Carlson Capital’s 13F Holdings & Investment Analysis

Updated on November 27th, 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 nearly $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-November 2017 through mid-November 2020) would have generated annualized total returns of 5.05%. For comparison, the S&P 500 ETF (SPY) generated annualized total returns of 12.20% over the same time period.

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 $3.4 billion of the total assets are allocated to public equities. In line with Carlson’s philosophy, no sector occupies more than 18%, with its funds being spread over several industries. The portfolio consists of 152 stocks, the top 10 of which make up around 27 % of total equity weight, vs. 34% during the previous filing. Hence management has diversified Carlson’s portfolio further since then.

The company’s top 10 holdings are below:

SWK Holdings (SWKH) 

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 (-1%) during the quarter, with shares accounting for around 4.1% of total holdings. It’s  currently the fund’s largest holding.

Varian Medical Systems (VAR)

Varian Medical is currently Carlson’s second-largest position. The company initiated a position worth around $135 million during the quarter, after Siemens Healthiness agreed to buy the company for $16 billion. Carlson play is most likely a way to acquire some nearly low-risk returns, waiting for the acquisition to close. Hopefully this one will not end like Tiffany play, which was quite similar but didn’t end up closing.

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 once again by around 37%, currently holding around $90 million worth of stock. Still, the holding remains its sixth-largest position at around 2.6%, which points out that either the fund is losing hopes for a merger, slowly unloading its position.

Willis Towers Watson (WLTW)

Carlson decreased its position in Willis Towers Watson by a massive 37%, currently being Carlon’s fourth-largest holding at nearly 2.7% of its portfolio. The advisory and brokerage 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) & Wells Fargo (WFC)

Buffet-backed Bank of New York Mellon makes for a top holding in Carlson Capital’s portfolio. The fund decreased its position again, this time by 29%. The reason the fund trimmed  its position is likely to book some profits off of BK’s recent rally, as 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 Q2 and Q3. Yet, shares are only trading at a P/E of around 8.85. 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 8.4% of the bank’s total shares outstanding. Considering Buffet’s robust due diligence and expertise in banks, Carlson’s past additions at quite attractive price levels could pay up big time.

In contrast, Carlson increased its position in Well Fargo by a massive 810%. The stock is now its fifth largest holding. With shares currently trading near a decade low, we believe that Carlson hopes for a potential recover from the company’s current challenges, including loses for the year. The company remains a speculative pick with a slashed dividend despite the rest of the banks reporting great results as a whole.

Grubhub (GRUB)

Grubhub climbed quickly to Carlson’s third-largest position, as the fund purchased another 115,000 shares during the quarter. 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 $493 million during Q3, revitalizing investor interest for the stock.

Maxim Integrated Products (MXIM), Applied Materials (AMAT), and Xilinx (XLNX)

While the company remains border-line unprofitable, as well as operates in a brutally competitive space, with razor-thin margins., the company neared profitability closer during Q3, losing only a marginal $9.3 million.

Closing Carlson’s top 10 holdings, these three stocks account for around 6% of Carlson’s holdings. Maxim is an entirely new position, while Applied Materials and Xilinx were only slightly adjusted. As COVID-19 has greatly increased the demand for electronics and data centers, the industry is benefiting, and it seems that Carlson is capitalizing on these three stocks while they trade at relatively reasonable valuations. Still, investors should be wary of their cyclical nature and fluctuating financials.

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 stocks 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.