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Hooray, It's Letter to Investors Season



July 28, 2010 – Comments (0) | RELATED TICKERS: AON , HAWKQ.DL

I love earnings season.  Yes, it's great to see the results of the companies that one has invested time in researching, but to me that's not the best part of this time of the year.  At the beginning of the new quarter, most mutual funds and hedge funds publish their quarterly letters to investors.  This is a chance to take a peek at the stocks that some of the best investors in the world own and often to read a description of their reasons for buying them.  There's few better ways to become a great investor than looking at the actions of other great investors.

I came across an interesting letter to investors from a hedge fund called Corsair Capital yesterday.  I am not familiar with the company's fund, but apparently it is provided investors with an average annual return of 14.1% since its fund's inception in 1992, so they're definitely worth paying attention to.  Kudos to Market Folly for the link to Corsair's letter.  Here's a copy of it for anyone who's interested:

Corsair Capital's Latest Investment Ideas: Q2 Investor Letter

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The fund has several current positions that I find interesting, including its long positions in Seahawk Drilling (HAWK) in Aon Corp. (AON) and its post-bankruptcy investment in LyondellBasell (LALLF.PK).  I am currently long the first two companies in CAPS and I have requested to have the ticker added for LLALLF.

On HAWK, Corsair notes that the company, which is currently trading at around $10, has $5/share in net cash and that it believes the company's fleet of rigs could be dismantled for around $10/share for a total value of $15/share...50% higher than where the stock is currently trading.  I have mentioned that this company is trading below its liquidation value in the past and I have had several intelligent CAPS players dispute this claim.  I have chosen to make my real money play in the distressed drilling sector with a much saver investment in Ensco (ESV), but I am long both companies in CAPS.

AON is the world's largest insurance broker and human resources consulting firm.  I added the company to my CAPS portfolio in early May after noticing that a number of smart hedge fund managers owned the company.  Here's what I had to say at the time:

Continued improvement in the Aon's operations by its excellent management team, enough cash to repurchase shares or increase its dividend, an eventual improvement in insurance industry pricing, the inevitable increase in interest rates which would boost the company's investment earnings, and the recent removal of the ban on contingent commissions will all benefit the company long-term. 

Corsair believes that a buying opportunity has presented itself in AON after the company's shares fell when it announced that it was acquiring Hewitt Associates (the stock of the acquirer usually falls after deals are announced).  Corsair believes that the deal is "value creating" and benefits AON.  It believes that AON is now trading at only nine times forward earnings, which is cheap for a solid, growing company with a decent moat at the bottom of the insurance rate cycle.  It sees AON as a double over the next several years.

The last company that Corsair mentioned in its letter that I found interesting is LyondellBasell.  As I mentioned, this company is not currently available in CAPS, but I have requested that its ticker be added to the game.  I have been looking to experiment in CAPS with a post-bankruptcy that's trading OTC.  This sort of special situation has been touted by a number of intelligent investors in the past.  Corsair says in its letter that LyondellBasell is currently only trading at 4.5 times its mid-cycle EBITDA while most other companies in the sector are currently trading at six times.  This gap should close after the Company ditches the pink sheets and lists on a major exchange.  


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