Friday, October 15, 2010

Bruce Berkowitz Buys St. Joe Company (JOE) Amidst Einhorn-Fueled Sell Off

Over the past two days, shares of the St. Joe Company (JOE) have plummeted almost 20% largely spurred by David Einhorn's bearish presentation on JOE at the Value Investing Congress. Amid the torrential selling, Bruce Berkowitz's Fairholme Capital was buying.

According to a 13D filed with SEC regarding St. Joe, Fairholme now owns 29.0% of the company with 26,891,820 shares. Berkowitz purchased 135,600 shares on October 13th and some of you may be wondering why he didn't buy even more shares given the huge drop. Well technically, he really couldn't.

Berkowitz entered into a standstill agreement with the company in April 2009 that caps his ownership stake at 30%. So given his current 29% stake, he doesn't have much wiggle-room to buy more. The standstill agreement expires in April 2012 and interestingly enough, it prevents Berkowitz from hedging his position.

Due to the publicity surrounding Einhorn's short thesis on JOE, the value of Berkowitz's position in the company has decreased by over $100 million. In Einhorn's presentation, he mentioned that he attempted to reach out to Berkowitz to discuss the investment but hadn't heard back. St. Joe has now become a battleground stock.

Berkowitz's Thesis

JOE has attracted the eyes of many value investors in the past. At the Value Investing Congress West back in May of this year, Berkowitz mentioned that he thought he purchased the stock for swamp land prices. He highlighted the quality of the land, the fact that it is the last 'open' land left in Florida and that the new airport will help spur interest. The embedded video below outlines his thesis (email readers will need to come to the site to watch the video):

Einhorn's Thesis

Some of you might recall that this isn't the first time Einhorn has shorted the company. Back in 2007, Einhorn laid out the bearish case for JOE at the Ira Sohn Conference. Back then, his valuation pegged JOE at around $15 per share. In fact, Jonathan Heller of CheapStocks exchanged dialogue with Einhorn about the position three years ago and posted up Einhorn's 2007 thesis on JOE.

Fast forward to today and you can compare it with his in-depth JOE presentation from the Value Investing Congress. This time around, the Greenlight Capital fund manager feels St. Joe is worth $7-10 per share if they convert into a rural land company. He feels St. Joe needs to take impairments and has clearly monitored this company for quite some time.

Battleground Stock

So, Berkowitz versus Einhorn. Ding... Round 1. Einhorn has certainly struck Berkowitz where it hurts with his publicized presentation. Some investors will argue that the first 10% the stock fell is more-so attributed to who was presenting the short idea (Einhorn) rather than the idea itself (JOE). After all, Einhorn has found great success with some of his shorts in the past (Lehman Brothers anyone?) But then again, shares of JOE fell an additional 10% the next day so clearly some investors are concerned.

Given the fact that Berkowitz owns 29% of the company and is locked in a standstill agreement that prevents him from hedging, it's pretty safe to say that he's in this for the long haul. We'll have to wait and see if he responds to Einhorn and whether or not he does so privately or publicly. The investing community waits with bated breath.

*Update: Berkowitz has apparently pseudo-responded to Einhorn via his comments to Reuters. Berkowitz said that, "If we were able, we would buy the whole company. I want to send him (Einhorn) a box of chocolates. This is the kind of advertising you just can't buy. The company should hold a David Einhorn memorial investment week." When asked if he had responded to Einhorn, Berkowitz said, "Why would I want to talk to him? If someone wants to lower the price of a product I'm buying, I'm okay with that. We're long-term investors here."

Taken from Google Finance, St. Joe Company is "a real estate development company. The Company owns approximately 577,000 acres of land concentrated primarily in Northwest Florida. St. Joe is engaged in town and resort development, commercial and industrial development and rural land sales. It also has interests in timber."

Be sure to check out all of our coverage from the Value Investing Congress where you can read about presentations by some of the top hedge fund managers in the game.

Berkshire Hathaway Reduces Position Moody's (MCO)

Warren Buffett's Berkshire Hathaway has sold shares of Moody's (MCO) again according to a Form 4 just filed with the SEC. On October 12th and 13th, Berkshire Hathaway sold 370,146 shares of Moody's (MCO) at prices ranging from $27.40 to $28.00.

After the sales, Berkshire is left with 28,503,610 shares of MCO, still a very sizable position. This is the third subsequent sale of MCO by Buffett's organization and we've pointed out the trend for Berkshire to sell MCO anytime shares trade north of $25. The majority of Berkshire's Moody's position is held by their subsidiary, GEICO.

For more of our coverage on the Oracle of Omaha, we've highlighted Buffett on the topic of success as well as words of wisdom from Warren Buffett.

Taken from Google Finance, Moody's is "a provider of credit ratings; credit and economic related research, data and analytical tools; risk management software, and quantitative credit risk measures, credit portfolio management solutions and training services."

Lone Pine Capital Increases Polo Ralph Lauren (RL) Stake

Stephen Mandel's hedge fund firm Lone Pine Capital just filed a 13G with the SEC regarding shares of Polo Ralph Lauren (RL). Due to portfolio activity on October 4th, the filing discloses Lone Pine's 5.0% stake in RL with 3,278,958 shares.

This means Mandel's hedge fund has increased its position size by almost 56%. They previously held 2,106,191 shares back on June 30th of this year. Mandel's background is in the consumer sector so it's no surprise to see their stake in Polo Ralph Lauren.

Lone Pine has been busy in the market as of late, starting a brand new position in TransDigm Group (TDG) recently as well. You can view the rest of Lone Pine's portfolio here in our newsletter.

