Friday, October 1, 2010

Howard Marks: Buy High Quality Large-Cap US Growth Stocks

“History doesn’t repeat itself, but it does rhyme.” Today we are exploring the venerable Howard Marks' current view on the markets after his last commentary focused on the Greek tragedy. The themes of Oaktree Capital Management's most recent letter to investors are the recurring patterns that permeate capital markets, and what Marks believes is the most useful of all investment adages - “What the wise man does in the beginning, the fool does in the end.”

Equities

Quickly becoming one of the most quotable men in financial markets, Marks starts with a brief history of equities. Stocks were largely believed to be a speculative asset classes prior to the 1950s until the advent of brokerage firms like Merill Lynch began to espouse the merits of equity ownership. The growth stock investing craze soon followed in the 1960s and investors witnessed the birth of the “nifty-fifty”.

This group of stocks soon traded at multiples between 80x and 90x earnings, signaling that logic had succumbed to ballyhoo of growth investing mania. When the tide went out in the 1970s, timid investors sought shelter in the form of bonds as prosperity shifted to recession. In August 1979, BusinessWeek published a cover a story entitled “The Death of Equities” as the PE ratio of the formerly lionized growth stocks fell to 8 or 9.

It was during this nadir of investment psychology that Marks became a portfolio manager. As sentiment surrounded stocks rebounded, the S&P saw an annual return of 15.4% from 1979-1990 before improving even further between 1991-99, returning an unprecedented 20.6% a year without a single down year. As we know, this overzealous sentiment propped up the tech bubble. Marks summarizes his main point as follows: “But investors consistently fail to recognize that past above average returns don’t imply future above average returns; rather they’ve probably borrowed from the future and thus imply below average returns ahead, or even losses.”

Such market extremes are propagated by the investor’s (and all humans for that matters) tendency toward gullibility rather than skepticism. According to Marks, the pivotal question investors must continually ask themselves is not “What has been the normal performance of stocks?” but rather “What has been the normal performance of stocks if purchased when the average p/e ratio is 33?”

Bonds

According to Marks, over the past 60 years the story of bonds can be viewed as the mirror opposite of what happened to stocks. Bonds were the bedrock of most investment portfolios for the better part of the 20th century. During the roaring 90s, bonds were seen as anchors hindering performance. The decline in bond popularity can also be attributed to the policy of the Greenspan Fed to stimulate the economy by keeping interest rates low for a prolonged period of time. Accordingly, bond allocations reached all-time lows at the most inopportune time, 2008, when treasuries, gold, and cash were the only asset classes that performed well.

Current Outlook

Marks is surprised that investors have suddenly “awakened” to bonds’ attraction after missing the boat during the credit crisis, and questions whether this is another example of investing while looking in the rear view mirror. Citing Bloomberg, he notes that roughly $33 billion has left equity funds while investors have sent about $185 billion into bond funds. These inflows and outflows are indicative of the trends in investor psychology.

Marks believes that investors are currently extrapolating the recent poor performance of stocks (following the great hype of the 90s) into the future, despite the lower prices. Such behavior is congruent with the tendency to expect trends to continue rather than regress toward the mean (Marks is betting on the latter). History confirms this tendency, as investors following their herd mentality appear to systematically buy high and sell low.

The proverbial pendulum has swung, as it always does, because investors are still not asking the fundamental question, “At what price?” If investors asked themselves this question they wouldn’t succumb to the blanket statements that have previously brought so much pain, i.e. “internet stocks will always outperform the market” or “home prices can only go up”.

The Oaktree Capital Chairman believes the economic recovery will be lackluster and has recently recommended buying solid, non-levered and non-cyclical companies, and owning more bonds than stocks. However, now that stock prices have fallen so low while bonds have surged, he finds himself reconsidering. In his words, Marks is not an “equity guy” yet he sees substantial merits in the stock market currently.

First, companies are leaner than ever after the massive layoffs and have become increasingly efficient. Second, corporations are piling up the cash on their balance sheets, which adds greatly to their financial security and allows for dividend increases and share buybacks. Third, stocks currently trade at very attractive valuations, as PE ratios are lower than the historical average and annual free cash flow of American corporations (excluding banks) is currently at 6.8% of their market value. When juxtaposed with the current yield on bonds, this “cash flow yield” becomes very attractive. Legendary investor John Paulson just highlighted this too, proclaiming you should buy stocks and sell bonds.

