Today we're pleased to present an interview with Seth Hamot, 48, founder and managing partner of Roark, Rearden, & Hamot Capital Management. His fund has over $150 Million under management, has performed well through 2-3 recessions, and returned an annualized 17% to investors net of fees. This interview comes as a guest contribution from Ankit Gupta of SelectedFinancials.com. We're always looking for rising managers here at Market Folly and Ankit has done an excellent job with the below discovery:
"The following is an interview to try and learn a little bit about Seth Hamot's experience. As you read this, do remember that he has spent 15+ years building this investment fund and this interview cannot capture that, but hopes to bring a small portion to the public surface. Dr. Sergio Magistri, who led a company through the dot-com bubble and exited with a large acquisition by GE also shares his thoughts on what happened. He led InVision Technologies, which turned out to be an amazing investment for Seth’s fund. Today, InVision’s products can be found in airports helping to prevent terrorism. With his input, we can analyze this amazing investment from the side of Seth and Sergio, both.
When did you launch your investment fund and what were you doing leading up to that?
RRH launched in the mid to late 90’s and prior to that, I was working with partners buying distressed and defaulted debt backed by real estate. I started doing that in 1989 and 1990. Prior to that, I was the President of College Pro Painters, a painting contracting company with a student labor force. I graduated college and since CPP was owned by a foreigner, and needed a local president and leadership, I was brought on board. It was going through financial distress, had no local leadership, and so I was brought in to turn it around. We went from $3 Million/year in revenue to $11 Million when I left. Shortly after, a real estate recession kicked and, and so I began looking for turnaround situations with distressed debt that could be bought. My partners from those ventures eventually retired and so I continued what I was doing into the public markets. We found poorly performing assets that were either too encumbered with too much debt or too little leadership, focusing on hard assets like real estate and mining assets.
What is your fund’s underlying approach? What wrong do you right in the markets?
I want to find companies going through a transition. Eventually, that transition will translate into others seeing that the company will be worth more than they originally thought. It might be divesting a cash burning division, or new credit facility, or maybe the company just did a merger or acquisition allowing the business model to be leveraged, etc. The objective is to NOT be an activist in these situations. There are a lot of great opportunities because really great companies make errors, but they can move on. We enjoy dealing with smart businessmen on a daily basis. Often times though, managers slowly become content to have a larger span of control and more remuneration. They change by rationalizing their business to make themselves better focused and more efficient and effective.
Where did you get your first 5 investors for your fund?
College roommates, families of college roommates, friends, my own money, etc.
What were the first 5 years of your fund like? How many employees did you have and what were some of the larger challenges?
It was a small fund and so picking investments was the main challenge. It was just myself initially. We took a very large position in a liquidating insurance company that lasted 2-3 years, but was very profitable because the markets misunderstood it entirely. It took a little bit of activism and at the end of it, I met someone, who introduced me to his own limited partners, and that’s where I brought in some fresh capital. One of the joys there was that I met some great people who were also doing small cap value investing.
Eventually I was introduced to a well-run fund of funds on the west coast. I was told that we made some great investments, but our documentation was on napkins and we used grid pads for calculations. We got a real lawyer, real documentation, put together information for investors, and then began to grow. From the original $2 Million that we started with, we had grown to somewhere around $15-20 Million, and then these guys came in. We’ve been successful in our performance with investors: Over the last decade, ended December 2009, we’ve returned 17% annualized, net of all fees.
The name of your fund has a very unique name – it has names of characters from the books of Ayn Rand. Can you tell us why you did this?
In general, we take a contrarian view. Doing it all the time is not contrarian and so this allows us to take investments from a unique vantage point.
What do you look for in an investment?
A perfect investment would be in a business that was once well covered by investors, analysts, raised a lot of money, etc. and then the company and industry went through a transformation and the stock trades very cheaply. Even after that, the underlying business itself makes sense and with some tough decisions, it can regain its value and it will right itself. A simplistic example is a REIT that for some reason no longer pays its dividend, driving the stock price very low. It’s a hard asset business that won’t just disappear. If you can foresee the dividend coming back, it will get bought again for its yield eventually. So if someone calls in and says, “I’ve got this REIT I want you to look at,” I’ll respond by asking, “Is it paying a dividend?” If the answer is yes, then I don’t care, but if the answer is no, then let’s talk!
How do you find your investments? Are they brought to you or do you screen for them?
We don’t use as many screens as our competitors – we look for situations of transition. We monitor a lot of announcements for spinoffs, acquisitions, divestitures, distributions and one-time dividends, etc. A good 1/3rd of our investments come from people who call about how they’ve lost a lot of money and they don’t understand why the equity is performing so poorly. They want information, but in another sense, they’re questioning whether an activist could help out. More often than not, present management and the board of directors will deal with the issues. We don’t want to be activists, generally, but to the extent that we’re wrong that the CEO isn’t good, we have to do it.
