Updated on April 20th, 2021 by Nikolaos Sismanis
Knighthead Capital Management is a long-short hedge fund that specializes in the following investment types:
- Distressed credit
- Special situations
The company was founded in 2008 by Ara Cohen and Thomas Wagner. Since that time, Knighthead Capital Management has grown to over $5.8 billion in managed assets.
Investors following the company’s 13F filings over the last 3 years (from mid-February 2018 through mid-February 2021) would have generated annualized total returns of -6.55%. For comparison, the S&P 500 ETF (SPY) generated annualized total returns of 12.50% over the same time period.
Note: 13F filing performance is different than fund performance. See how we calculate 13F filing performance here.
You can download an Excel spreadsheet with metrics that matter of Knighthead Capital Management’s current 13F equity holdings below:
Keep reading this article to learn more about Knighthead Capital Management.
Table Of Contents
- Introduction & 13F Spreadsheet Download
- Knighthead’s Family of Companies
- Knighthead’s Holdings
- Final Thoughts
Knighthead’s Family of Companies
Knighthead Capital Management invests the ‘float’ from its related company, Knighthead Annuity & Life Assurance Company. This company is based in the Cayman Islands and has more than $2 billion in assets.
Knighthead also advises for Jazz Re, a captive reinsurance company owned by Sentinel Security Life Insurance Company with the purpose of reinsuring select blocks of life insurance policies. Sentinel Security merged with Advantage Capital Holdings in 2016.
Knighthead Capital Management is also related to real estate loan originator Knighthead Funding.
Knighthead’s public-equity portfolio is very concentrated, holdings just 9 stocks in 4 different industries. During the quarter, the fund executed the following notable equity Buys and Sells.
- Wynn Resorts (WYNN) (new PUTs sold position)
- Sysco Corporation (SYY) (new PUTs sold position)
- Mercer International Inc. (MERC) (new PUTs sold position)
- Energy Transfer LP (ET)
Knighthead’s largest holding is PG&E, which accounts for more than half of the portfolio. The total portfolio comprises the following equities:
Source: 13F Filings, Author
Knighthead Capital Management has bet heavily on California electric and gas utility PG&E. This investment certainly falls under the ‘special situations’ banner.
PG&E was responsible for several California wildfires from 2015 through 2018. The company was levied with a massive $15 billion fine. As a result, the company filed for Chapter 11 bankruptcy reorganization in January 2019.
Knighthead, together with Abrams Capital Management and Redwood Capital Management, proposed a restructuring plan for PG&E in a detailed letter.
Knighthead’s PG&E investment has yet to pay off, and management likely loses patience considering it trimmed its PG&E position last quarter by 25%. The company’s latest 13F filing shows it now holds 24,567,349 shares, worth nearly $290 million at current prices.
It’s impossible to know exactly when Knighthead purchased the bulk of its shares, but the average share price in Q1 2019 – when Knighthead loaded up on shares – was $16.34. In its recent filing for Q4 2020, Knighthead’s stake accounts for 52.6% of its total holdings. This means that the fund’s high-conviction thesis remains alive, despite the underwhelming results thus far.
This lopsided risk-reward ratio is not something that happens often. If PG&E ends up failing – and that’s something Knighthead has at least some control to prevent – then Knighthead will have a complete loss on its position. That’s the worst-case scenario. But the upside is that PG&E could end up prospering, resulting in multi-bagger returns for Knighthead.
This style of investing could generate solid returns in a diversified portfolio. The stock’s forward P/E is currently only around 11.4, reflecting the underlying risks.
This level of concentration is likely due to the influence that Knighthead has on the situation. Having some level of control warrants a more highly concentrated position, all other things being equal.
It’s important to note that Knighthead does not invest only in equities. The firm is far more diversified than the outsized equity position in PG&E would seem to show at first glance. Indeed, their 13F filing shows put and call options as well. Additionally, the firm invests heavily in debit/credit markets. Overall, the PG&E position is worth around $290 million right now. That’s only ~5% of the firm’s assets under management.
2. Sabre Corporation (SABR)
Knighthead’s recent investment in Sabre Corporation further shows its capital allocation towards equities facing significant pressure. Every bit of the company’s operations is directly related to the travel and tourism industry, which were hit with a massive disruption of its operations during the pandemic. Sabre’s quarterly sales dropped from around $1B, to just $83 million during Q2-2020, a massive 92% plunge.