Taken from Google Finance, Polo Ralph Lauren is "engaged in the design, marketing and distribution of products, including men’s, women’s and children’s apparel, accessories, fragrances and home furnishings."

What We're Reading ~ 10/15/10

Happy fifth blogiversary to Abnormal Returns, a must-read site [Abnormal Returns]

St. Joe Company (JOE): David Einhorn versus Bruce Berkowitz [RationalWalk]

Taking a look at ValueLine (VALU) [ResearchPuzzlePix]

Biglari Holdings (BH) bids for Fremont Michigan again [Street Capitalist]

Biglari Holdings is a stock Zeke Ashton pitched at the VIC [MarketFolly]

Dividends are the strongest performing theme this year [WSJ MarketBeat]

Hedge fund transparency: be careful what you wish for [AllAboutAlpha]

An in-depth profile of Bill Ackman [Reuters]

See also our past profile of Ackman's hedge fund: Pershing Square [Market Folly]

ATP Oil & Gas (ATPG) here comes the short squeeze [AboveAvgOddsInvesting]

The fundamental law of active management [Humble Student of the Markets]

Make money off mixed market messages [Kiplinger's]

Weight Watchers (WTW): valuation too fat [Margin of Safety Investing]

On the topic of Warren Buffett bias [PsyFiBlog]

Covered calls and naked puts revisited [OptionsForRookies]

Defensive stocks or value traps? [Fortune]

JC Penney hires Goldman for defense against Ackman [Dealbook]

Facebook for finance [Institutional Investor]

How to bet like John Paulson [WSJ]

Byron Wien on the next George Soros [Fortune]

Ex-Goldman Sachs traders starting new hedge funds [Bloomberg]

Thursday, October 14, 2010

Save 50% on the Next Value Investing Congress: Discount Expires Tonight!

The most recent Value Investing Congress was a huge success with tons of actionable ideas backed up by in-depth presentations. We're excited to announce that Market Folly readers can SAVE 50% on the next Value Investing Congress that takes place on May 3rd & 4th in Pasadena, California.

This special 1-day offer expires tonight at midnight
and is the absolute cheapest price you can receive. Click here to receive your discount before it expires.

Whitney Tilson, Carlo Cannell, Alexander Roepers: Notes from Value Investing Congress

Continuing our coverage of day two of the Value Investing Congress, we have summaries of the presentations from Whitney Tilson & Glenn Tongue (T2 Partners), Carlo Cannell (Cannell Capital), as well as Alexander Roepers (Atlantic Investment Management).

If you missed it, we've posted a plethora of resources from the event, including:

- Presentations from John Burbank & Lee Ainslie
- Bill Ackman's Q&A session from the Congress
- Presentations from David Einhorn, Kyle Bass, & Mohnish Pabrai
- Summaries of speeches from fund managers Zeke Ashton, Guy Spier, & Michael Lowitt

Next, onto the last round of speakers at the Value Investing Congress:

Carlo Cannell ~ Cannell Capital

The fund manager's presentation was named after 'Megaloceros Giganteus,' or an Irish elk that became extinct. Cannell says that over a long enough timeline, all companies will die and his talk zeroed in on a company he believes to be on the verge of extinction. He is short Pitney Bowes (PBI), a company that he says has an obsolete business model. There has been a decline in mail demand and this is hurting the mail processing equipment company.

Cannell warns that it might not be an 'actionable' short at the moment. At the same time, he cautions that stubborn short sellers can be come extinct just as easily. Remember the old market adage? The market can stay irrational longer than you can stay solvent. This isn't the first fund manager we've seen with a negative stance on Pitney Bowes. In the past, we've seen that Matt Iorio's White Elm Capital has owned puts on PBI for numerous quarters.

Two companies that are on Cannell's watchlist as potential shorts are Buffalo Wild Wings (BWLD) and Texas Roadhouse (TXRH). You can view notes from a previous talk by Cannell here.

Whitney Tilson & Glenn Tongue ~ T2 Partners

Tilson and Tongue began their presentation focusing on the economy and their fund has been positioned conservatively given their tepid economic outlook. The T2 managers highlight that the market is likely to remain range-bound, trading sideways via oscillations in either direction that cancel each other out. Housing remains the biggest issue to the economy as prices still have further to fall and inventories need to be absorbed. As such, T2 Partners is short the homebuilders via the exchange traded fund XHB.

The hedge fund is still long BP (BP) as they purchased it back in the company's darkest hour as shares tanked due to the unfortunate oil spill. He jokingly said that he's thankful for Jim Cramer, who he has utilized as a contrarian indicator. Tilson thinks the stock is easily worth $50 (it currently trades around $41 per share, so 20% upside potential). Fears from the oil spill have been greatly overblown and T2 feels the company is still cheap and will reinstate the dividend at some point.

Regarding other portfolio positions, recall that Tilson has been short InterOil (IOC). We've also detailed T2 Partners' latest letter to investors for those interested.

Alexander Roepers ~ Atlantic Investment Management

Roepers typically runs a concentrated portfolio and focuses on mid-cap stocks. He likes predictably profitable companies with solid balance sheets and solid cashflows. Roepers will focus on companies with market caps of $1 billion to $20 billion with a holding period of typically 1-3 years.

He pitched Owens Illinois (OI), pointing to its very strong moat and increasing share in emerging markets and thinks it goes to $45 per share (currently trading around $27). Roepers labeled the company a growth business and points to their packaging business in particular. Hedge fund Viking Global had previously held a position in OI, but they sold completely out in the first quarter of this year.

