NEW YORK Hedge fund manager Mick McGuire is betting on an eventual housing recovery by owning stakes in an aerospace and defense company, a sugar farming conglomerate and a land developer.
While investments in GenCorp, Alexander & Baldwin and Brookfield Residential Properties have little in common with one another, they each sit on a mountain of land.
These acres, some held on the companies' books for a fraction of the cost they would command now, could become extremely valuable when new neighborhoods, luxury resorts and office complexes are built on them at some point in the future, McGuire said at the 8th annual Value Investing Congress on Monday.
"There is a theme that ties these companies together, and that is land," McGuire, who has run his $750 million Marcato Capital Management for exactly two years.
He ranks among the top-performing managers in 2012 putting up double-digit returns.
Citing recent U.S. housing data such as the increase in housing starts, McGuire said a real estate recovery "is inevitable" and land-strapped builders will be hungry for plots of real estate.
This would make the mountains of land each of these companies sit on especially valuable.
Brookfield, a Canadian company, for example has roughly half of its land holdings in Canada and the other half in the United States where the housing picture could not be more different. In Canada house prices are still hovering near all-time highs while those in the United States are near all-time lows.
In the United States, homebuilders ditched much of their shovel-ready land holdings - land with zoning and pre-development approvals from local and federal authorities - when new construction virtually ground to a halt during the financial crisis. But as building picks up again, those construction companies will need to replenish their land supplies, and McGuire is betting that Brookfield Properties, with some 30 years of land inventory, will be able profit through sales.
GenCorp, for example, is sitting on a corridor of land in California once used for aerospace testing that can now be sold off for real estate development. The stock is trading at $9.81, but McGuire said the price could reach $24 in the future.
And Alexander & Baldwin, which began buying up land in Hawaii in 1870 largely for agricultural use, now sits on acres of prime real estate, ripe for luxury development.
But each of the companies do not rely primarily on the land to make money.
"Land is the gravy," McGuire said specifically when speaking about GenCorp.
For many money managers, land has become a hot bet again, with a handful of prominent hedge fund firms, including John Paulson's Paulson & Co, taking stakes in shovel-ready land in some areas hit hardest by the housing downturn.
McGuire got his start in the $2 trillion hedge fund industry at Pershing Square Capital Management, a $10 billion hedge fund run by William Ackman.
Ackman has invested with McGuire, and this year his former partner was delivering far better returns than the average fund.
At the end of August, Marcato Capital Management was up roughly 20 percent, while Pershing Square Capital was up roughly 10 percent through the middle of September.
McGuire's fund specializes in finding mid-cap stocks that are often ignored or not found by the larger funds. Like Ackman, he has pursued some activist strategies. But he said on Monday that these three stock picks are passive investments.
(Editing by Jan Paschal)