Friday, April 1, 2011

Bill Ackman Starts Activist Position in Alexander & Baldwin (ALEX)

Bill Ackman's hedge fund firm Pershing Square has initiated a new activist position in Alexander & Baldwin (ALEX). Per a 13D filed with the SEC, Pershing has disclosed a 8.6% ownership stake in ALEX with 3,561,943 shares due to portfolio activity on March 21st. This comes after Ackman's other activist position in J.C. Penney (JCP) as well as his stake in Fortune Brands (FO).

Not a New Position?

While this appears to be a brand new position, Pershing also filed an amended 13F for the fourth quarter of 2010. And guess what all of a sudden appears? Shares of ALEX. At 2010 year-end, Ackman's hedge fund actually owned 172,001 shares. This position was previously unreported on their last 13F filing because they filed with the disclaimer of "confidential information has been omitted from this report and filed separately with the Commission."

Ackman obviously did this in order to stealthily accumulate his position. Because let's face it, had he been forced to disclose the tiny new position back in February, the imitators who mimic his every move would have seen this new position and driven prices. Pershing accumulated most of their stake in March. To see the rest of Pershing's investments, head to our Hedge Fund Wisdom newsletter.

Working With Marcato Capital Again

Also worth highlighting in Pershing's new activist stake is the fact that they will be working with fellow hedge fund Marcato Capital again. Marcato was founded by ex-Pershing analyst Mick McGuire and he had previously recommended shares of Landry's Restaurants to Pershing and the two worked together on the activist position.

They've teamed up again on shares of Alexander & Baldwin and Marcato owns 1.3% of ALEX with 551,881 shares. Collectively, the two hedge fund firms together now own 9.9% of the company. Their average purchase price seems to be around $41.xx per share given they spent $168.8 million on the stake.

Additionally, the hedge fund firms have exposure to 372,900 shares via total return swaps. These have a price of $45.12 per share and their ownership stake inclusive of these jumps to around 11% of the company. Overall, the SEC filings contain the standard activist boilerplate regarding talking to management about enhancing shareholder value. We'll have to see what tricks Ackman and McGuire have up their collective activist sleeves.

Per Google Finance, Alexander & Baldwin is "engaged in property development and agribusiness operations. The Company’s wholly owned subsidiary Matson Navigation Company, Inc., together with its two subsidiaries, is engaged in ocean transportation operations, related shoreside operations in Hawaii, and intermodal, truck brokerage and logistics services. The Company operates in five segments in three industries: Transportation, Real Estate and Agribusiness."

To learn more about this hedge fund, check out our profile of Pershing Square.

Eton Park Reduces Airgas (ARG) Position

Eric Mindich's hedge fund firm Eton Park Capital has reduced its stake in Airgas (ARG). Due to an amended 13D filing with the SEC, Eton Park now shows a 4.92% ownership stake in ARG with 4,145,191 shares due to portfolio activity on March 29th.

This is a 31% reduction in their position size. Back in December 2010, Eton Park owned 7.15% of Airgas. The bulk of their recent sales came on February 16th and March 30th at weighted average prices of $63.0019 and $66.3244, respectively.

You'll recall that Airgas had in the past been subject to a takeover bid by Air Products (APD). Eton Park had supported the bid after APD raised its offer numerous times. However, Airgas did not seem receptive. For now, Eton Park still holds a position, albeit a smaller one than previous months.

Per Google Finance, Airgas is "a distributor of industrial, medical and specialty gases (delivered in packaged or cylinder form), and hardgoods, such as welding equipment and supplies."

Viking Global Increases H&R Block (HRB) Stake

Andreas Halvorsen's hedge fund Viking Global has boosted its stake in H&R Block (HRB). Per a 13G filed with the SEC, Viking has disclosed a 5.5% ownership stake in HRB with 16,664,422 shares. This is a 60% increase in their position size as they owned 10,408,200 shares at the end of 2010.

The firm has been taking more concentrated positions as each portfolio manager essentially owns each other's "best ideas". Before founding Viking, Halvorsen worked at Julian Robertson's Tiger Management. You can see the rest of Viking Global's portfolio here.

Per Google Finance, H&R Block is "has subsidiaries that provide tax, banking, and business and consulting services. The Company’s Tax Services segment provides income tax return preparation, electronic filing and other services and products related to income tax return preparation to the general public primarily in the United States, and also in Canada and Australia."

