Friday, October 21, 2011

Alan Fournier's Pennant Capital Buys More Universal Stainless & Alloy Products (USAP)

Alan Fournier's hedge fund Pennant Capital filed an amended 13G with the SEC regarding their position in Universal Stainless & Alloy Products (USAP). In it, they disclose a 10.04% ownership stake in USAP with 685,770 shares.

This marks a 27% increase in their position size since the end of the second quarter when Pennant owned 538,400 shares. We've covered the rest of Pennant's holdings in our Hedge Fund Wisdom newsletter.

About Pennant Capital

Prior to founding Pennant Capital, Alan Fournier was responsible for the global equitiy portfolio for David Tepper's Appaloosa Management. He pursues a long/short equity strategy and graduated from Wentworth Institute of Technology's Mechanical Engineering program.

About Universal Stainless & Alloy Products

Per Google Finance, Universal Stainless & Alloy Products is "manufactures and markets semi-finished and finished specialty steel products, including stainless steel, tool steel and certain other alloyed steels. The Company’s manufacturing process involves melting, remelting, heat treating, hot and cold rolling, machining and cold drawing of semi-finished and finished specialty steels. The Company’s products are sold to rerollers, forgers, service centers, original equipment manufacturers (OEMs) and wire redrawers."

Hedge Fund Scout Capital Acquires Total Return Swaps on Domino's Pizza

James Crichton and Adam Weiss' hedge fund Scout Capital just filed a Form 3 and Form 4 with the SEC regarding their position in Domino's Pizza (DPZ).

On October 18th, Scout acquired various total return swaps with expiration dates of September 6th, 2012 and November 16th, 2012. The conversion/exercise price of these derivatives range from $23.38 to $28.94 and in all these swaps seem to represent over 750,000 shares. DPZ currently trades around $31.40.

The footnotes of the filings also indicate that Scout has now become a 10% owner of Domino's Pizza (DPZ) as a result of the company's buyback program.

For more from this hedge fund, head to Scout's presentation on Williams (WMB) and Sensata Technologies (ST) from the Value Investing Congress.

Per Google Finance, Domino's Pizza is "is a pizza delivery company in the United States. The Company operates its business in three segments: domestic stores, domestic supply chain and international. Its brands include the Domino’s Pizza, Domino’s HeatWave hot bag, Domino’s American Legends pizzas and Domino’s BreadBowl Pasta and Cinna Stix. Domino’s earns its revenue by retail sales at its franchise stores, which generate royalty payments and supply chain revenues to the Company. DPI’s also generates earnings through retail sales at its Company-owned stores."

What We're Reading ~ 10/21/11

Steve Eisman to launch new fund in January [FINalternatives]

The case for Bank of America (BAC) as a 'terminal short' [Zero Hedge]

Why Netflix's Reed Hastings might be getting desperate [Benzinga]

The growing audience for dividends [Abnormal Returns]

Why eBay should spin-off PayPal [Motley Fool]

Is Klarman's Baupost seeking cash from investors? [Institutional Investor]

Fernandez leaves Fairholme Fund [Morningstar]

Uncovering hedge fund skill from holdings they hide [SSRN]

Paulson tells investors 'we made a mistake' [Dealbook]

Thaler's JAT Capital up 31% this year [SF Gate]

Scott Forstall, the sorcerer's apprentice at Apple [BusinessWeek]

Hedge fund guru warns of period of high inflation [Yorkshire Post]

Analyzing info from the Groupon IPO roadshow [Felix Salmon]

Kindger Morgan to buy El Paso for $21.1 billion [Dealbook]

Thursday, October 20, 2011

Lee Hobson's Highside Capital Doubles Clearwire (CLWR) Stake

Lee Hobson's hedge fund Highside Capital filed a 13G with the SEC regarding shares of Clearwire (CLWR). In it, Highside reveals a 5.5% ownership stake in CLWR with 16,174,400 shares.

This marks a 129% increase in their position size since the end of the second quarter.

