Friday, October 22, 2010

Bill Ackman's Potential JC Penney (JCP) Thesis: Real Estate

The following is a guest post from Todd Sullivan at He does some great in-depth research and is a fundamental investor worth checking out.

Recently, Bill Ackman of hedge fund Pershing Square Capital Management started an activist position in JC Penney (JCP). In his guest post below, Todd hypothesizes as to what part of Ackman's thesis with the company might be:

"I thought I’d dig through JCP filings to get a better handle on what Ackman/Vornado see in it. Here is the brief rundown as I suspect this is some sort of real estate play (hence Vornado’s interest).

- JCP owns ~41M sq. feet of its retail space (JCP does not break it out so I simply divided the owned by the total and applied that % to the total sq. ft. of space) that generates ~$149 sales per sq/ft. (for all properties, sales excluded) for ~$6.1B in revenue from owned real estate (not including distribution centers).

- 11.2M sq.ft of owned distribution space:

(click to enlarge)

- They also own their Plano HQ and the 240 acres around it
- 3 consecutive years of declining revenue/EPS
- Interest expense rising / SG&A constant (FY 2009)
- Cap Ex down $600m since 2007, cash up $500m, and debt down $300m (FY 2009)
- EPS down 80% (FY 2009) from 2007

Real Estate Assets

The value in JCP is clearly its real estate holdings. Since JCP management and Board has less commercial real estate experience than my 4 kids (all under 7), we have to assume this is the reason for Vornado being included. Two scenarios: outright sale/leaseback of the properties to Vornado (already a JCP landlord in many areas) OR the creation of a JCP REIT/Vornado JV in which Vornado would own >50% and operate.

Why? JCP doesn't need to own its real estate. It makes them no money and in 2009, "impairment losses totaling $42 million, $21 million and $1 million in 2009, 2008 and 2007, respectively, were recorded in the Consolidated Statement of Operations in the real estate and other, net line item. The 2009 impairment charges include primarily seven department stores and other corporate asset."

$42 million, while not seemingly like a huge number for a company valued at $7.8B, is quite a bit when you consider JCP made only $241M in 2009. Owning the real estate for JCP as it ages has several issues. First, cap ex on it is higher than under a lease, it depreciates and becomes impaired as commercial real estate prices fall. All of these are negative to earnings. I would argue JCP should have taken larger write-downs in 2008-09 but that is a discussion for another day. In 2009, JCP made $304M in lease payments (FY 2009 10-k pg f-24) including overage and personal property leases. This number is well under JCP’s depreciation, impairment charges and debt service on owned properties. In other words, leasing, not owning these would be a net positive operationally.

JC Penney realizes the value of the REIT structure as they themselves have $178m invested in REIT assets (FY 2009 10k pg. f-17). No details of what these investments are in are disclosed: "Real estate and other consists mainly of ongoing operating income from our real estate subsidiaries whose primary investments are in REITs, as well as investments in 14 joint ventures that own regional mall properties, six as general partner and eight as limited partner."

What price then? There has to be some assumptions here so we are going to use base numbers so as to not get confused with fudging anything. All estimates are purposely on the conservative side.

JCP values its land/building at $4.5B (FY 2009 10-k pg. f-11) excluding furniture and equipment. We’ll say ~80% of this is the retail space, not distribution/corporate (again no details in 10-k so we’ll simple use the sq. ft ratio from above). That gives us a rough $3.5B carrying value for the retail stores ($14/share). If we subtract this from JCP market cap of $7.8B it means the total retail operations (including are valued at $4.1B ($18/share). The company has $3 in long term debt not tied to any specific RE holding. Any value of that on the open market would be far greater.

The good news is that there is serious land value to be unlocked here for shareholders.

Now the Bad News

You have all probably heard of management’s “poison pill” action from Monday. In that post I commented on management’s lack of both buying shares on the open market and their ownership in general. After more digging (this information is not in the 10K, filed separately in a 14A) I found it (as of FY 2009):

(click to enlarge)

Abysmal. As a group they hold <1%.>$9M. In fact, I have not seen that during 2009 or 2010 management made ANY open market purchases of stock.

Some of you will say, “20k shares at $30 a share is still $600k worth of stock”. Yes it is. However, if we look at the chart below, we see share for the Board are being accumulated through awards of 16k to 25k shares a year in most cases, not even from the exercise of options or god forbid open market purchases. Bottom line, the $60k a year the BOD takes is sweet and the stock awards are a pure gift.