Marks summarizes the issue plainly: “The bottom line is that, as bond prices rise (reducing yields) and p/e ratios fall, the chances increase that stocks will outperform bonds. Thus the benefits high grade bond investors feel they’re gaining through what they’re buying can be undone by what they’re paying. I’ll say it another way: the attractiveness of one investment relative to another doesn’t come from what it’s called or how it’s positioned in the capital structure, but largely from how it’s priced relative to the other.”

The letter finishes by recommending investors “assemble a portfolio of iconic, high quality, large-cap U.S. growth stocks that will provide appreciation in a strong environment, a measure of protection in a weak environment, and a meaningful dividend yield regardless.” This is the same advice we've seen numerous other hedge fund managers dole out. Other investors have recommended the likes of Johnson & Johnson (JNJ), Microsoft (MSFT), Pfizer (PFE), and Kraft (KFT). Market strategist Jeremy Grantham has also favored high quality stocks.

Embedded below is Oaktree Capital's latest commentary from Howard Marks:



You can download a .pdf copy via this link.

For some ideas on what stocks to buy, check out what prominent hedge funds own in our newsletter: Hedge Fund Wisdom. And to read more great insight from top investment managers, head to our compilation of hedge fund investor letters.


Soros Fund Management Buys More Exar Corp (EXAR)

George Soros' firm, Soros Fund Management, just filed a Form 4 with the SEC detailing a transaction in shares of Exar Corp (EXAR). Soros has been adding to EXAR recently and they just bought 100,000 additional shares on September 28th at a weighted average price of $5.78. After this purchase, they now own 6,366,666 shares of EXAR.

While Soros Fund Management is a global macro hedge fund, they hold a copious amount of equity positions. When we examined Soros' portfolio in our newsletter, Hedge Fund Wisdom, we highlighted that he holds over 800 stocks, a feat matched by only a handful of other hedge funds. Soros is the author of The Alchemy of Finance.

Taken from Google Finance, Exar is "a fabless semiconductor company that designs, sub-contracts manufacturing and sells differentiated silicon, software and subsystem solutions for industrial, telecom, networking and storage applications. The Company’s product portfolio includes power management and interface components, datacom products, storage optimization solutions, network security and applied service processors."


What We're Reading ~ 10/1/10

On the philosophy of objectivism: Atlas Shrugged [Ayn Rand]

Does quantitative easing drive asset prices higher? [PragmaticCapitalism]

Six rules from Michael Steinhardt [TheKirkReport]

A look at Paulson's bet on gold [Teri Buhl, Forbes]

On investing with Soros versus Buffett [Jeff Matthews]

A look at Visteon (VSTNQ) [AboveAverageOdds]

Ready to be rich: profile of David Tepper [NYMag]

Plan not to panic [Joel Greenblatt]

What do you do at quarter's end? [Reformed Broker]

An interview with Eric Sprott [KingWorldNews]

The fund of funds fee model is about to change drastically [BusinessInsider]

Ken Fisher dubs 'new normal' idiotic, sees great decade ahead [Bloomberg]

How to start a hedge fund [Vanity Fair]

A theoretical 2 & 20 fee structure on Berkshire Hathaway [Telegraph]

A series of podcasts featuring Toby Carlisle of Greenbackd, Jon Heller of CheapStocks, Asif Suria of SINLetter, George at FatPitchFinancials, and Tariq Ali of StreetCapitalist [Geoff Gannon's Investor Questions Podcast]


Thursday, September 30, 2010

Mark Foley & Tina Larsson's Pendo LLC: International Value Investing

Today we're taking a look at the latest commentary from Tina Larsson and Mark Foley's investment firm, Pendo LLC. Pendo seeks absolute returns (or as they put it, "We don't hug an index") through in-house bottom-up fundamental analysis in order to find undervalued companies outside the United States while remaining agnostic regarding market cap, industry, sector, geography, traditional weightings, etc. As of the end of August, Pendo's International Strategy Fund was -5.34%. Their trailing twelve month return is 8.83%.

In the letter, Larsson and Foley note that despite tumultuous and volatile world markets, they remain quite optimistic about the future of their international investments, and not just for the long term, as they believe their investments will out perform their benchmark indices over the next 6-12 months. While not satisfied with their recent performance, they believe their strategy is now ready to outperform as the global economy improves and they continue to hold businesses that are insulated from the ails of the US market and dollar.