Clearwire Volatile Lately

Highside crossed the 5% threshold that required disclosure to the SEC on October 7th, the day Sprint (S) held their investor day .
This is relevant because that day Sprint signaled that they might cease purchases of CLWR's services after next year. Sprint owns almost 54% of Clearwire equity (but just 49.7% of voting rights).

This news, coupled with a CLWR downgrade from Moody's on October 14th, triggered speculation that Clearwire could possibly miss interest payments and caused the company's bonds to plunge.

This is the second major hedge fund we've seen take a sizable stake in Clearwire (CLWR). We highlighted how Larry Robbins' Glenview Capital bought the stock and you can read their CLWR investment thesis here.

About Highside Capital

Prior to founding Highside, Hobson was at Lee Ainslie's Maverick Capital. Highside employs a long/short equity strategy and invests in public markets. Hobson received his MBA from Harvard Business School and attended undergrad at Princeton University.

About Clearwire

Per Google Finance, Clearwire is "a provider of fourth generation (4G) wireless broadband services. Clearwire builds and operates next generation mobile broadband networks that provide high-speed mobile Internet and residential access services, as well as residential voice services. Its 4G mobile broadband network provides a connection anywhere within its coverage area."

For more hedge fund updates, be sure to check our extensive notes from the Value Investing Congress.

Eric Mindich's Eton Park Capital Adds to 3Legs Resources Position

Eric Mindich's hedge fund Eton Park Capital has added to its position in London listed 3Legs Resources (LON: 3LEG). Due to trading on October 9th, Eton Park now owns 5.58% of 3LEGS' shares.

We originally reported when Eton Park took its initial position in 3Legs when they bought stock via the placing on the AIM market in June 2011. They've since acquired an additional 2.1% of the company.

Per Google Finance, 3Legs Resources is "engaged in the exploration, evaluation and development of oil and gas targets, from unconventional resource plays. The Company has six exploration and prospection licenses covering approximately 4,387 square kilometers (1,084,000 acres) (gross) in the onshore Baltic Basin."

In other activity from this hedge fund, we also detailed Eton Park's position in MSCI.

Odey Asset Management Buys More Lookers

Crispin Odey's UK-based hedge fund, Odey Asset Management, has added to its holdings of car dealer Lookers (LON: LOOK). Due to a filing made on October 13th, Odey now owns 5.19% of Lookers shares.

Odey has fancied UK car dealers for some time. In Crispin Odey's January 2010 letter for his flagship fund, Odey European, he said that he in particular liked London listed car dealers Pendragon and Lookers. Odey wrote,

"I have bought well managed businesses, where management have taken the necessary action to live in a world in which demand remains excessively weak. Where management have demonstrated the ability to take advantage of further dislocation –for instance if interest rates were to rise, they would be able to exploit this as an opportunity to buy their rivals.

In the UK this has put me into the likes of Lookers and Pendragon, both car dealers. Current new car sales are running at 1.8 million cars a year, some thirty percent below the replacement rate of 2.8 million cars. Money is being made in used car sales and servicing, both of which are benefitting from the ageing of the fleet. On a P/E for this year of 5x, I find shares that are on discount to a level of profitability which already discounts the worst. That double discount gives me a great deal of comfort.”

Odey Likes Pendragon Too

Since then, Lookers shares have traded more or less sideways whilst Pendragon shares have lost over half of their value. As Pendragon's shares fell in 2010 and 2011, Odey doubled-down, building a large ownership stake of 21.09% of the company. Odey's last purchase of Pendragon stock was in mid-August 2011.

Other Recent Activity

Odey also recently added to his holdings in London listed business services company RSM Tenon. You can also view Odey's latest market outlook.

About Lookers

Per Google Finance – “Lookers plc is a motor retail company. It is a multi-franchise main dealer group with franchises for many car manufacturers. It operates 122 retail outlets across 32 franchises operating from 73 locations. And was organized into two main business segments: motor division and parts distribution."

