Jonathan Auerbach’s Hound Partners Offshore Fund sharply cut into its losses last month as it strives to get back to break-even by year-end. The long-short fund has now sliced roughly two thirds from its first-half loss.
The fund, managed by New York–based Hound Partners, surged 4.7 percent in October. As a result, it is now down 5.7 percent for the year.
In the first half of 2016, the fund was off nearly 16 percent net. The Hound Partners Long Fund dropped 12.5 percent, while the Hound Partners Concentrated Fund — also a long-only vehicle — plunged 17.4 percent.
It is not known how the two long-only funds are faring right now.
However, we do know that the firm seeded by Julian Robertson Jr.’s Tiger Management Corp. has turned the Hound Partners Offshore Fund around, partly by sticking with its two largest positions, even though they were also the two top sources of losses in the first half of the year for all three funds.
For example, shares of Spirit AeroSystems, a maker of large commercial aircraft structures and Hound Partners’ biggest U.S. long, rose about 16 percent from July through August. The stock is up another 10 percent so far this month, closing at $55.51 on Friday.
Spirit dropped 14 percent in the first half of the year, making it the second-largest loser for two of the three Hound funds and the biggest loser for the Concentrated Fund.
Tesoro Corp., Hound Partners’ No. 2 long, rose 20 percent from July through October. The refiner and marketer of petroleum products was the biggest loser for all three funds in the first half of the year. The stock, which was down nearly 1 percent this month, closed at $83.22 on Friday.
In its first-half report sent to clients — the firm does not send quarterly updates — Hound said it remained “very excited” about the two stocks.
In the case of Tesoro, it explained that the sector had sold off “due to shrinking near-term national crack spreads,” industry jargon for the difference between crude oil prices and end products. Hound stressed that Tesoro’s business is highly weighted toward the California crack spread, which it asserted was still attractive. “We remain confident that the long-term normalized earnings power of Tesoro is significantly higher than the market appreciates,” Hound told clients.
Auerbach was right for now.
In the case of Spirit, Hound reassured clients in the first-half letter that the company had already reported “two encouraging quarters of operating results, won promising new business, received investment grade credit ratings, refinanced expensive and restrictive debt, and repurchased 6 percent of its outstanding shares.”
The letter also noted that Spirit’s stock underperformed even though sell-side analysts had raised their earnings estimates for 2016 and 2017 due to “deteriorating sentiment regarding the commercial aerospace cycle” and executive changes at the company.
However, Hound said it was still bullish on the stock, partly because Spirit derives 70 percent of its profit from what Hound deems the healthiest segment of the market — narrow-body aircraft — which has a nine-year backlog industrywide. “This category should grow even in an industry downturn,” Hound added. The firm was also excited by the February hiring of Thomas Gentile III as chief operating officer.
Hilton Worldwide Holdings, which became Hound’s No. 3 individual U.S. common stock position after the firm established a new one in the second quarter, was roughly flat from July through October.
Another reason Hound has been able to rebound so sharply in the second half of the year: In June it finally threw in the towel on Valeant Pharmaceuticals International and liquidated its entire stake in the embattled drugmaker, which was its second-largest long as recently as December 2015.
Hound sold its Valeant shares for $25 apiece, according to the firm’s first-half client letter. The stock is now trading at about $18.
Clearly, Hound picked the right major holdings to stick with.
