Anthony Bozza’s Lakewood Capital Management is coming off its worst year in a decade — but the long-short manager is downright ebullient about the current investment environment.
“We enter 2019 with the most attractively-valued long book we have seen in a decade,” Bozza said in his fourth-quarter letter, obtained by Institutional Investor. In fact, Lakewood's gross and net exposures are the fund’s highest in the past 10 years.
Bozza added that the only other times he was this excited was the beginning of 2009 — several months before the stock market bottomed after the financial crisis — and the fall of 2011. Each time, the subsequent two years were his best.
Bozza founded Lakewood in 2007, managing $4.94 billion at the end of 2017, according to a regulatory filing. The firm specializes in deep, fundamental value investing and stock-specific short selling.
Lakeview lost 10 percent in the fourth quarter, its worst quarterly loss since the third quarter of 2011. The hedge fund finished 2018 down 14.3 percent, the worst performance in a decade, according to its letter.
“Our value-oriented long positions largely stagnated in the first nine months of the year, and while we believed they were attractively priced heading into the fourth quarter, they collectively ended the year in dismal fashion,” Bozza told clients in the letter.
After the firm's short book struggled earlier in the year, Bozza said it bounced back to finish 2018 “solidly profitable” thanks to the firm's best ever quarterly short performance. Its short equity positions produced a 34 percent return on capital for the fourth quarter and a 4 percent return on capital for the year.
Looking ahead, Bozza is heavily bullish on his long book. He points out the average price-to-earnings multiple of his holdings is just 10 times the firm’s 2019 earnings estimate. “We expect those earnings to grow at an attractive rate over the coming years,” he said.
And although he acknowledges the economy is slowing down and there is a risk of recession, he added that “judging by the values of our long positions and many other stocks we follow, it appears to us that nearly all market participants have already reached that conclusion.”
Bozza said the bar for many of his stocks to rise 50 percent “is incredibly low,” so he has been “adding aggressively” to his long book in recent months. In fact, he is so excited about his portfolio that instead of discussing a few favorite stocks in the letter, Bozza highlights broader areas of enthusiasm.
For example, the fund’s largest allocation is to financial stocks, specifically “well-capitalized financial companies at discounts to book value.” The fund’s two largest positions are Citigroup and Ally Financial, whose shares ended 2018 “well below book value” and trading around 7 times forward earnings. During the fourth quarter, the fund also purchased shares of CIT Group and Goldman Sachs Group.
Bozza also is long what he calls deeply-discounted auto- and housing-related companies. “Concern of an impending economic slowdown has kept buyers at bay as no one wants to be caught owning these stocks at the top of the market,” he explained.
One stock he is especially bullish on is BMW, trading at just 1 times tangible book value and less than 5 times earnings, net of cash. Lakewood also owns Volkswagen and Lithia Motors.
On the homebuilding side, it owns Masco, manufacturer of branded home improvement and building products, and Builders FirstSource and BMC Stock Holdings, suppliers of building materials.
Lakewood is also long “high-quality, undervalued industrial companies” such as Airbus, WestRock, FedEx Corp., Andeavor Logistics, and Brunswick Corp., saying they're “well-positioned companies that have strong prospects for earnings growth in the years ahead.”
And finally, it is long Alphabet and Facebook, calling them “value technology companies.” Other long bets include Comcast Corp. and Asian tech stocks Baidu, China Tower, SK Hynix, and Yahoo! Japan.
Finally, Lakewood is long several what it calls out-of-favor asset managers with strong earnings growth potential, including Apollo Global Management, Julius Baer Group and DWS Group — all trading at single-digit earnings multiples.
The firm is short pot stocks, saying Canadian marijuana stocks are “one of the best short opportunities we have ever seen.” It is short Canopy Growth, Aurora Cannabis, and Tilray.
Lakewood is also short what it calls several questionable, overvalued Korean biotech stocks, including Celltrion, a manufacturer of biosimilars. Bozza said the company is now valued at over $4 billion “despite purchasing its only drug for $150 million with virtually no incremental developments since then to support the drug’s efficacy.”
