Alex Roepers Up 38% In 2013; Sees JCP As ‘Bankruptcy Candidate’

Alex Roepers Up 38% In 2013; Sees JCP As ‘Bankruptcy Candidate’

Alex Roeper’s Atlantic Investing Management celebrated its 25-year anniversary in 2013 by beating the market almost across the board, according to a shareholder letter obtained by ValueWalk. Its concentrated US equity value fund, the Cambrian Fund, was up 38.3% for the year. The US equity long/short fund AJR/Quest was up 20.3% with strong alpha on the long side and neutral alpha on the short side. Cambrian Global was up 28.8% and Cambrian Europe was up 22.3% for the year. Most impressive, Cambrian Japan returned 42.9% in 2013, with net gains on every individual investment position. Atlantic currently has $1.9 billion in AUM.

Alex Roepers and Atlantic’s constructive approach to activism

Atlantic President and CIO Alex Roepers attributes much of this success to the fund’s brand of ‘constructive shareholder activism’ (CSA), which avoids public fights and tries to effect change by providing “compelling, tailored, win-win solutions for management and shareholders alike. Working constructively behind-the-scenes, we let management take credit for improved share performance triggered by our proposals,” he writes.

While Alex Roepers says that the fund will push its position through independent board members, and in some cases through financial media, it isn’t interested in gaining board seats on the companies it invests in preferring to stay flexible and retain the ability to trade.

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Alex Roepers forecasts $1 trillion in M&A in next few years

Even though multiple expansion has been the big story of 2013, Atlantic reports that it estimates its equity portfolio to have an average EV/EBIT of about 8x based on year forward estimates.

“Our holdings have solid downside valuation support and strong upside appreciation potential over the next 12-18 months based on previously achieved valuation multiples,” Roepers writes.

In addition to the CSA toolbox that has led to strong returns in the last few years, Roepers sees the potential for lots of M&A deals next year and believes that the Atlantic portfolio is well-positioned to benefit from takeover efforts. He points out that U.S. companies have $2.7 trillion in cash between them and private equity funds have another $400 billion, which he forecasts will result in $1 trillion in M&A deals in the next few years.

“Most of our companies are also potential takeover targets by both strategic and private equity buyers due to their strong and predictable cash flows, unique assets, franchise values and low insider control, which create vulnerability to unsolicited takeover attempts,” Alex Roepers writes.

Atlantic’s top U.S. positions are Baker Hughes Incorporated (NYSE:BHI), Owens-Illinois Inc (NYSE:OI), Harman International Industries Inc./DE/ (NYSE:HAR), Oil States International, Inc. (NYSE:OIS), and Cameron International Corporation (NYSE:CAM). The fund’s top European positions are Technip (ADR) (OTCMKTS:TKPPY) (EPA:TEC), Atos SE (EPA:ATO), Safran SA (EPA:SAF) (OTCMKTS:SAFRY), MTU Aero Engines AG (ETR:MTX) (OTCMKTS:MTUAY), and Sulzer AG (VTX:SUN) (SWX:SUN), and its top Japanese positions are Kuraray Co Ltd (TYO:3405) (OTCMKTS:KURRY), Itochu Techno-Solutions Corporation (TYO:4739) (OTCMKTS:ITTOY), Koito Manufacturing Co., LTD. (TYO:7276) (OTCMKTS:KOTMF), Sumitomo Electric Industries, Ltd. (TYO:5802) (OTCMKTS:SMTOY), and Kurita Water Industries Ltd. (TYO:6370) (OTCMKTS:KTWIY).

The top short positions according to the letter from Alex Roepers:

The 2013 short activity was challenged in a year that favored growth and thematic stocks, often with little regard  for valuation. Short attribution was negative, but in line with what a market hedge would have generated.  Winners on the short side included our fundamental short on J.C. Penney Company, Inc. (NYSE:JCP), which we continue to hold as  we see this as a bankruptcy candidate. Our themes to short the digital storage REIT names, like Digital Realty Trust, Inc. (NYSE:DLR), Rackspace Hosting (RAX) and CoreSite Realty (COR), as well as the organic grocers, including  Whole Foods Market (WFM), Sprouts Farmers Market (SFM) and The Fresh Market (TFM), worked out well. We are entering 2014 with a compelling and diversified short book of 25-30 individual shorts, which have generated solid positive attribution so far in 2014.

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Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.
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