Their portfolio is currently trading at 13.5x trailing earnings, down from an ~18x multiple at the beginning of the year. A PE expansion back to previous multiple would provide a 33% return on its own. They believe this is reasonable considering that the MSCI EAFE benchmark currently only trades at ~20x but has traded at an average PE ratio of ~25.5x real earnings since 1982. Larsson reiterates that they are not market timers, but they remain committed to actively managing their long-term value approach by reducing positions as they become over-valued while increasing positions that become undervalued.

As of August 31st, Pendo International Strategy's top ten holdings are as follows:

1. Sichuan Expressway (China)
2. Tsingtao Brewery (TSGTY)
3. Canadian Natural Resources (CNQ)
4. Hong Kong Exchanges & Clearing (Hong Kong)
5. Philip Morris International (PM)
6. JSE Ltd (South Africa)
7. CEMIG (Brazil)
8. CNOOC (CEO)
9. Anglo American (UK)
10. Silver Wheaton (SLW)


Pendo's Global Value Strategy holds different names and here is their top ten:

1. BM&F Bovespa (Brazil)
2. Deluxe Corp (DLX)
3. McDonald's (MCD)
4. Sanofi-Aventis (France)
5. Vodafone (VOD)
6. Walt Disney (DIS)
7. Canadian Natural Resources (CNQ)
8. Newmont Mining (NEM)
9. Philip Morris International (PM)
10. Leucadia (LUK)

There are some names worth highlighting above because Warren Buffett's Berkshire Hathaway has been fond of Sanofi-Aventis. Additionally, David Einhorn's hedge fund Greenlight Capital has a large position in Vodafone (VOD) and you can see their investment thesis here. In terms of overlap between both of Pendo's portfolios, Philip Morris International (PM) and Canadian Natural Resources (CNQ) are found in both strategies.

The second half of Pendo's letter focuses on recent developments in China where the visiting Premier Wen Jiabao addressed the need for political reform, or more specifically, the need to curtail excessive political control. Such sentiment reassured Larsson that China understands they will have to continue to allow more freedom in the marketplace in order for China’s 30+ years of overall growth and development to continue.

Larsson and Foley feel that centralized planning can work very well in steering a nascent economy towards a more developed, functioning entity. Yet, she also acknowledges that, “in order to fully develop and remain an expanding, dynamic, and innovative powerhouse, free markets must be respected and embraced.” Like China, Brazil is another country that has benefited from starting to separate itself from socialism, as GDP growth is expected to be a robust 7.34% in 2010. Brazil is becoming a global leader through providing financial and technological aid to developing countries, and thus building good will and valuable trading partners (Larsson notes that these developing countries are notably commodity-rich).

Pendo cites a quote from July 17th issue of The Economist to drive home their point: “This aid effort—though it is not called that by the government—has wide implications. Lavishing assistance on Africa helps Brazil compete with China and India for soft-power influence in the developing world. It also garners support for the country’s lonely quest for a permanent seat on the UN Security Council. Since rising powers like Brazil will one day run the world, argues Samuel Pinheiro GuimarĂ£es Neto, the [minister for strategic affairs], they can save trouble later by reducing poverty in developing countries now.”

Embedded below is Pendo's latest commentary:



You can download a .pdf copy here.

We almost exclusively cover fundamental bottom-up stockpickers and you can follow our coverage of these hedge funds and their investments here. For more commentary and market analysis, head to our compilation of recent hedge fund investor letters as well.


Lone Pine Capital Selling Intertek Group (ITRK)

Stephen Mandel's hedge fund Lone Pine Capital have steadily reduced their position in Intertek Group (LON: ITRK). Due to trading on September 24th, 2010, they now own 3.96% of the company's outstanding shares. This is down from a 5.9% ownership stake they held in July of this year. At its peak, Mandel's hedge fund owned 12.13% of the company in November of 2008 and we had previously detailed their Intertek position here.

While Intertek is a UK holding, it was substantial in Lone Pine's overall portfolio during 2008 and 2009. In fact, shares of ITRK have roughly doubled since Mandel first purchased them back in July of 2008 for £990. Today, shares trade for £1,840. Lone Pine has been steadily selling shares since May of this year. Overall, this looks to have been quite a successful investment for the hedge fund and those of you interested in Lone Pine's US equity positions can find them in our newsletter: Hedge Fund Wisdom.