During Q4, the company showed signs of recovery, posting revenues of $313.7 million. Despite the slight recovery in sales, however, these levels are nowhere near their pre-COVID ones. Due to a lack of economies of scale, the company is not able to yet produce profits, hence still posting quarterly losses of around $300million.
Knighthead has structured its bullish position in Sabre through both acquiring shares and selling puts. The fund trimmed its position by around 7% during the quarter, but it’s still worth nearly $84 million, or 15.2% of the portfolio. During its most recent filing, for Q4, Knighthead sold $450K worth of puts as well, strengthening its bullish position. The rest of the market seems to agree with Knighthead, as shares have rallied back to $15.30, indicating returns of around 132% based on the fund’s average purchase price of around $6.72.
While Sabre’s sales may take a while before completely recovering, Knighthead could end up massively benefiting, amid normalization. The company would generate more than $330 million in net profits under a normal financial year. At its current valuation of just $4.8 billion, the stock is trading around 16 times its under-normal-conditions profitability. The market is forward-looking, potentially expecting that recovery to such high net income levels may take a long time if it even materializes in the first place.
As a result, while Knighthead’s equity and option positions could pay big bucks amid a rebound, management’s capital allocation in Sabre could also end up being a significantly risky move.
3. Wynn Resorts, Limited (WYNN)
Knighthead’s position in Winn Resorts is brand new, as the fund purchased around $60 million worth of call options just this previous quarter. The stock matches the fund’s criteria of distressed businesses, as Wynn suffered massively as a result of the ongoing pandemic.
Despite the company’s revenues slightly recovering in Q4, Wynn is still losing money, and is yet to stabilize financially. However, investors have been confident enough to cause a strong rally over the past year, sending the stock price to its pre-Covid levels.
Knighthead’s choice to purchase call options indicates that the fund believes the stock has still some gas in the tank, to advance further going forward.
4. Marathon Petroleum (MPC)
Another one of Knighthead’s heavy bets on distressed equities is its recent, new position in Marathon Petroleum. Knighthead initiated a position during Q2, acquiring 1,450,555 shares, currently worth around $57 million because the fund trimmed its position by around 300K shares during the quarter. Marathon Petroleum was a Marathon Oil Corporation (MRO) spinoff, which occurred in 2011 to unlock shareholder value.
Marathon Oil is currently trading near all-time lows, as COVID-19 adversely impacted its oil exploration and production activities, forcing management to suspend the dividend during 2020. In contrast, while Marathon Petroleum’s operations were also negatively impacted, its petroleum refining, marketing, retailing, and transportation have performed better during the pandemic. In fact, during Q2 2020, the company broke even and by Q4 it returned to profitability, showcasing its resilient logistical operations.
In 2020, the company had announced closing the sale of its Speedway convenience store and gas station chain to Seven & I Holdings’ (SVNDF) 7-Eleven subsidiary, for $21B in cash. The divestment has significantly boosted MPC’s liquidity. This has helped with maintaining its dividend as well as staying solvent while demand for its refining and transportation operations gradually picks up again. As a result of undergoing a more manageable situation than its former parent company, Marathon Petroleum has retained its quarterly dividend, which currently yields around 4.4%.
Due to a better-than-expected performance so far coming out of the pandemic, Marathon Petroleum’s shares have rallied fairly notably. At a recent share price of ~$53, Knighthead has recovered its early losses, and is now holding shares with unrealized gains. Knighthead’s average purchasing price is around $37.
5. Sysco Corporation (SYY)
Sysco Corporation markets and distributes a range of food and related products internationally, including frozen foods, such as meats, seafood, fully prepared entrees, fruits, and more.
Sysco has increased its dividend for over 50 consecutive years, placing it on the exclusive list of Dividend Kings. You can see the full list of all Dividend Kings here.
Sysco has been growing its revenues relatively consistently; however, its net margins are razor-thin at below 3% even in favorable business environments. COVID-19 also increased the company’s costs, resulting in losses. The food distribution industry typically has low margins, so the company should be expected to see its bottom line in the red whenever major issues arise.
Still, revenues should remain mostly resilient as well due to the defensive nature of the food industry. Knighthead’s position is entirely new, purchasing 500K call options similar to its Wynn move.