He also mentioned positions in Xerox (XRX) which he views as an acquisition target and targets $18 per share as a fair valuation of the company. The manager also mentioned ITT (ITT). Lastly, Roepers also rattled off positions in Rheinmetall (RHMGY) in Germany, as well as Muraka and Creata Water.

That wraps up our series of notes from the event. You can scroll through our entire coverage of the Value Investing Congress by clicking here. Stay tuned because in the coming days we'll take in-depth looks at some of the investment ideas from select hedge fund managers. Don't miss out! Receive our free updates via email or free updates via RSS reader.

Why David Einhorn is Short St. Joe (JOE): Presentation from Value Investing Congress

At yesterday's Value Investing Congress (our extensive notes from the event here), David Einhorn of hedge fund Greenlight Capital presented the short case for the St. Joe Company (JOE). Einhorn lays out why he is short JOE with the main reason being that the company has a vastly overvalued portfolio of land and needs to take impairments.

He argued that should St. Joe convert into a rural land company, it would be worth around $7-10 per share. JOE currently trades in the low $20's, and that is after taking a 10% haircut solely due to Einhorn's speech yesterday. Alternatively, the Greenlight Capital manager argues that if the company keeps with its current practices, the stock could be worth $0 in 10 to 15 years.

Below we have embedded an audio file of Einhorn's speech, as well as the actual slideshow of his presentation further down the page. This way, you can follow his walk-through as if you were there (email readers will need to come to the site to hear the audio).

Simply press play to hear Einhorn and don't turn your volume too high because the background applause/laughter is loud on occasion. Please use either the Firefox or Internet Explorer web browser for the best compatibility with the audio file.

Also embedded below is the 139-slide presentation in which David Einhorn outlined his short thesis for St. Joe Company (JOE) from yesterday's Value Investing Congress:

You can download a .pdf copy here.

For all the rest of our Value Investing Congress coverage, be sure to also check out the following:

- Bill Ackman's Q&A session from the event
- Presentations from John Burbank & Lee Ainslie
- Zeke Ashton, Guy Spier & Michael Lewitt's investment ideas
- Presentations from Kyle Bass & Mohnish Pabrai

Wednesday, October 13, 2010

Notes From the Value Investing Congress: Einhorn, Bass & Pabrai (Day 2)

Today is the second day of our coverage of the Value Investing Congress including presentations from Kyle Bass (Hayman Capital), David Einhorn (Greenlight Capital), and Mohnish Pabrai (Pabrai Investment Funds). Their latest ideas are outlined below and be sure to check back frequently as we will be updating this post throughout the day.

We've already posted a wealth of information from the event, including:

- Presentations from John Burbank, Lee Ainslie, & Francisco Parames
- Further notes from day 1 of the Congress
- Bill Ackman's Q&A session

Let's now dive right into day two's presentations from the Value Investing Congress:

David Einhorn ~ Greenlight Capital

Three years ago, Einhorn pitched a short of Lehman Brothers at the Value Investing Congress. We all know how that turned out. This year, he doled out his latest short sale: a 139-slide presentation against the St. Joe Company (JOE). In essence, Einhorn believes Joe's whole portfolio of land is incredibly overvalued. He joked that he'd be wrong if JOE discovers oil on its land. After news got out of Einhorn's short, shares of St. Joe plunged more than 9%.

He highlights that the company should have impairments from their riverfront properties but that they have taken none. JOE is counting untouched land as 'developed'. He believes St. Joes's rural land is worth somewhere around $900 million, or between $7-10 per share (JOE shares are currently trading in the low $20's). Einhorn argues that if the company continues current practices, it will eventually be worth $0 in 10-15 years.

In his presentation, the Greenlight Capital fund manager went through specific properties of JOE. He highlighted Windmark Phase II which JOE carries as $165 million on their 10K while Einhorn argues its only worth $18 million or so. He also believes an impairment should be taken on their Rivertown property that is selling lots below cost. Overall, he takes issue with the fact that St. Joe only writes down an investment when they exit it.

Market Folly readers will recall that Bruce Berkowitz (Fairholme Fund) is on the other side of this trade, long the stock. And 'long' is an understatement; he owns almost 29% of JOE. In the question and answer session, Einhorn mentioned that he reached out to Berkowitz but is awaiting his response. Berkowitz started buying JOE in late 2007 and purchased additional shares in February 2009. This is the beauty of markets and the dichotomy of opinion. For a counter-argument, we've also posted up the bullish case for St. Joe from Broyhill's Affinity hedge fund.

Lastly, in Einhorn's Q&A session, he said he is excited about Vodafone (VOD) and that the market is still not giving the company credit for their stake in Verizon Wireless. We've previously covered Einhorn's Vodafone thesis here.

Kyle Bass ~ Hayman Capital

Bass' presentation, 'Does Debt Matter?' is by far the gloomiest of all the speakers thus far. He immediately cites the high levels of US credit market debt and not only the staggering amount of unemployment, but the fact that we are seeing permanent job loss. Bass notes that there's now $200 trillion in total credit debt throughout the world and this amount has tripled over the past 8 years.

He is very concerned about Ireland and says they're very likely to default. Bass is also 100% certain that Japan will default. It's not a matter of 'if', but 'when.' In fact, we've covered how Bass is betting against Japanese Government Bonds (JGBs). Bass mentioned that he is using out of the money interest rate call options to play the potential (or in his mind, inevitable) Japanese default. Should he be correct, he will make 50x to 100x his original investment.

