Docstoc

Corsair-Capital-Q4-2010

Document Sample
Corsair-Capital-Q4-2010 Powered By Docstoc
					                                                  Corsair Capital Management, LLC
                                                   350 Madison Avenue, 9th Floor
                                                        New York, NY 10017



                                                                                                            January 25, 2011




                                                                                          ly
 Dear Limited Partner:

 For the fourth quarter ended December 31, 2010, Corsair Capital was up an estimated 8.0%* net,
 after all fees and expenses. For 2010 as a whole, Corsair Capital returned 15.4%*, coincidently
 matching our compounded net annual return since inception in January 1991.




                                                                                       ol
                                                                 Corsair Capital (net)                      S&P 500               Russell 2000
      4Q10 return                                                              8.0%                           10.8%                    16.3%
      2010 return                                                             15.4%                           15.1%                    26.9%
      Annualized since inception (1991)                                       15.4%                             9.1%                   10.8%
      Total return since inception (1991)
     tf                                                                      1641%                             475%                     683%
 * Returns are based on investments made at fund inception and using the highest possible fee schedule. Returns for investors in
 this or any of the Corsair funds are most accurately provided in the monthly capital statements.

 In response to a weak economic outlook and data suggesting underlying inflation was trending
 below target levels, the Fed announced in early November plans to buy $600 billion in short and
 medium term Treasuries over the following eight months. Though major indices finished the first
   ke
 half of 2010 in negative territory, the markets greeted this second round of quantitative easing
 (QE2) with cheer and ended 2010 on a strong note.

 What are the potential consequences of QE2? Some analysts argue gold’s vault to a record
 $1,400 per ounce indicates low confidence in markets and weak growth in most currencies.
 PIMCO founder Bill Gross thinks we are in a “liquidity trap,” with interest rates and consumer
 demand both stuck at critically low levels, and he suggests QE2 may signal the end of a 30-year
 bull market in bonds. In our last quarterly letter, we highlighted the disparity between equity and
 ar


 fixed income valuations and the potential for stocks to adjust upwards to 13-14 times earnings,
 equivalent to a yield of 7-8%. While we did experience some multiple expansion in equity
 valuations in the fourth quarter, part of the normalization to equivalent risk-adjusted returns for
 stocks versus bonds came in the form of fixed income underperformance. Clearly, the longer
 term impacts of QE2 have yet to be discerned. Importantly, however, we don’t consider
 ourselves to be macro investors. As such, we are confident that we can continue to generate
 attractive risk-adjusted returns by employing our “bottom-up” fundamental investment strategy
m



 that has served us well through both good and bad environments over the past twenty years.

 Ivan Seidenberg, CEO of Verizon, recently said, “By reaching into virtually every sector of
 economic life, government is injecting uncertainty into the marketplace and making it harder to
 raise capital and create new business.” U.S. voters shared this viewpoint and handed control of
 the U.S. House of Representatives to Republicans in November. Partly as a result of this defeat,
 This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in
 which Corsair Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital Management, LLC and its
 affiliates may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without
 providing any notification of such changes. It should not be assumed that any trading activities pursued in the future will be profitable and may in fact
 result in losses.

                             This letter brought to you via MarketFolly.com
 Obama announced plans to extend expiring tax cuts for all Americans. Amid signs of economic
 growth, we are encouraged by The President’s more centrist economic policy; however, global
 imbalances continue to muddle our outlook. Because of the potential risks and uncertainty
 associated with the many stimuli and regulations recently enacted, we remain very focused on
 the risks taken to achieve our returns. While Corsair participated in the fourth quarter’s broader
 move higher, we continued to post strong absolute returns with significantly less risk than the




                                                                                          ly
 equity markets. Our 2010 volatility of 11% came in sharply lower than the indices, with the S&P
 500 at 19% and the Russell 2000 at 24%.

 We wrote in our 2009 year end letter to investors that one of the strikingly positive features of
 the year was the impressive cost cutting by major corporations, and we continue to see profits
 improve from further operating leverage. As we believe post-recession equity markets are




                                                                                       ol
 generally driven by the direction of earnings, which in turn is driven by economic growth, the
 markets seem to have room to move higher. Despite overall headwinds or tailwinds, we are
 optimistic about the composition of the portfolio. We believe we are well positioned in terms of
 overall exposure levels and the types of business and balance sheet risk we take through our
 shareholdings. Our current portfolio reflects our consistent strategy of investing at very attractive
 valuations in quality enterprises run by strong, incentivized management teams who are focused
     tf
 on creating shareholder value. Results in the fourth quarter were characterized by broad positive
 performance, with many core holdings contributing, some of which are listed below.