Tuesday, October 18, 2011

Value Investing Congress: Slideshow Presentations & In-Depth Notes

Our Value Investing Congress notes and summaries from day 1 have been completely replaced with the actual slideshow presentations and/or in-depth notes from each speaker. We've also posted up links for day 2's speakers. Click each hedge fund manager's name below to view this brand new material:

Value Investing Congress Slideshow Presentations & In-Depth Notes

Bill Ackman (Pershing Square Capital): Long Fortune Brands Home Security (FBHS)

David Einhorn (Greenlight Capital): Short Green Mountain Coffee Roasters (GMCR)

Leon Cooperman (Omega Advisors): Long Apple (AAPL) & E*Trade Financial (ETFC)

Jim Chanos (Kynikos Associates): Beware the global value-trap

Adam Weiss & James Crichton (Scout Capital): Long Sensata Technologies (ST) & Williams (WMB)

Boykin Curry (Eagle Capital): Long Aon (AON) & Goldman Sachs (GS)

Bernard Horn (Polaris Capital): Traveling the world to uncover value

Joel Greenblatt Gotham Capital: The big secret for value investors

Guy Gottfried (Rational Investment Group): long The Brick (TSE:BRK)

Vladimir Jelisavcic (Longacre Fund): DryShips (DRYS) Convertible Bonds

Timothy Hartch (Brown Brothers Harriman): Dentsply (XRAY) & Energy Solutions (ES)

Alexander Roepers (Atlantic Investment Management): Anticipating more M&A

Whitney Tilson & Glenn Tongue (T2 Partners): Long Berkshire Hathaway (BRK.A) & J.C. Penney (JCP)

Want more hedge fund coverage? Don't miss out: get our free updates via email or via RSS reader.

Bill Ackman: Long Fortune Brands Home Security (Value Investing Congress Presentation)

At day two of the Value Investing Congress, Bill Ackman of hedge fund Pershing Square Capital gave the case for going long Fortune Brands Home Security (FBHS) in a presentation entitled "You'll Want to Hear This."

Be sure to check out all our notes from the Value Investing Congress.

Bill Ackman (Pershing Square Capital)

Embedded below is his full slideshow presentation:

Ackman has spoken every year for the seven years of the conference's existence. He runs $10 billion now and has an 8-person investment team. His analyst (who presented it) generated the idea.

"A Homespun Fortune"

Fortune Brands Home & Security (FBHS): Makes faucets, kitchen/bath cabinets. Was just spun off from Fortune brands 2 weeks ago. Own Moen, #1 faucet brand in NA, security Master Lock, #1 Padlock brand in US. Secular winner: industry leader with scale, strong management team. Cyclical winner: when the housing market normalizes, EBITDA can triple from here due to operating leverage. “Platform business” as it can roll-up small adjacent categories. Key is housing starts need to improve, if it does, stock can go to $22, up 70% from today’s price of $15. Classic spinoff, being sold by Fortune Brand investors who don’t want this type of business.


Plumbing. Moen faucets. Has held up throughout downturn- low-ticket items that can really improve look of the bathroom, also high install base for replacement sales.

Cabinets. Excess capacity, most vulnerable to housing. Barely profitable while peers are losing money.

Security. Master Lock business. Stable demand in the core padlock market. Can market more aggressively now that it’s separate from Fortune Brands. Windows & Doors. Very leveraged to new home building market. Barely profitable.

2007 had 14% EBITDA margins, now only 5%. But plumbing & security business has, 50% of Revenue, but 80% of EBIT. Currently the Cabinets and Windows/Doors are underperforming due to housing market. If capacity gets reduced in housing sensitive segments, they could get to a 10% EBIT margin overall. Good balance sheet, can make some acquisitions.

Housing market review: Housing starts are at the lowest level in the last 40 years. This is the fifth year of the housing recession, at 600k housing starts. Excess supply today is 2 – 2.5M units. 1M needed every year, building only 600k, 400k reduction of supply every year implies 5.6 years to remove excess supply.

FBHS upside case: With housing recovery- EBITDA doubles. If no recovery, company will have to cut out costs to get back to 10% EBITDA margins. Trades at 9.7X LTM EBITDA, 23x P/E. Looking forward 6.4x 2012E EBITDA.

