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Learning from hedge funds: CF Industries' 70% outperformance

Part 5
Learning from hedge funds: CF Industries' 70% outperformance (Part 5 of 7)

Why did hedge funds exit or cut their positions in CF Industries?

Only a matter of time

Did Third Point’s disclosure of CF Industries Holdings, Inc.’s (CF) position kick off the company’s uptrend? Maybe. But large hedge fund purchases and CF Industries buying back its own shares likely played important roles. CF Industries was undervalued compared to its peers. Given the undervalued stock price, it was only a matter of time that the management or outsiders would do something to reappraise its valuation.

CF Industries Forward PE and Share PriceEnlarge Graph

Offsetting industry weakness

While Terra Nitrogen Company, L.P. (TNH) and CVR Partners, LP (UAN) performed poorly during the third and fourth quarters, largely due to falling nitrogen fertilizer prices amid poor market conditions, CF Industries’ significant discount and ongoing share buyback program more than enough to offset such weakness. CF Industries’ shares have climbed 35.88% since mid-2013. Over the same period, its forward PE rose 74.48% to 12.83x, which is now more or less inline with UAN and TNH’s past forward multiples’ averages.

Hedge Fund CF Industries PositionEnlarge Graph

Exiting positions

Consequently, ValueAct Capital and Third Point had both existed positions by the end of 2013, while Soros Management and Renaissance Technologies had cut positions. As hedge funds focused on finding (event driven) value investment opportunities, there was no reason for them to hold onto CF Industries Holdings, Inc. (CF) anymore, preferring alternatives that they must have found to have better return to risk profiles.

Outperformance

Since the start of this year, however, CF Industries Holdings, Inc. (CF) has continued to outperform the SPDR S&P 500 ETF (SPY). While the SPY has mostly traded flat, CF has risen 7.4% YTD. The stock has also outperformed the Market Vectors Agribusiness ETF (MOO) by ~10%. CF’s past two months of performance doesn’t guarantee CF will definitely outperform over the next few months. With the hedge funds having drastically cut their positions, is the company no longer attractive?

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