Stock Picking

Steve Clapham has an excellent record as an investment analyst both on the sell-side where he has won numerous awards in various surveys and on the buy-side. He was a partner of Toscafund Asset Management LLP which at the peak had AUM of over $7bn and more recently he was Head of Research at Altima Partners, whose Global Special Situations Fund had AUM of $1-2bn in quoted equities.

Contractual arrangements with these two hedge funds prevent Steve from revealing (or even from publishing the performance of) his stock selections. His model portfolio had a market neutral return in excess of 30% and this can be demonstrated to potential clients and externally verified.

In this medium, we can only demonstrate the performance of a series of stock recommendations made by Steve to the principal of a $5-10bn London based equities hedge fund which culminated in a job offer.

These recommendations were made in a series of emails an example of which is reproduced below (and the others are available upon request). The chart of the subsequent performance in the next 6 months is shown here:

 

The performance was less good over a 12 month period, with a market neutral performance of c20%, an annual outperformance which continued over every 6 month period, whether it's 18 months or 24 months. Quite a lot has changed, and it's unlikely that the selections would have remained intact, but in the interests of full disclosure, the relevant comparisons at the time of writing in May 2013 are:

Average gain: 70%

Best: 160%

Worst: 31%

MSCI World: 24%

 

FOONOTE - Kabel Deuschland was subsequently taken over, generating just shy of a treble.

We have reproduced below an example of the summary research behind some of these recommendations. They took the form of quick and dirty emails, which were sent to the relevant hedge fund principal, whose identity we can reveal to any potential client requiring this as a reference.

 

From: Stephen Clapham
Sent: 03 October 2010 19:57
To: xxxxxxx'
Cc: xxxx'
Subject: idea

xxxxx, you asked me to give you some evidence that I can generate ideas.


Headline story in today's Sunday Times identifies GE subsidiary Vetco Gray as bidder for Wellstream. We saw with Amersham that GE was willing to pay fancy prices for the right asset and this bodes well. If I worked for you, you would have on your desk at start Monday morning an investment proposal outlining the merits of two laterals:


Probably of more practical interest is the US lateral - National Oilwell Varco (NOV, $45.18) has a $19bn mkt cap and trades c.$200m/day. I recommended it at xxxx in February of this year after meeting the CFO at a broker dinner and getting sensible answers to some of my concerns. NOV is essentially a top quality manufacturer of mission-critical equipment used on oil and gas rigs and enjoys its highest market shares in deep water and other challenging environments. I saw it as a key beneficiary of the Petrobras rig ordering programme (they have been busy this year equipping a new facility in Brazil in readiness) and this has obviously been reinforced by the Macondo incident and likely further tightening of standards and regulation of additional equipment - it's quite possible that the market for some of their rig equipment products could double overnight as regulators require duplication of certain critical safety equipment. They see a dip in eps in 2011 as project deferrals in 2009 bite (new orders in 09 fell to $1.6bn from $7bn) but they will return to growth in 2012 and the share prices in this sector are often driven more by backlog than eps.


It's a consensus buy - 23 buys 5 holds 0 sells - and is up >30% from the bottom; I suspect that the stock has not done better because deep sea rig rates have been softening post the Gulf moratorium but this is a temporary phenomenon which realistically will have very little impact on NOV's earnings; and it looks an extremely attractive long term fundamental proposition. This is an industry which has huge barriers to entry - the downtime cost of a rig means that quality not price is the key selling point for rig equipment, and hence it's extremely challenging for new entrants and there is limited incentive to compete on price. It has net cash of c10% of the mkt cap - the long duration of their contracts means that their business expansion is funded by advance payments from customers and FCF generation is decent ($1bn+ pa). Next results Oct 26.


The other idea is Wood Group (WG/ LN, 438p). This is a $3.7bn mkt cap stock which I think GE is quite likely to bid for next, whether or not it is successful with Wellstream. Wood is a competitor to Vetco in certain subsea products (respective market shares unlikely to be an obstacle) and it has a subsea engineering business which would be highly complementary to Wellstream and Vetco. In addition, it has a business servicing gas turbines which would be an excellent fit with the GE in-house arm. GE would likely sell on the Production Facilities business which is one third of the current group (falling to 20-25%) to Amec or Petrofac. The share is already highly rated for 2011 at 15.5x consensus eps and 8.3x on consensus ev/ebitda but 1) earnings have been understated by the market; 2) the company has just started to win several new contracts; and 3) the Wellstream takeout will focus attention on this sub-sector. Petrobras will start awarding rig orders in early 2011. As it only trades $10-15m/day, it's probably too small for you. I recommended it at xxxxx in Q4 20xx, and we bought it at xxxxxx in XXXember 20xx at sub-200p after I happened to meet the Chairman who is also the largest holder at a dinner (he told me then he had been buying the stock pa).


please feel free to call or email me if you want more
thanks
steve