Point: I am not saying JCP is unique here and this stuff is not rampant in corporate USA. JCP’s BOD just happens to be the ones trying to make it impossible for their largest shareholder (and thus largest owner, in case they forgot) to effect change at the company. Because of that we need to really explore what their motives might be. Since they said it was “for shareholders” we have to examine that claim. Due to the fact they are essentially only shareholders of the company due to grants and awards, not open market purchases, I then draw the conclusion that what is of prime importance to them is keeping the gift/grant spigot open vs the performance of the stock.

From the filing:

"Each non-employee director receives an annual stock grant consisting of a number of restricted stock units having a market value nearest to $120,000. For 2009, the number of units was determined by dividing $120,000 by the closing price of JCPenney common stock on the date of grant (rounded to the nearest whole unit)."

Think about it: a Director holding 25k shares and getting another 15k in awards (low end of the range) makes 60% on his/her holdings if the share price does nothing. Tell me why they would want that to end? Is it any wonder they adopted the poison pill? They do not want the gravy train to stop.

(click to enlarge)

Bottom line for those of you who own shares: when you hear the Board and management talking about “shareholder rights” what they really mean is, “the right for us to get more shares for nothing” Bit of a difference, no? Lastly, two requests to investor relations to discuss the above went ignored."

This has been a guest post from Todd Sullivan at If you enjoyed his in-depth look at JCP, definitely check out his work. For more on the activist saga in JC Penney, we've detailed some further thoughts from Ackman on JCP as well.

Mistral Capital Partners: Latest Investment Themes (Q3 Letter)

McLane Cover's Mistral Capital Partners recently released their third quarter letter and in it we see they were up 9.81% net for September compared to 8.55% for the S&P 500. While Mistral is down 5.9% year to date compared to an S&P gain of 2.3%, they are still up over 121% over the past 10 years. McLane Cover, President and CIO, sees two important themes driving the markets in the fourth quarter:

First, the Republicans taking the House following the November elections as the country demands a more fiscally conservative approach from the US Administration. And second, the Federal Reserve will likely continue to flood the economy with liquidity by pursuing a second round of Quantitative Easing.

Sector & Economic Themes

Recently, Mistral Capital has taken profits in the technology sector given the significant appreciation in their portfolio, but they continue to believe the sector is attractive and well-positioned going forward. Additionally, they believe asset plays will out perform as the Fed (and other central banks) remain focused on reflating the economy.


They expect US consumer spending to remain constrained but probably exceed extremely low investor expectations. Mistral expects auto sales to remain strong and thus are sticking with their core position in Ford Motors (F). In the past we've noted that Jim Chanos is short F. Mistral also believes that the emerging market consumer becomes an increasingly dominant force, as they note that more than 80% of the world’ s six billion people currently live in emerging economies with China and India representing one billion each. McLane highlights ChinaCast (CAST) has a player in this space. ChinaCast is a leading player in four year vocational universities and they believe that the Chinese government’ s support of vocational universities will propel future growth.


Mistral Capital continues to believe that natural gas becomes a key component of US energy policy, though they admit they have been “ long and wrong” on this call for quite some time. Natural gas is politically attractive because it is sourced in America and we have a lot of it (90 years of supply by some estimates). Furthermore, an expansion in the use of natural gas would stimulate job growth. Natural gas is carbon based but its carbon footprint is half of coal and thus more environmentally friendly. Natural gas represents a bridge to more eco-friendly alternatives as wind, solar and geothermal become scalable and more economically viable.

They believe in JA Solar (JASO) as a play off a comeback in solar. JA Solar is a low cost quality leader in the solar space and is the world’ s largest manufacturer of crystalline silicon cells based in China. JA Solar has tailwinds as industry solar demand have continued to rise for 2010 and 2011.

Other Plays

In healthcare, they like Volcano (VOLC) – A leading global provider of intravascular ultrasound (IVUS) and functional flow measurement (FFR) equipment and catheters. In telecom, Mistral favors American Tower (AMT), a dominate wireless tower provider in the US with an emerging market presence in India and Latin America. The company is considered to have the highest quality portfolio among its peer group in terms of location and tower size. AMT was one of the specific equities highlighted in-depth as a hedge fund favorite in our newsletter, Hedge Fund Wisdom.

Embedded below is Mistral Capital Partners Q3 letter:

You can download a .pdf copy here.

We're starting to post up a bevy of fund manager market commentary and outlooks, so be sure to scroll through our set of investor letters as we continue to highlight them.