If it’s activism, it’s because the board or CEO is not reasonable. When we are activists, we always say to CEO’s and board members that we see this (something specific) as a problem and that any reasonable businessman would see this as a problem. Reasonable owners, your shareholders, see this as a problem. “Why don’t you get in front of this and solve it?” It’s only when they refuse to address the issue and completely ignore rational shareholders that we become activists. It’s not a case of them not being granted an opportunity to fix it. Furthermore, when they stick to their actions – often to feather their own actions, they refuse to accept that we are the shareholders and owners of the business. Instead, they try to publicize that we are a “lesser class” of shareholder, a hedge fund. One extreme example is a board that said they had a program in place to find new, more docile, shareholders. Instead of realizing value by spending time to follow suggestions, they were spending time on finding money and new bosses.
How long do you typically hold an investment for?
Our average investment period is well over a year, probably closer to a couple of years. I’m the chairman at TEAM, chairman at ORNG, both of which we have owned for over 4 years. Some of our other big positions are in the 3rd year of our ownership. We’re not traders and our investors see it by the tax bill – we’re not paying short-term taxes nearly as much as others.
Some of your investments are in pharmaceuticals or biotechs along with energy, mortgage processors, etc., how are you doing this?
We’re generalists and start digging into anything. If the problem is product based, we don’t dig into that. We’re focused on the business. If the company has successful products, but is spending too much on R&D, it’s a question of capital allocation. We avoid biotech companies without significant revenues because we don’t have a take on science. At the same time, we don’t have any problem in investing in a pharmaceutical spending a lot on biotech, but already has successful drugs in the marketplace. If there is a mismatch between capitalization and value of drugs that are already in the market, there will be a major discount to the market value of the company. A big discount points out that investors don’t value the R&D pipeline even though the drugs are kicking off a lot of cash.
How much do you care about where the overall markets are and where they are headed?
We used to not care at all, and through 2008, a lot of my competitors and I started to care very greatly. I don’t really pay all that much attention to it though, because I’m investing longer term than most, 2-4 years, and if they can turn a business around in 2 years, any 1 days headlines today won’t be the headlines 2 years from now.
Do you take long positions only or short positions as well? Is any of this as a hedge or do you look for companies with something that is fundamentally wrong when taking a short position?
We do take short positions, but we’re not nearly as good at them as our longs. We look for bad business models, too much leverage, and companies generally run for the benefit of senior management and board members. Shorts tend to go against us because whenever any activity continues, the investment community rates it highly. We’re not too good at anything other than when the debt comes due causing the company to reorganize or hand over ownership to the debt holders.
Your firm seems to be okay with small cap positions. Do you ever worry about a complete lack of liquidity that small caps will see whenever there’s a downturn?
Yes, we worry about liquidity. We think about it more today than 2 or 3 years ago because it is an issue and with many stocks that we used to get involved in, we will no long get involved in.
How do you manage and define risk?
We define risk as leverage – certainly not beta. Our only use of leverage will be used to trade around positions. That said, liquidity is the first coward and when liquidity dries up, you just have to put up with the bumpy road. There’s a desire to avoid volatility at all costs. The flip side is that you’re paying for it in liquidity. Our 17% annualized return partly comes due to an illiquidity premium. Neither the auditor nor the IRS makes us give back our excess return due to that though!
Your fund has lived through 2 or 3 economic downturns – which one were you most prepared for?
2000 Internet crackup. In 2002, when the S&P500 fell 22%, we were up almost 10%. These crises are very good for us, eventually. They’re not so good short term because we go through hell too. Just after it though, we tend to double and show over 100% returns. Leading up to the recent troubles, we were short on homebuilders and held CDS’s at one point, however gave those up on suspicions that the markets were rigged.
Do you ever notice that it’s easier to be right than it is to know when you’ll be proven right?
Yes, very much so. It happens in real estate quite a bit. You can buy a property one minute and then in the next minute, you can come up with a number for what it’s worth. Sometimes, it takes longer, and sometimes it’s shorter. This applies to stocks too – you know what it’s worth when you buy it, you have to wait though. We were investing 3-4 years ago and are still waiting for the investments to complete. We see how they will, but the markets have not recognized it yet.
Historically, do you have any investments that you remember as amazing? Maybe an investment where you were just so darn right that it was memorable?
Yes, two in specific:
1. Nursing Homes: In the early parts of the last decade, nursing homes were providing elderly housing and elderly care. They were expanding the elderly care to provide ancillary types of procedures, like occupational therapy, breath therapy, etc. and all these things made tons of money. The underlying business was great, and then they issued a ton of debt, raised capital, etc. Shortly after, congress cut back funding. With that, the top lines and margins went through the floor, leveraged ones went bankrupt, and the industry in itself went through a transition.
The markets priced that as if nursing homes would go away. In reality, there would only be more elderly people given enough time. We were buying healthcare REITS, preferred shares with 20% yields, dividend-paying instruments for 50% of pay, etc. Lo and behold, the Internet stocks went to hell and these nursing homes were going through a change too. Even while they went through a change, they had to keep paying rent, and so the REIT dividends kept coming in. It was priced like a junk bond, but the yields were better and actual ratings were better too!
2. InVision Technologies (from Seth Hamot’s point of view). During the internet bust, you would hear tons of ideas that all began, “This company has so much cash on hand and is only burning this much per quarter.” We found INVN, which was a collection of venture ideas that were being commercialized. The CEO of this company, though, was committed to being profitable. Same sort of upside, but without the cash burn, as the Internet investments. The CEO basically said this: “They (our investments) turn positive NOW, not later on.” Meanwhile, I’m getting a ton of calls from people to buy 1 of 6 online pet food supplier stocks, they have a ton of cash and little burn – they don’t need money for two years! I heard that all day long and then went to buy Invision. I paid less than the cash they had and saw some upside on a logger product that was going to make logging much more efficient. They weren’t burning cash either, and that’s what made it attractive.
I went over just 1% of the company by September 10th, 2001. On the next morning, terrorists attack the country and so the markets don’t open for a while. Invision actually had technology that sniffs for bomb threats in airports. At this time, it was in beta testing at a few regional airports. I hadn’t paid attention to this part of INVN at all, but now it was a lot more important than all the other activity at the company. I had been buying the stock for $3 per share, less than net cash. It was a “net net.” As you know, the markets remained closed until September 17th, when it opened around $7.50. By that afternoon, it traded around $9. This is when all the value investors got out right away. Around this time, I said, “You know, if it’s a real business, and it’s up to $9 today, because it was installed as a beta test, the government will want hundreds and thousands of these in the recent future, these will be hot.” Eventually, I got out between $17-20. If you travel now and look behind the check in counter, those machines that they put your luggage through are Invision machines. I have no idea what happened to the log cutting advancements or anything else, I was following a CEO who wanted profitability even when everyone else had different ideas.
2a. InVision Technologies (now from Sergio's point of view - CEO/President)
Dr. Sergio Magistri was the President the CEO of InVision Technologies, which developed technologies for Explosive Detection Systems (EDS) and other civil aviation security. He joined in 1992, raised $21M in 1997, and entered into a merger agreement for $900M, or $50 per share, on December 6th, 2004. Below are some of his thoughts:
1. Does the description that Seth gave of the situation sound adequate?
Yes, from a contrarian investor point of view looking at the overall high-tech space near the end of the dot-com bubble. At InVision (INVN) though, we never felt that we were part of the dot-com mania. We had a long-term strategy that was quite simple: (1) Security is an event driven market (2) The best marketing is the quality of our products (3) Keep developing the best technology in the industry without running out of money and maintaining at least a cash flow break even or better (4) At some point in time, the market demand will come. In retrospect, I wish we would have been wrong or at least the demand (as a consequence of a terrorist event) would have been lesser.
2. Why did you care about cash flow break even or positive at a time when most others did not?
At the valuation we had before September 11th and during the dot-com period, the company was not re-financeable almost at any valuation, because we were not “fashionable.” We had real products, revenues, and even some profit.
3. Did you get a hard time from anyone for pursuing cash flow breakeven and profitability before others?
Quite a lot of our investors (and our own people) were pushing for some kind of splash change in strategy to appease the dot-com believers, but at the level of management and board of directors, we decided to keep executing our security strategy. We had a clear understanding that we didn’t belong to the dot-com world.
4. Seth mentioned a logging enhancement that your firm was working on, but that might have been hidden by the success of the Explosive Detection Systems. Could you tell us what eventually happened?
After September 11th, we were management and resource limited. For a while, we tried to spin it off as an independent and financed entity to avoid defocusing our security effort. Once this failed, we decided to abort the development. Even today, while recognizing the need for the decision at the time, I believe that this was and will be a very interesting opportunity.
And now, back to some questions for Seth: When dealing with small caps, do you ever think about why some of them are publicly traded to begin with?
All the time. If you actually understand the classical theory of public markets, they exist for raising initial capital. No one would actually give capital unless there’s an exit strategy, and the public markets allow that exit strategy to be a reality for small holders of stock.
Looking at your current positions, can you offer any insight as to some of the more interesting ones?
Aeropostale (ARO) – Aeropostale is the premier teen retailer in my estimation. When you compare the company’s fundamentals to the other large players, AEO and ANF, you see the superiority clearly. Yet, ARO is relatively cheaper than its competitors. Let’s first look at the ability to drive same store sales. In 2009, arguably the worst year for retail in the last generation, ARO had year over year gains every month. Furthermore, if you consider the gains in total sales compared to the recent trimming of inventory – that’s right, the decline in inventory – you realize the increasing efficiencies that are driving huge cash flows at ARO. [Specifically, let’s take the summation of the last four quarters of “percentage yearly revenue gains” and subtract from that number the summation of the last four quarters of “percentage of yearly inventory gains,” the latest quarter being actually a reduction in inventory. ARO’s resulting number is 50.83 and accelerating. AEO’s is 21.88, and going in the wrong direction and ANF’s is 34.68 and also headed in the wrong direction.]
Analysts miss all this though. They are so wed to their bullish calls on ANF and AEO that they have conjured up a story that once the recession ends, all those customers who are moving to a lower price point by shopping at ARO are going to return to the competitors’ stores. Hence, ARO trades at 5.43x its LTM EBITDA, while ANF trades at 7.26x and AEO traded at 7.14x until it lost 35% of its value in the last quarter. Caught up in their past view of the world, they are missing one of the great retail stories around today, which continues to improve its business quarter over quarter.
Nabi (NABI) – this is a wonderful story. Nabi has a vaccine that helps with smoking sensations. Glaxo Smith Cline (GSK) actually put up $45 Million to partner with them on this drug. No one spends $45M on a drug that isn’t credible. That will probably move forward by the end of 2011. When I entered my position, I wasn’t paying more than cash and the NPV of royalties, probably lower and upper 3’s. GSK validated the vaccine and the ramifications of its approval are mind-boggling. You take 4-5 shots over 6-8 months and you can get over smoking. Our nation spends a lot of money on smoking and so there will be a lot of push behind this drug, you could make budgets balance if less people smoked. Even if you doubt it, the GSK guys have been looking at it for months and when they’re done with the next phase of development, GSK will pay NABI another $30 Million for the work they’re doing, and then the numbers get really crazy for royalty payments. When I was buying, I got in at prices where most of the story was for “free” because of where the stock price was trading.
(Market Folly note: There's an interesting tie-in here as readers will recall that Dan Loeb's hedge fund Third Point had been selling Nabi, though they still own a sizable position).
BreitBurn Energy Partners (BBEP) – This company found they were overleveraged at one point last year and so they cut the dividend distribution, causing the stock to go down to $6. Dividend money went to cut down debt and now it’s at $15. We went from $6 to $15. Baupost is there and the interesting thing is that they got involved with a proxy contest with the largest shareholder. Quicksilver, the largest shareholder, went on the board and removed 2 guys – the chairman and CEO, the two folks whose name is in the company name itself. They became management employees.
(Market Folly note: You can view the specifics of Seth Klarman's BBEP investment via Baupost's portfolio.)
Quicksilver (KWK) is overleveraged and owned 21 million shares of this company at one point, or about 40% of the company. They had a proxy contest and those 2 were removed. You have to take a step back and wonder what’s going on. If there is nothing going on, why would they bother to remove people from the board who will object and not be happy about the situation? There’s a possibility that managers were taken off the board of directors so that potential M&A activity could be kept segregated from the operations, which offers a potential exit strategy for Quicksilver. In the meantime, I got a 10% dividend and 37.5 cents per quarter per share, not too bad at all, and mostly tax-free.
How do you try and structure your portfolio? Your top holding is 15% of your invested portfolio and the top 5 make up 44% of your portfolio, even though you had 29 positions at the last 13F filing.
We tend to buy as much as 6-7% of the portfolio and will be pruning as it crosses the 10-15% threshold. We’re usually always pruning.
How do you deal with prices at which you are okay holding a stock, but not buying?
Opportunity cost would say that if you aren’t willing to buy it at the current price, you shouldn’t be holding it, because by not selling, you’re effectively buying at the current price. One of the pains is you buy stocks out of favor. Often times, they become in favor! Just because they’ve risen past fair value, and you saw that in InVision, where the fundamentals had markedly changed, you have to be patient and see it runs its course. By the same token, if I was buying for the log cutting machine software, and if it was done with the beta tests without much business activity, I would have found another investment to move onto. From my point of view, I can be patient.
Can you recommend a few books for investors that you found to be helpful?
Sure - Ben Graham's Security Analysis, The Intelligent Investor, and Seth Klarman's Margin of Safety. Additional reading includes Warren Buffett's annual letters and an understanding of topics of leveraged buyouts and stability of cash flows."
And that concludes the excellent interview. The above was a guest contribution courtesy of Ankit Gupta of SelectedFinancials.com. Those of you interested in a .pdf copy of the above interview can download a .pdf here.
If you or anyone you know is a fund manager open to being interviewed, please send us an email.
Wednesday, July 7, 2010
Three Investment Ideas: Interview With Seth Hamot, Founder of Roark, Rearden, & Hamot Capital
Mark Rachesky's MHR Fund Management Receives Convertible Notes From Emisphere Technologies (EMIS)
MHR Fund Management run by Mark Rachesky recently filed a Form 4 with the SEC in regards to Emisphere Technologies (EMIS). Per the filing, Rachesky's firm received convertible notes on EMIS for reasons we'll discuss below. We see that MHR acquired $1,272,753 worth of convertibles with an exercise price of $3.78 and an exercise date of September 26th, 2012. These convertibles in aggregate represent 336,705 shares of common stock in Emisphere Technologies.
This is not the first time MHR has acquired EMIS convertibles either. Rachesky's firm has owned 11% Senior Secured Convertible Notes since May 16th, 2006. These convertibles have interest "payable in kind semi-annually in arrears through the issuance of the reporting persons of additional convertible notes." As such, MHR has filed this Form 4 with the SEC to disclose the receipt of these additional Convertible Notes as paid-in-kind interest on the notes they already owned. This is also not the only transaction relating to Emisphere for MHR in recent times. As we detailed in June, MHR also acquired warrants on EMIS.
Rachesky received his B.S. in molecular aspects of cancer from the University of Pennsylvania and an M.D. from Stanford University School of Medicine. Additionally, he also holds an MBA from the Stanford Graduate School of Business. Prior to founding MHR Fund Management, Rachesky previously worked as a senior investment officer and managing director to Carl Icahn. While Rachesky was once viewed as Icahn's apprentice, it's intriguing to see them now essentially pitted against one another in a separate position. As we've detailed numerous times before, Icahn has been bidding for Lions Gate Entertainment (LGF), one of MHR Fund Management's largest holdings. We'll continue to watch and see how that one plays out.