Whole story depends on how fast housing recovers. Range of stock price outcomes: No recovery: $14, no upside. Partial recovery: $18, 35% upside. Huge recovery: $27 per share, 110% upside.

Q&A Session:

1. Why is FBHS the right way to play the housing cycle? “Low risk way to play it, if we’re wrong, we don’t lose much money.”

2. Ackman says election could be a potential catalyst to help consumer confidence; renting is more expensive than buying in some markets. Says recovery happens much more quickly than 5 years.

3. Question on C: stock off 30% from when started buying the stock, mistake was not using a higher discount rate for the uncertainty of the stock.

4. Talking up the Hong Kong Dollar options - only 1% of the fund, but if they’re right in a year, make 60x their money.

5. JCP: real estate isn’t core to the story. Idea is for management to improve the business. “Retail, when you get it right, can be close to the best business. Look at the wealthiest people in every country in the world- the richest are often retailers.” If you get retail right, it can be an incredible business. Most relevant thing is this “incredibly smart, charismatic guy” is going to run the business. Perfect training for the job- 15 years at Target, then building Apple stores. “Ron is going to re-invent the department store.” Incentives in line, no liquidity on his options for 6 years, and bought $50M of stock himself. Ackman now has 26% of JCP.

6. Justice Holdings. Trades on LSE. “SPAC.” Cash shell. Ackman put up $450M. Idea is to find a business to buy and effectively take public.

7. Howard Hughes, from $35 to $77, back to the $40s- any comment? Owns Ward in Honolulu, South St Seaport, GGP HQ business in Chicago, book value about $50 on a very conservative estimate, zero net debt. Good board and management. “A collection of assets that will do well over time.”

8. His business model is to take big stakes in companies. He has made a lot of money for co-investors, who he doesn’t even know. When he’s in a stock, it sends a very strong message to boards because they know that there are many other investors behind him. Allows him to have influence on how management operates the company.

In addition, large stakes allows him to get a good CEO, who they can “protect” from Wall Street. They get some control without paying a control premium. Free riders actually help him. Better than LBO firms, because they have to pay a huge premium over public market price for control. They also have a private, illiquid, levered position. Ackman’s is less liquid than typical public stock, but much cheaper entry point.

“People making money off our strategy is part of the business, and healthy.” (This is the second time we’ve heard him say this - it’s really the key to what he does.) Tilson piled on, and said Ackman took the best advantages of both Hedge Funds and Private Equity. Says Ackman made more money faster than anyone did in history.

For more from the Pershing Square manager, be sure to head to Ackman's presentation on the Hong Kong Dollar as well as read about how Pershing bought $600 million worth of investments during the August volatility.

Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.

Scout Capital: Long Williams (WMB) & Sensata Technologies (ST) ~ Value Investing Congress Presentation

At day two of the Value Investing Congress, Adam Weiss & James Crichton of hedge fund Scout Capital gave the case for a long of Williams (WMB) and Sensata Technologies (ST) in a presentation entitled "Two Investment Opportunities."

Be sure to check out all our notes from the Value Investing Congress.

Scout Capital

Adam Weiss: long Williams Co (WMB)

Three parts: pipelines, midstream producer of LNG, E&P. Feb new CEO breaking up the company. Stock $24, Base case $37, based on infrastructure business being revalued on break up, reserves is $9 per share for E&P, “hidden asset” worth $3/share. Upside case is total $47-50.

*Note: In the past we saw large hedge fund buying in WMB and analyzed it in a past issue of our Hedge Fund Wisdom newsletter.

Business quality: “good, not great”

Business model: inevitable product/service, benefits of scale, favorable competitive environment as pipelines take time to build, WMB is low cost provider.

Sustainable growth: 7-10% EBITDA CAGR over 5 years. Well-located pipelines, in most cases, coal to gas switching is required by law and Transco (WMB) has the only pipelines there.

Management: New CEO, break-up of company within months of taking over, strong performance record in the past – he ran the WMB midstream business prior to this and it had the highest growth of any division.