6. Mercer International Inc. (MERC)
Mercer is Knighthead’s only exposure to basic materials. The Canadian company specializes in manufacturing and selling northern bleached softwood kraft (NBSK), which is the paper industry’s benchmark grade of pulp. Due to the niche and small market, Mercer has a market cap of just $1 billion.
The trust’s position is quite unique in that it is its oldest holding, with its first position dating back to Q4 of 2010. Knighthead has regularly traded its shares, as the cyclical demand for its products allows for regular stock swings.
Knighthead trimmed its position by 37% during the quarter, likely to book some profits off of the stock’s prolonged rally. It also sold around 350K puts, which means that the company remains quite confident in Mercer’s future. Considering that Knighthead has been trading the stock for nearly a decade, we believe that Mercer does not indicate a long-term position.
Instead, it is a vehicle used for opportunistic trades, based on the market’s cyclicality. The company’s initiation of a dividend over the past few years, however, should provide Knighthead with positive returns while it holds its shares.
The stock is currently yielding around 2.57%, due to the recent dividend cut. Still, Knighthead remains confident in the stock, which makes for around 1.7% of its public-equities portfolio.
7. Equitrans Midstream Corp (ETRN)
Equitrans operates, acquires, and develops natural gas transmission, storage, and water services assets in the Appalachian Basin. The midstream company occupies around 1.3% of Knighthead’s total holdings. The position in Equitrans is relatively new, initiated in Q2-2020 for around $8.5 million. During Q3 the fund increased its stake in the company by 33%, while in the most recent quarter, the position was held steady.
The company had a rough 2020, undergoing dividend cuts and steep share losses due to the adverse effects of the pandemic. Despite facing challenges lately, like the rest of the companies in the sector, the company beat its outlook for FY2020 EBIDTA at $1.20B-$1.22B. The stock is also trading at a very reasonable valuation multiple, around 9.7 times its forward EBITDA.
8. Genesis Energy (GEL)
Like many of the midstream companies that were forced to cut their distributions, one such case is Knighthead’s next holding, Genesis Energy. The fund initiated a position by purchasing 266,378 worth just under $2 million during Q2 when the stock was trading at around $6-$7. The company’s operations were adversely impacted during the first half of 2020, as domestic and international customers of sodium hydrosulfide and caustic soda were constantly canceling orders during the peak months of the pandemic.
As a result, management was forced to cut its quarterly distributions by 72%, to $0.15. This has likely contributed to the stock trading at quite a discount, at only 8.9 times its forward EBITDA.
It’s also worth noting that Genesis had cut its distributions again in 2017. Shares are currently trading slightly higher from Genesis’ purchasing ones, while the fund collects a fat 8.45% yield on cost as it waits for a potential appreciation. The position was held steady during the quarter.
Despite Knighthead’s enthusiasm, we see Genesis’s operations quite riskier than the rest of the midstream sector. Commodities such as sodium hydrosulfide and caustic soda are more cyclical than oil and natural gas, offering less predictable cash flows. With shares near a 23-year low, we believe that Knighthead’s new position was mostly executed in hopes of a quick trade amid a potential swing and not as a long-term investment position.
9. Enterprise Products Partners L.P. (EPD)
Enterprise Products Partners is our top-ranked Master Limited Partnership, or MLP. You can see our full MLP list here.
Knighthead initiated an entirely new position in Enterprise Products Partners last quarter (Q3), further betting on a rapid recovery in the midstream space. The fund bought its stake at an average price of around $15.70, which has already been a successful pick now that shares trade around $22.84.
EBITDA generation remained incredibly stable during the quarter, despite the overall challenges. The company also has a distribution coverage ratio of over 1.5x, leaving room for distribution increases and unit repurchases. Enterprise Products’ high-quality assets are able to generate strong cash flows, even in recessions.
As a result, Enterprise Products has been able to raise its distribution to unitholders for 22 years in a row. EPD is one of the few companies in the sector to have maintained their distributions, which is a testament to their high-quality assets.
Knighthead Capital generally looks to invest where other capital is scarce, potentially leading to higher returns. This is evident in the company’s distressed credit investing. The strategy can be seen with the PG&E example in particular, as well as its recent picks in Marathon Petroleum, Genesis Energy, and Equitrans.
You can download an Excel spreadsheet with metrics that matter of Knighthead Capital Management’s current 13F equity holdings below: