Ira Sohn Conference Notes: Investment Ideas From Hedge Fund Managers ~ market folly

Wednesday, May 26, 2010

Ira Sohn Conference Notes: Investment Ideas From Hedge Fund Managers

This year's Ira Sohn Conference was packed with investment presentations from heavy hitting hedge fund managers including Seth Klarman, David Einhorn, Bill Ackman, David Tepper, Larry Robbins and more. Like the Value Investing Congress (in-depth notes from that recent event here), you get a plethora of ideas from top talent. Presentations at Ira Sohn in years past include Greenlight Capital's David Einhorn blasting Lehman Brothers before it failed and Pershing Square's Bill Ackman detailing his bullish stance on shares of General Growth Properties when they were trading below $1 (as they now trade north of $13).

We covered many of last year's Ira Sohn presentations for those interested and the list goes on, but you get the picture. Without further ado, let's dive into some of the investment presentations we've aggregated from various sets of notes that were sent to us, as well as the live-tweeting of NY Times' Michael de la Merced and additional coverage from Barron's Tiernan Ray. We'll post up more in-depth presentations as they become available.

David Tepper of Appaloosa Management: Tepper was nonchalant in the outset of his presentation where he mentioned that his firm had lost $1 billion in AUM over the past month, yet he shrugged his shoulders and joked 'what are ya gonna do?' He then shifted to his current investment ideas such as his bet on AIG 8.175 junior subordinated debt. It trades somewhere around 70 cents on the dollar and he thinks this mispricing is due to a misunderstanding of AIG's capital structure. Additionally, Tepper likes Bank of America (BAC) and thinks it could see $27 in the next year. Sticking with banking, he also likes Spanish giant Banco Santander (STD). Lastly, Tepper also likes commercial mortgage backed securities (CMBS) here. Regarding the economy and a potential turnaround, he is hopeful and thinks we can handle it. His funds are typically invested in 70% debt and 30% equity. Currently, his debt exposure is 50% corporate and 20% asset backed. We recently detailed Appaloosa's portfolio for those interested in the rest of Tepper's investments.

David Einhorn of Greenlight Capital: Einhorn had all kinds of negative things to say about the creditworthiness of the US. His presentation was entitled, "Good News for the Grandchildren" implying that grandchildren won't have to pay off the government's spiraling debt. Einhorn actually thinks that a crisis has unfolded already and our generation will be the ones paying for it. He says it is very necessary to address the situation now rather than spiral into a debt crisis. Einhorn again lambasted the credit ratings agencies and thinks official ratings should be eliminated. He notes that Treasury Secretary Timothy Geithner is 'all-in' because he thinks that the US's credit rating will never be cut. To this though, Einhorn said, "I don't believe a US debt default is inevitable." In his presentation, Einhorn mentioned that he is still short Moody's (MCO) as well as McGraw Hill (MHP), the parent company of ratings agency Standard & Poors. Einhorn originally laid out a short thesis on these names at last year's Ira Sohn Conference in a presentation, The Curse of the Triple-A.

Einhorn then shifted the discussion to real-world costs and inflation. He went on to say that, "if your goal is to never see inflation, you will never see it until it is rampant." Einhorn was critical of the government's zero interest rate policy and warns it can create another bubble. He thinks that higher rates would actually lead to increased lending in the private sector because right now all you're seeing is banks playing the yield curve. Einhorn outlined all the past scenarios where the Federal Reserve didn't see a bubble until it was too late: from Long Term Capital Management to the dot-com bubble to the housing bubble and now to the sovereign debt crisis.

In terms of investment ideas, he likes African Barrick Gold (LON: ABG) traded in London. He thinks this name is cheap and could eventually be added to various indexes as well which would serve as a catalyst for institutional buying. Einhorn ended by saying, "We own some gold and some gold stocks for our investors and for ourselves. We will worry about our grandchildren later." If you'll remember a long while back, we first detailed when Greenlight Capital started storing physical gold. In recent activity, regulatory filings disclosed Einhorn's new position in NCR and we've also detailed Greenlight's portfolio. To learn more about Einhorn and his investment process, we recommend checking out his book, Fooling Some of the People All of the Time.