What We're Reading ~ 4/1/10

Evaluating equity investments: Accounting for Value [Stephen Penman]

Famed subprime short-seller Michael Burry's FCIC testimony [ValueWalk]

AIG's mistake explained [Economics of Contempt]

How Verizon could purchase Sprint and harm Vodafone [Cautious Bull]

Bill Ackman speaking at Make A Difference in Milwaukee on April 27th

Bridgewater, Elliott & SAC shape report on long-term investing [AR+Alpha]

More on Chinese reverse mergers [CNBC]

GGP, HHC, The Wall Street Journal and David Simon [ValuePlays]

What hedge fund managers know about making money [Marketwatch]

Managed account platform assets grow by 27% [HFMWeek]

Hedge funds may salvage month despite quake [WSJ]

Short linkfest this week. For more good financial reads, head to Abnormal Returns

Tuesday, March 29, 2011

Crispin Odey on Agricultural Commodities & Farming

The founder of UK based hedge fund firm Odey Asset Management, Crispin Odey, is out with his latest market commentary and investment outlook. Penned on the 28th of February, Odey writes on the slightly tangential, yet increasingly talked about topic of farming and agricultural commodities.

We've detailed how legendary investor Jim Rogers is bullish on agriculture and has also bought farmland. Also, the now famous subprime short-seller Michael Burry also bought farmland. While these well-known investors focus on arable land, Odey's recent commentary expresses concern regarding agricultural commodities and supply/demand imbalances.

Here's Crispin Odey's outlook:

"This is always the time of year when my farming friends ring me up every day to ask 'should they be selling forward their harvest?' The truth is that at this time of year they have little to do other than worry about it, and because they worry they are always early sellers. Like everyone, they are risk averse. By now with the harvest less than six months away, they are probably 65% pre-sold and yet they watch the price rising and falling and of course on weak days they kick themselves for not selling more.

In my hedge fund we are also forced to get involved. We are shareholders in a station in Australia which this year has grown over 23,000 acres of cotton, and plans to grow 25,000 acres next year. Cotton has nearly tripled in price in eighteen months and it is no surprise to find that we sold this year's harvest, which is just about to start, at half the current prices. Why? Because we had sold 2/3 of our crop forward by November of last year. We were the lucky ones because our neighbours further down the Darling River lost most of their crop, thanks to the flooding, and the rise in the price from $100 to $220 per bushel was nothing more than them covering that shortfall. Like many people, they hated taking a loss and the same conservatism that had led them to sell forward, led them to sit and hope that the price would come down before delivery in April. Many of these farmers face bankruptcy, in the best year for cotton in 30 years. This year the farm will make a 30% return on our investment made nearly four years ago. If prices hold into next year we would almost earn what we paid for the farm, in one year. In other words prices are very unlikely to hold!

However, if you look generally at where we are globally, soft commodities are suffering from the same kind of demand/supply imbalance that has driven steel production worldwide to go from 580 million tons to over 1350 million tons in less than a decade. Taking grain production last year globally, the world produced 2.179 billion cubic tons, down 2.4% from the previous year, but up from 1.87 billion cubic tons, produced in 2000. However, consumption was 2.235 billion cubic tons and inventories in thenorthern hemisphere are now 27% below where they were in 2000 and down 15% in a year to 425m tons. The importance of China can't be overstated. The USA increased exports of corn, soy beans, wheat and cotton by 18% last year, but China's share of exports rose by 34%.

Over ten years China's urban incomes have risen threefold; their agricultural incomes have doubled. If you believe like I do that China's growth will not falter until their current account deficit goes negative, my farming friends may have to devise an alternative pastime after the shooting season ends in January, to selling their harvest early.

The corollary of all of this is of course that the cost of living is rising for the developing world at an alarming rate. Most of these countries exacerbate their problems by subsidising food prices. Investors must expect that revolutions, sparked by bread riots, will be part of their diet, for as long as China's demand continues to grow."

More insight from this manager can be found in Odey's previous commentary.

Jeff Saut: A Lot of Price Risk Has Been Removed From Select Stocks

The last time we checked in with market strategist Jeff Saut in late February, he was putting money to work in stocks, but cautioned that the correction was not yet over. And he was right, as the market fell 4.77% further in the weeks after his prescient call.

This time around, his latest missive is entitled, "Be Conservative, Not Conventional." With a title like that, one can easily guess what the gist of his message is. He quotes the wise value-investing-father Benjamin Graham who wrote, "The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept."

