Carlson Capital’s 13F Holdings & Investment Analysis

Updated on October 9th, 2020 by Nikolaos Sismanis

Founded in 1993 by Clint Carlson, Carlson Capital, L.P. is an alternative asset management hedge fund based in Dallas, Texas. It currently manages over $13 billion, providing its services to pooled investment vehicles and corporations. The firm invests in public equities, fixed income, and uses hedging strategies, mainly in the United States.

Investors following the company’s 13F filings over the last 3 years (from mid-August 2017 through mid-August 2020) would have generated annualized total returns of 2.2%. For comparison, the S&P 500 ETF (SPY) generated annualized total returns of 11.9%.

Note:  13F filing performance is different than fund performance.  See how we calculate 13F filing performance here.

You can download an Excel spreadsheet with metrics that matter of Carlson Capital’s current 13F equity holdings below:

 

Keep reading this article to learn more about Carlson Capital.

Table Of Contents

Carlson Capital’s Investment Philosophy & Structure

Carlson Capital’s Management believes that higher risk-adjusted returns can be produced by utilizing careful, targeted hedging investment strategies in a diversified portfolio of securities, while combining the intuition and skills of multiple decision-makers. The last point is especially evident in the firm’s number of employees. The fund currently has 178 employees, 89 of which are investment professionals. The firms want to utilize a variety of investment ideas, necessitating a relatively high number of employees.

Despite hedge funds managing billions in assets, many employ just a handful of people, sometimes less than 10. In that sense, Carlson Capital makes for quite an unusual personnel structure. It’s worth noting that the majority of the firm is employee-owned, while its founder, Clint Carlson, is still active as the firm’s CIO.

Carlson Capital’s Portfolio & Top Holdings

According to its most recent form ADV, the company’s discretionary assets under management (AUM) amount to nearly $13 billion. Its latest 13F filing revealed that around $3.6 billion of the total assets are allocated to public equities. In line with Carlson’s philosophy, no sector occupies more than 30%, with its funds being spread over several industries. The portfolio consists of 148 stocks, the top 10 of which make up around 34 % of total equity weight, vs. 40% during the previous filing. Hence management has diversified Carlson’s portfolio further since then. At the same time, financials have been in the fund’s crosshairs as of lately, with Carlson massively increasing stakes in the sector amid its reasonable valuations. – Financials make up for around 28 of its total holdings.

The company’s top 10 holdings are below:

Caesars Entertainment ($CZR)

Carlson’s largest stock holding is currently Caesars Entertainment. The gaming giant runs resorts primarily under the iconic Caesars, Harrah’s, and Horseshoe brand names, as well as various casinos. Despite the challenges that the sector has faced due to COVID-19, Carlson’s significant stake in the company is due to Caesars merging with Eldorado Resorts (ERI). Shareholders of the two companies have already approved an $8.58B cash-and-stock merger that is expected to compose the biggest casino operator in the country.

We have previously seen another hedge fund loading up on Caesars to benefit from a low-risk merger play, in our latest article on Athanor Capital. Carlson’s huge position of 5.5 million shares was formulated entirely within this past quarter alone.

Tiffany & Co. (TIF)

Last quarter, the company was holding 1,570,000 shares of the jewelry giant, Tiffany, which was the top holding in the fund’s portfolio. This has been a merger arbitrage play since the company had shaken hands with LVMH Moet Hennessy – Louis Vuitton, to be acquired at $135/share.

However, the deal didn’t end up being a smooth process. LVMH backed out in early September, as it found itself not in a position to carry out the $16-billion merger. Since then, there have been a series of countersuits, with a ferocious legal battle going on. Still, with Tiffany’s push for the merger, several regulators have shown the green light for the deal. The merger is on a dual path of moving forward with regulators simultaneously that the companies are battling in court.

To protect itself and manage its risk, Carlson trimmed its Tiffany position by around 30%. Yet, the holding remains its third-largest position at around 3.5%, which points out that the fund is still hopeful for the merger to be finalized.

Willis Towers Watson (WLTW)

Carlson increased its position in Willis Towers Watson by a massive 592%, making the company Carlon’s second-largest holding at nearly 4% of its portfolio. The advisory and broking solutions giant experienced robust cash flows during the pandemic, posting consistent profitability despite the challenges. The company’s shares have steadily appreciated since the previous quarter, which means that Carlson’s bet on this low-volatility company has been paying off nicely. The company has never slashed its dividend since it initiated one in 2001, despite most companies in the financial sector being forced to cut it during the Great Financial Crisis. This showcases the management’s prudent distribution policy and commitment to shareholder returns. 