Bill Ackman of Pershing Square Capital Management: In typical Ackman fashion, he crammed an 80-slide presentation into 15 minutes. He proposed a "Wait to Rate" system to reform the rating agency business where it would be illegal for an agency to issue a rating within sixty days of the security's issuance. And if the agencies mess up, then they should lose their status. Turning to specific investment ideas, Ackman again focused on General Growth Properties (GGP). Some of you will remember that Ackman presented this same idea last year when shares were ridiculously cheap. Last year's premise with this name was an argument that the company's assets were worth more than their liabilities and that this bankruptcy was different than most.

This year, Ackman's GGP thesis continues on in that he sees very little mall construction over the next three to five years, an area GGP already has a dominant position in. He highlights that GGP is being split up into two entities: GGP & GGO. GGP would be the cash-flow generating side of the business and GGO would represent underperforming but valuable assets. Lastly, Ackman quickly remarked that his firm Pershing Square has been buying Citigroup (C) in recent weeks and has assembled a position of 150 million shares, but ran out of time to elaborate on the stake. For more on Ackman's investing style, he is the subject of Christine Richard's new book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. Additionally, we've previously profiled Pershing Square and detailed Ackman's portfolio.

Seth Klarman of Baupost Group: Klarman continued his stern and gloomy comments from last week. He essentially gave a speech on what he would say if he were called in front of Congress to discuss Wall Street. He likened short sellers to policeman and reiterated the fact that they are not evil. He commented negatively on risk regulators, saying that they will inevitably make mistakes and that they won't be able to head off the next crisis at the pass. He feels the market should work itself out and that there should be no bailouts and that only the strong should survive. Klarman noted that many institutions have been bailed out and that the government's action related to AIG has 'raised moral hazards to new heights.' Klarman also joined in on the berating of the ratings agencies saying something should be done about them. Lastly, Klarman says that anyone in a transaction with a counterparty thinks the other investor is wrong, that's the beauty of a market. Just a few days ago we highlighted Seth Klarman's recommended reading list so definitely check that out. We also posted a summary of Klarman's speech at the CFA conference and have previously detailed Baupost Group's portfolio as well.

Steve Eisman of FrontPoint Financial Services Fund (Morgan Stanley): This name should be familiar to those of you who have read Michael Lewis' The Big Short, as he was one of the investors profiled in the story of the subprime trade. His presentation was entitled, "Subprime Goes to College" and as you can guess, he's negative on for-profit education companies. Those of you who followed the Ira Sohn Conference last year will remember that Jim Chanos gave a similar presentation berating these companies. Eisman sees Washington continuing to clamp down on the industry after these companies hired seemingly every lobbyist out there in previous years. He notes that a key to the problem here is the 'rating' these institutions receive from accreditation boards and he likens these boards to the ratings agencies who blessed subprime mortgages.

Eisman focused specifically on Apollo Group (APOL) and noted that if employment figures started to rise, APOL & others could see EPS declines of 40% annually. His presentation called out numerous other players in the space, including ITT Educational (ESI), Corinthian Colleges (COCO), and Education Management (EDMC). Eisman also painted Washington Post (WPO) in a negative light due to their ownership of the Kaplan test preparation business. That last one is intriguing because we recently saw Roberto Mignone's hedge fund Bridger Management buy shares of Princeton Review (REVU), a fellow test prep service.

The dichotomy of opinion continues as the for-profit education space has been an area ripe for debate. We've seen many prominent hedge fund managers own sizable stakes as Stephen Mandel's Lone Pine Capital has been bullish on education plays. That said, we've also noted that some of these managers have had a recent change of heart. David Stemerman's Conatus Capital had been long and sold out of their education plays. Andreas Halvorsen's Viking Global also exited Apollo Group recently. Additionally, there are also numerous high profile detractors such as Chanos and now Eisman.

Jamie Dinan of York Capital: Dinan's first idea was Coca Cola Enterprises (CCE) as they saw Coca Cola buy their bottling operations in the US earlier this year. He loves CCE's free cash flow. We've actually seen numerous other prominent hedge funds owning CCE shares as well, so they're definitely not alone in this pick. Dinan's second bet is on ING (ING). He values it at 1.2x book resulting in a value of 9.32 euros a share. He also noted that post bankruptcy equities are good places to be. This is a sweet spot for York Capital given their focus and he cited Lyondell (LALLF) as an example as he thinks it's worth $22 (it currently trades around $17). We just yesterday detailed some of York's recent portfolio activity for those interested.