Saut hints that the recent low in the market on March 16th could be "THE" low for quite some time, but if a re-test were to occur, he'd be a buyer. He also reiterated his call in buying Williams Companies (WMB) when it was trading around $28.70. This stock has been a hedge fund favorite and you can read an in-depth analysis of WMB in our current issue of Hedge Fund Wisdom.

He also cites fondness for Peoples United Financial (PBCT), LINN Energy (LINE), and EV Energy Partners (EVEP).

Overall, the market strategist concludes that, "I think a lot of the price risk has been removed from select stocks and therefore I am not afraid to gradually accumulate favored names."

Embedded below is Jeff Saut's latest market commentary:

You can download a .pdf copy here.

More insight from the strategist can be found in his thoughts on the never-ending market cycle of fear, hope and greed.

Hedge Fund Glenview Buys More ArvinMeritor (ARM)

Larry Robbins' hedge fund Glenview Capital has increased its position in ArvinMeritor (ARM). Due to portfolio activity on March 18th, 2011, Glenview has disclosed a 5.72% ownership stake in ARM with 5,388,617 shares.

This marks a 33% increase in their position size from the end of 2010 when they owned 4,038,617 shares. Since the beginning of 2010, shares are down around 6%. Keep in mind also that ARM's ticker symbol will be changing to MTOR at the end of the month. In addition to this recent portfolio activity, Larry Robbins' hedge fund recently expanded its short portfolio as well.

Per Google Finance, ArvinMeritor is "a global supplier of a range of integrated systems, modules and components to original equipment manufacturers (OEMs) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The company serves commercial truck, trailer, off-highway, military, bus and coach and other industrial OEMs and certain aftermarkets, and light vehicle OEMs."

Monday, March 28, 2011

Glenview Capital Expands Short Portfolio

Larry Robbins' hedge fund firm Glenview Capital has recently expanded their short equity portfolio to include more single names (rather than index shorts). Why?

The firm is still seemingly optimistic about equities as a whole and has transitioned money from long fixed income strategies to long equity strategies due to better risk/reward. At the same time, Glenview has also found shorting opportunities in companies that could be negatively affected by the current and impending economic and monetary environment (read: higher interest rates).

Below is an excerpt from Glenview's annual letter where they identify compelling short opportunities in REITs, cruise lines, healthcare, and companies largely reliant on government contracts:

"a) We established short positions in a series of REIT equities whose valuations reflect exceedingly low cap rates proportional to the exceedingly low interest rate environment. We do not believe that our core competency is predicting forward interest rates, but we are exceedingly comfortable betting that over the course of the next year, twelve months will pass. As we examine the term structure of interest rates, a 3.3% 10-year bond yield is comprised of a one year yield of 25bps, and therefore the subsequent nine years average 3.65% (of which the last eight years are 4%). For REITs that reflect a 6% cap rate, a 70bps move over the two years will create 10% multiple compression solely by moving two years forward on the term structure of interest rates. Should inflation accelerate above expectations, this rate rise would be even more pronounced, and the multiple compression more significant. While we don’t expect REITs to implode, we do believe they will underperform over time.

b) We established short positions in cruise lines and other travel related equities that will likely see profits eroded by declining revenue on aging assets combined with inflationary cost pressures including oil. Furthermore, asset intensive travel industries such as hotels are also often valued on cap rates and susceptible to the same valuation compression as REITS, as described above.

c) We broadened our portfolio of shorts in companies that derive a significant portion (or all) of their revenue from government sources whose ability to grow such spending is impaired by their own balance sheet constraints and fiscal deficits. Such companies are likely to see decelerating revenue trends and more intense pricing and margin pressure as a result of the deteriorating financial health of their government and government related customers.

d) In healthcare, we expanded our short positions in companies that we believe will come under more intense pricing and reimbursement pressure as the healthcare reform debate migrates from coverage back towards bending the cost curve."

While most hedge funds don't reveal their exact short positions, they often provide hints. For example, if Glenview is shorting cruise lines, there are only so many players in this space such as Carnival (CCL), Royal Caribbean (RCL), etc. And in the REIT space, a quick valuation screen can narrow down the field somewhat.

A cursory look at Glenview's long portfolio of course reiterates that they already have hefty long exposure in the healthcare sector via McKesson (MCK), Express Scripts (ESRX), Life Technologies (LIFE), and Medco Health (MHS). The first three have been some of Glenview's largest positions for a while now and so it seems their new healthcare shorts are obvious hedges to this copious long exposure.

We recommend reading the full Glenview letter, available via Dealbreaker.