market folly

Today we present the latest investor letter from Jay Petschek and Steven Major's hedge fund Corsair Capital. For the second quarter, Corsair was down -6.3% and that leaves them flat on the year. So, why should you care what they have to say? Well, because they've returned an impressive 14.9% annualized since inception in 1991.

Petschek and Major believe that a lot of pessimism is currently priced into stocks. While there has been much talk this year about the lack of success in stockpicking, Corsair argues that, "while tight correlation among stocks is challenging in the near term, it is helpful in creating opportunities for stockpicking." In general, they are looking for companies that can generate value beyond merely participating in an economic recovery. In particular, they are trying to focus on less cyclical business models.

So, what stocks do they see as compelling? Take LyondellBasell (LALLF) as an example. This post-bankruptcy equity has improved its balance sheet and operating cost structure yet has sold off recently. While comparable companies trade at 6x mid-cycle EBITDA, LALLF only trades at 4.5x. Additionally, the company trades below a bid it received while in bankruptcy from Reliance Industries. This isn't the first time we've seen a hedge fund advocate a position in this chemicals company. At the Ira Sohn Investment Conference, Jamie Dinan of hedge fund York Capital presented the bullish case for Lyondell. Additionally, Dan Loeb's hedge fund Third Point LLC stated they were bullish on post-bankruptcy equities as well in a recent investor letter.

In Corsair's first quarter commentary, Petscheck and Major outlined a bullish stance on Expedia (EXPE). This stance continues in their most recent letter given the company is trading at 12x EPS and under 10x free cash flow. However, they have noted some caution due to Google's move into the online travel industry with its acquisition of ITA. While they are watching the developments there, they like the risk/reward skew. The online travel booking space has certainly garnered interest from some prominent hedge funds. Chase Coleman's Tiger Global has fancied Priceline.com (PCLN). Additionally, Matt Iorio's hedge fund White Elm Capital has in the past added shares of Orbitz (OWW). Corsair, on the other hand, prefers Expedia (mainly due to their high growth and high margin asset, TripAdvisor).

In addition to those plays, hedge fund Corsair also highlights Live Nation Entertainment (LYV) as an attractive investment due to secular tailwinds, an oligopolistic business and modest capital requirements. Keep in mind that fellow hedge fund Lone Pine Capital acquired a Live Nation stake as well. Lastly, Corsair points out opportunity in the leveraged recapitalization of Fidelity National Information (FIS), one of the more widely held stocks among hedge funds.

Embedded below is Corsair Capital's second quarter letter as well as a full investment write-up on their latest pick, insurance broker AON (AON):



You can download a .pdf copy here.

We're covering a deluge of second quarter market commentary and have already detailed Perry Capital's latest letter, David Einhorn's most recent investments, and a presentation from hedge fund T2 Partners. Stay tuned for more coverage each day.