One of activist investor Elliott Investment Management’s stock picks is Crown Castle (NYSE:CCI). They sent a letter to the board on Nov. 27 recommending various changes it felt the owner of cell towers should make to remedy its underperformance in the markets.
Elliott has amassed a $2 billion stake in the company. It would like to see new management and board leadership. In addition, it would like the company to conduct a strategic review of Crown Castle’s fiber business and several other initiatives to improve shareholder returns. In its letter to Crown Castle’s board, Elliot wrote:
“Crown Castle has continued to underperform its peers over all time periods in the last 15 years; has underperformed the S&P 500 index over one-, three- and five-year periods; and has seen its stock price recently hit a six-year low.”
Activist investors like Elliott make money by taking billion-dollar stakes in underperforming companies, campaigning for change operationally and at the board level, and then profiting from a higher stock price once changes have been completed.
While it doesn’t always work, Elliott is successful enough of the time that it’s built a business with nearly $60 billion in assets under management, including $13 billion listed on its quarterly 13F filing.
Here are three stocks to buy from that $13 billion.
Pinterest (PINS)
Pinterest (NASDAQ:PINS) is Elliott’s fourth-largest holding, according to its Sept. 30 13-F, accounting for 5.88% of its $13 billion portfolio. It first started buying the stock in Q2 2022. It’s paid an estimated average of $22.61 per share for its PINS stock.
The visually-driven social media platform is up nearly 50% year-to-date. That puts it around where it traded in July 2020. It will take some time to revisit $80, but the business is reasonably strong.
In Q3 2023, its revenues rose 11% year-over-year to $763 million, with GAAP net income of $6.7 million, up 110% from a loss of $65.2 million in Q3 2022. More importantly, its global monthly active users (MAUs) were 482 million at the end of the third quarter, 8% higher than a year ago and a record high for the company.
What amazes me about Pinterest is that it’s barely scratched the surface outside the U.S. and Canada. In Q3, its revenue in Europe and the rest of world increased by 33% and 29%, respectively, yet combined, they accounted for just 19% of revenue overall. This is despite possessing 80% of the global MAUs.
In Q4 2023, it expects revenue to increase by 11% at the midpoint of its guidance, while its non-GAAP operating expenses will fall by 11%, leading to higher profits in the year’s final quarter.
Look at the cash flow statement from the third quarter; you’ll see that the company repurchased $500 million of its stock through the first nine months of 2023, the entire amount of its $500 million share repurchase program approved in February.
Pinterest paid $500.5 million for 21.22 million shares of its stock in the second quarter, at an average price of $23.59. Based on its current share price, that’s a return on investment of 44% in less than a year.
On Sept. 16, its board approved a $1 billion buyback plan. I’m all for it if it makes timely buys like the ones in the third quarter.
Triple Flag Precious Metals (TFPM)
This is Elliott’s largest position at $1.75 billion, accounting for 13.58% of its portfolio.
I’d never heard of Triple Flag Precious Metals (NYSE:TFPM). The Toronto-based company provides streaming and royalty financing to mine operators. These royalties are based on revenues from operating mines in the Americas and Australia producing gold and silver.
The beauty of this business model is that it’s not making equity investments in the mines or the operators of those mines, so it has limited exposure to the operating and capital costs associated with them.
It can generate significant free cash flow because it has no capital expenditure exposure through its royalty financing. In the last 12 months ended Sept. 30, it had a free cash flow of $153 million, up from $118 million in 2022. Since 2017, its free cash flow has grown by 467%.
Based on an enterprise value of $2.85 billion, it has a free cash flow yield of 5.4%. Anything between 4% and 8% is a reasonable valuation.
Whether we’re talking oil and gas, mining, restaurants, technology, etc., royalty financing is a much safer way to bet on individual industries and sectors. I can see why Elliott’s made Triple Flag a top investment.
Howmet Aerospace (HWM)
Howmet Aerospace (NYSE:HWM) is a much smaller investment for Elliott, accounting for 1.95% of its portfolio. It used to be much larger, but it sold 11.66 million shares in the third quarter, reducing its stake from 7.46% of its portfolio at the end of June.
Elliott first started buying the stock in Q4 2015. It’s estimated to have paid an average price of $21.67, considerably less than where it currently trades.
As mentioned, I look at a company’s free cash flow yield to determine its valuation. Howmet generated $689 million in free cash flow in the 12 months ending Sept. 30. Based on an enterprise value of $25.3 billion, it has a free cash yield of 2.7%, putting it below my 4% minimum.
However, as long as it grows free cash flow at 10%+ annually, I don’t see a problem holding HWM long term. That said, if you’re looking for a quick strike based on its momentum, you could be disappointed in the near term due to its lofty valuation.
As for analysts, 22 cover its stock, with 17 rating it Overweight or an outright Buy, with a $57 target price, 9% above where it’s currently trading. These same analysts expect it to earn $1.77 in 2023, $2.14 in 2024, and $2.60 in 2025. Trading at 20x its 2025 earnings, that’s right around its five-year average.
I like this aerospace and defense company’s growth prospects in 2024 and beyond.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