The Bank of New York Mellon (BK) & The Goldman Sachs Group (GS)

Buffet-backed Bank of New York Mellon makes for a top holding in Carlson Capital’s portfolio. The fund increased its position again, this time by 45%. The reason the fund keeps adding to its position is likely because the company has been posting robust performance over the past couple of quarters, despite COVID-19. The bank achieved nearly $2 billion worth of net income in Q1 and Q2. Yet, shares are only trading at a P/E of around 7.5. As long as financials keep trading at a discount, we are confident that the fund will keep on increasing its positions, including The Bank of NYM.

It’s worth noting that the Oracle of Omaha, Mr. Warren Buffet, owns (through Berkshire Hathaway) around 10% of the bank’s total shares outstanding. Considering Buffet’s robust due diligence and expertise in banks, Carlson’s additions at such attractive price levels could pay up big time.

Additionally, Carlson increased its Goldman Sachs position by 186%, getting the investment bank at around 3% of its total holdings. The company has been reporting record top and bottom lines throughout the pandemic. Yet, shares have a price-to-earnings ratio of around 15 attached remaining cheap, similar to the rest of the sector. We believe that Carlson’s strategy to keep accumulating on value stocks such as Goldman Sachs is a wise and prudent move.

It’s worth noting that both Bank of NYM and Goldman Sachs currently yield around 3.5% and 2.5%, respectively, proving Carlson with that extra income generation.

JPMorgan Chase & Co. (JPM) & First Horizon National Corp ($FHN)

With a high conviction for the financial sector offering great value, JPMorgan and First Horizon make up another banking duo for Carlson Capital, collectively occupying around 5% of its total holdings. JPMorgan was an entirely new position, which Carlson is likely to have scooped up below $90/share, with a fat 4% dividend yield attached. Shares have already run more than 10% higher.

Carlson’s First Horizon was increased by 122% during the quarter, as the fund currently holds 4,698,886 shares. The regional bank is another undervalued stock in the sector, currently yielding nearly 6%. Management’s dividend increase during February, which has comfortably been maintained during the pandemic, should reassure investors of the company’s financial resilience, even under adverse economic conditions.

Grubhub (GRUB)

Grubhub climbed quickly to Carlson’s fourth-largest position, as the fund purchased 1,669,500 shares during the quarter, while they were trading at a discount. Based on the price levels Carlson bough, the fund could currently be enjoying paper gains of as much as 50%. With strong demand for restaurant pick-up services due to the staying-at-home economy, the company reported record revenues of $460 million during Q2, revitalizing investor interest for the stock.

However, it’s worth noting that the company remains border-line unprofitable, while it operates in a brutally competitive space, with razor-thin margins. In our view, the company remains a high risk/high reward play at this point.

SWK Holdings (SWKH) & E*Trade Financial (ETFC)

SKW is a complex business. The company is a specialty finance whose expertise is small pharmaceutical and health care financing. An optimal example of operations includes a small biotech company licensing its drug candidate to a larger pharmaceutical company, which pays them royalties based on sales. The small biotech is then able to receive immediate cash by selling all or part of its royalty right back to SWK.

By being an underwriter of royalties in this niche market gives the company a great moat, while most of its revenues end up in the bottom line, because of how frictionless its business model is. For context, the $200 million company only employs 33 people. At the same, there are multiple risks involved as royalties have expiration dates, while new pharmaceuticals pop up by the day, potentially threatening SWK’s cash flows. Carlson’s stake remained constant during the quarter, with shares accounting for around 3.2% of total holdings.

When it comes to E*Trade, the company is no longer listed, as it was acquired by Morgan Stanley in an all-stock deal. However, this is not to be ignored. We believe that Carlson’s holding was not only a way to play the merger waiting game for a safe return but also Morgan Stanley perfectly fits Carlson’s increased exposure to the financial sector. Considering that the fund has added considerably to its banking positions, we believe that the E*Trade purchase was also a way to acquire some shares in Morgan Stanley, possibly to become a long-term holding.

Final Thoughts

Carlson Capital’s 13F equity holdings have lagged the S&P500 over the last three years. While its diversified portfolio of equities provides its investors with a well-rounded base of assets, its multi-sourced investment ideas philosophy has not largely paid off. With two acquisition-driven stock and massive banks in its top holdings, it looks like the fund is turning to a relatively safe pool of assets, such as the currently attractively-priced financial stocks.