Street misunderstanding: spin/break-up of a conglomerate- different types of investors in the stock- E&P and infrastructure are at odds with each other. Sell-side and buy-side coverage issues. New CEO, new culture. Hidden asset- the off-gas processor in the Canadian gas sands. By breaking up the company, shifts focus from EBITDA to multiples to dividend power, yield and NAV.

Valuation: Sum of the parts: Base case $37, bull case $47-50

1. Infrastructure assets. Dividend of $1.14-1.37, 1.2x coverage, gets $25 stock based on 4.5% yield, similar to KMI or OKE comps. Upside case 4% yield is $30.

2. E&P business: $9.00 floor share, based on NAV comps- CHK, et al. $1.24 per proven mcf, 25% below peers.

3. Hidden asset. Canadian Midstream business, oil sands gas processor. Based on 4.5x EBITDA get $3.00 base case, upside based on dividends, 0.40 div, 4.5-5.0% yield, get $6-8 per share in bull case.

4. Balance sheet value/ cap structure optimization. Either M&A or buyback, get $2-3 per share.

Risks: MLP valuation risk, NGL stability (20% of EBITDA from commodity-sensitive margins), regulatory changes - taxation of MLPs are a headline risk.

Path to realization? Spin of business Q1-2012 is catalyst. Dividend raise. Discovery of hidden asset by Street. Excess capital usage.

James Crichton: long Sensata Technologies (ST)

Airbags, jet circuit breakers, HVAC systems. High value add solutions. Low cost, high value nature of products, with high switching costs. The current issue of our Hedge Fund Wisdom newsletter also analyzes ST.

How Scout determines their Circle of Competence: Know the right people? Not quarter-to-quarter news flow, deep industry knowledge. Product? Do we understand the drivers of demand? Mental models: are there any useful predictable models in place? His example, Sensata engineers work at customers’ facilities, so familiarity makes it easy for customers to buy from them. Impact of un-analyzables. Identify risks and things that you can’t know for sure.

Business Quality. Powerful moat, inevitable product- make machines safer and more efficient. High value, low cost value proposition- typical sensor costs $10, in a multi-thousand dollar engine. High switching costs once designed into products. In flat GDP, grows revenue from 4% to as high as 20% in a better economy. FCF grows 12-30%.

Management: grew revenue 6.5% CAGR despite auto industry contraction. Management owns 2.2%, $100M of stock, CEO owns $45M.

Misunderstanding by Street: levered equity stub in a relatively new public company without peers. Change of incentives makes levered equity stubs work. (This was a Bain LBO from TXN in 2006, and then IPO’d). Management is paid more by stock than cash. Scout is higher than Street on estimates. “Sponsor” still owns 51% of stock, is selling, and may become more liquid. (Can be some overhang in these situations though).

Risks: need auto sales to hold up, improve for stock to work. Scout is modeling no growth, but also no further drop. Also, bull case relies on further accretive acquisitions. Valuation multiple may not expand.

Q&A Session: Did KMI/EP deal change their numbers for WMB? Gets you 11-12x EBITDA for pipeline asset, does indeed add to bull case price target.

For more from this hedge fund, head to some of Scout's other new positions.

Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.

Leon Cooperman's Value Investing Congress Presentation

At day two of the Value Investing Congress, Leon Cooperman of hedge fund Omega Advisors gave the case for going long Apple (AAPL) and E*Trade (ETFC) in a presentation entitled "The Investment Outlook & Some Attractive Values."

Be sure to check out all of our notes from the Value Investing Congress.

Leon Cooperman (Omega Advisors)

Embedded below is the full slideshow presentation from Cooperman:

"Like it or not, we've entered a world of risk-on risk-off macro world." Four conclusions that require four assumptions:

1. Assume US will avoid recession; remain slow growth at worst: Metrics suggest we are not on a recession track. Bank lending improving, consumer savings rate up to 4% from 1%, debt service ratio good. Not a “feel good” environment, with 9% unemployment, 10% only part-time. “I take very strong exception to the idea that 2011 is another 2008.” Corporate America most cash on balance sheets since 1955. Oil drop from 115 to 80.