Additionally, Bass says Greece and Iceland are the two other countries in peril here. Greece's default is inevitable and people's reaction will be to buy US dollars. Lastly, the Hayman Capital manager shifted his focus to Australia where he believes the country is due for a housing crisis.

Mohnish Pabrai ~ Pabrai Investment Fund

Pabrai's presentation centered on his 'checklist,' a system of questions/guidelines on how to approach an investment. Pabrai's presentation at the Value Investing Congress West back in May also focused on his checklist. Pabrai will tell you about the checklist, why he created it, and how you can create your own. However, he seemingly does not tell you what is on his checklist as he must regard it as proprietary.

He says the best way to craft an investment checklist is to look at crashes and hone in on others mistakes. By learning from them, you can ensure you don't make the same ones. His checklist is an ongoing process and he's had around 97 questions on the list broken down into categories such as management, ownership, moat, and leverage. While no company can give him the green light by successfully answering all 97 questions, it helps him decide how he should allocate position sizes. This has led to a change in his portfolio allocations. He was previously more concentrated and now is more diversified. A 2% position is a basket trade, a 5% bet is baseline, and a 10% position would be considered a 'home run.'

In his presentation this time around, Pabrai addressed the mistakes that famous value investors have made in order to learn from them. Currently, he is seeing opportunity in Japan and he's building a basket of high quality Japanese stocks. It's interesting to see Bass pound the table on Japan's demise one minute, and the next to see Pabrai recommending the country. Lastly, Pabrai echoed the sentiment from yesterday's presenter Zeke Ashton as he also likes Fairfax Financial (FRFHF). For more from this value investor and Warren Buffett emulator, we've highlighted notes from Pabrai's annual meeting as well.

Michael Kao ~ Akanthos Capital Management

Kao invests across the capital structure including equity and debt. While he usually takes around 40 positions, his top ten positions typically comprise up to 50% of his portfolio. Giving a case study, Kao in particular liked GM convertible bonds. He mentioned he was long the convertible bond and short the stock. Overall, he thinks we're close to a bottom in vehicle sales.

Speaking on GM, Kao highlights their 13% market share in China and consolidation of car brands. The current iteration of the trade would be long GM convertible bonds and then short Ford (F). We've detailed in the past how Jim Chanos is short Ford as well, although his does not seem to be a pair trade. The Akanthos manager thinks GM debt has around 50% upside.
He says that GM convertible debt is trading at 2x EBITDA while F is over 4x EBITDA.

That wraps up this set of presentations. To see what top hedge funds are buying and selling on a daily basis, receive our free updates via email or our free updates via RSS reader.

Bill Ackman's Question & Answer Session at the Value Investing Congress

Instead of giving a presentation at the Value Investing Congress, Pershing Square hedge fund manager Bill Ackman engaged in a question and answer session. We'll dive into each of the various topics he addressed below. Keep in mind that we've published notes from John Burbank and Lee Ainslie's presentations, as well as further notes from day 1 of the Congress if you missed either of those.

Bill Ackman ~ Pershing Square Capital

On the topic of JC Penney (JCP)
: Ackman recently started an activist position in JCP and he says this is the most economically sensitive stock that Pershing Square owns. While it is an activist investment, he has not yet spoken to the company's management. However, he believes it is very cheap and a high quality asset. This is mainly due to its real estate assets (arguably better than Macy's ~ M or Sears Holdings ~ SHLD). Ackman also highlights JCP's strong balance sheet as the company is close to being debt neutral. He also says JCP has significant non-operating assets, something that he interestingly enough stumbled upon during his work on the General Growth Properties (GGP) bankruptcy.

On the economy & markets in general: Ackman is pretty bullish on the economy and thinks the stock market is relatively cheap. He believes that the weak dollar is a huge advantage for US companies but the unemployment situation continues to be a problem. Also, he opined that the environment is ripe for corporate acquisitions and thinks this should help boost the value of equities. The one thing he believes is missing is confidence in both business and the consumer.

Interestingly enough, Pershing Square only has 7% short exposure to equities. As we've pointed out in the past, this is most likely due to the fact that Pershing likes to utilize credit default swaps (CDS) for shorting and hedging. In fact, we've detailed how Ackman bought BP credit default swaps.

Pershing Square only has a 7-person investment team and likes to seek companies with high cashflow. Ackman likes to focus on investments in the US as the companies are easier to deal with and he is familiar with the legal system. Via his past experience with Sears Holdings, he says his biggest takeaway was the ability to enact change. Ackman said that (paraphrasing here): 'our competitive advantage is the ability to buy a stake in a company and make something happen.' Undoubtedly he will lean on this mantra with his new activist investment in Fortune Brands (FO).

On the topic of financials: He notes that many banks have aggressively marked down their books and cited Citigroup (C) and Bank of America (BAC) as perfect examples. Keep in mind that Ackman bought Citigroup earlier this year.

On the topic of General Growth Properties (GGP): Ackman pointed out that GGP has some prime real estate in Las Vegas via the Summerlin property. GGP's new spin-off, Howard Hughes Co, owns this property and will also own the South Street Seaport (a property Ackman sees value in). Via GGP's emergence from bankruptcy and re-structuring into two separate companies, GGP will retain the high quality cashflow properties while the Howard Hughes spin-off will focus on lesser developed assets.

This concludes notes from Bill Ackman's Q&A session at the Value Investing Congress. For more on Ackman's hedge fund, be sure to check out our profile of Pershing Square.

Stay tuned later this morning as we'll be providing live updates of the second day at the Value Investing Congress so follow @marketfolly on Twitter. Be sure to also check back at frequently for full notes.