 The Portfolio

 Having emerged from bankruptcy in early 2010, LyondellBasell (“LYB”) continued to surpass
 market expectations by announcing a very strong Q3, a dividend policy, and plans to further
   ke
 optimize its capital structure. In addition to its operational and financial achievements, LYB held
 a successful investor day, gained listing on the NYSE, and received numerous “buy” ratings
 from sell-side firms. While these catalysts drove LYB stock 44% higher during the fourth
 quarter, we believe LYB still trades at a significant discount to competitors. We expect this gap
 to close as LYB continues to post superior results. LYB ended the quarter at $34.40.

 CapitalSource (“CSE”) positively contributed to the portfolio as the company continued to
 execute on its transition from an over-leveraged REIT to a well capitalized bank. Management’s
 ar


 debt repurchases and announcement of a significant share repurchase plan signaled to the market
 CSE aims to maximize shareholder value. Subsequent to year end, news wires reported that CSE
 has hired JP Morgan to explore strategic alternatives, again confirming our belief the shares
 remain undervalued. CSE ended the quarter at $7.10.

 KapStone Paper & Packaging (“KS”) traded up during the quarter as the company announced
 strong Q3 results driven primarily by selling price increases across its paper grades. Our research
m



 shows a tight supply/demand relationship, low inventory levels, and improving utilization rates,
 which give us confidence KS can realize additional price increases and higher earnings. Having
 ended 2010 with a de-levered balance sheet, we expect KS to again make a large accretive
 acquisition in 2011. The stock ended the quarter at $15.30.


 This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in
 which Corsair Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital Management, LLC and its
 affiliates may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without
 providing any notification of such changes. It should not be assumed that any trading activities pursued in the future will be profitable and may in fact
 result in losses.
 Aon Corporation (“AON”), another positive contributor during the quarter, announced the
 completion of its acquisition of Hewitt, a transformational event that we believe will enhance
 AON shareholder value and create a global leader in human capital solutions. As part of the
 acquisition financing package, AON issued 30 year senior unsecured bonds, which we view as
 the credit market’s vote of confidence in the new company. AON reported strong third quarter
 earnings that reflected solid operational performance against a challenging global economy. We




                                                                                          ly
 continue to believe AON will be able to earn $5.00 in cash EPS in the near term through
 improved earnings from operations and share buybacks. The stock ended the quarter at $46.01.

 Globe Specialty Metals (“GSM”) again positively contributed to the portfolio this quarter, as
 manufacturing and industrial activity progressed faster than expected and silicon metal and
 ferrosilicon prices rose. GSM also benefited from the revival of automotive production and a




                                                                                       ol
 corresponding increased demand for aluminum. During the quarter, competitor Elkem was put
 up for sale by parent company Orkla, which we believe will lead to further industry
 consolidation and tightening of silicon metal prices. Following its scheduled maintenance in the
 third and fourth calendar quarter of 2010, we expect a strong operational year ahead with
 production near full capacity. The stock ended the quarter at $17.09.

 One company that disappointed us during the quarter was Chiquita Brands International
     tf
 (“CQB”), which slipped on the proverbial banana peel in its Q3 results. After repositioning its
 packaged salads business, selling a 50% stake in an unprofitable product line (Just Fruit in a
 Bottle), and paying down debt, the company had difficulties navigating a deteriorating banana
 market in Europe (despite tariff reductions which we anticipated would be beneficial). Recent
 banana supply disruptions in South America combined with competitors’ plans to reduce EU
 banana capacity have helped current banana supply/demand fundamentals and pricing. While
   ke
 frustrated with the results in Q3, we believe that CQB has mid-cycle cash earnings power of
 approximately $2.00 and that the company could soon be in a position to return cash to
 shareholders through a buyback or dividend. The stock ended the quarter at $14.02.

 While the markets have certainly edged higher as we head into 2011, we continue to see a robust
 pipeline of new investment ideas, including spin-offs, post-reorganization equities, and general
 special situations going through strategic change.
 ar


 Annual Investor Meeting

 We look forward to celebrating with you Corsair’s twenty years of successful investing at our
 annual meeting on March 8th at the Harvard Club.

 Thank you for your continued support and confidence. We hope you have a healthy, happy and
 prosperous 2011. The attached Appendix is a write-up of a core investment. Please feel free to
m



 call us with any questions you may have at (212) 389-8240.