Taken from Google Finance, Intertek Group is "engaged in testing, inspection and certification of products and commodities. The Company’s services cover the whole supply chain, including the sourcing of raw materials, product design, manufacturing processes, compliance certifications and performance testing of the end product. It has six divisions: oil, chemical and agri; consumer goods; commercial and electrical; analytical services; industrial services, and minerals."

To see what other UK positions hedge funds are buying and selling, click here.


Wednesday, September 29, 2010

John Paulson Says Buy Stocks, Sell Bonds

At the end of last week, the market ripped higher presumably from hedge fund manager David Tepper's comments when he said he likes equities here. Now add to the mix another well known manager in John Paulson. His hedge fund Paulson & Co of course made billions from his bet against subprime as detailed in the book, The Greatest Trade Ever. Given his success, everyone now latches onto his every word, hoping for advice.

Paulson did divulge some of his latest views at a lecture for New York's University Club. Simply put, he said to buy stocks and sell bonds. His favorite stocks are blue-chips with dividends such as: Johnson and Johnson (JNJ) and Coca Cola (KO). Playing on his 'recovery' theme, he also continues to like Bank of America (BAC), Suntrust Banks (STI), and Regions Financial (RF). To see what he's been buying and selling, check out Paulson's portfolio in our newsletter: Hedge Fund Wisdom.

Equities

He says to simply replace low yielding bonds with higher yielding stocks. A 10 year Treasury yields around 2.6% and so stocks with earnings yields of 7-8% are much better options. While Paulson did not mention these names, a quick scan pulls up companies with even higher earnings yields such as Medtronic (MDT) at 9.43%, ConocoPhillips at 10.52%, and Microsoft at 8.53%.

Gold

We've examined John Paulson's gold fund in-depth in the past, and so it should come as no surprise that the hedge fund manager thinks the precious metal is headed higher. He says that gold (currently around $1,200) could hit $2,400 on monetary expansion alone and even $4,000 with significant inflation. His hedge funds offer a fund share class denominated in gold and Paulson himself has 80% of his assets in this class. Additionally, given his inflationist bent, Paulson thinks the US Dollar will fall and that yields on Treasuries will rise. He has been buying 5 and 7 year calls on the 30-year bond yield. We've seen numerous hedge funds put on this type of trade before.

Housing

Lastly, Paulson thinks this is the best time to buy a home in fifty years, exclaiming that, "If you don't own a home, buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home." Great, isn't that just the type of mentality that created the housing bubble in the first place? We realize he is using hyperbole to illustrate his point, but still. Given his prominence in the investing world these days, some people might actually take him literally. For more notes on Paulson's talk, head to Zero Hedge and to Forbes.

In terms of recent position movement from hedge fund Paulson & Co, we detailed their activist position in NovaGold Resources (NG) and sale of Centamin Egypt position.


Tudor Sells Completely Out of Renewable Energy Holdings (LON: REH)

Just yesterday, we highlighted that Paul Tudor Jones' hedge fund had reduced its position in Renewable Energy Holdings (LON: REH) to a 3.99% ownership stake in the company. They've just filed another regulatory disclosure which reveals that the hedge fund sold completely out of REH and now own 0 shares due to trading on September 24th, 2010.

What's interesting here is that Weiss Asset Management (the investment manager to Brookdale International and Brookdale Global), have just acquired a 6.5% holding in Renewable Energy Holdings due to trading on the exact same day. So, it's somewhat likely that Tudor was essentially selling to Weiss.

Taken from Google Finance, Renewable Energy Holdings is "a United Kingdom-based renewable energy company. It owns and operates the European on-shore windfarms, the Kesfeld and Kirf Windfarms in Germany and the Gwynt Cymru Landfill Gas site in Wales. The Company operates in five segments: head office, CETO development, German windfarms, polish windfarms and landfill gas."

Head to all of our coverage of hedge fund positions in the UK for more.


Notes From Mohnish Pabrai's Annual Meeting

Mohnish Pabrai of Pabrai Investment Funds recently held his annual meeting and thanks to Alex Bossert we're able to get a peek as to his latest thoughts. Pabrai is a value investor and our quote of the week featured his thoughts on emulating Warren Buffett, something he strives to do. Here are some selected excerpts from the question and answer session of the annual meeting:

"What are your views on position sizing?