Zeke Ashton, Guy Spier, & Michael Lewitt: Value Investing Congress Presentations

Given the large amount of speakers at the Value Investing Congress, we're trying to dissect the day's events into digestible nuggets of information. The following article details the presentations from Zeke Ashton (Centaur Capital Partners), Guy Spier (Aquamarine Fund), and Michael Lewitt (Harch Capital Management).

We posted up comprehensive notes from day 1 of the Value Investing Congress here encompassing presentations by John Burbank, Lee Ainslie, and more. We've also highlighted Bill Ackman's question and answer session in a separate post as well. Make sure to check out those resources. Without further ado, the rest of the presentations from day 1:

Zeke Ashton ~ Centaur Capital Partners

Ashton has seen an impressive 16% CAGR since inception with his hedge fund, Centaur Capital Partners. He had some ideas in the property & casualty insurance space, notably Fairfax Financial (FRFHF) as well as Aspen Insurance (AHL). Fairfax is run by Prem Watsa, a man many have dubbed the 'Warren Buffett of the north' as he's based in Canada.

Aspen Insurance is a name we've seen in David Einhorn's portfolio for a while as well and Ashton believes it could see $40, a book value of 1.15 (it currently trades around $30 per share) as the company continues to buy back stock at a discount. He also sees Liberty Mutual as potential value when they eventually come public.

Turning to his next play, Ashton brought Biglari Holdings (BH) to the table. While he believes retailers in general are cheap, he sees BH trading at 8x free-cashflow and Sardar Biglari (the man in charge) only gets paid if FCF grows 6% per year. Many investors (particularly in the value investing community) have taken issue with Biglari's compensation package. Ashton sees lots of real estate value in BH and likes that they are shifting to a franchise model with their Steak n' Shake stores.

Biglari is essentially trying to create a Berkshire Hathaway-esque holding company/model as his company has made buyout offers for insurer Fremont Michigan (FMMH). Many have pondered whether or not Steak 'n Shake (now Biglari Holdings) was the next Berkshire Hathaway. Biglari also recently revealed a position in Sonic (SONC).

Centaur Capital Partners currently has 20% overall exposure to the retail sector. Ashton believes diversifying between retailers, restaurant, and a high quality operator (like Target - TGT) is beneficial in the space.

Lastly, Ashton mentioned that equity asset managers are cheap due to the public's current distaste for equities. He feels buying a basket of these stocks is a solid approach. He cited (CLMS) as an undervalued asset manager, Janus Capital (JNS), and also MVC Capital (MVC). Interestingly enough, the Centaur Capital Partners manager also noted his use of the iShares 20+ year treasury (TLT) as a hedge against interest rate risk.

Guy Spier ~ Aquamarine Fund

From a theoretical/educational standpoint, Spier highlighted to pay heed to a sign in Warren Buffett's office reading 'invest like a champ today.' Spier profoundly professed that starting relationships with the right people can have a very strong impact on your life as an investor. In particular, choosing the right investors for your fund sets your fate. He highlighted Whitney Tilson and Glenn Tongue's partnership to form hedge fund T2 Partners as well as Markel Corp (MKL) as another good example. On this notion, Spier recommended Michael Eisner's book, Working Together: Why Great Partnerships Succeed.

Shifting to specific picks, Spier actually sees Japan as a compelling potential investment. Screening for stocks in this universe returns a lot of companies with negative enterprise value, many of which are paying dividends and partaking in share buybacks. In particular, the Aquamarine Fund manager singled out Otaki Gas (TYO:9541), a pipeline company that owns assets in Japan. His best idea is slightly morbid in Heian Ceremony Service (JSD:2344), a funeral service business that can benefit from Japan's aging population.

Lastly, Spier had an intriguing quote on the notion of liquidity. He says that liquidity today is not important. Instead, liquidity is important when you want to exit a position.

Michael Lewitt ~ Harch Capital Management

Lewitt, also the author of The HCM Market Letter, started out by saying that we need to rid ourselves of fiscal problems because the traditional tools aren't working. He would prefer a constructive approach instead of pumping out another trillion dollars via quantitative easing round two. Lewitt feels that central banks are destroying currencies (especially in Japan). Also, he feels that naked credit default swaps (CDS) shouldn't exist and highlighted the situation with BP (BP) as an example. You'll recall that in the past we highlighted that Bill Ackman bought BP CDS.

In terms of opportunities, Lewitt sees bank loans as an attractive asset class because they are secured, can be leveraged to enhance returns, and many have 7% floating rates. As a play on bank loans, he likes KKR Financial (KFN). He highlights the 5.5% yield which should increase. He also singled out Tetragon Financial Group (AMS:TFG) trading in Europe.

Turning to bonds, Lewitt says junk bonds have been on fire (obviously). While he likes them, he notes you obviously have to be very selective due to their very cyclical nature. In particular, he finds value in BB and BBB corporate bonds.

Lastly, The HCM Market Letter author recommended utilizing ProShares UltraShort 20+ Year Treasury (TBT) as a way to short bonds. Keep in mind that since this is a leveraged ETF, it suffers from tracking error over longer time periods. He also advocated a long position in gold, something many managers have done.

That wraps up the presentations from these speakers. If you are on Twitter, we are posting live updates from the Congress on our @marketfolly Twitter feed. Be sure to also check out our comprehensive notes from day 1 of the Value Investing Congress.