 Sincerely,


 Corsair Capital Management
 This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in
 which Corsair Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital Management, LLC and its
 affiliates may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without
 providing any notification of such changes. It should not be assumed that any trading activities pursued in the future will be profitable and may in fact
 result in losses.
 Appendix – Neo Material Technologies (“NEM” – $8)

 NEM produces and processes rare earth elements widely used in smartphones, electronics,
 optical lenses and various solar components. NEM’s core product offerings are at a macro
 inflection point supported by an undersupply of rare-earths used in developed and emerging
 markets. While we recognize investors have crowded into certain over-hyped rare earth stocks,




                                                                                          ly
 we believe the market is ignoring one of the only rare-earth companies that will see an
 immediate economic benefit from Chinese quotas and end-market demand growth. As illustrated
 in the table below, rare earth pricing has seen geometric growth.
 US $ per Kg
                                  2009           Q1 2010          Q2 2010           Aug-10            Oct-10              Nov-10 ! Since 2009




                                                                                       ol
 Cerium                            $4.00            $4.50            $6.50           $37.00            $38.00              $50.00      1150%
 Dysprosium                       115.00          155.00           200.00            300.00            305.00              305.00       165%
 Europium                         495.00          515.00           530.00            600.00            615.00              640.00        29%
 Lanthanum                           5.00            6.00             7.50            38.00             42.00               50.00       900%
 Neodymium                         19.00            27.50            33.00            49.00             75.00               78.00       311%
 Praseodymium
     tf                            18.00            26.00            33.00            49.00             72.00               73.00       306%
 Samarium                            3.40            3.40             3.40            33.50             35.00               35.00       929%
 Terbium                          360.00          480.00           540.00            605.00            615.00              615.00        71%

 NEM operates in two divisions, AMR and Magnequench.

 AMR sells rare earths and certain rare earth finished goods. AMR purchases rare earth
 concentrate in China and separates it into purified rare earth elements through a technically
   ke
 complex process. While China has an abundance of rare earths, its export license system restricts
 supply. AMR is a licensed exporter under Chinese quota laws and derives ~25% of its revenues
 by selling rare earths to customers outside China, where pricing has skyrocketed. The company
 expects to capitalize on the current pricing bubble by exporting the highest margin rare earths.

 Magnequench processes Neodymium (periodic element # 60) into neo magnets, which comprise
 essential parts of hard disk drives, small electronic motors, and other electronics. Before China
 recognized its own domestic need for rare earths and limited exports to ensure sufficient supply,
 ar


 neodymium and other rare earths were economical and pervasively used in everyday products.
 Because substitution can be difficult and expensive, end-users are committed to using neo
 magnets; this demand inelasticity has allowed Magnequench to pass higher input costs (75-
 100%) onto customers. While the cost recovery tends to lag, we saw numerous price increases in
 2010 and expect additional increases in the future should rare earths continue their exponential
 rise.
m



 At the time of our initial investment, the sell side projected $0.56/share for 2011 EPS, and we
 believed this understated NEM’s earnings potential given we expected a Q4 EPS of $.15/share
 which could increase towards $.20/share per quarter by the end of 2011. We also recognized
 potential incremental contribution from other near term opportunities. For example, because
 finished goods which use rare earths are not subject to the same quotas that govern rare earth
 This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in
 which Corsair Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital Management, LLC and its
 affiliates may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without
 providing any notification of such changes. It should not be assumed that any trading activities pursued in the future will be profitable and may in fact
 result in losses.
 concentrate, NEM’s finished goods facilities in China give the company an advantage over
 competitors with finished goods facilities domiciled in Europe. Specifically, NEM is doubling its
 catalytic converter capacity in China at a time when one competitor with facilities outside of
 China recently announced a doubling in price of its catalytic converters. We also believe the
 market is giving NEM no credit for its strategic relationship with a Brazilian rare earth mine,
 which could supply NEM with rare earths by late 2011. Management believes the mine could




                                                                                          ly
 wean the company off its dependence from China and eventually supply much of its rare earth
 needs. News from Brazil has been encouraging, and we expect management to give an update on
 its next conference call.

 In summary, we believe NEM is a rare, profitable rare earth company which should benefit from
 tightness in the rare earth market. At the time of our initial investment, we believed NEM




                                                                                       ol
 deserved at least an 11-12x multiple on 2011E EPS of ~$.70/share. This plus credit for their cash
 would create an $8-9 stock. We now believe a further move to $15 is possible if the REE/MCP
 crowd discovers NEM and begins to extrapolate future growth or gives the company credit for its
 Brazilian mine.

     tf         Click here for more hedge fund letters at MarketFolly.com
   ke
 ar
m




 This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in
 which Corsair Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital Management, LLC and its
 affiliates may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without
 providing any notification of such changes. It should not be assumed that any trading activities pursued in the future will be profitable and may in fact
 result in losses.

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:32729
posted:2/11/2011
language:English
pages:5