2. Assume that Eurozone will effectively ring-fence Greek sovereign debt issues: “We expect sane policies to prevail, since there is no choice.” His view, based on 45 years of experience, is when the problem is so catastrophic, and expected to occur, it doesn’t occur. He thinks they’ll follow the US banking model, raise capital, shed noncore assets, delever.

3. Assumption that failed, Obama would come to the center: He says it’s not happening. Old expression: “When the President is in trouble, the market is in trouble.” He rants against Obama- says he only wants to tax the wealthy, debase the dollar, borrow from the world to create a welfare state.

4. Assume the Middle East settles down, oil prices stay reasonable: At 1100, the SPX had already discounted a mild recession that was not happening. He says stocks are compelling valuations here. Says market dropped 20%, a traditional recession market correction is 25%. Thinks the recent lows of 1100 are the downside for the cycle. Requires two of the top 4 assumptions.

Even if we did have a recession, SPX eps usually only drops 15-20%, so even if they did drop, he says 14 times trough earnings to be very compelling. He still expects SPX eps of $100 or more in 2012. Still in early stages of an economic recovery.

Valuation: Stocks are cheap relative to history, inflation, and interest rates. Last 50 years, SPX ave P/E was 15x. Now multiple is 11.6x, with only 2% interest rates vs. 6.6% average. Highest ERP in 20 years. Average bear market bottom the P/E was 12x, where we are now. Just had one of the worst 10 year return years in history, believes will mean revert. Corporate bonds are nowhere near where they were in 2008/9, down 70% in yield, yet SPX is 2 multiples lower than it was back then. He is starting to buy corporate bonds with 9% yields. 45% of the SPX stocks now pay higher yields than 10-year treasury bonds- same high level as 2009, we haven’t seen this in 50 years.

Avoid treasuries: Says 10-year bonds historically yield same as nominal GDP. Says if you believe we get 2% growth, plus 2-3% inflation, that’s 4-5% yield, and bonds will lose a lot of money. Still predicts low growth for next decade: 2-2.5% GDP, 2-2.5% inflation, 4-5% nominal GDP, stocks make 7-9%, treasuries negative return.

“You don’t have to have a strongly rising stock market to make a lot of money.” 1967 Dow was 1000, 10 years later, 1982, the Dow was 1000. Over time, there is ample opportunity to find things that are mispriced to the market. (They had EP yesterday as a 2% position before the buyout).

He’s 78% net long, says things look very cheap. With a little patience, can make a great deal of money.

Top Ten Long Ideas:

Apple (AAPL): Less than 10x multiple net of cash. Succession clear. Financial policies somewhat destructive, sitting on $80B in cash, but that may change.

Boston Scientific (BSX): 20% FCF yield

Qualcomm (QCOM): 16% grower trading for 12x

Sallie Mae (SLM)


Transocean (RIG): Says deep water drilling cycle is turning. 6.5% yield, well covered dividend, day rate is improving. Says stock is discounting $5-10B, but will settle for $1-2B

Exxon Mobil (XOM)

KKR (KKR): Dividend paying stock, but get K1, getting 9% yield, and expects growth.

Energy XXI (EXXI)

E*Trade Financial (ETFC): Ken Griffin involved, TD Ameritrade (AMTD) could buy them. Mortgage losses over, even with no deal, management is on the right track.

For more from the Omega Advisors manager, head to Cooperman's thoughts from Delivering Alpha.

Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.

Boykin Curry's Value Investing Congress Presentation: Aon & Goldman Sachs

At day two of the Value Investing Congress, Boykin Curry of Eagle Capital gave the case for going long Aon (AON) and Goldman Sachs (GS) in a presentation entitled "Time Horizon & Analytical Tools."

Be sure to check out all our notes from the Value Investing Congress.

Boykin Curry (Eagle Capital)

Aon (AON): Should have a 15% compound return for five years. It's a duopoly with a free call option (their new GRIP system) and another call option (multiple expansion). However, the company won't have any organic growth and GAAP measure makes it look less attractive.

He mentioned that the turn in the insurance cycle should be a tailwind. Compound rates are over 100% and some natural disaster/catastrophe will be a catalyst for insurance premiums to increase. We've analyzed AON in a past issue of our Hedge Fund Wisdom newsletter.

Goldman Sachs (GS): Company is facing a lot of short-term headwinds but if you put a 14x multiple on the i-banking division you get $1 billion and you put a 13x multiple on the PE division. He gives a liquidation value of $155 billion and most of their assets are liquid. Curry says GS could buyback 30% of equity over 3 years.

Q&A Session:

1. Goldman's balance sheet? They are borrowing money and sitting in cash to protect against bank run and to take advantage of potential opportunities.

2. Regulatory uncertainty will continue to be a problem for GS but he thinks they should still make a bunch of money.

About Boykin Curry: Eagle Capital has over $10 billion AUM and since inception in 1988 has returned 15.1% annualized.

Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.

Bernard Horn's Value Investing Congress Presentation

At day two of the Value Investing Congress, Bernard Horn of hedge fund Polaris Capital Management gave the case for a long of in a presentation entitled "Traveling the World to Uncover Value."

Be sure to check out all our notes from the Value Investing Congress.

Bernard Horn (Polaris Capital Management)

Embedded below is his full slideshow presentation:

Long discussion on his investment style- says markets are efficient, sounds like something of a closet indexed, “screen” approach, across markets worldwide. Says instead of the emerging world standard of living converging up to ours, ours will drop to theirs.

Defensive companies in their portfolio:

Nichirei Corp: Japanese frozen food manufacturer and logistics company. In deflationary environment, negative growth, but he still says stock goes from 360Y to 420Y because earnings will climb as they cut costs. “Chicken processing facility in Thailand” not an exciting company, lots of risks.

Methanex Corp: Largest global methanol producer. Chinese are more expensive, provide a floor to pricing. Stock at $20, price target $47. $2B market cap.

Trevi Finanziaria Industriale S.p.A.: Italian foundation equipment company. €450M market cap, stock €7 now, target price €15. Work on foundations of big buildings, such as the WTC. Risk is weak commercial real estate.

Smurfit Kappa: European packaging materials company, got hurt badly this summer, exposed to Europe. Stock price €4 now, price target €9. Lots of debt, €3B, €8.1B EV.

YIT OYJ: Building and industrial services. Construction in Finland.

Ameris Bancorp: South Georgia bank, very weak market. $9 stock, price target $19, expanding with FDIC- assisted deals.

Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.

Whitney Tilson's Value Investing Congress Presentation on Berkshire Hathaway & J.C. Penney

At day two of the Value Investing Congress, Whitney Tilson & Glenn Tongue of hedge fund T2 Partners gave the case for going long Berkshire Hathaway (BRK.A) and J.C. Penney (JCP) in a presentation entitled "Many Ways to Win."

Be sure to check out all our notes from the Value Investing Congress.

Whitney Tilson & Glenn Tongue (T2 Partners)

Embedded below is their full slideshow presentation:

The hedge fund pitched J.C. Penney (JCP) and they have a $71 price target (stock $31 now). “Decent” business. Followed Ackman, but got a lot more interested with new CEO on board. Story well known, same as Bill Ackman’s JCP thesis a few months ago. Persistent question about how the real estate value can be realized.

Other new stocks they have added in size: Goldman Sachs (GS), Citigroup (C), and Sandisk (SNDK). GS, C: Ackman also has these positions. Says trading at discount to book value. Says everyone ignores a fabulous business at C’s “good bank” and only looks at the bad bank portion.

SNDK: they own disk drive makers, says 90% storage on spin platters, the other 10% will be in Flash memory. Memory capacity constrained, explosive demand via tablets, smartphones. NAND has historically been commodity product, but being spec’d into a smartphone is different, enormous operating leverage, SNDK has IP on MLC.