Berkshire Hathaway Trims Moody's (MCO) Stake... Again

In what has seemingly become a regular occurrence for Berkshire Hathaway in the month of October, we see that Warren Buffett's company has again sold shares of Moody's (MCO). Per a Form 4 filed with the SEC, Berkshire Hathaway has disclosed the sale of 88,360 shares at weighted price averages of $26.7148 and $27.3297 on October 19th and 21st, respectively.

After these sales, Buffett still owns 28,415,250 shares of MCO, still a sizable stake. As we've detailed in Berkshire's other recent sales, they are willing to share MCO for a price north of $25 per share (and especially north of $27). For more on the Oracle of Omaha, we recently posted about Buffett's worst trade and biggest mistake.

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."

To learn from the investing legend himself, head to Warren Buffett's words of wisdom.

What We're Reading ~ 10/22/10

Blackstone's Steve Schwarzman talks about his worst loss [Dealbreaker]

John Paulson lowers Bank of America (BAC) EPS estimates [Teri Buhl, Forbes]

An interview with Whitney Tilson of T2 Partners [Benzinga]

Cautionary signs in the market [Abnormal Returns]

Bank of America woes haven't put John Paulson's trade in the red [Teri Buhl, Forbes]

Activist investing picks up via Ackman & Icahn [CNNMoney]

Harrah's files for IPO (HET) [DistressedDebtInvesting]

An interview with Eric Sprott [Business Insider]

Noble (NE) impacted by moratorium but worst may have passed [Rational Walk]

Paul Tudor Jones says price limits are needed [BusinessWeek]

For-profit education stocks worth monitoring during government reform [Peridot Capitalist]

Why dividend stocks might be riskier than you think [Business Insider]

Copper loses its PhD & set for a stumble [Trader's Narrative]

Reasons for optimism: equity thoughts & forecast for Q4 [Trader's Narrative]

How to tell when the CEO is full of it [peHUB]

Lone Pine's Stephen Mandel seeds another hedge fund manager [HFAlert]

Thursday, October 21, 2010

Falcone's Harbinger Reduces New York Times (NYT) Position

Phil Falcone's hedge fund Harbinger Capital Partners just filed an amended 13D with the SEC regarding shares of the New York Times (NYT). Per the filing, Harbinger has disclosed a 7.41% ownership stake in NYT with 10,757,386 shares due to portfolio activity on October 19th.

This is a decrease in Falcone's position because Harbinger previously owned 13,120,178 shares as of June 30th. This marks an 18% reduction in his position size. The hedge fund originally filed an activist 13D on NYT back in February of 2008 and they purchased shares at around $19.

Regarding the recent transactions, Harbinger's Master Fund sold 1,500,000 shares at $7.80 on October 19th. Harbinger also sold over 821,000 shares back in late August at prices of $7.16, $7.44, and $7.52. This comes after we've seen recent portfolio activity from Falcone where Harbinger sold some Inmarsat (ISAT) as well.

Taken from Google Finance, New York Times is "a diversified media company that includes newspapers, Internet businesses, investments in paper mills and other investments. The Company is organized in two segments: News Media Group and the About Group."

Scroll through our coverage of SEC filings to see what other top hedge fund have been investing in.

Latest Hedge Fund Exposure Levels in Various Asset Classes

Societe Generale is out with their latest hedge fund watch and we see that overall, hedgies are very long the Swiss franc and have increased long positions in oil. Let's take a look at SocGen's round-up of hedge fund exposure to the various asset classes.

With regard to equities, Societe Generale finds that hedge funds as a whole are astonishingly 'neutral' on the markets. While a few funds have net shorts on the S&P, the main area hedgies are maintaining short positions are in small caps with the Russell 2000 (which investors typically play via the IWM exchange traded fund). In our particular coverage, we've seen many hedge funds favor high quality stocks essentially as placeholders in a portfolio given the somewhat tepid economic environment.

In bonds, they note that many funds had net short positions but they've been forced to square those positions as double-dip fears returned. SocGen notes that hedgies are somewhat long 10 year treasuries though as the second round of quantitative easing looms large. Back in May when the market started to panic, Broyhill's Affinity hedge fund outlined ten reasons to buy bonds.

Possibly the most notably change in terms of asset class exposure would be the uptick in commodity positions. As the dollar has weakened, many hedge funds believe commodities will benefit from quantitative easing round two. Specifically, these funds prefer positions in oil with a large net long position. At the Value Investing Congress recently, John Burbank of Passport Capital said that he is fond of hard assets/commodities.

Embedded below is Societe Generale's latest hedge fund watch report:

You can download a .pdf copy here.

If you're looking to see what specific equities hedge funds have been honing in on, be sure to stay up to date with our coverage of the latest SEC filings.

T2 Partners Bullish on Automatic Data Processing (ADP): Latest Investor Letter

In an industry typically shrouded in secrecy, Whitney Tilson's fund bucks the trend. Why? He recently said that, "we choose to share some of our ideas and analyses publicly not for marketing or ego reasons, but because it helps us make money for our investors, in three primary ways: a) when it is widely known that we have a position in a particular stock, we often hear from other investors who share valuable information or analyses; b) invariably, some people have the polar opposite view of a particular stock and, in sharing it with us, they can help us identify things we might have missed in our analysis; and c) when we share our ideas, it creates reciprocity and others share their best ideas with us."

Tilson and Glenn Tongue's hedge fund, T2 Partners, is out with their September letter to investors. T2 recently started a new position in Automatic Data Processing (ADP), citing high switching costs for customers, 20% operating margins, and solid management. He also points out that it is 4x bigger than its closest competitor. Bill Ackman's hedge fund Pershing Square started a new position in ADP during the second quarter as well, which we highlighted months ago in our newsletter Hedge Fund Wisdom.

Assessing the full situation, Tilson points out that ADP's growth has stalled and the stock isn't necessarily "cheap" as it trades at 17.4x trailing EPS. Tilson believes low interest rates and unemployment are weighing on the stock in the near-term but it is poised to outperform over the long haul. You can read the full thesis in Tilson's letter below.

We also see that T2 Partners remains short a basket of for-profit education stocks even after the recent declines. Tilson feels that these companies will face big challenges from new regulations, continued bad publicity, and a sharp cut in their long-term profit growth.

Over the months, we've detailed how the for-profit education space is a battleground amongst hedge funds. Richard Blum's hedge fund Blum Capital has been buying ITT Educational (ESI). Steve Eisman of FrontPoint Partners led the charge against these companies with his original presentation, "Subprime Goes to College." Tilson continues to share Eisman's view (for the time being at least).

Embedded below is T2 Partners' latest letter to investors where they detail the bull cases for Automatic Data Processing (ADP) and Iridium (IRDM):

You can download a .pdf copy here.

Secondly, we've also included a link to T2 Partners' presentation from the Value Investing Congress, entitled "Our View of the Market, An Update on the Housing Market, and Two Stock Ideas." The two investments they detail include BP (BP) and Liberty Acquisition/Grupo Prisa (LIA). You can download a .pdf copy here.

Finally, we've posted summaries of the various speaker presentations and you can view comprehensive notes from the Value Investing Congress here.

Carlson Capital Sells Cano Petroleum (CFW) Shares

Dallas based hedge fund Carlson Capital filed an amended 13D and a Form 4 with the SEC regarding shares of Cano Petroleum (CFW). Per the filings, we see that the hedge fund sold 800,000 shares of CFW on October 18th at a price of $0.4575. After the transaction, Carlson Capital is left holding 4,805,818 Cano Petroelum shares and this marks a 14% reduction in their position size.

According to the 13D filing, this now translates into a 10.6% ownership stake in the company. Carlson originally filed a 13D back in August of 2008. Carlson recently sold the majority of shares in their Black Diamond Relative Value Offshore fund and their Double Black Diamond Offshore fund. Carlson Capital is the largest shareholder in Cano Petroleum, followed by Sage Asset Management, Goldman Sachs, and Soros Fund Management.

In terms of other portfolio activity from Carlson, we've detailed their activist position in Hot Topic (HOTT) as well.

Taken from Google Finance, Cano Petroleum is "an independent oil and natural gas company. The Company’s assets are located onshore United States in Texas, New Mexico and Oklahoma. As of September 22, 2010, Cano had 18 wells containing multiple completions."

Wednesday, October 20, 2010

The Joys of Compounding: East Coast's Q3 Letter

Chief Investment Officer Christopher Begg is out with East Coast Asset Management's third quarter letter. Readers will recall that back in the second quarter, East Coast offered a prudent exercise in consensus versus variant perception in the markets. This time around, Begg focuses on the joys of compounding.

