Palantir Fund Revs Up for Dollar Rally

HOUSTON ( TheStreet) -- Tom Samuels, manager of the Palantir Fund ( PALIX), says he's getting ready for a rebound in the U.S. dollar by taking short positions in commodities.

The fund, which takes both long and short positions, has risen 14% this year, better than 66% of its Morningstar ( MORN) peers. Non-U.S. companies make up almost a third of the fund.

Welcome to TheStreet's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks in five fast and furious questions.

Are you a bull or a bear?

Samuels: An effective long-short manager should rarely be solely bullish or bearish. The Palantir Fund is a global multi-cap long-short fund. This flexible charter provides a broad assortment of tools that allow more textured and effective risk management than long-only funds typically possess. Our mission is to identify opportunities to be simultaneously positioned as a bull and a bear in specific stocks and sectors.

With that said, we have been growing increasingly bearish on the broad U.S. stock market since summer. If signs begin to emerge that government-fueled liquidity excesses are winding down -- and we feel this is a question of when, not if -- our response would be more decisively bearish. For now, we are specifically bearish on highly leveraged companies that rely on the growth of American consumer borrowing and spending on discretionary and luxury goods. At the same time, we are bullish on Asian consumer spending on basic goods and services, which results from rising income levels. In other words, we are bullish on Asian needs and bearish on American wants.

What is your top stock pick?

Samuels: Shanda Interactive Entertainment ( SNDA) is using its online gaming business in China to becoming a multimedia entertainment company. Shanda is growing rapidly and has a huge war chest of cash, which could fuel acquisitions of smaller players and the development of new opportunities. Sales have been growing more than 30% per year and because the company is China-based, it is particularly well-positioned to compete with foreign firms entering this lucrative space. Think "China's Disney ( DIS)."

On the short side, we believe that the rebound in the corporate high-yield bond sector has gotten far ahead of the fundamentals of the U.S. economy. An unprecedented influx of government-driven liquidity has fueled a dramatic surge in prices for high-risk trades in general, and in the high-yield sector in particular. We are short the SPDR Barclays Capital High Yield Bond Fund ( JNK) and the iShares iBoxx High Yield Corporate Bond Fund ( HYG), which are two high-yield bond exchange traded funds. These junk-bond vehicles have wandered sideways since September while the S&P 500 gained. They have not fallen far yet, but we believe it is just a matter of time.

What is your top "under-the-radar" stock pick?

Samuels: A potentially lucrative new directional drilling technology, steady core businesses and a "fortress" balance sheet attract us to Ceradyne ( CRDN). After a long fall from $70 two years ago, we believe that Ceradyne is attractive at these levels. The company trades near its tangible book value, and seems like a bargain with a price that's four times its free cash flow. It's also growing international sales strongly. We believe that the bad news from falling body armor sales has driven Ceradyne's stock price down too far and it is a buy.

SVB Financial ( SIVB) is the holding company for Silicon Valley Bank. We are short as our work suggests that past-due loans are expanding and that recent loans seem to be heavily weighted toward risky borrowers. Last quarter, the company beat consensus estimates by reducing allowances for bad loans by 22% and using other one-time maneuvers, but management's forward guidance was pretty dismal. SVB is an unlikely bailout candidate. Loans are down, interest margins and income should remain under pressure. The stock tripled off the March bottom and appears vulnerable.

What is your favorite sector?

Samuels: Agriculture and food products in Asia are a long-term investment theme for the Palantir Fund. As Asian incomes rise from subsistence levels toward middle class, consumers are demanding higher-quality food and more variety. This rising tide of expectations also includes the "protein cycle." The protein cycle refers to the nearly universal human trend of increasing meat consumption as income expands. In the Asian case, this means more chicken, pork and beef. This is bullish for the entire agricultural sector since it takes additional grain to raise farm animals.

We own several companies that are positioned to take advantage of this theme. Some are not traded on the U.S. exchanges. One example is Chaoda Modern Agriculture. This vertically integrated company grows, processes and distributes fruits and vegetables in China. With sales and earnings growing at over 25% per year over the last 5 years and no long-term debt, Chaoda is trading overseas at a 12-month forward price-to-earnings ratio of just 5.6.

Which sector or stock are you avoiding?

Samuels:While the investing world is nearly universally bearish on the U.S. dollar, we have been moving into a bullish dollar position. The long-term fundamentals on the dollar seem poor, massive global short positions have been established, and it is hard to get anyone to even listen to the bullish case. To a contrarian, these factors point to a potentially sharp intermediate-term rally that could be accelerated by short covering.

If the dollar rallies, it will likely mean a substantive correction in the precious metals and commodities sectors. We have begun shorting in these sectors.

-- Reported by Gregg Greenberg in New York.
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.