Taken from Google Finance, Emisphere Technologies is "a biopharmaceutical company that focuses on a delivery of therapeutic molecules or nutritional supplements using its Eligen Technology".
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Market Strategist Jeff Saut Still Cautious, Highlights Negative Indicators
Raymond James' Chief Investment Strategist Jeff Saut is out with his weekly missive and there's honestly not much new from him in terms of commentary. Last week, we covered how Jeff Saut was decisively cautious and his stance stands seemingly unchanged this time around. While he still advocates caution, he notes that such extreme pessimism can often be seen as a contrarian signal. As such, it would not surprise him to see a rally as stocks have been compressed on a short-term basis.
Of the negative signs, Saut cites:
- Dow Theory sell signal
- His proprietary trading indicator flashing 'sell' (for the first time since December 2007)
- Negative readings on the monthly stochastic indicator
- Downside violation of the 12-month moving average in stocks (most stocks have broken 'triple-bottoms')
- A death cross (where the 50 day moving average crosses below the 200 day moving average)
You can't really argue with the fact that all of those indicators are indeed quite ominous. Saut notes that as of the month of June of the asset classes he follows, only gold, silver, fixed income and the Japanese yen were higher for the month and year-to-date. It's no coincidence that these are often areas where investors flee to safety when volatility ramps up and uncertainty reigns. A few weeks back, the Raymond James strategist argued that the market was in a bottoming process. However, as the negative indicators began to pile on, he was quick to adapt to the change in trend and advocated caution. Saut presumably has a portion of his accounts sitting in cash given his stance and the fact that he removed market hedges into the turmoil.
In summation, Saut believes that the first duty of investors at this point should be to protect capital (and in particular the gains from the March 2009 lows). At the same token, he would not be surprised to see a rally (at least in the near-term) given the abounding pessimism. Embedded below is Jeff Saut's weekly investment strategy publication:
You can download a .pdf copy here.
If you haven't already, definitely read Saut's commentary from last week where he was decisively cautious as it is much more in-depth than this week's note. And for more recent market commentary, we recently highlighted Crispin Odey's market outlook from hedge fund Odey Asset Management which is worth examining.
Hedge Fund Axial Capital Buys More QLT Inc (QLTI)
Eliav Assouline and Marc Andersen's hedge fund firm Axial Capital Management recently filed a Form 4 with the SEC regarding shares of QLT Inc (QLTI). Per the filing, we see that Axial bought 419,200 shares of QLTI spread out over the course of three days. They purchased:
139,200 shares at $5.74 on June 30th, 2010
80,000 shares at $5.75 on July 1st, 2010
200,000 shares at $5.73 on July 2nd, 2010
After their purchases, Axial's total position in QLTI totals 6,195,429 shares. This is not the first time Assouline and Andersen's hedge fund have bought shares recently either. Back in early June, Axial bought QLTI at an average cost of $6.20. Shares have obviously decreased drastically in the one month that's elapsed and that has whet their appetite for more shares.
This is only the third time we've covered Assouline and Andersen's hedge fund as our previous posts include detailing their addition to another position as well. Julian Robertson seeded Axial in 2005 and the hedge fund offices out of Tiger Management's old headquarters at 101 Park Avenue. You can view the proverbial 'Tiger Family Tree' of hedge fund managers here. As of their last 13F filing, Axial disclosed $799 million in assets invested in US equities.
Taken from Google Finance, QLT is "biotechnology company. The Company is engaged in the development and commercialization of therapies for the eye. The Company focuses on its commercial product, Visudyne, for the treatment of wet age-related macular degeneration (wet AMD), and developing its ophthalmic product candidates."
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Warren Buffett ~ Market Folly Quote of the Week
When Market Folly first came to be, a 'quote of the week' was featured each Monday. Somewhere along the line, that tradition fizzled away for no reason. As such, it's time to bring it back with a vengeance. To kick-start the series again, let's begin with none other than the Oracle of Omaha himself, Warren Buffett. And, fun fact: The name of this site (Market Folly) partially stems from his quotation below.
For more on all things Buffett, head to our coverage of Warren's recommended reading list and a multi-decade look at Buffett's career.
Friday, July 2, 2010
Latest Value Edge Newsletter Released: 15% Discount Included
The July issue of the Value Edge newsletter was just released so we wanted to remind you that Market Folly readers receive an exclusive 15% discount to this monthly publication. The Value Edge newsletter includes 12 issues and normally costs $199 per year. Our readers receive it for only $169. Click here to receive the discount and follow the steps to checkout. While the July issue has the newest up-to-date stock ideas, those of you who want to check it our first can download last month's issue for free here.
Simply put, this newsletter is an investment idea generation tool based on various stock screens to generate both long and short ideas. On the long side, you'll find screens categorized by:
- Contrarian
- Deep Value
- Cheap Franchises
- International Value
- Potential Activist Targets
- Potential Liquidations
- Merger Arbitrage
- ValueHuntr's Proprietary Screen
And then for short selling ideas, the newsletter screens for:
- Overvalued Companies With Poor Business Prospects
- Herd Mentality Picks
- Companies With High M-Score Parameters
- Companies With Low Z-Score Parameters
Whether you're an institutional investor or individual investor, these aggregated stock screens are perfect for idea generation. Prominent managers use screens just like this to source their next actionable pick. Click here to receive your 15% discount and receive the latest July issue.