The Joys of Compounding According to Warren Buffett

Upon revisiting the early Partnership letters from Warren Buffett, Begg extracted two major observations: Buffett emphasized the importance of compound returns and he diligently assessed what types of investments would allow him to earn such returns.

Importance of Compound Returns

To illustrate the power of compound returns, Warren Buffett used investment examples of Isabella's $30,000 underwriting of Columbus's voyage to find the new world, Francis I of France's $20,000 purchase of Leonardo da Vinci's Mona Lisa, and Peter Minuit's $24 investment to buy the island of Manhattan.

Using Buffett's rate of a 6.5% compounded return, Queen Isabella would have earned $4.4 quintillion, Francis I would have earned $98 quadrillion, and Peter Minuit would have made $763 billion. Obviously compounding is quite a powerful force.

Buffett's Investment Categories

Perhaps the most useful information from Buffett's "Joys of Compounding" exercise is his categorization of investment ideas. He utilized three categories including: generals, workouts, and control.

Generals were undervalued securities where he had no timetable for when the undervaluation might turn into fair valuation. In 1965, Buffett wrote that, "over the years, this has been our largest category of investment, and more money has been made here than in either of the other categories."

Workouts were companies dependent on corporate action for financial results rather than supply/demand factors in markets.

Control investments were obviously where Buffett sought control of a company to institute change. Just yesterday we discussed how Buffett's biggest mistake was actually buying Berkshire Hathaway, a company he took control of.

East Coast's Three Investment Categories

Expanding on Buffett's methodologies, East Coast Asset Management utilizes three investment categories of their own: compounders, transformations, and workouts. Compounders are "strong businesses whose intrinsic value is growing at a healthy rate." Transformations are loosely "businesses where the economics are improving." And lastly, workouts are "opportunistic situations where a structural, observable catalyst is in place to unlock value." To get further feel for their investment process, we've in the past highlighted equity specific research from East Coast with their bullish case on Becton Dickinson (BDX).

For an in-depth look at the categorization of investment ideas and the benefits of compounding, embedded below is East Coast Asset Management's third quarter letter:

You can download a .pdf copy here.

Be sure to also check out Begg's excellent previous insight that focused on consensus versus variant perception in the markets as well as their past look at the deflation-reflation continuum.

Odey Starts Short Position in Admiral Group (LON: ADM)

Crispin Odey's hedge fund Odey Asset Management has revealed a brand new short position via UK regulatory filing. Due to trading on the 18th of October, the hedge fund has started a new short in Admiral Group (LON: ADM) to the tune of -0.25% of ADM's total shares outstanding.

It's been a while since we last covered activity from this hedge fund but you'll recall in Crispin Odey's market commentary he felt that equities remain attractively priced but unloved back in September. In terms of other portfolio activity from Odey, we noted an increase in their stake in Pendragon (LON: PDG) as well.

Taken from Google Finance, Admiral Group plc is "the holding company for the Admiral Group of companies. The Company’s principal activity is selling and administration of private motor insurance and related products. The Company principal business is selling, administering and underwriting United Kingdom private car insurance through four brands: Admiral, Bell, Diamond and"

For more activity in UK markets from prominent hedge funds, head to our UK positions update.

Tuesday, October 19, 2010

Warren Buffett's Worst Trade & Biggest Mistake

Investors always remember their worst trade or biggest mistake. Warren Buffett is no different. However, Buffett's biggest mistake might surprise you. In an interview with CNBC, the Oracle of Omaha admitted that the worst trade of his career was buying Berkshire Hathaway (BRK.A). Imagine that. But if you dig deeper into his account of the story, you'll see that while his worst trade might have been buying Berkshire Hathaway, his biggest mistake was letting emotion get the better of him.

Embedded below is the video where Buffett talks about his worst trade in Berkshire Hathaway (email readers will have to come to the site to watch the video):

Extracting the transcript, here is the relevant commentary where Buffett tells his story:

"So I started buying the stock (Berkshire). And in 1964, we had quite a bit of stock. And I went back and visited the management, Mr. (Seabury) Stanton. And he looked at me and he said, 'Mr. Buffett. We've just sold some mills. We got some excess money. We're gonna have a tender offer. And at what price will you tender your stock?' And I said, '$11.50.' And he said, 'Do you promise me that you'll tender it $11.50?' And I said, 'Mr. Stanton, you have my word that if you do it here in the near future, that I will sell my stock at $11.50.'

