John Burbank’s Passport Capital is up 2.2% in third quarter, according to a letter obtained by ValueWalk. The fund has returned 11% net of fees, year to date. Fund assets stand at $1.4 billion and firm assets total $3.4 billion. The hedge fund began the quarter approximately 88% long by 95% short and ended the quarter 100% long by 45% short. At quarter-end, their largest gross exposures by sector were Basic Materials (38%), Internet/Technology (23%), and Consumer (19%).
John Burbank has become bearish on the global economy. Taking a cue from Seth Klarman and David Einhorn, John Burbank criticizes the easing policies of central banks. Burbank states ‘while central banks huff and puff to create real GDP growth, they appear to be near exhausting their resources. We believe that much of the growth we’re seeing is understated inflation, not real.’
Burbank in particular, is bearish on China. He notes the slowing energy consumption. Burbank says that GDP growth numbers from China ‘can hardly be believed.’
Despite the bearish outview, Burbank is finding value in US dividend yielding large cap equities. Burbank discusses some of his top holdings, and why he likes the companies.
Cytec Industries Inc (NYSE:CYT) (7% of Global Fund NAV): Cytec has been a consistent top 10 investment throughout 2012. Burbank see potential gains in both legacy aircraft builds, which are approximately 5%–20% carbon fiber by weight, as well as in new designs, such as the Boeing 787 Dreamliner and Airbus A350, which are approximately 50% carbon fiber. With about an 8-year backlog for planes and the constant concern over fuel prices, we believe Cytec’s commercial aerospace composites business will continue its rapid growth trajectory. Based on comparables such as Hexcel Corporation (NYSE:HXL) (HXL US) and SGL Carbon SE (ETR:SGL) (SGL GR), he believes that Cytec Industries Inc (NYSE:CYT) should trade at a 9x EV/EBITDA from the 7-8x it traded at as of mid-October.
Huntsman Corporation (NYSE:HUN) (5% of Global Fund NAV): Huntsman is a chemicals company that produces titanium dioxide (TiO2), Polyurethanes, MTBE, and variety of other chemicals for numerous global industries.
Vivus, Inc. (NASDAQ:VVUS) (5% of Global Fund NAV), is a stake which Burbank just added to today. He believes that Vivus is a compelling take-out candidate for a major pharmaceutical company. He notes that according to the most recent statistics from the Centers for Disease Control and Prevention, nearly 36% of U.S. adults over 20 years old are obese, and about 17% of children and adolescents aged 6-19 are obese. Using the 2011 Census count of 311 million Americans, this implies nearly 100 million obese Americans. In the emerging world, obesity is a growing epidemic. Qsiva is an important drug for the company, which helps fight obesity.
He also notes that:
The placebo-adjusted, average weight loss for Qsymia patients is about 10%, which is highly significant. This approaches the average weight loss of gastric bypass, but in a single, once-daily pill. This has important consequences to cardiometabolic function and insulin and glucose tolerance: if you lose 10% of your weight, you can lower your blood sugar, reduce blood pressure, improve cholesterol levels and increase your chances to get off insulin and other Type II diabetes medication. The central debate in the market is whether this is an ethical, cardiometabolic adjunct for the treatment of diabetes or a lifestyle and aesthetic pill. We believe that large pharmaceuticals are watching the company’s progress very closely and that their silence is deafening.
Kinder Morgan (5% of Global Fund NAV): Kinder Morgan is a $39 billion market cap company that owns and operates energy transportation and storage assets in the United States and Canada. It is levered to the energy infrastructure growth in North America through interests in Kinder Morgan Energy Partners LP (NYSE:KMP) and El Paso Pipeline Partners, L.P. (NYSE:EPB), which enables stable cash flow with visible growth from broad and diversified energy assets. He likes the dividend yield of 4.2% and believes that it could grow dividends per share at KMI by approximately 12.5% per year.
MENA Equities (17% of Global Fund NAV): Saudi equities dominate their MENA portfolio which, at 17% of NAV, represents the largest long-equity weighting in the Fund. Burbank likes Saudi Arabia, and notes that it is the only emerging market which he is net long.
One of the reasons Burbank likes Saudi Arabia, is its $600 billion in foreign reserves. He believes that the Saudi economy is well-cushioned against any short-term correction in oil prices. Additionally, Burbank notes that since the beginning of 2009, the Saudi market has tended to have a lower correlation to oil than the S&P 500 has had.
Burbank mentions two Saudi stocks which he likes:
Etihad Etisalat (5% of Global Fund NAV): Etihad Etisalat operates under the brand name Mobily, is the second largest mobile operator in Saudi, and is a key beneficiary of the deregulation of the Saudi telecom sector. Earnings have grown over 30% annually for the last five years. He notes that the company can potentially pay SAR 4.50/share, or a 6.2% yield. Mobily currently trades at approximately 6.3x 2012 EV/EBITDA.
Yanbu National Petrochemical Company (4% of Global Fund NAV): Burbank notes that the two largest contributors of their product lineup, are Ethylene Glycol and Polypropylene, which have been resistant to the recent slowdown of global growth. Additionally, the company has a highly advantaged feedstock position in Saudi Arabia. Burbank notes that if Yansab paid out all of its 2012 free cash flough through dividends, the company would sport a dividend yield of approximately 14%.
Disclosure: No position in any securities mentioned