Embedded below is a sample issue (last month's) for you to peruse:
You can download a free sample newsletter here. The July newsletter was just released and to get the most up to date stock ideas, be sure to receive your exclusive 15% discount to the Value Edge newsletter.
Jeff Saut: Decisively Cautious, Cites Dow Theory Sell Signal
Market strategist Jeff Saut takes a decisively more cautious tone in his investment commentary this week compared to previous notes and understandably so. The markets have seen somewhat of a precipitous decline that has many participants worried. The Chief Investment Strategist at Raymond James is currently very focused on "keep(ing) the profits accrued since the March 2009 bottom." This is definitely a defensive posture. And rather than focusing on the investment opportunities at hand on both the long and short sides of the portfolio, Saut seems solely concerned about protecting profits.
This all becomes intriguing when you consider Saut's commentary over recent weeks. Last week, Saut noted he removed market hedges during the turmoil. He was letting his protection go when he needed it most and when it was hardest to let go. Normally, that would be the right play. However, the market's precipitous decline has continued. And prior to removing his hedges, Saut argued that the market was in a bottoming process.
Now that we've come full circle, Saut highlights a few reasons to be cautious. Firstly, the market recently registered a Dow Theory sell signal (something that speaks for itself). Secondly, he cites weakening economic reports, specifically the sharp decline in the Economic Cycle Research Institute's weekly leading index. Additionally, Saut says his own proprietary indicator has registered a sell signal as well. There is one last signal he is watching for and that is the impending 'death cross' when the 50-day moving average crosses the 200-day moving average to the downside. Not to mention, a technical analysis video we recently highlighted points out a bearish engulfing pattern in the markets.
In the near-term, Saut is cautious. In the long-term, he thinks equity markets will be okay. He writes, "the yield-curve is still relatively steep, credit spreads have not leaped, the Advance/Decline Line appears steady, and earnings comparisons should remain favorable; so unless it is different this time the recent correction in the equity markets should resolve itself with higher prices."
To be honest, we're not quite sure how Saut comes to that conclusion after the barrage of negative signals and indicators he referenced earlier. Maybe he thinks the negative sentiment is overstated, who knows. Saut honestly admits he is cautious in the near-term and he's certainly not alone there as global macro hedge fund Prologue Capital outlined cause for concern as well recently. That said, Saut is still on the prowl for solid risk/reward situations. Specific stocks Saut is intrigued by currently include Chevron (CVX), Wal-Mart (WMT), and Peabody Energy (BTU). Saut in particular likes Wal-Mart under $50 per share due to strong fundamentals and Peabody for the 'supercycle for coal.'
Embedded below is Jeff Saut's market commentary for Raymond James:
You can download a .pdf copy here.
As mentioned before, you can view Saut's previous commentary including his removal of hedges and his call that the market was in a bottoming process. Overall though, his message is still clear: selectively upgrade the stocks in your portfolio. This could turn out to be a big call as the market is undoubtedly at a potential turning point here with the technicals looking bearish.
Odey European's Hedge Fund Market Commentary From Founder Crispin Odey
Today we present you the latest market commentary and current outlook from Crispin Odey, founding partner and portfolio manager at Odey Asset Management, one of the premier and widely regarded UK based hedge funds. Odey currently manages around $5 billion for institutions, endowments, private banks and individuals. Crispin founded the firm in 1991 with a focus on preserving capital and generating superior returns.
In terms of recent results, we saw in our May hedge fund performance update that Odey was down 10.96% in the month of May alone. Crispin addresses this and other topics in his most recent commentary:
"May was ugly. Markets did exactly the opposite of what I was expecting them to do. Government bonds rose by 8%, equities fell by 8%. In my hedge fund I was 100% short the bonds and 100% long these equities. Risk controls cut in and ensured that we lost only 1.5% on the bond book, but we also lost money on the currencies. We took the net equity book down to 40% at one stage and we reduced the bond short book to less than twenty percent. This was not one's finest moment.
However, do all those price moves change much? Are there lessons to be learnt? What are markets predicting?
Questions, questions, questions. Sure the ECB handled Greece badly. They should have investigated bankruptcy. Sure the Spanish Caixas need recapitalizing and some honesty needs to be brought to bear in property loans in evaluating Spain, but should this blow off course the natural reflationary policies being pursued by the authorities. The price action of May for all asset classes was only explicable on the grounds that Europe and indeed the world is going to follow Japan into deflation.
The line of argument goes. Firstly, credit cannot expand because there is a standoff between those who have the equity to buy assets and those selling the assets; over price. The equity participants are asking for a discount on the assets. The sellers, thanks to low interest rates, do not have to sell and are holding out. This presents an uneasy truce but it does not permit credit gains.
