Diamond Hill Capital
has updated its third-quarter portfolio, which includes four new
stocks: Citigroup (
), American International Group (
), KeyCorp (
) and Fortress Investment Group (
A value-oriented firm, Diamond Hill focuses on fundamental rather
than macroeconomic factors. Its record features a 125.6% return
cumulatively over the past 10 years, compared to 34.9% for the
Diamond Hill Capital
purchased 4,577,017 shares of Citigroup for $29 per share on
average in the third quarter. Since the transaction, the price
has risen almost 30%.
Diamond Hill Capital
has not traded Citigroup since it sold out a position in the
first quarter of 2009.
Citigroup stock has gained 43% year to date on several
developments. The bank reported on Oct. 15 its fourth consecutive
quarter of earnings growth (excluding a CVA/DVA loss on its exit
from a Morgan Stanley Smith Barney joint venture and a tax
benefit in the third quarter of 2012), its fourth consecutive
quarter of book value growth, an 11% increase in deposits and 3%
increase in loans in the third quarter.
Citigroup also has $33.8 billion in cash on its balance sheet,
reflecting an 18% increase from year end 2011, and had a return
on average common equity of 1% in the third quarter of 2012, a
decrease from 6.5% in the previous quarter and 8.4% in the third
quarter of 2011.
The same day third-quarter earnings were released, Citigroup
announced the resignation of its CEO, Vikram Pandit, to be
replaced by Mike Corbat, who previously served as CEO of the
bank's Europe, Middle East and Africa division.
In June, the results of a federal stress test showed that Citi
was one of the best capitalized U.S. banks,
according to Bill Ackman
. But the Fed did not approve Citi's proposal to return roughly
$5 billion to $8 billion of capital to shareholders following the
American International Group (
Diamond Hill Capital purchased 2,233,645 AIG shares for $33 per
share on average. Since the transaction, the price has increased
9%. Diamond Hill Capital has not traded AIG since it exited a
position in the third quarter of 2008.
AIG shares have increased 53% year to date. In June, it reported
results for its second quarter, which included net income of $2.3
billion, reflecting a 13.9% increase from $1.8 billion the
previous year, and revenue of $3.817 billion, reflecting a 0.3%
increase from $3.805 billion the previous year.
AIG also reported return on equity of 7.7%, compared to 6.6% the
previous year, and a 31.8% lift in book value per share to $60.58
for the six months ended June 30 2012 from $45.97 the previous
The U.S. Treasury Department, a significant shareholder since the
financial crisis, may sell the remainder of its shares before
2013, according to CEO Robert Benmosche. Its lockup period ends
in November of 2012.
Fairholme Fund manager Bruce Berkowitz, who has a significant
portion of his portfolio invested in AIG, commented on the
company in his second-quarter letter: "Our best idea remains AIG
) common (35% of the Fund) with a reported book value of $57 per
share. There are few occasions when systemically important
franchises sell for half of book value and are profitable. This
is one of those times. AIG warrants held by the Fund (another 3%
of the Fund) provide the right to 21+ million shares at $45, or
maybe more shares at lower strike prices for the next 34 quarters
if dividends above $0.675 per trailing 12-month period are paid."
Diamond Hill Capital purchased 375,521 shares of KeyCorp for $8
per share on average. Since the transaction, the stock has gained
KeyCorp is the holding company for KeyBank National Association
and other subsidiaries. KeyBank has 1,058 retail banking branches
in 14 states and opened another national bank subsidiary in
KeyCorp shares have increased 11% year to date. In its third
quarter results announced Oct. 18, 2012, KeyCorp reported net
income of $214 million, or $.23 per common share, compared to
$229 million, or $.24 per common share for the third quarter of
2011. Revenue increased 8.1% year over year to $1.22 billion from
Third-quarter book value increased 5.5% year over year, and
return on average total assets rose year over year to 1.14% from
Results reflected the benefit of acquisitions, higher net
interest margin due to lower funding costs, and its fourth
straight quarter of average loan growth.
During the quarter, the bank also re-entered the credit card
business and repurchased 9.6 million shares.
Fortress Investment Group (
Diamond Hill Capital purchased 249,875 shares of Fortress
Investment Group for $4 per share on average. Since the
transaction, the stock has increased 13%.
FIG, a global investment management firm founded in 1998, has
over 1,400 institutional investors and private clients globally
and about $48 billion in assets under management (AUM).
FIG shares have increased 33% year to date. In its results for
its second quarter, FIG announced AUM increased 3% sequentially
and 9% year over year, with $1.7 billion net inflows and $0.6
billion of hedge fund redemptions.
Net income was $14 billion, an increase from a net loss of $246
million the previous year. Year-over-year improvements were
driven by the expiration of an agreement, an increase in
incentive income. Book value per share increased year over year
to $2.18 from $2.12.
FIG paid off its only outstanding debt obligation - a corporate
term loan with a remaining $189.3 million balance. After the
payment, it has no outstanding term loans or revolving debt.
See Diamond Hill's portfolio here. Also check out the undervalued
stocks, top growth companies and high yield stocks of Diamond
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