Larry Robbins of Glenview Capital: Robbins highlighted that the market's P/E multiple is 12.3x and as the political presence in Washington grows, the P/E shrinks. He thinks now is a great time for stockpicking and not cash, 10 year treasuries or debt. He says to buy definitive growth and avoid high valuations. In particular, Robbins likes McKesson (MCK), Express Scripts (ESRX), Life Technologies (LIFE) and Fidelity National Information (FIS). Regarding FIS specifically, he agrees with the board's decision to reject Blackstone's bid and is in favor of the leveraged recapitalization plan. Regarding Express Scripts, he sees stable earnings and points out they have cash on hand to buy back stock or make acquisitions. We've pointed out that Andreas Halvorsen's Viking Global is bullish on ESRX as well. On Life Technologies, Robbins highlights organic growth, a defensive business mix, and potential industry consolidation. He also likes McKesson because it has a ton of cash, great free cash flow, and is trading at 11x earnings. For more from Robbins, we've previously outlined his thoughts on the case for global equities in 2010 at a hedge fund panel.

Jon Jacobson of Highfields Capital: Jacobson, formerly of Harvard's endowment and now one of the founders of Highfields, listed Sallie Mae (SLM) as his favorite pick. The main thesis here is that it is moving into a fee-based business with a great management team. He noted that the street has had a hard time valuing shares due to the gross leverage. And while this play is risky, he thinks it's undervalued. In a run-off scenario, Jacobson thinks SLM is worth between $15 and $25. While Sallie Mae is term funded, he argues they are adequately capitalized. He mentioned its legacy "FFELP" business is worth $6-8 a share on its own. SLM trades at 2x earnings and many of their competitors are essentially gone. SLM enjoys economies of scale, the credit quality of their loans is getting much better, and Jacobson also mentioned insider buying. Shares were up in aftermarket trading following his presentation. Shifting to the general commentary, Jacobson also cited his concern for the climate in Washington as he claims there is no leadership and that many US states are the American equivalent of Greece, bankrupt or about to be. Overall, he feels that the government is simply delaying these problems for future generations. We've covered some of Jacobson's previous thoughts at a hedge fund panel where he addressed whether or not there is alpha in asset allocation.

Daniel Arbess of Perella Weinberg Partners/Xerion Capital: Arbess' presentation focused on China. He specifically likes Yum Brands (YUM), as the fast food chain has great exposure to that country. Additionally, he likes Ivanhoe (IVN) in the metallurgical coal space as he's bullish on gold and commodities as well. On gold specifically, he says "I doubt we're at a top" but at the same time he does not like it as a safe haven against inflation. In currency trades, he likes a trade of short the Japanese yen and long the Canadian dollar. Arbess also listed Celanese (CE) as one of his picks. Lastly, he sees more distressed credit opportunities coming up as maturities start to roll in. And like many other presenters, he had an unpleasant view of the current political administration and their actions. Turning lastly to the debt crisis, Arbess thinks there are no quick fixes and the outcome is unpredictable. In the past, we've previously covered some brief portfolio activity out of Perella Weinberg.

Jeremy Grantham of GMO: His favorite picks were commodities and in particular, timber. He highlights this because it's the only asset class that did not lose value in the 1970's or during the Great Depression. His second pick centered on emerging market equities and thirdly, Grantham also favors high quality US stocks. Armed with a chart displaying equity valuation of mega caps since 1955, he points out that mega cap valuation has declined since 1955 and they currently represent great value. Shifting to macro thoughts, he thinks the UK housing bubble has yet to burst and that prices could fall as much as 33% more and also warned of a possible bubble in Australia.

Niall Ferguson: He mentioned that now is not the time to short Treasuries. However, he also cautioned to avoid holding 10 year bonds to maturity. Scarily enough, Ferguson thinks the US will be like Greece by 2013 and that we won't be able to 'print' our way out of this mess.

That wraps up our aggregation of notes from the Ira Sohn Investment Conference. If you enjoyed our coverage, please consider receiving our free hedge fund updates via email or our free updates via RSS reader. Thank you to those that sent us notes and stay tuned as we'll post up in-depth presentations as we receive them.

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