Lakewood Capital Management L.P. had a 1% gain net fees last quarter with long and short equity positions canceling each other out (3% v -3% respectively) and long/short equity positions gaining 1%, but the hedge fund’s letter to investors forecasts that better conditions for value investors are on the rise. Equity exposure was 87.5% long and 36.8% short, while fixed income was 4.0% long and 0.4% short. The top five positions made up 19.2% of equity capital and the top ten made up 34.5%
“In recent weeks, it looks like investors are becoming reacquainted with one of the most basic truths of investing: price matters. We find this environment refreshing and it should bode well for our fundamental, value-based investing approach,” writes Lakewood Capital Management founder Anthony Bozza.
Lakewood Capital: Ingram Micro and EnPro are top contributors
Ingram Micro Inc. (NYSE:IM) contributed 89bp last quarter on strong earnings, but Bozza still sees plenty of upside. He expects Ingram Micro to be debt free by the end of this year and to hit $3.25 EPS or higher in 2015. With a 12x PE multiple, that would put the stock at $40 compared to $26 today.
EnPro Industries, Inc. (NYSE:NPO)’s stock price catapulted from $56 to $76 in mid-January (adding 50bp to Lakewood for the wuarter) after getting a favorable ruling in an asbestos case involving one of its subsidiaries. Bozza had considered the asbestos liabilities to be manageable and assumed that EnPro would be able to salvage something from the subsidiary, which was deconsolidated from financial statements once it entered bankruptcy proceedings. As the asbestos liabilities continue to be resolved, Bozza sees the stock price moving up to $95 for a 9x EBITDA valuation.
Lakewood Capital: Spirit AeroSystems, Magnachip detract more than 50bp each
Spirit AeroSystems Holdings, Inc. (NYSE:SPR) was Lakewood’s biggest winner in 2013, and Bozza reduced the position as it approached what he sees as fair value, but when disappointing earnings caused the price to fall he increased the position once again. He still likes the stock and thinks it could trade above $40 in the long term, but it cost the fund 62bp last quarter.
Magnachip Semiconductor Corp (NYSE:MX) lost ground this month, costing Lakewood 52bp, as a change to accounting methodology both delayed its earnings report and caused analysts to walk back some of their estimates. Bozza had forecast a 2015 EPS of $3 and now thinks it will be closer to $2, but with a current stock price of about $14 that’s still plenty of upside.
Lakewood’s new positions
Bozza initiated a new long position on Bombardier, Inc. (TSE:BBD.A), saying that its core business is cyclically depressed and should start to recover and that the CSeries planes that are currently a drag on earnings will prove to be popular with airlines as they are 20% more fuel efficient than Boeing’s equivalent.
The fund also started new positions on NCR Corporation (NYSE:NCR), Micron Technology, Inc. (NASDAQ:MU), and SBM Offshore N.V. (AMS:SBMO).
Lakewood also initiated short positions on Plug Power Inc (NASDAQ:PLUG), citing serious skepticism about its business model, and Cardtronics, Inc. (NASDAQ:CATM), which is having tough negotiations with its largest and most profitable client, 7-Eleven.