I went back to Omaha. And a few weeks later, I opened the mail and here it is: a tender offer from Berkshire Hathaway- that's from 1964. And if you look carefully, you'll see the price is $11 and three-eighths. He chiseled me for an eighth. And if that letter had come through with $11 and a half, I would have tendered my stock. But this made me mad. So I went out and started buying the stock, and I bought control of the company, and fired Mr. Stanton. Now, that sounds like a great little morality tale at this point. But the truth is I had now committed a major amount of money to a terrible business."

So out of anger from being ripped off, Buffett made what at the time was perhaps an irrational decision in buying control of a fledgling textile company. While he eventually bought a good insurance company for Berkshire and altered his fate, things could have turned out much differently.

This just goes to show that when it comes to financial markets, you have to take emotion out of the equation. Human emotion and irrationality often lead to market folly as investors are driven by the typical fear and greed. Buffett's story, though, illustrates that other emotions not named fear or greed can take hold of an investor and lead to knee jerk reactions. Lucky for Buffett though, his emotional mistake didn't cost him dearly; he was able to turn a negative situation into a positive one.

The stock market is a game of mistakes. You make them, you pay for them, you learn from them, and you try not to make them again. Those who minimize the losses associated with their mistake(s) live to invest another day. Even the best investors in the world make mistakes and Buffett is a prime example.

So what was Buffett's biggest mistake? It wasn't necessarily buying Berkshire Hathaway; that was his worst trade. Instead, his biggest mistake was letting emotion get the better of him. And in the aftermath of Buffett's revelation, we can't help but wonder what would have happened to Buffett if he had received the full $11.50 offer and tendered his Berkshire Hathaway shares.

To learn more from the most successful investor of our generation, head to Warren Buffett's recommended reading list as well as our compilation of the top 25 Warren Buffett quotes.

Richard Blum's Firm Buys More ITT Educational Services (ESI)

Richard Blum's hedge fund Blum Capital has filed an amended 13D with the SEC regarding shares of ITT Educational Services (ESI). Due to portfolio activity on October 14th, Blum Capital has disclosed a 12.1% ownership stake in ESI with 4,076,705 shares.

The firm also filed a Form 4 disclosing recent trades in the stock as they purchased 200,000 shares of ESI at $54.73 on October 14th, amongst other smaller transactions. Blum Capital has been buying ESI in small spurts through September and October and originally filed a 13D on ITT Educational Services back in March of 2008.

This isn't the only education-focused stock they own either. Blum also has a sizable position in Career Education Corporation (CECO). The for-profit education sector has been a battleground of hedge fund activity as well as regulatory concerns and changes. Richard Blum's firm is obviously on the long side of the trade, as are Lee Ainslie's hedge fund Maverick Capital and Chase Coleman's Tiger Global Management (with shares of Apollo Group ~ APOL. Or at least they were as of the end of Q2. Given the shake-up in the industry, it's hard to know for sure if they still own it).

There are other hedgies on the short side of the trade. Steve Eisman of FrontPoint Partners has seemingly led the charge against for-profit education with his presentation, "Subprime Goes to College." Whitney Tilson's T2 Partners has been short various names in this sector and recently commented that they haven't covered their position yet despite the sharp declines as of late. We've also posted Footnoted Pro's research on the for-profit sector which they highlighted back in May before many of the stocks dropped 40%+.

With big names on both sides of the trade, we'll have to see how this one shapes up as regulatory change seems to be the determining factor. One thing's clear though, Blum Capital is betting on ESI and CECO.

Richard Blum founded San Francisco based Blum Capital in 1975. The firm focuses on controlling investments in public and private domains. They typically focus on small and mid-cap names and seek to extract shareholder value. He received both his BA and MBA from the University of California at Berkeley. This is the first time we've detailed portfolio activity from this firm and we'll track them from here on out.

Taken from Google Finance, ITT Educational is "a provider of postsecondary degree programs in the United States. The Company offered master, bachelor and associate degree programs to approximately 80,000 students. It has 125 locations (including 121 campuses and four learning sites) in 38 states."

For more of our daily coverage of SEC filings, scroll through our breakdown of hedge fund portfolio activity.

Hound Partners Sells Some Network 1 Security Solutions (NSSI)

Jonathan Auerbach's hedge fund Hound Partners just filed a Form 4 with the SEC regarding shares of Network 1 Security Solutions (NSSI). Per the filing, we see that Hound Partners sold 64,815 shares of NSSI at a price of $1.60 on October 14th and 15th. The hedge fund's various investment vehicles still own a substantial amount of shares though as Hound Partners Offshore Fund retains 1,130,253 shares, Hound Partners LP holds 786,784 shares, and Hound Partners LLC owns 214,731 NSSI shares.