His allocation policy changed in 2008 to reflect slightly elevated investment risks of his investment baskets and prior mistakes. If he has 10% positions it’s very hard to recover from a mistake. He discussed his new allocation framework with Charlie Munger who disagreed at first. After Mohnish explained it further, Charlie agreed that Berkshire Hathaway has achieved success with a more diversified portfolio. Mohnish talked about basket bets. When the risk is slightly elevated he will buy a basket of companies with small weightings. For example, he said he is currently researching companies in Japan. If he ends up buying companies there, he will buy a basket of companies each with small weightings in the portfolio. He said stocks there are very cheap.

What attracts you to a business?

When he finds a company that looks interesting he starts by thinking as a skeptic. He looks for something that will prove him wrong. He looks for areas of extreme mispricing. It has to be very undervalued but he also has to be able to understand it. He thinks there may be value in Coke bottlers in Japan. The Nikkei has done nothing for 27 years.

Can you name some great companies that you’d love to own at the right price?

Ikea, In and Out Burger, Costco, the low cost mines owned by BHP and Rio Tinto. Great companies are all over the place across the world. There are great companies in India and China but and ownership issues exists over there. Pricing is also an issue. Ben Graham’s approach was to go to the store and buy what was on sale and Charlie Munger’s approach is to go to the store and wait for quality items to go on sale. He likes Charlie’s framework."


The fact that Pabrai changed his stance on position sizing is intriguing as there are essentially two different schools of thought on that front: build concentrated positions and monitor them closely, or diversify risk among smaller positions. Value investors are usually firmly planted in one camp or the other and the debate as to which one is 'right' wages on. In a sense, it's a matter of personal preference and investing style. Pabrai noticed an inefficiency with his position sizing strategy during the crisis and sought to correct it to reduce risk.

Of the companies he'd most like to buy (at the right price of course), it's intriguing that he'd be most interested in companies that are low cost providers in their industry and that could possibly be a function of the economic environment we're in. Those of you trying to get a better grasp on the amount of research he does on any given company will be interested to know that for his previous investment in Teck Cominco (TCK), he read the last 8 years worth of annual reports to understand the business as he spends a lot of time focusing on the balance sheet. Head to Alex Bossert's summary for the full meeting notes. And if you want to hear Pabrai's latest investment ideas, he'll be speaking at the Value Investing Congress (sign-up fast, only 17 seats remain).


Tuesday, September 28, 2010

Footnoted Pro: Exclusive 15% Discount for Market Folly Readers

Today we're very proud to announce an exclusive 15% discount for Market Folly readers to Footnoted.com's Pro service. You can receive the discount by clicking here. If you're unfamiliar with Footnoted (now part of Morningstar), Michelle Leder and her team dig through hundreds of company SEC filings each day to find the details buried within them. From aggressive accounting to excessive compensation to more serious problems, Footnoted sniffs out details that lead to actionable investment ideas.

Numerous hedge funds and investment managers subscribe to the service due to its institutional quality research. So if you manage money professionally, this is a must-read service as both BusinessWeek and Kiplinger's have given praise. Legendary investor Seth Klarman is notorious for paying attention to detail and even named his horse 'Read the Footnotes.' This will save you a ton of time and help you pinpoint actionable ideas. Footnoted Pro normally costs $10,000 for an entire year's subscription (they publish reports every week), but Market Folly readers save $1500.

Here's an example of the great work Footnoted Pro does: Back in May they highlighted uncertainty in the for-profit education space (a sector hedge funds have been all over). Many of the stocks covered in Footnoted Pro's report have dropped precipitously since their May 17th publication date. Education Management (EDMC) has fallen from $22 to $12, a 45% drop. Lincoln Educational Services (LINC) dropped from $25 to $14, a 44% loss... and the list goes on.

Embedded below is a sample of their research on the for-profit education stocks from May:



You can download a .pdf sample here.

Needless to say, a subscription to Footnoted Pro's service more than pays for itself with the actionable ideas garnered. They analyze hundreds of company SEC filings everyday so you don't have to and provide you with weekly reports. Take advantage of the exclusive 15% savings by clicking here.


Tudor Investment Corp Sells Renewable Energy Holdings (LON: REH)

Paul Tudor Jones' hedge fund Tudor Investment Corp recently filed regulatory disclosures in the UK regarding its position in Renewable Energy Holdings (LON: REH). Back in March 2008, Tudor owned 9.5% of the company's outstanding shares. Ever since then, they've been slowly reducing their position as we detailed back in October 2009 when they owned 8% of the company and that dwindled to 6.7% of the company in March 2010. As of September 21st, 2010, Tudor now only owns 3.99% of REH with a remaining position of 2,784,333 shares. To see what other hedge funds have been buying and selling in UK markets, scroll through our coverage here.

