dollar Thrifty trades at 14x trailing earnings, reflecting a bump in margins last quarter that pulled its earnings up 16% compared to a year ago.

Next, Atlantic Investment Management, managed by Alexander Roepers, purchased additional shares of glass bottle manufacturer Owens-Illinois (OI). The fund now owns about 10.4 million shares, compared to the 8.9 million it had reported on its 13F for the second quarter. The increased stake means that Atlantic now owns 6.3% of the shares outstanding. Owens-Illinois is trading at value levels: given sell-side estimates of $2.88 in earnings per share for 2013, the forward price-to-earnings ratio is 7. Looking out further, the five-year price/earnings/growth ratio is 0.8. Note, however, that the company's net income has been in decline recently: a $162 million gain in 2009 became a $47 million loss in 2010 and a $510 million loss last year.

Finally, John Scully's SPO Advisory Corp. sold shares of Lamar Advertising (LAMR), reducing its position to 13 million shares from 15 million (the fund still owns about 17% of the shares outstanding). Abrams Capital Management, a 10% owner of Lamar, has been selling shares, so it is interesting to see another fund getting out of the stock. Lamar is up 16% so far this year, and 14% this quarter, so both of these investors may simply be cashing in gains. While the company has been growing recently (its earnings rose 22% last quarter compared to the same period a year ago), it trades at 55x expected earnings for 2013. Considering Lamar primarily earns advertising revenue from outdoor billboards, we thought the stock might be overpriced. SPO's sale gave us more confidence.

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