Why Phil Falcone Likes Spectrum Brands: Stock of the Week

This week's focus stock is Spectrum Brands (SPB) and the article takes a look potentially at why Phil Falcone's hedge fund Harbinger Capital Partners has established such a large position. Previous write-ups include: why Maverick Capital owns Amdocs and why George Soros owns Comverse Technology.


The following is written by Tsachy Mishal, portfolio manager at TAM Capital Management.

The subject of billionaire hedge fund manager Philip Falcone elicits strong feelings. He is best known for his big bet on Lightsquared but lesser known for his other big bet: Spectrum Brands (SPB). Phil Falcone controls over 50% of the $1.65 billion company.

Spectrum Brands is a roll-up of many consumer brands such as Rayovac batteries, Remington shavers, Hot Shot bug killer, Tetra fish food and many more. The largest chunk of the profits comes from the batteries division. Spectrum Brands has had good momentum versus its peers as their discount brands tend to gain market share during difficult economic times.

SPB has a $3.35 billion enterprise value and a $1.65 billion market cap. On an enterprise value to EBIDTA basis, Spectrum Brands trades at an 11% discount to peers based on 2013 expectations. This does not even take into consideration the $1.2 billion net operating loss carry forwards (NOLs) they hold.

What I Like:

- Spectrum's stock has 23% upside before trading at the valuation of its peers, even ignoring the NOL's.
- The businesses have positive momentum and are gaining share. Consumers are likely to continue shifting towards lower price brands.
- Spectrum Brands has a greater than 12% free cash flow yield based on 2012 expectations.
- The controlling shareholder seems to have his incentives aligned with the best interests of other shareholders.


What I Don't Like:

- The company is carrying a lot of debt.
- The business is cyclical both from an economic perspective and a market share perspective.
- The stock is illiquid as a few owner's control 70% of the company. Fewer than 200k shares trade a day on average.
- Phil Falcone does not seem to have the highest ethical standards as he borrowed money from his hedge fund while locking up other investors.


The valuation of Spectrum Brands is attractive compared to its peers and is the most tempting aspect of the stock. I suspect that it will outperform but in the end I decided not take a position due to the negative factors I listed.

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Thanks to Tsachy for the write-up. We've also highlighted how Harbinger has been buying SPB shares recently. The hedge fund originally acquired shares back in August 2009 when the company emerged from reorganization (Chapter 11).

At a past investment conference, Falcone has previously stated that he likes Spectrum Brands' solid balance sheet, high 11-12% free cashflow yield, and the fact that the company had been focused on debt paydown by reducing leverage from 3.5x to 3x.


You can scroll through all of the previous stock of the week articles via this link.

Phil Falcone's Harbinger Capital Scooping Up Shares of Spectrum Brands (SPB)

Phil Falcone's hedge fund Harbinger Capital Partners has been on a buying spree as of late. Per an amended 13D with the SEC, Harbinger's various entities combined now own 55.9% of Spectrum Brands (SPB) with 28,988,997 shares.

While the Harbinger Capital Partners Master Fund only owns 180,189 shares, the overwhelming majority of the position is owned by Falcone's Harbinger Group (HGI).

Overall, Harbinger's entities have scooped up 768,850 shares since January 20th. This most recent disclosure was made due to trading activity on February 8th. The majority of Harbinger's recent purchases have come at a price of around $29.50 per share.

Harbinger's History With SPB

So while this offers investors a somewhat rare chance to buy at prices right alongside a hedge fund, just know that they've built their stake up over time and these most recent shares are just a drip in the their bucket full of shares.

We originally detailed Harbinger's original acquisition of SPB shares back in August 2009 when the company emerged from reorganization relief under Chapter 11.

The hedge fund manager also explained Harbinger's Spectrum Brands thesis at a hedge fund best ideas conference back in September of last year.

About Spectrum Brands

Per Google Finance, SPB is "a consumer products company. The Company manufactures and markets alkaline, zinc carbon and hearing aid batteries, herbicides, insecticides and repellants and specialty pet supplies. Its consumer products have positions in seven product categories: consumer batteries; pet supplies; home and garden control products; electric shaving and grooming products; small appliances; electric personal care products, and portable lighting."


While Harbinger certainly owns a huge stake in Spectrum, keep in mind that this hedge fund has made a much bigger bet on a 4G wireless venture: LightSquared.

Hedge Fund Best Ideas: Kyle Bass, Dan Loeb, Leon Cooperman, Phil Falcone

All today we've been covering the Delivering Alpha conference and we conclude with the Best Ideas & Alpha panel featuring Kyle Bass (Hayman Capital), Leon Cooperman (Omega Advisors), Philip Falcone (Harbinger Capital), Dan Loeb (Third Point), J. Tomilson Hill (Blackstone Alternative), and Anne Popkin (Symphony Asset Management). Each presented their best current idea:

Kyle Bass (Hayman Advisors)

Bass is well known for his subprime short and prediction of sovereign defaults. At the conference, he said that the sovereign debt crisis is unlike anything seen in history.

Bass believes Japan is in the worst position, saying "Japan spends almost half of their revenue on debt service. So, a minute move can put them literally into check-mate ... We see a structural anomaly creating the cheapest option in the world."

Simply put, Bass says to buy price put options on government bonds in Japan. He believes it's the best opportunity in the world. In the past, we've outlined how Bass was betting against Japanese Government Bonds (JGBs).


Leon Cooperman (Omega Advisors)

Earlier this summer, the legendary hedge fund manager presented at the Leaders in Investing Summit where he was concerned about employment and thought that bonds were screaming to be shorted. At today's conference, Cooperman says that the economic and financial crisis from 2008 would not repeat in 2011 or 2012.