In the past, we've covered Hound Partners' position in NSSI and revealed that they also own NSSI warrants with a conversion price of $2.00 and an expiration date of April 16th, 2012. Hound is a New York based firm founded by Auerbach and seeded by Tiger Management's Julian Robertson. As such, it is referred to as one of the 'Tiger Seeds.'

Taken from Google Finance, Network 1 Security Solutions is "engaged in the acquisition, development, licensing and protection of its intellectual property. It owns six patents issued by the United States Patent Office that relate to various telecommunications and data networking technologies and include, among other things, patents covering the control of power delivery over local area networks (LANs) for the purpose of remotely powering network devices over Ethernet (PoE) networks and systems and methods for the transmission of audio, video and data over LANS."

To see what other hedge funds are investing in, scroll through our recent coverage.

Invest For Kids: Chicago's Investable Ideas Conference

Invest For Kids is modeled after the Ira Sohn Conference and features prominent hedge fund managers presenting their latest investment ideas to benefit local children in Chicago. Last year the event sold out and raised $800,000. 100% of the money raised directly benefits children via local charities so it's a great cause.

Invest For Kids will take place November 3rd at the Harris Theater in downtown Chicago from 2pm to 6pm with a cocktail reception afterward. Speakers include:

Bill Ackman of Pershing Square Capital Management
Larry Robbins of Glenview Capital
Meredith Whitney of Whitney Advisory Group
Sam Zell of Equity Group Investments
Joshua Friedman of Canyon Partners
William Browder of Hermitage Capital
John W. Rogers of Ariel Investments
Doug Silverman of Senator Investment Group
Richard Driehaus of Driehaus Capital
Brian Feltzin of Sheffield Asset Management
David Herro of Herris Associates

A great line-up of speakers for a great cause. Embedded below is the registration form for Invest For Kids:

You can download a .pdf registration form here.

Given that so many conferences take place on the coasts, this event in Chicago is great for those of you in the Midwest or close by. To learn more about the event, head to

Monday, October 18, 2010

Death of Stockpicking Claims Are a Good Sign for Value Investors

The following is a guest post from Grey Owl Capital. In the past, Market Folly has posted their second quarter letter that outlined how uncertainty can provide opportunity. Here is Grey Owl's recent commentary on the influx of claims that stockpicking is dead:

A recent Wall Street Journal article highlights the macro-driven nature of today’s stock market. In it, long-time value investors lament the current environment where stocks appear to trade in unison based on unemployment data or European bank stress test results. If stocks are driven by macro factors instead of individual company fundamentals, stock pickers can’t get an edge. Market strategist James Bianco of Bianco Research asserts “stock picking is a dead art form.” Macro hedge-funds are opening at a rate equivalent to that of traditional stock funds and the big asset management firms are even launching macro mutual funds.

We think stock-picking is very much alive. In fact, we recently wrote a 20-page investment guide that details a bottom-up approach for today’s environment. Call us contrarian, but we couldn’t think of a better sign than this article that fundamentally-driven, bottom-up stock-picking is likely to make a comeback sooner rather than later. Didn’t the commodity bubble burst right around the time that the asset management firms were rolling out a new commodity fund or ETF every week? Moreover, didn’t “the death of equities” cover stories in the early 1980s signal the start of a 20+ year bull market for stocks?

The Wall Street Journal article presents data that shows the correlation of stocks in the S&P 500 between 2000 and 2006 was 27% – quite a bit of disparity indicating undervalued stocks could appreciate and overvalued stocks could depreciate as opposed to trading up or down in unison. The article also points out that correlation spiked to 80% during the credit crisis and again more recently during the European sovereign debt scare. As these issues petered out, correlations never dipped below 40% and today hover around the mid 60s. However, the article does not point out the length of time over which the correlations were measured – days, weeks, months?

The time period over which the correlation is measured is critical. “Time arbitrage” has proven to be a very effective investment strategy. Who cares if individual stocks are correlated over days and weeks when your investment horizon is years? Glenn Tongue (one of the Ts in T2 Partners along with Whitney Tilson) highlights this fact in a recent appearance on Yahoo! Finance. Like us, the partners at T2 believe buy-and-hold stock picking is far from dead. Mr. Tongue also makes a critical point about matching the duration of the investment strategy and the investors. This is why we work very hard to ensure our investors understand our process before they become clients.

