Updated April 16, 2021 by Nikolaos Sismanis
Founded in 1993 by Clint Carlson, Carlson Capital, LP is an alternative wealth management hedge fund based in Dallas, Texas. The company currently manages nearly $ 13 billion in management and services for pooled investment vehicles and corporations. The company invests in public stocks, fixed income securities and employs hedging strategies, primarily in the United States.
Investors who had filed the company’s 13F filings over the past three years (from mid-February 2018 to mid-February 2021) would have earned an annualized total return of 8.43%. For comparison: the S&P 500 ETF (SPY) achieved an annualized total return of 12.50% over the same period.
Note: The 13F filing performance is different from the fund performance. See here how we calculate the 13F filing capacity.
You can download an Excel spreadsheet of metrics relevant to Carlson Capital’s current 13F stock holdings:
Keep reading this article to learn more about Carlson Capital.
Table of Contents
Carlson Capital’s investment philosophy and structure
Carlson Capital management believes that careful, targeted hedging strategies can produce higher risk-adjusted returns. These strategies are used in a diversified portfolio of securities and combine the intuition and skills of several decision makers. The last point is particularly evident in the number of employees in the company. The fund currently employs 178 people, 89 of whom are investment professionals. Companies want to take advantage of a variety of investment ideas, which requires a relatively large number of employees.
Despite hedge funds that manage billions in assets, many only employ a handful of people, sometimes fewer than 10. In this sense, Carlson Capital has a rather unusual staff structure. It’s worth noting that most of the company is employee-owned while its founder, Clint Carlson, continues to serve as the company’s CIO.
Portfolio & Top Holdings from Carlson Capital
As of the most recent form of ADV, the company’s assets under management (AUM) are nearly $ 13 billion. The most recent filing by 13F found that approximately $ 2.8 billion of its total assets are for public stocks. In line with Carlson’s philosophy, no sector occupies more than 18%, with its funds being spread across multiple industries.
The portfolio consists of 132 individual stocks, with the top 10 accounting for around 36.7% of the total stock weight, compared to 27% in the previous submission. Management has been concentrating Carlson’s portfolio since last quarter and is likely to stick with its compelling ideas.
Source: 13F documents, author
The company’s top 10 positions are listed below:
Source: 13F documents, author
SWK Holdings (SWKH)
SWKH is a complex business. The company is a specialty finance company whose expertise lies in the financing of small pharmaceuticals and healthcare. An example of doing business is a small biotech company that licenses its drug candidate to a larger pharmaceutical company and pays them royalties based on sales.
The small biotechnology company can then receive cash immediately by selling all or part of its license fees back to SWKH. Hence, the bulk of the bottom line came from the bottom line as the only expenses are mostly due to the pay of the management team.
Being a royalty underwriter in this niche market gives the company a great moat while the bulk of its revenue goes into the bottom line. In context, the $ 208 million company employs just 34 people. At the same time, there are several risks as license fees have an expiration date while new drugs pop up every day that potentially jeopardize SWKH’s cash flows.
Carlson’s share remained constant during the quarter. Shares accounted for around 5% of the total participation. It is currently the fund’s largest holding.
Grubhub quickly climbed to Carlson’s second-largest position as the fund bought more stocks in the previous quarter. Based on the price level purchased from Carlson, the fund could sit on paper gains of up to 50%. In response to the strong demand for restaurant pick-up services from the staying-at-home economy, the company posted record sales of $ 1.82 billion (LTM) (Last Twelve Month), reinvigorating investor interest in the stock.
Despite rising revenues, net losses have also increased. The company has managed to keep its gross margin at 30%, but there is little room to incur additional investment and funding costs without losing money.
GrubHub accounts for 4.7% of the Carlson portfolio.
Varian Medical Systems (VAR)
Varian Medical is currently Carlson’s third largest position. The company opened its position in the third quarter, which is now valued at approximately $ 120 million after a slight cut this quarter. Siemens Healthiness agreed to buy the company for $ 16.4 billion. Carlson Play is most likely a way to get low risk returns and wait for the acquisition to complete.
Inphi Corporation (IPHI) and Xilinx (XLNX)
These two semiconductor stocks are Carlson’s fourth and fifth largest positions. They make up around 8.6% of Carlson’s holdings. Since COVID-19 has greatly increased the demand for electronics and data centers, the semiconductor industry is benefiting. It appears that these two stocks give Carlson the benefit of the industry’s bullish outlook.
