Whitney Tilson's Hedge Fund T2 Partners: Annual Letter ~ market folly

Friday, January 29, 2010

Whitney Tilson's Hedge Fund T2 Partners: Annual Letter

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners has put out their annual letter. In this latest letter to investors, they address the macro environment, talk about how their portfolio fared, and discuss their largest long and short positions.

Since hedge funds often do not reveal their short positions, we wanted to make special note of this glimpse we get into their short book. We had previously seen some of their shorts, but the list below is more expansive. Whitney Tilson and many other prominent hedge fund managers will be presenting investment ideas at the Value Investing Congress May 4th & 5th in Pasadena and we highly recommend attending. We've secured a discount to the event for our readers so make sure to use discount code: P10MF5.

T2 Partners' ten largest short positions heading into this year were (in alphabetical order):

1. Capital One (COF): In T2's letter, Tilson and Tongue mention that this is a hedge to their long of American Express (AXP).

2. Dow Chemical (DOW): This is a hedge to their long position in Huntsman (HUN).

3. Homebuilders (various plus an ETF): T2 Partners has been bearish on the housing market.

4. InterOil (IOC): Tilson has been bearish on this name for a while and argues that all their press releases (there's a lot of them) have artificially lifted the stock higher on no substantial news.

5. iShares Barclays 20+ Year Treasury Bond (TLT): We now see yet another hedge fund shorting long-term treasuries as a bet on rising interest rates, inflation, etc. This was one of Howard Marks' main recommendations in his recent plays for inflation. One of the original hedgies Michael Steinhardt himself has called treasuries foolish. Legendary investor and ex-Quantum fund manager Jim Rogers shares this sentiment and dislikes treasuries. Hedge fund legend Julian Robertson is betting on higher interest rates and is doing so via constant maturity swaps (CMS).

6. iShares Dow Jones Transportation Average (IYT): This appears to be another macro hedge.

7. Moody's (MCO): T2 Partners joins hedge fund colleague David Einhorn & Greenlight Capital who are also short MCO. In Einhorn's recent investor letter, he mentioned how this short position has been causing them pain, but they still feel Moody's faces headwinds.

8. Netflix (NFLX): Shares are up sharply on this name after they just reported earnings. This stock had been heavily shorted by hedge funds and looks to be causing everyone on the short side some pain.

9. Retail HOLDRs (RTH): This seems to be another macro hedge/short as they wager against consumer spending, and in particular discretionary spending. This gives them exposure to a basket of names.

10. Vistaprint (VPRT): This short position is intriguing because we've known many other hedge fund managers to be short. However, a few prominent hedgies also have long positions, so it's interesting to to note the difference in opinion. When we looked at the portfolio of Stephen Mandel's Lone Pine Capital, we noticed they had a large Vistaprint stake. Additionally, fellow hedgie Matt Iorio and his White Elm Capital had been long. We'll have to see which side of hedge fund land wins this battle.

Moving on, we also got to see their twelve largest long positions as of 12/31/09 and they are as follows:

1. General Growth Properties (GGWPQ): We recently covered their thoughts on GGWPQ.

2. Berkshire Hathaway (BRK.A/BRK.B): Tilson was recently out talking about how he thinks Berkshire is undervalued and how it could be added to the S&P 500. His latter point just recently came to fruition as BRK.B replaced Burlington Northern in the index. This creates a ton of buyers as index funds will need to buy $38 billion worth of BRK.B, around 23% of the total shares outstanding.

3. Iridium stock/warrants: They note that it is growing very rapidly and has taken market share from competitors.

4. Microsoft (MSFT): They think this name is cheap, safe, and rapidly growing.

5. American Express (AXP): While they have been trimming their long position as it has risen, they deem it currently at 'reasonable valuation' and continue to hold.

6. Huntsman (HUN): They believe the company is now well poised to ride out the economic crisis after their net debt declined by almost $3 billion and they have no more meaningful maturities until 2012.

7. Pfizer (PFE): We've started to see a lot of smart investors pile into this name. Fairholme Fund manager Bruce Berkowitz has a large Pfizer position. Also, we recently noted that Pfizer was the second most popular stock held by hedge funds. Berkowitz is certainly not alone in his fondness for this name. John Griffin's hedge fund Blue Ridge Capital had Pfizer as their third largest US equity holding when last we checked.

8. dELiA*s (DLIA): T2 Partners likes this name because it has a low probability of permanent loss of capital and a good chance of making multiples on their money.

9. Sears Canada (TSE: SCC): Tilson notes, "This stock trades at 4.2x trailing EV/EBITDA, around half the valuation of comparable retailers."

10. Yahoo! (YHOO): This is definitely a contrarian play in the tech space as most of the hedge funds we follow are long Google (GOOG). T2 believes that Yahoo's intrinsic value is nearly double its current price.

11. Fairfax Financial (FRFHF): They feel this is a "diverse collection of high-quality insurance businesses at a discount to intrinsic value."

12. Wendy's Arby's Group (WEN): They are confident Nelson Peltz and his team can turn Wendy's around just like they did with Arby's.

So, there you have their long and short positions. Embedded below is hedge fund T2 Partners' annual letter in its entirety (RSS & Email readers will need to come to the site to see it):

For more great investment ideas from hedge fund managers, make sure to check out the Value Investing Congress May 4th & 5th in Pasadena. We've secured a discount to the event for our readers so make sure to use discount code: P10MF5.

For more insight from Tilson & T2, head to our coverage of hedge fund T2 Partners.

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