Notes From Ira Sohn West: John Burbank, Barry Rosenstein, Jeffrey Ubben, Brian Zied & More

Zero Hedge recently posted up notes from the Ira Sohn West Conference that just took place out in San Francisco. It included a heavy-hitting speaker line-up of prominent hedge fund managers. Let's quickly summarize their investment picks and presentations:

John Burbank of Passport Capital: He focused on how the US should be viewed as an 'emerging market' from an investment perspective due to increased sovereign risk of the US. Burbank argues that the US is at an inflection point and can head in the direction of either Argentina or Germany. You can read more from this manager in a recent interview Burbank did as well.

Barry Rosenstein of JANA Partners: He thinks the activist investor environment is improving. Rosenstein also points out the high levels of cash at corporations and notes that private equity has $500 billion on the sidelines. In terms of investment picks, he likes Netherlands based TNT (TNT NA). The global transport company could be attractive to FedEx, who only has small market share in Europe. TNT trades at 6x EBITDA and 11x earnings. Rosenstein actually thinks the company will break up in the next 6-9 months and thinks it goes to 27 euros from its current price of 20 euros. The JANA Partners fund managers also is fond of Charles River Labs (CRL) as the company has raised prices and gained market share. Currently at $32, he believes $46 is attainable with a breakup value of above $50 per share.

Brian Zied of Charter Bridge Capital: Before founding Charter Bridge, Zied was previously a Managing Director at Lee Ainslie's Maverick Capital. Zied likes Sirius XM Radio (SIRI) here as 60% of new cars have built in satellite radios and 46% of those convert into paying customers. While the company is leveraged, he expects them to pay off debt soon. He also highlights John Malone's significant ownership stake in the company, arguing that they could acquire Sirius.

Jeffrey Ubben of ValueAct Capital: In his activist investing, he looks for oligopolistic industries and intellectual property. In recent investments, his hedge fund acquired 20% of Valeant Pharmaceuticals (VRX) as a turnaround story. We've covered some of ValueAct's recent portfolio activity here.


Many other manages provided their thoughts and latest investment ideas at the event. Embedded below courtesy of Zero Hedge is a set of notes from the Ira Sohn West Conference (Email readers will need to come to the site to view it):



For more on the latest hedge fund portfolio movements, click here to scroll through our coverage.

Dan Loeb Discloses Gold Bullion and Potash (POT) Positions

For September, Dan Loeb's hedge fund Third Point was up 3.9%. Year to date for 2010, their offshore fund is up 19.1%. Third Point's annualized return now sits at 18% with a correlation to the S&P 500 of 0.41 and a Sharpe Ratio of 1.27. To follow in his successful footsteps, check out Dan Loeb's recommended reading.

In a monthly disclosure to investors, Loeb's portfolio reveals some interesting new plays. At the end of September, Third Point's top positions were:

1. Chrysler (multiple securities)
2. Gold Bullion
3. Delphi Corp (multiple securities)
4. Potash (POT)
5. CIT Group (multiple securities)

The most notable change right off the bat is the listing of gold bullion as Third Point's 2nd largest position. As far as we're aware, Loeb has not owned gold since around the beginning of 2009 when he utilized it as an uncertainty hedge. This position was not present in the previous monthly disclosures from the hedge fund so its fresh appearance is duly noted.

Many investors will be curious as to his rationale for the position. In Third Point's latest letter, Loeb outlined how the firm had put on numerous "asymmetrical trades using derivatives, options and debt securities to hedge against extraordinary global events." They are allocating 1% of fund assets per annum to this protection. In late 2008 and into the first quarter of 2009, Third Point utilized gold (among other things) as 'doomsday and fat tail risk' trades. Gold bullion could again be a part of that basket, but they might have purchased for other reasons too, there's no clear answer.

The second notable portfolio change is Third Point's addition of Potash (POT) to the portfolio in size. As their fourth largest holding, this stock is an arbitrage play. Potash received an unsolicited buyout offer of $130 per share from BHP Billiton (BHP). Shares currently trade above the offer at $141 as speculation grows a bidding war will emerge or BHP will raise their offer.

Third Point's recent winning positions include: Lyondell (LALLF), a post-reorganization equity that many hedge funds have been fond of, including Jamie Dinan's York Capital. In Loeb's second quarter letter to investor, he asserted his fondness for post-reorganization equities and mortgage exposure. Loeb's fund also saw positive performance from their Anadarko Petroleum (APC) stake, a position we revealed after the unfortunate Gulf oil spill. Other winning stakes for Third Point include NewPage Corp and Liberty Media Corp Interactive (LINTA). Losing positions for the firm consist of four undisclosed short positions.

Back in the second quarter, we noted that Third Point reduced equity exposure. That theme is largely still prevalent as the hedge fund is only 26.3% net long equities. They are net short energy at -0.3% and their largest net longs are consumer at 7.9% and financials at 5.9%. In credit, we see a new position as Third Point is net short Government at -14.4%. They are net long mortgage backed securities (MBS) at 19.5% and distressed at 15.8%. In terms of other portfolio positions, we noted how both Loeb's Third Point and David Einhorn's Greenlight Capital recently provided a bridge loan to BioFuel Energy (BIOF).

Bruce Berkowitz's Fairholme Capital Issues Statement on AIG

As Market Folly detailed recently, Bruce Berkowitz's Fairholme Capital has filed an activist 13D on shares of AIG (AIG). At the time, their activist intent wasn't clearly outlined so we're waiting to see what Fairholme has in store in that regard. AIG and the government have proposed a solution to sell the government's stake. Fairholme Capital recently released this statement which gives us a little more clarity regarding their position size and announced their support of the proposed plan:

"Miami, FL – September 30, 2010 – Fairholme Capital Management today issued the following statement:

On behalf of our approximate 440,000 shareholders and clients, Fairholme owns approximately 24% of the outstanding common stock, 38% of the mandatory convertible bonds and other debt instruments of American International Group, Inc. (AIG).

Fairholme invested over $1.8 billion in AIG securities, more than 10% of assets under management, with the knowledge that for decades AIG was the premiere insurer - a shining example of how the United States can compete around the world. We also invested in AIG with the belief that such a past is not easily destroyed.

Nevertheless, all of us at Fairholme applaud and appreciate the yeomen's work of AIG's management and board of directors, the United States Treasury, the Federal Reserve System and its trustees and countless others involved in this most complex process.

We strongly support the proposed solution to revitalize AIG in a fair and equitable manner for all constituents, foremost our country's taxpayers, and look forward to a vibrant future for AIG and the U.S. economy.

Contact: Bruce R. Berkowitz
Founder and Managing Member Fairholme Capital Management, L.L.C."


Yesterday we also got news that Berkowitz's Fairholme is set to invest $1 billion in the IPO of AIA Group, a subsidiary of AIG. This IPO was mentioned in our recent article examining AIG's road to recovery. So it will be interesting to see what (if any) activist measures Berkowitz takes. One thing is for certain though, he is betting heftily on an AIG recovery.

For other portfolio activity, we've detailed Fairholme's MBIA stake as well as their new position in Morgan Stanley (MS).

Bill Ackman's Pershing Square Receives Borders Group (BGP) Warrants

Bill Ackman's hedge fund Pershing Square Capital Management recently filed a Form 4 with the SEC regarding shares of Borders Group (BGP). In the filing, we see that Ackman received BGP warrants on September 30th, 2010. The hedge fund has received warrants in the past which we also detailed back in May.

As a result of certain anti-dilution adjustments outlined in Pershing Square's previous 13D filing, Bill Ackman's firm has received warrants to purchase an aggregate of 8,542,399 shares of common stock of BGP. The exercise date is September 30th and the expiration date is October 9th, 2014. These warrants have a conversion/exercise price of $0.65 . In total, all of Ackman's related entities now own 25,944,236 BGP warrants.

In terms of other recent activity out of his hedge fund, Bill Ackman bought BP (BP) credit default swaps in the second quarter. You can view Pershing Square's entire portfolio in our new newsletter: Hedge Fund Wisdom.

Taken from Google Finance, Borders Group is "an operator of book, music and movie superstores and mall-based bookstores. As of January 30, 2010, Borders operated 511 superstores under the Borders name, including 508 in the United States and three in Puerto Rico."

To hear Bill Ackman's latest investment ideas, he's speaking at the Value Investing Congress in New York City next week. Sign-up here as only a limited amount of tickets remain.

Lansdowne Partners Acquires Central Asia Metals (LON: CAML) Position

Steven Heinz and Paul Ruddock's hedge fund Lansdowne Partners have recently taken a 17.94% stake in Central Asia Metals (LON: CAML). Due to a regulatory filing in the UK, it shows that Lansdowne bought their shares on the 29th of September when Central Asia Metals listed in London and placed £38.1m shares. The company plans to use the money raised to build a SX-EW plant at Kounrad that will have the capability to produce 10,000 tonnes of copper cathode a year.

It's unclear as to whether the hedge fund acquired these shares in the IPO or on the open market, but given Lansdowne's prominence, we'd guess the former. For more coverage of this UK hedge fund, we recently detailed a portfolio update on Lansdowne.

According to Reuters, the "newly listed company is looking to sign the deals for when it ramps up copper production from its 60-percent owned Kounrad project in Kazakhstan at the end of next year, but is wary of setting prices too early."

Central Asia Metals plc is an AIM-listed UK incorporated company based in London. Its main countries of operation are Kazakhstan and Mongolia. CAML is a precious and base metals mining, exploration and development company with majority stakes in copper, gold and molybdenum projects throughout Central Asia.

In terms of other recent hedge fund activity in UK markets, we detailed that Harbinger Capital sold some of Inmarsat.

Hedge Fund Harbinger Capital Sells Some Inmarsat (ISAT)

Yesterday, Philip Falcone's hedge fund Harbinger Capital Partners announced its intention to sell 13% of its stake in Inmarsat plc (LON: ISAT), or 60,000,000 shares. A regulatory filing in the UK details that, "Harbinger hereby announces that it does not intend to make an offer to acquire the entire issued and to be issued share capital of Inmarsat not already held by Harbinger." It had long been thought that Falcone's fund would make a play for Inmarsat, but that is clearly not the case now. You'll recall that Harbinger has been building out a 4G network via LightSquared.

In the filing, Falcone also made a statement about Inmarsat saying, "Inmarsat has been a terrific investment for Harbinger and its investors. Although we have determined that we are not going to make an offer for all of the company, I remain a strong believer in the company's future and am extremely happy to maintain a core position in the company's stock and our partnership with Inmarsat through LightSquared Inc."

Per UK regulatory filings, Harbinger owns 14.1% of Inmarsat's outstanding shares as of October 5th, 2010 with 64,277,349 shares. This halves their prior stake of 28.76% owned back in March of 2009. Interestingly, the filing also notes that Harbinger's remaining shareholding will be "subject to a 180 day lock-up arrangement with Credit Suisse and UBS Investment Bank." Even though Falcone won't be pursuing the rest of the company, Harbinger's LightSquared has been working with Inmarsat on implementation of its spectrum co-operation plan for the 4G network.

In terms of other portfolio activity from Falcone's hedge fund, we've highlighted that Harbinger reduced its Tate & Lyle position (TATE). Also, the firm added to Crosstex Energy (XTXI) last month.

Taken from Google Finance, Inmarsat is "a provider of global mobile satellite communications services (MSS), providing data and voice connectivity to end users worldwide. The Company’s Inmarsat Global MSS segment is engaged in the supply of internally generated airtime, equipment and services to distribution partners and end users of mobile satellite communications by the Inmarsat business. Its Stratos segment is engaged in the supply of mobile and fixed-site remote telecommunications services, the provision of customized remote telecommunications solutions, value-added services, equipment and engineering services to end-users."

For more coverage of Harbinger's bet on 4G, Teri Buhl has an exclusive interview with Falcone and has also detailed Falcone's defense of his 4G plan.

David Tepper ~ Quote of the Week

Recently David Tepper, founder of hedge fund Appaloosa Management, sat down for a rare interview with CNBC where he said he likes equities here. In it, he gave us some interesting words of wisdom and his most astute advice came when he sat reflecting on the markets back in August:

"This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.”

~ David Tepper

Prudent words, certainly. To see what Tepper's Appaloosa has invested in, head to our quarterly newsletter: Hedge Fund Wisdom.

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."