The manager continues to avoid government bonds and again says that stocks are the "best house in the asset management neighborhood." He likes stocks assuming that Obama softens his 'anti-wealth' stance and that the Middle East remains stable. He mentioned liking Apple (AAPL), Sallie Mae (SLM), and Boston Scientific (BSX). To see what other stocks Cooperman is invested in, head to our Hedge Fund Wisdom newsletter.

Cooperman will also be presenting his latest investment ideas at the Value Investing Congress next month.


Philip Falcone (Harbinger Capital)

Falcone has seen somewhat of a transformation lately as his hedge fund looks more like a private equity fund with his large private investment in a 4G wireless network: LightSquared. At the conference, he pitched Spectrum Brands (SPB), noting the company's solid balance sheet and high free cashflow (11-12% free cashflow yield).

The company sells batteries, personal care products, home and garden items, and more. Falcone points to their strong management team and collection of strong global brands. The company is currently focused on debt paydown and reducing leverage from 3.5x to 3x.

Harbinger owns 28 million shares via his publicly-traded Harbinger Capital. We detailed Falcone's original acquisition of SPB shares back in August 2009 as well as his subsequent purchase in April of 2010. While SPB isn't a "high octane" stock, he likes it.


Dan Loeb (Third Point)

We've covered Loeb's recent activist investment in Yahoo! (YHOO) and that's exactly what he talked about at the conference. Just today he sent another letter to Yahoo as his first conversation didn't seem to go too well. Ahh, the trials and tribulations of activist investing.

He feels YHOO has an intrinsic value of around $20 per share and you can see Loeb's investment thesis in his original letter to Yahoo. But in summary, he feels that the company has great assets but has been horribly mismanaged. Calling the board of directors "clowns," Loeb points out that the company hasn't changed since 2004, has kept a "crappy interface" and the "same stupid logo."

In particular, it seems that Loeb really likes their ownership stake in Alibaba Group. Interestingly enough, Loeb says that the company does not need to break up. He says they've hedged the position against the S&P 500 and they've also hedged exposure to Yahoo Japan.

We've also detailed how Third Point has reduced equity exposure for four consecutive months.


J. Tomilson Hill (Blackstone Alternative Asset Mgmt)

This manager believes that non-performing loans and mortgage-backed securities are the best play on a risk-adjusted basis. He also says that, "you have the ability to buy mortgage servicing rights at prices we've not seen before."


Anne Popkin (Symphony Asset Management)

She argued that levered credit is cheap and is focused on loans and high yield bonds. The manager cautioned not to put all your eggs into this one basket and not to buy an entire position right away. Popkin says, "risk management is absolutely crucial here, because volatility is very high." So it sounds as if she's used the volatility in the sector to slowly assemble a position.


Embedded below is video of the entire Best Ideas & Alpha hedge fund panel:




For more coverage of the Delivering Alpha conference, head to our posts:

- Bill Ackman's new investment: long Hong Kong Dollar

- China: Bubble or Bonanza? Dan Arbess versus Jim Chanos

- Paul Touradji & Jeff Scott on commodities

- Jim Chanos: long corruption, short property in China

Falcone's Harbinger Acquiring Spectrum Brands (SPB) Shares

We have some transactions to update you on regarding shares of Spectrum Brands (SPB), Philip Falcone's hedge fund Harbinger Capital Partners, as well as hedge fund D.E. Shaw & Co's Laminar Portfolios. Firstly, we see that Harbinger filed an amended 13D with the SEC and now shows a 39.68% ownership stake in SPB with 12,153,819 shares. The filing was made due to activity on March 30th and we also have some color on recent transactions. We initially covered when Harbinger went activist on Spectrum back in 2009 as the company was reorganizing from Chapter 11 bankruptcy. Shares of Spectrum recently switched from ticker symbol SPEB in the over-the-counter (OTC) market and began trading under ticker SPB on the NYSE.

In the fine print of the recent filing, we see that Falcone's hedge fund has entered into a 10b5-1 purchase instruction with Credit Suisse Securities, "pursuant to which the parties thereto established a trading plan to effect purchases of up to 100,000 shares per week." These purchases can be made Monday through Thursday of each week at a price not to exceed $31.50. This plan will exist until either August 6th or the mailing of a definitive proxy statement to stockholders in connection with the merger, whichever date comes first.

Secondly, we see that Harbinger has entered an agreement with fellow hedge fund D.E. Shaw & Co (Laminar Portfolios) where Harbinger acquired Shaw's 89,300 shares at a price of $30 per share. This transaction was reflected in Form 4's filed with the SEC by both D.E. Shaw Laminar and Harbinger. In addition to this, Falcone's hedge fund updates us on the amount of SPB shares they purchased on March 31st and April 1st. Here is a breakdown of their transactions and keep in mind that the purchases executed at $30 are the D.E. Shaw transactions:

(click to enlarge)

So, Harbinger is slowly but surely scooping up the shares of Spectrum Brands (SPB). Overall, Falcone's hedge fund firm has been quite busy as of late. They of course recently announced plans for a 4G wireless network and completed the SkyTerra merger. Additionally, we took note that they've been selling some New York Times (NYT) shares as well. They've definitely been active in the SEC filing department, that's for sure. In terms of other activity out of fellow hedge fund D.E. Shaw, we saw they recently updated a position and we covered their research on leverage as well.

Taken from Yahoo Finance, Spectrum Brands "together with its subsidiaries, operates as a consumer products company worldwide. The company offers consumer batteries, including alkaline and zinc carbon batteries, rechargeable batteries and chargers."

To see what other equity positions Falcone owns, you can view Harbinger's portfolio here.