It should be noted, however, that the ratings of both Inhpi and Xilinx have risen sharply. Semiconductor companies are cyclical in nature and mostly experience fluctuating market conditions. While the outlook for the future remains positive, it is likely that current investors will overpay near this price level.
Carlson’s position in Inhpi is completely new. It seems like a compelling decision considering how quickly it rose to the top 10 positions in the fund. The fund also increased its position in Xilinx by a whopping 52% and shared similar views.
Slack Technologies, Inc. (WORK)
Carlson’s sixth largest stake, Slack, is to be acquired by Salesforce (CRM) for $ 27.7 billion. Carlson is most likely holding the stock as a low-risk way to grow his fortune after the acquisition closes.
Lowe’s currently holds approximately 3% of the fund’s public equity portfolio and is Carlson’s seventh largest position. The position was increased 61.4% in the quarter, which could be a bet that the company’s home improvement market share will increase over Home Depot (HD). This was the firm belief of Mr. Ackaman, as we mentioned earlier, when he covered Pershing Square and its largest holdings of stocks.
The company has proven resilient and has seen sales growing over the past year as consumers focus on home improvement in the home-based economy. The company posted sales of nearly $ 90 billion for the past four quarters, the highest in its history.
Additionally, Lowe’s net profit margin remained robust at around 6.5%, although most companies saw higher costs due to the pandemic. The company’s margins have never been very high as a retailer, but with volumes this high, Lowe’s managed to generate $ 5.81 billion in profit during that period, also the highest in its history.
It’s worth noting that Lowe’s is a dividend king, boasting 57 years of consecutive annual dividend increases. Despite the company’s mature profile, Lowe’s continues to be very aggressive in returning capital to its shareholders. The most recent dividend increase was a satisfying 9% as the company repurchased its shares very quickly, withdrawing more than half of its outstanding shares over the past 15 years.
As a result, even if the fund doesn’t add to its position, Carlson’s stake is likely to continue to grow, as continued buybacks gradually result in the fund owning a larger percentage of the company over time.
Alexion Pharmaceuticals, Inc. (ALXN)
Alexion Pharmaceuticals is Carlon’s eighth largest position. Similar to the previously mentioned positions Varian (VAR) and Slack (WORK), Alexion is to be taken over by AstraZeneca. Alexion shareholders will receive $ 60 in cash and 2,1243 AstraZeneca American Depositary Shares (ADS), with each ADS representing half of one (1/2) common share of AstraZeneca. The fund is likely to be waiting for the acquisition to complete, which should result in relatively low but low risk returns as of the reporting date.
DICK’S Sporting Goods, Inc. (DKS)
DICK’S Sporting Goods operates as a retailer of sporting goods, mainly in the eastern United States. The company offers hardlines including sporting goods, fitness equipment, golf equipment, hunting and fishing equipment.
While stocks plunged in the early stages of COVID-19 due to the company’s involvement in retailing, the sellers proved wrong. Performance remained robust and demand for outdoor products increased. Revenue and net income hit all-time highs of $ 9.58 billion and $ 530 million, respectively, with gross margins all high.
Similar to Lowe’s, the company’s stable financial data and robust business model have enabled DICK’s to return significant sums of money to its shareholders. The stock currently offers a yield of 1.77% despite the excessive rally. The company has also repurchased and retired around 1/3 of its shares outstanding since 2013, which is extremely amazing.
IHS Markit Ltd. (INFO)
UK-based IHS Markit provides critical information, analysis and solutions for a variety of companies and industries around the world. The company’s solutions provide deep insights into business, finance, and government clients. The revenue has increased gradually, albeit with a few bumps along the way. Still, IHS achieved record sales of $ 6.03 billion last year.
Still, the company re-invests most of its profits, so the net result remains somewhat compressed for the time being. The stock currently generates a tiny 0.8% return and is valued at a relatively reasonable multiple for the analytics industry and current company performance. That is around 30 times the forward earnings of the stock.
The stock is an entirely new position for Carlson, which opened in the fourth quarter.
Carlson Capital’s 13F holdings have lagged the S&P500 for the past three years. While the concentrated stock portfolio offers its investors a well-rounded base of diversified assets, its investment philosophy has largely failed to pay off. With three acquisition-driven stocks in its top positions, the fund appears to be heading towards a relatively safe pool of assets, including Dick’s and Lowe’s.
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