Secondly, governments are only too aware that this crisis has left government finances in an untenable position long-term. Tax revenue has rarely managed to get about 40% of GNP. Government expenditure is now universally running in excess of 50% of GNP. In Osborne's case, the need to bring expenditures into line with revenues is compounded by the fact that if he does not announce cuts immediately, he cannot blame the outgoing government.
Markets are worrying in many ways rightly, that with the corporate sitting on cash, a fall in government expenditure is not going to be met by a rise in private sector spending and employment. Thus the market in May is pricing in a double dip.
This has been compounded by the weakness in the corporate bond market of late. With the one year ECB repo of ?400 billion coming due on 1st July, every bank is nervous that the ECB may not renew it or will only renew it only quarterly. Here I remain more positive. For me the lucky thing for Europe is that Germany may have the strongest economy in Europe, but they also have the weakest banking system and that is some claim when you look at the competition in Europe. This means the 1st July is likely to bring news that the repo loan is extended and most likely for one year. Thus fear of deflation provokes further reflationary policies.
This brings me on to the future. It is highly unusual for a new bear market in equities to begin even as profit estimates are being upgraded as they are now. Equities are cheap against all other assets, pricing in a 30%-40% fall in profits.* They are also under-owned. That makes them vulnerable to changes in sentiment. That makes them volatile, but it also makes them attractive as investments.
As some stage the re-flation will result in inflation and all of these fire practices will help the fund to do well. But in the meantime it looks like returns will be allied to volatility. *Even in 2009, with the banks going bankrupt in the UK, profits only fell by 8%. Written the 28th of May 2010."
Certainly intriguing commentary from the Odey manager and for more from this hedge fund we've previously covered Odey's European Fund commentary from earlier in the year. Additionally, we often cover fund manager Hugh Hendry on the site and keep in mind that before founding his firm Eclectica, Hendry was previously a partner at Odey. As such, we recommend you also view Hendry's recent thoughts where we learned he has constructed an Asian bear portfolio.
For more market commentary from top investment managers, head to our compilation of various hedge fund investor letters.
Matthew Grossman's Plural Investments Set to Open to New Investors?
While we don't usually cover news like this on the site, this one caught our eye. It appears as though Matthew Grossman's hedge fund Plural Investments plans to accept new capital next year. If you'll recall, Grossman launched his fund with $450 million in 2009 and was already closed to new investors before they even started trading. He previously worked at Steven Cohen's SAC Capital as the Chief Investment Officer of the CR Intrinsic unit. Before that, he followed energy stocks for Julian Robertson's Tiger Management.
This was definitely one of the more notable fund launches during the financial crisis and so it's interesting that they might already open up to new investors next year. Apparently the fund has a lengthy four year lockup so they might consider becoming more lax on that policy as well. For 2009, Plural Investments finished up 7.3%. You can see how they fared compared to others in our 2009 hedge fund performances update. We haven't seen an update as to how they're faring thus far in 2010, but some reports have postulated that the fund was flat back in the first quarter.
As of the first quarter of 2010 (according to their 13F filed with the SEC), some of Plural's largest positions included: S&P 500 (SPY) Puts, American Tower (AMT), Crown Castle (CCI), Medco Health (MHS), and Schlumberger (SLB). So it definitely seems as though Grossman's fund is on the wireless tower stocks bandwagon that we've seen many hedge funds riding. In fact, almost all of Plural's top holdings are some of the most popular stocks amongst hedge funds. We'll have to see if that holds true when they reveal their second quarter holdings in a few weeks.
Phil Falcone's Hedge Fund Adds to Corn Products Stake
After market close yesterday, Phil Falcone's hedge fund Harbinger Capital Partners filed a 13G with the SEC on Corn Products International (CPO). Due to portfolio activity on June 21st, 2010 Harbinger now shows a 5.22% ownership stake in CPO with 3,930,019 shares. This marks an increase in their stake because back on March 31st, Falcone's hedge fund owned 3,483,280 shares of Corn Products when we looked at Harbinger's portfolio. They've added 446,739 more shares to their position over the past three months, a 12.8% increase in shares owned.
Just yesterday, we also detailed how Harbinger has been selling Tate & Lyle shares. This is interesting because both companies are essentially involved in the corn industry in some fashion or another so we'll have to see what Falcone has in mind here.
Taken from Google Finance, Corn Products International, Inc. "manufactures and sells a number of ingredients to a variety of food and industrial customers. The Company is a corn refiner and a supplier of food ingredients and industrial products derived from wet milling and processing of corn and other starch-based materials."
Be sure to check out the rest of Harbinger's portfolio as well as our continuing hedge fund portfolio updates.