Stephen Mandel's Lone Pine Capital Starts TransDigm Group (TDG) Position

Stephen Mandel's hedge fund firm Lone Pine Capital just filed a 13G with the SEC regarding shares of TransDigm Group (TDG). Per the filing, detailing portfolio activity on September 29th, Lone Pine has disclosed a 5.0% ownership stake in TDG with 2,479,871 shares. This is a brand new position and the majority of shares reside in their Lone Cascade fund.

In the past, TransDigm Group had been a sizable position for Chase Coleman's fellow hedge fund Tiger Global Management. Additionally, this has been one of Dan Loeb's largest equity positions both as detailed months ago in our newsletter, Hedge Fund Wisdom.

In terms of other recent portfolio activity from Mandel's hedge fund, we noted Lone Pine's sale of Intertek Group as well as an increase in their VanceInfo Technologies stake (VIT). Mandel founded Lone Pine after previously working at Julian Robertson's Tiger Management. Lone Pine is named after a historical lone pine tree at Mandel's alma mater, Dartmouth College.

Taken from Google Finance, TransDigm Group is "a global designer, producer and supplier of highly engineered aircraft components for use on commercial and military aircraft."

To see the rest of Lone Pine's positions, click here.

Tuesday, October 12, 2010

Notes From the Value Investing Congress: Burbank, Ainslie, Parames, & Singhi

We're pleased to present notes from the Value Investing Congress taking place today and tomorrow. Today's notes include presentations from John Burbank (Passport Capital), Lee Ainslie (Maverick Capital), Francisco Parames (Bestinver Asset Management), and Amitabh Singhi (Surefin Investments).

Below is a quick summary of today's ideas. We'll also cover tomorrow's presentations so be sure to receive our free updates via Email or our free updates via RSS.

John Burbank ~ Passport Capital

Burbank's presentation focused on the 'math of democracy.' His talk started off quite grim as he believes the US government's current level of spending is unsustainable. Burbank feels the US is changing and must now be viewed as an emerging market. This is along the lines of what Burbank presented at the Ira Sohn West Conference recently as well. Over the longer-term, he believes we're headed either in the direction of Argentina or Germany.

The most jolting claim in Burbank's presentation was the notion that classic bottom-up stockpicking is dead. This is intriguing of course because the majority of attendees at the VIC employ such a strategy. Burbank approaches things a bit differently, utilizing a top-down approach and actually feels that the next two years in the market could be more tranquil than currently anticipated.

In terms of portfolio allocation, Burbank likes being long countries with high political/economic freedom. He likes a group he refers to as the "new CASSH" referring to Canada, Australia, Singapore, Switzerland, and Hong Kong. Conversely, he likes being short developed countries with large debt.

In terms of specific positions, Burbank mentioned Passport's largest position as Riversdale Mining (ASX: RIV). He believes gold is a 'must have' investment, but preferably via the physical asset and *not* through the exchange traded fund, GLD. David Einhorn of Greenlight Capital has also in the past mentioned that owning physical gold is cheaper than GLD (due to expenses). Passport Capital currently has an 8% position in physical gold as it is a much cheaper way to play the metal.

Burbank is quite fond of hard assets/commodities and wants to buy assets that China needs. Specifically, he likes potash for that very reason and has big stakes in Mosaic (MOS) and CF Industries (CF). Additionally, he has a position in Potash (POT), the company subject to takeover bids from BHP Billiton. Recently, Dan Loeb's hedge fund Third Point disclosed a new stake in POT. Burbank also has a major investment in coking coal in Mozambique. The fund manager also said he is long steel and short copper.

In terms of other positions, Passport also owns big blue-chips with yield including Exxon Mobil (XOM), Kraft (KFT), Dr. Pepper (DPS), and Microsoft (MSFT). Lastly, the hedge fund manager mentioned that individuals who understand capital allocation need to boost their contributions to political candidates. Passport Capital's portfolio is detailed in our newsletter, Hedge Fund Wisdom.

Lee Ainslie ~ Maverick Capital

Ainslie's presentation focused on the 'case for technology.' The Maverick Capital founder noted that the investment landscape is very different now than it was two years ago. The hedge fund manager says this is a tough market for stock pickers and that we're seeing the highest correlation among large-caps since the 1930's.

Back in 2009, low quality and small-cap stocks (higher beta) rallied furiously and led the market rebound. Interestingly enough, these low quality names have also led the market thus far in 2010 and that fundamentals haven't played an important role.

According to him, the most attractive opportunities currently reside in high quality, large-cap, lower beta stocks. In essence, he's targeting companies with solid balance sheets and high return on equity. Currently, Ainslie believes technology stocks are the cheapest they've been in 20 years. He cites their high free-cashflow yields and points out that 'growth' tech is beating out 'value' tech.

He believes the weak US dollar is helpful to technology companies. Ainslie also points out the large amount of cash on their balance sheets and opines that this cash should be deployed via acquisitions, share buybacks or dividends to benefit shareholders. Maverick's fondness for technology is an investment theme of theirs we've tracked since the first quarter of this year.

In terms of specific names, Ainslie emphasized Commscope (CTV) as a good hold through 2012. This is one of the five major tech stocks in his portfolio. The others include Marvell Technology Group (MRVL), Intel (INTC), Microsoft (MSFT), and Dell (DELL). Maverick Capital is currently 17% net long technology, their highest exposure ever.

Lastly, shifting to the heated topic of for-profit education, Ainslie was positive on the sector. But then again, we already knew that considering his sizable long of Apollo Group (APOL) disclosed in Maverick's portfolio.