Taken from Google Finance, Renewable Energy Holdings is "a United Kingdom-based renewable energy company. It owns and operates the European on-shore windfarms, the Kesfeld and Kirf Windfarms in Germany and the Gwynt Cymru Landfill Gas site in Wales. The Company operates in five segments: head office, CETO development, German windfarms, polish windfarms and landfill gas."

If you're interested, you can check out our past coverage of Paul Tudor Jones here.


Monday, September 27, 2010

David Einhorn Adds to CareFusion (CFN) Stake

David Einhorn's hedge fund Greenlight Capital just filed a 13G with the SEC regarding shares of CareFusion (CFN). Due to portfolio activity on September 15th, Greenlight has disclosed a 6% ownership stake in CFN with 13,374,724 shares. This means that Einhorn's hedge fund firm has boosted its position size by 53.4% . Greenlight held 8,718,724 shares back on June 30th and you can hear David Einhorn's latest investment ideas at the upcoming Value Investing Congress (sign-up fast because there are only 23 seats left: receive a discount here).

You'll recall that in September of last year CareFusion (CFN) was spun off from Cardinal Health (CAH) through a pro rata distribution of approximately 81% of the shares. In recent company developments, we see that Cardinal Health sold its remaining 13.7% CareFusion stake to Morgan Stanley in a block trade as of September 16th, 2010.

Given the timing of this sale and Greenlight's purchase, you wonder if Greenlight acquired some of the shares that Cardinal sold off. As detailed in our coverage of Greenlight Capital's portfolio, Einhorn owns both CAH and CFN. In terms of other recent investment activity, Greenlight provided a bridge loan to BioFuel Energy and reduced its position in F&C Asset Management.

Taken from Google Finance, CareFusion is "a global medical technology company. The Company offers product lines in the areas of IV infusion, medication and supply dispensing, respiratory care, infection prevention and surgical instruments. CareFusion’s primary product brands include Alaris IV infusion systems that feature its Guardrails software; Pyxis automated medication dispensing systems that provide medication management and Pyxis automated medical supply dispensing systems; AVEA and Pulmonetic Systems ventilation and respiratory products, and Jaeger and SensorMedics pulmonary products; ChloraPrep skin antiseptic products that help prevent vascular and surgical-site infections and MedMined software and surveillance services that help target and reduce healthcare-associated infections (HAIs), and V. Mueller surgical instruments and related products and services. It operates in two segments: Critical Care Technologies and Medical Technologies and Services."

To see what else David Einhorn is invested in, head to a free sample of Hedge Fund Wisdom, our new newsletter.


Greenlight Capital Files 13D on BioFuel Energy (BIOF), Provides Bridge Loan

David Einhorn's hedge fund Greenlight Capital just filed an amended 13D with the SEC regarding shares of BioFuel Energy Corp (BIOF). Per the filing, Greenlight shows a 39.8% ownership stake in BIOF with 11,853,500 shares. This is an increase in their position because back on June 30th, they owned 7,542,104 shares of BIOF. This marks a 57% boost in their position size. To see the rest of Greenlight's portfolio, head to a free sample of our Hedge Fund Wisdom newsletter.

BIOF is up around 35% today on news that the company entered a six month bridge loan agreement with Greenlight Capital and an affiliate of Dan Loeb's Third Point LLC for $19,420,620 with an interest rate of 12.5%, a maturity date of March 24th, 2011, and a funding fee of 4%. If the company does not pay off the loan, the hedge funds would be issued warrants exercisable for an aggregate of 15% of BIOF's equity capitalization on a fully diluted bases at an exercise price of $0.01 per share. Dan Loeb's Third Point owns 5,803,284 shares of the company, or a 25.7% ownership stake.

From the press release:

"The proceeds from the bridge loan were used to repay in full its working capital loans under its senior debt facility. In addition, the Company has entered into an agreement with Greenlight and Third Point pursuant to which it has agreed to conduct a rights offering in which all holders of its Common Stock and Class B Common Stock will be granted the right to purchase convertible preferred stock of the Company, with the goal of generating sufficient proceeds to repay the bridge loan and BioFuel Energy, LLC's subordinated debt and to make certain other payments."