What We're Reading ~ 7/2/10
TradeStream Your Way to Profits: Building a Killer Portfolio in the Age of Social Media [Zack Miller]
An excellent translation of Li Lu's "My Teacher: Charlie Munger" [Enoch Ko]
Congrats to Mebane Faber on the announcement of his global tactical asset allocation ETF [World Beta]
Li Lu's 2010 lecture at Columbia [Street Capitalist]
The long and short of The St. Joe Company (JOE) [Greenbackd]
An in-depth look at American Capital (ACAS) [Distressed Debt Investing]
Borrowing BP [FTAlphaville]
God and RenTech's black box [Reuters Felix Salmon]
Hedge funds face large tax [Absolute Return + Alpha]
Could now be a good time to buy some Google? [The Globe and Mail]
TheKirkReport's strategy session with options guru Adam Warner [KirkReport]
Inflation versus deflation revisited [Humble Student of the Markets]
Poker is better than chess to learn about risk management [TexasHoldEmInvesting]
A look at value investing from a momentum perspective [Ivanhoff Capital]
Value in large cap stocks [Street Capitalist]
Cash is king at Myriad Pharmaceuticals (MYRX) [TapeBeat]
A look at Ray Dalio's unique culture at Bridgewater Associates [WSJ]
So that's why investors can't think for themselves [Jason Zweig, WSJ]
John Paulson is buying plots of land [WSJ]
Paul Kedrosky's chat with Mark Cuban re: Wall Street, trading & more [Kauffman]
Amid the gulf crisis, Wall Street touted BP stock [Reuters]
PIMCO's push into equities [Bloomberg]
Crackdown on hedge fund pay in the EU [BBC]
Thursday, July 1, 2010
Warren Buffett's Berkshire Hathaway Buys More Tesco
Warren Buffett's Berkshire Hathaway recently increased its stake in Tesco, an international retailer that is traded in London as TSCO and on the pink-sheets as TSCDY. This is the first time that Berkshire has filed a regulatory disclosure regarding Tesco and we'll get into the history of the stake below because they've held a position for a few years now. The gist of this most recent transaction is that Buffett bought more and now owns 242,153,373 shares, or 3.02% of the total shares outstanding. This is the latest move from Berkshire Hathaway, the vehicle of this legendary investor and you can learn to follow in his footsteps of course by starting with his recommended reading list.
In the past, we've detailed how Buffett already owned Tesco even though he had not filed with regulators. (He originally revealed this position in one of Berkshire Hathaway's annual letters). Back then, he owned 229,070,000 shares (or around 2.9% of the company). Since the position was below a 3% threshold, he was not required to disclose it to regulators. Now, however, Berkshire Hathaway has added around 1.85 million shares of Tesco to bring their total over this trigger-point. For nitpickers like us, it was kind of comical to see Berkshire actually make a mistake on their filing as they stated their position had gone 'below 3%' when in fact it had gone *above* 3% since this is the first time they've filed.
So, the main thing to takeaway here is that Buffett's Berkshire has added 1.85 million new shares since the last time we saw a disclosure regarding their Tesco stake. And, now that they're above this threshold, we'll see future updates regarding their position. For the rest of his investments, head to Warren Buffett's portfolio. In other resources regarding the Oracle of Omaha, we also posted up a multi-decade look at Buffett's career for those interested and notes from Berkshire's annual meeting.
Hedge Fund Harbinger Capital Reduces Stake in Tate & Lyle
Phil Falcone's hedge fund firm Harbinger Capital Partners recently filed a regulatory disclosure in the UK regarding shares of Tate & Lyle (LON: TATE). While not a major change in position size, they've gradually reduced their stake over time and we now see that Harbinger owns 41,171,670 shares, or 8.95% of the shares outstanding. This disclosure was made due to activity on Thursday June 24th. We covered Harbinger's previous filing on TATE from back in October 2009 when they owned a 9.21% stake.
Let's take a historical look at their stake in Tate & Lyle: Hedge fund Harbinger started to really ratchet up their stake in early 2008. Their position then peaked at a high of 19% ownership back in July 2008. Since then, Falcone's firm has slowly decreased its position size to current levels. Over the past year or so, the press has speculated that Harbinger would completely sell out of the stake but that does not appear to be the case (at least for now).
It appears as though Harbinger's thesis with Tate & Lyle was a push for a link with Bunge (BG), the US food group which Harbinger also previously had an interest in. (Sidenote: Falcone's fund had sold out of Bunge a while back but when we looked at Harbinger's portfolio from the first quarter of 2010 we saw they re-initiated a new position in Bunge). Back in 2008, Tate & Lyle's then CEO Iain Ferguson said that Falcone's investment in the company stems from his habit of focusing on scarce assets that are hard to replicate.
Specifically in the case of Tate & Lyle, the scarce assets Falcone fixated on were its US plants, including the (then new) Fort Dodge plant in Iowa which was the first corn wet mill built in twelve years, along with the company's access to valuable slots on the US rail system. We'll have to see where this stake goes, but ever since 2008 it's been slowly and steadily reduced by the team at Harbinger Capital Partners. For more portfolio activity out of this hedge fund, check out their latest new position as well as our previous look at Falcone's portfolio.
Taken from Google Finance, Tate & Lyle "is a manufacturer of renewable food and industrial ingredients. The Company, through its subsidiaries, is engaged in developing, manufacturing and marketing food and industrial ingredients made from renewable resources. The Company operates through four divisions: Food and Industrial Ingredients, Americas; Food and Industrial Ingredients, Europe; Sugars, and Sucralose. Tate & Lyle participates mainly in four markets: food and beverage; industrial ingredients; pharmaceutical and personal care, and animal feed. The Company holds a 16.6% interest in Tapioca Development Corporation."
For more on the latest moves from prominent money managers, head to our coverage of hedge fund investments in the UK and scroll through our continuing hedge fund portfolio tracking series.