Amitabh Singhi ~ Surefin Investments

Singhi has returned 29.8% annualized since inception in mid-2001. He focuses on India with his investments often buys 'cigar butts' and plays special situations. His current portfolio is comprised of 12 positions (most of which have single digit P/E ratios as he typically doesn't like to pay for growth). At the Congress, he spouted off numerous ideas.

Firstly, he mentioned Larsen & Toubro as an infrastructure play in India. This company trades as LTOUF on the pink sheets and as BOM:500510 in India. Secondly, he likes Housing Development Finance Corp as a play on housing upgrades (traded as BOM: 500010 in India). The interesting thing about some of Singhi's picks is that they are stocks trading near highs and some would argue that valuation is stretched here. Singhi does not own Larsen & Toubro because it trades at a very high multiple, 40x earnings. He is recommending superbly run and very well known companies, though.

Singhi's main idea today was Balkrishna Industries Limited (traded in India as BOM:502355), a tire maker known as BKT. The company trades at a P/E of just 7, but Q1 in FY '11 was slow. His last idea was Agrimax.

Francisco Garcia Parames ~ Bestinver Asset Management

Parames is Spain's largest money manager at $6 billion under management. He is a follower of the Austrian School of Economics. From an investment standpoint, he typically looks for good businesses with strong management trading at a solid price. Currently, he feels the Europe is still a less efficient market than the US. Obviously as a value investor, this could be seen as a welcome development as it can present opportunities. But what's interesting here is that while Parames is based in Spain, he doesn't have a single cent invested in his country.

In his talk, Parames said that, "patience is our biggest competitive advantage." He likes to buy family owned companies, something that is much more common in Europe (80% of his investments fit this criteria). In general, Bestinver focuses on strong businesses with high free cash flow yield.

At the Congress, he said that he likes BMW Preferred Shares (LSE: 0KF2.L) which currently trade at 3.1x 2012 free cash flow per share. He thinks the preferreds have over 200% upside and he owns 11 million shares (they are thinly traded at around 60,000 shares daily). Parames notes BMW's 7% margins and that this can be improved to 8-10% via better manufacturing operations.

He also mentioned CIR SpA (BIT: CIR), through Sorgenia Group, a multi-utility operator in Italy. Also, Parames mentioned Ferrovial which trades on the pink sheets as FRRVY and in Europe as ETR:UFG. He believes shares are worth around 17 euros (the company currently trades around 7 euros per share).

*** We'll also cover tomorrow's presentations so be sure to receive our free updates via Email or our free updates via RSS.

In separate posts, we've also posted up other notes from the event, including:

- Bill Ackman's Q&A session from the Congress
- Presentations from Zeke Ashton, Guy Spier, & Michael Lewitt

Monday, October 11, 2010

Hedge Fund Performance Numbers: September & YTD 2010

Given all the market oscillations this year, we figured it'd be good to check in on how some of the prominent hedge funds are faring out there. According to Credit Suisse's indices, the average hedge fund was up 3.5% for September and is up 5.5% for 2010. Without further ado, taken from individual fund investor updates and HSBC's latest hedge fund performance report:

John Burbank's Passport Capital: The San Francisco firm was up 4.9% last month and is now up 7.8% for the year. Passport's flagship fund has $1.7 billion under management while the firm's AUM comes in at $3.4 billion in total. Burbank recently spoke at the Ira Sohn West Conference and you can see notes from his talk here.

John Paulson's hedge fund Paulson & Co: Their Recovery fund was up 8.47% for the month (up 7.5% ytd). Their gold fund gained 5.67% last month (up 22.54% ytd). Paulson's Advantage and Advantage Plus funds gained 12.41% and 7.72% for the month respectively. For the year, those funds are -0.17% and -0.42% respectively. In a recent talk, Paulson said to sell bonds and buy stocks.

David Tepper's Appaloosa Management: Their Palomino fund was up 2.84% for September and sits up 15.13% for the year. In a recent (rare) interview, Tepper said he likes equities here.

Paul Tudor Jones' Tudor Investment Corp: Their flagship Global BVI fund was up 0.55% for September and is up 2.6% for 2010.

David Einhorn's Greenlight Capital: Up 2.2% in September and now up 4.2% thus far in 2010. Einhorn recently added to his stake in CareFusion (CFN).

Bill Ackman's Pershing Square: His flagship fund was up 3.4% net last month, bringing it up 6.5% for the year. Ackman of course just started a brand new activist position in JC Penney (JCP).

Ricky Sandler's Eminence Capital: Up 0.20% for September, down 7.78% thus far in 2010.

Dan Loeb's Third Point: Their offshore fund was up 3.9% in September and is now up 19.1% for thus far in 2010. Their Partners fund is up 22.2%, their Ultra fund is up 19.9%, and their Qualified fund is up 18.1%. Loeb recently disclosed new positions in gold bullion and Potash (POT).

Och-Ziff Capital Management: Their flagship fund was up 1.27% last month and is now up 4.18% ytd.

Nelson Peltz's Trian Partners: This activist hedge fund was up 7.5% for September.

Barry Rosenstein's JANA Partners: Another activist fund, JANA, was up 4.5% for the month and is now up 4% for 2010. In a recent presentation, Rosenstein said he thought the current environment was ripe for activist investments.

Steven Heinz & Paul Ruddock's Lansdowne Partners: The UK hedge fund was up 0.65% in September but down 3.87% for the year. The hedge fund recently acquired a position in Central Asia Metals (LON: CAML).

Richard Perry's Perry Partners: -0.04% for last month but up 11.17% for 2010. You can view Perry Partners' Q2 letter to investors here.