Don’t misunderstand our view. We agree the data shows a significant increase in correlation between individual stocks (and we witness this as we watch the market and our individual names on a daily basis). We also agree that the macro backdrop driving the market will remain for some time. The over-leveraged PIIGS, US federal and local governments, and the US consumer will likely take years to adjust to sustainable levels. In addition, the massive government intervention in fiscal and monetary policy does not appear to be subsiding with Bernanke and company preparing for QE2’s maiden cruise. (We have discussed these issues at length in several of our recent quarterly letters.) The market will certainly react to macro factors over short time periods, but that doesn’t mean significantly undervalued stocks or significantly overvalued stocks won’t gravitate toward fair value over a longer period of time.

In our recently published investment guide titled How to Prosper in Volatile and Range-Bound Markets we detail the strategy we are employing to deal with the current environment. We believe a concentrated portfolio will be more likely to outperform – a few deeply discounted names that are returning capital to investors (via share repurchases or dividends) and that also have a catalyst can outperform even if the majority of the market moves in unison. In addition, the flexibility of corporations to deal with macro shocks (be they slower growth, inflation, government regulation) means equities have a better chance of outperforming government bonds, currencies, or commodities (areas macro funds are more likely to play in).

Finally, we think valuation-based timing will be more important than it has been for traditional stock pickers. While Japan’s macro-driven market now trades at close to a quarter of its peak value 20 years ago the market experienced four rallies and five sell-offs of greater than 30% over that period. That type of volatility creates terrific opportunities for value investors to increase exposure as the macro shock of the day creates fear and to pare exposure as the fear fades away.

The above was a guest post from Grey Owl Capital. Be sure to check out our coverage of their second quarter letter as well where they outlined how uncertainty can provide opportunity.

Adam Weiss & James Crichton's Scout Capital Boosts Coca-Cola Enterprises (CCE) Stake

James Crichton and Adam Weiss' hedge fund Scout Capital recently filed a 13G with the SEC regarding shares of Coca-Cola Enterprises (CCE).

Per the filing, Scout Capital disclosed a 5.01% ownership stake in CCE with 16,719,500 shares due to portfolio activity on October 4th. This is a 35% increase in their position size as Crichton and Weiss' hedge fund held 12,350,000 shares back on June 30th.

Coca Cola Enterprises is a bit of an event driven play as Coca-Cola (KO) recently acquired the North American bottling operations of Coca-Cola Enterprises (CCE). CCE shareholders received a cash payout of $10 per share and the stock dropped 30% to reflect this.

Following the transaction, Goldman Sachs added CCE to its America Buy List with a price target of $28 per share (CCE currently trades around $24). Goldman feels that Coca-Cola Enterprises has "a stronger top-line growth outlook, a better margin/return profile and a dominant market share position." In the past, we've detailed how Jamie Dinan's York Capital was fond of Coca-Cola Enterprises and likes CCE's free cash flow.

This is the first time we've covered hedge fund Scout Capital and we will continue to do so from here on out. Adam Weiss founded Scout with James Crichton in August 1999. Before founding the hedge fund, Weiss worked at Dan Loeb's Third Point LLC (who we recently revealed has positions in gold bullion and Potash). Weiss received his degree from Harvard College (Phi Beta Kappa and a John Harvard Scholar) and his MBA from Columbia University.

Taken from Google Finance, Coca-Cola Enterprises (CCE) is "engaged in marketing, producing and distributing non-alcoholic beverages. The Company serves a market of approximately 421 million consumers throughout the United States, Canada, the United States Virgin Islands and certain other Caribbean islands, Belgium, continental France, Great Britain, Luxembourg, Monaco, and the Netherlands."

Glenn Greenberg on His Approach to Investing ~ Quote of the Week

Market Folly's quote of the week this time around comes from Glenn Greenberg of Brave Warrior Capital (formerly of Chieftain Capital). His quotation addresses his approach to investing which he's practiced for over 25 years:

"We are looking for good businesses where the fortunes of those businesses don't turn on slight changes in GNP statistics, where there is substantial free cash generated and put into the hands of extremely capable managements which will not go out and spend that money foolishly by over-expanding plant capacity, or paying too much for an acquisition to get into somebody else's difficult business. We look for people who have a vision of building something, building their company into a great business."

~ Glenn Greenberg

For more words of wisdom from top hedge fund managers, scroll through all of our previous quotes of the week.