Those interested can read the full filing here. Taken from Google Finance, BioFuel Energy Corp "produces and sells ethanol and its co-products (primarily distillers grain), through its two ethanol production facilities located in Wood River, Nebraska and Fairmont, Minnesota."

Check out the rest of Einhorn and Loeb's investments in our Hedge Fund Wisdom Newsletter. Receive a free sample here.


Jim Chanos Still Short Ford (F) & China Property Developers

Noted short seller Jim Chanos recently appeared on numerous media outlets and we wanted to check in on the latest thoughts from the $6.7 billion Kynikos Associates hedge fund manager. If you're unfamiliar with him, then you can verify his short selling credibility with the fact that he called out Enron's shenanigans. For those of you perhaps less familiar with short selling, check out Kathryn Staley's book, The Art of Short Selling as well as Chanos' comments on the power of negative thinking.

In his conversation, Chanos touches on the auto bailouts and he takes issue with "rewarding failed business decisions repeatedly." While President Obama recently pointed out that a lot of people would be out of work if the automakers failed, the Kynikos manager thinks it would have been a lot cheaper to put a federal guarantee on warranties.

In the sector specifically, Chanos has been short Ford (F) for quite some time and he continues to be. He argues that there is too much capacity both domestically and globally. The industry, he opines, is similar to that of the airline industry and steel industry. Embedded below is Chanos' interview with CNBC. Here's the first part (email readers will need to come to the site to view it):














Additionally, Chanos has been short China via commercial property developers and basic commodity companies. We presented his in-depth investment thesis there in the past. And here's part two of his recent interview:














Chanos makes a very brief cameo in the new movie, Wall Street: Money Never Sleeps. He was also a consultant on the film and persuaded Oliver Stone to change the focus from hedge funds to Wall Street investment banks. Lastly, in a separate interview with Bloomberg, Chanos commented that he is still short for-profit education companies and he's been short them for a few years now. To learn more about shorting, head to Kathryn Staley's widely recommended book, The Art of Short Selling.


Diversification Is Dead: Free Special Report From MarketClub

The team over at MarketClub have put together a special report entitled, "Diversification is Dead." Adam, the president of MarketClub says that he's been a big fan of diversification but he questions the common perception that it lowers portfolio risk. You can receive the free 10 page .pdf document here.


Hedge Fund Second Curve Capital Acquires More CompuCredit (CCRT)

Tom Brown's hedge fund Second Curve Capital has purchased shares of CompuCredit (CCRT) for the second time within a week. Per a SEC Form 4, Brown's firm bought 15,000 shares of CCRT at a price of $4.94 on September 22nd, 2010. After this buy, their total CompuCredit position encompasses 4,133,630 shares. This comes after we detailed Brown's previous CCRT purchases.

Taken from Google Finance, CompuCredit is "a provider of various credit and related financial services and products to or associated with the financially underserved consumer credit market."

To see what the top managers have been buying and selling, check out our detailed hedge fund portfolios.


Mohnish Pabrai on Investing Like Warren Buffett ~ Quote of the Week

Value investor Mohnish Pabrai has long emulated the ways of the legendary Warren Buffett. When he was asked about how Buffett found so much success and how to follow in his footsteps, Pabrai had this to say:

"In fact there are a couple of professors in Ohio, who studied any stock that Warren Buffett bought, if you bought on the last day of the month, when it was public that he owned that stock, and you sold it after it was public that he had started selling it, you would have generated north of 20% annual rate of return.

I would say that we will never see another Warren Buffett. Just like we will never see any Albert Einstein or another Mahatma Gandhi. Buffett is a very unique individual. His skillsets outside of investment are phenomenal but they get dwarfed by his investing skills. The main thing that makes Warren Buffett Warren Buffett is that he is a learning machine who has worked really hard for, let’s us say seventy years, and is continuously learning every day.

So the thing is if you want to be like Buffett, there is no short cut. First of all, you have to be deeply interested in investing and you have to be very willing spending tens of hours, hundreds of hours, reading the minutiae. There is a very famous value investor called Seth Klarman. He is into horse racing. And his famous horse is called Read the Footnotes."

~ Mohnish Pabrai

You can hear Mohnish and many hedge fund managers present their latest investment ideas at the Value Investing Congress on October 12th in New York City. There are only 23 seats left at the event and Market Folly readers can save $300 off admission here.