Joshua Fink's Enso Capital Management: The hedge fund managed by Blackrock CEO Laurence Fink's son was up a whopping 14.5% last month. The fund is up around 25% this year largely due to gains from big positions in commodity stocks. The fund now manages around $200 million.

Overall, long/short funds were up around 5.4% for September and up 5.3% year-to-date. Merger arbitrage funds in general were up 1.96% last month and now 7.64% for the year. Lastly, event-driven hedge funds are up 8.89% for 2010 after a positive 4.65% in September. Interestingly enough, global macro funds have lagged other strategies, up 0.45% last month and only up 2.26% year-to-date.

Long Term Stock Market Cycle: Where Are We Now?

This morning, Market Folly's quote of week focused on wisdom from value investor Joel Greenblatt. A few sentences in particular stuck out where Greenblatt says:

"Over the long term, despite significant drops from time to time, stocks (especially an intelligently selected stock portfolio) will be one of your best investment options. The trick is to GET to the long term. Think in terms of 5 years, 10 years and longer."

Given his commentary, the chart below is a perfect illustration of "the long term." This chart, courtesy of DecisionPoint (via Cynical Advisor) depicts how the stock market has traded in 16-18 year bull/bear cycles ever since 1932.

(click to enlarge)

Currently, the market appears to be in the bear cycle where it essentially chops sideways via wild oscillations every few years. By the chart's calculations, this means the market will be stuck in its current cycle for another 5-7 years before entering another bull cycle. This of course assumes the current trend of alternating cycles remains in tact. Focusing on the drawn-in trendline, a break below the level of 500 on the S&P would obviously be quite a negative signal jeopardizing the multi-decade trend.

In the end, this chart simply illustrates Greenblatt's notion of "long term." In a day and age when everyone is so focused on short-term performance, hopefully this forces you to take a step back and examine things from a multi-decade perspective. While the current trend is choppy to say the least, the long term trend is most definitely up. The problem for most investors though is the lack of ability to remain on course. Whether it be poor market timing or succumbing to emotion, investors have time and time again found a way to deviate offtrack.

Pershing Square Goes Activist on Fortune Brands (FO)

Bill Ackman's hedge fund Pershing Square Capital Management has apparently got the activist itch with his latest slew of 13D filings with the SEC. Due to portfolio activity on October 4th, 2010, Ackman disclosed a 10.9% ownership stake in Fortune Brands (FO) with 16,668,636 shares. This is a brand new position.

The hedge fund also has exposure to 603,486 notional shares of common stock via cash-settled total return swaps. This brings their aggregate economic exposure in FO to 17,272,122 shares (or an 11.3% stake in the company). This comes immediately after Pershing Square disclosed a new activist position in JC Penney (JCP) as well.

Ackman's hedge fund started acquiring shares of FO as early as July 12th around $40-41 per share. Shares of the company are already trading north of $55, with a recent 7% gain due to the news of Ackman's activist involvement. Overall, Pershing paid in excess of $764 million for their position in Fortune Brands. The 13D filed with the SEC is filled with the typical jargon regarding an activist position, so expect Ackman to work with management, etc. You can see the full extent of Pershing's FO trades here.

Without a doubt, Ackman's investment style centers on making few, concentrated bets and then monitoring them very closely (and in the two most recent cases, going activist). We'll have to wait and see what he has in store for his latest two plays, but you can bet he'll be talking about at least one of them tomorrow at the Value Investing Congress. To see the rest of Ackman's investments, head to our newsletter: Hedge Fund Wisdom.

Taken from Google Finance, Fortune Brands is "a holding company with operating companies engaged in the manufacture, production and sale of distilled spirits, home and security products, and golf products."

Joel Greenblatt on Risk & Investment Timeframe ~ Quote of the Week

Joel Greenblatt is quite a prevalent value investor. He founded hedge fund Gotham Capital, is an adjunct professor at Columbia University's Business School, has founded the Value Investors Club and more. Most recently, he has focused on Magic Formula Investing, a strategy that seeks to buy good companies with high earnings yield and a high return on invested capital.

Market Folly's quote of the week from Greenblatt centers on the topic of how to invest when you can't handle a 40% drop in the market:

"So, what should you do? The answer is annoyingly simple. I believe the stock market is a great place to make money over the long term. Despite the last decade's poor returns for the broad market averages (and including the knowledge that you are not forced to buy the average stock, but can follow a strategy like Formula Investing to buy a portfolio of above average companies at below average prices), I firmly believe almost everyone should have a significant portion of their assets in stocks. But here it comes - few people should put ALL their money in stocks. Whether you choose to place 90% of your assets or 40% of your assets in stocks should be based largely on how much pain you can take on the downside. As painful as it might be, if you put only 40% of your money in stocks and the market falls 40%, the simple math says you'll only be down 16% (though it depends on where the rest of your assets were at the time!)

However, and most importantly, once you've chosen an amount you can handle, every time the market drops, hopefully you will no longer be tempted to sell all your stocks, put on your feety pajamas and roll up into a little ball. Over the long term, despite significant drops from time to time, stocks (especially an intelligently selected stock portfolio) will be one of your best investment options. The trick is to GET to the long term. Think in terms of 5 years, 10 years and longer. Do your planning and asset allocation ahead of time. Choose a portion of your assets to invest in the stock market-and stick with it! Yes, the bad times will come, but over the truly long term, the good times will win out-and I hope the lessons from 2008 will help get you there to enjoy them."

~ Joel Greenblatt

For more market insight from this value investor, check out Greenblatt's book: You Can Be A Stock Market Genius (a book we might add that is recommended by none other than Seth Klarman).