You must overcome your initial knee-jerk reaction that “this is a terrible business.” The industry has changed- consolidated, and demand is exploding. Every iPad, iPhone needs it, yet analysts all expect pricing to fall as technology falls. They think pricing will improve. SNDK is trading so cheap, at a 6x P/E, and it could grow and trade at 20x P/E. Says a massive portion of the margin in iPhones is the incremental NAND. SNDK in the 4S.

As indicated in our September hedge fund performance numbers post, T2 was -9.5% in September and -29.6% for the year at that time.

Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.

Monday, October 17, 2011

Value Investing Congress Notes: Day 1

Today we're posting notes from the Value Investing Congress in New York where tons of prominent hedge fund managers are giving their latest investment ideas.

This post serves as an index and you can click each individual manager's name below for notes on their presentation.

David Einhorn (Greenlight Capital): short Green Mountain Coffee Roasters (GMCR)

Ricky Sandler (Eminence Capital): long CME Group (CME)

Joel Greenblatt Gotham Capital: The big secret for value investors

Guy Gottfried (Rational Investment Group): long Canadian company The Brick (TSE:BRK)

Jim Chanos (Kynikos Associates): Beware the global value-trap

Vladimir Jelisavcic (Longacre Fund): DryShips (DRYS) Convertible Bonds

Timothy Hartch (Brown Brothers Harriman): Dentsply (XRAY) & Energy Solutions (ES)

Alexander Roepers (Atlantic Investment Management): Anticipating more M&A

***UPDATE***: We just posted our Day 2 notes from the Value Investing Congress which features presentations from Bill Ackman, Leon Cooperman and many more hedgies.

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Alexander Roepers: Expects Increased M&A (Value Investing Congress Presentation)

At the Value Investing Congress today, Alexander Roepers of Atlantic Investment Management made the case for longs of Energizer Holdings (ENR), Ashland (ASH), Flowserve (FLS), MTU Aero Engines (MTX.GY), and Atos (ATO.FP) in a presentation entitled "Conducive Environment for Corporate Action, Activism & Takeovers".

Be sure to check out all of our notes from the Value Investing Congress.

Alexander Roepers (Atlantic Investment Management)

Embedded below is Roepers' full slideshow presentation:

His outlook is very positive for both stocks and especially takeovers/mergers.

1. Valuations attractive due to worst crash in 70 years. Record high equity risk premium

2. Balance sheets of corporations are strong

3. There are large cash pools for LBO out there

4. Low interest rates

5. Moderate organic growth in developed markets, so room for M&A

6. Cross border M&A activity heating up

7. If fear index falls below 25 (32 today) for 2-3 months, we will see increased M&A activity

What they look for: $1-10B, big enough to move the needle, small enough to get the deal done. Strategic franchises with high barriers to entry, <8x forward EBIT preferred, strong balance sheets, predictable & recurring cash flows, low insider ownership (<10% owned by management/family), noticeable activity in sector.

Investment Ideas:

Energizer Holdings (ENR): Batteries and personal care (razors). “A small Proctor and Gamble” good number two. Target is $102 in 12-18 months, based on 11x FY12E EBIT.

Ashland (ASH): Special chemical company. Trades at 5x EBIT, 7x P/E on FY2012 estimates. Target is $105 in 12-18 months at 10x EBIT.

Flowserve (FLS): Flow control products, pumps, valves, seals for pipeline and nuclear power industries. Trades at 5.7x EBIT on 2012 estimates, target is $135 in 12-18 months on 11x 2012E EBIT. Competitor just bought for 12x EBIT.

MTU Aero Engines (MTX.GY): German company. Military and commercial engines. Same thing, price target depends on multiple going from 7.8x EBIT to 11x EBIT

Atos (ATO.FP): French version of Accenture. IT and high tech consulting.

About Alexander Roepers: Manages $1.4 billion (part of which is long only). Has seen 19% compounded returns.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Timothy Hartch: Long Dentsply & Energy Solutions (Value Investing Congress)

At the Value Investing Congress today, Timothy Hartch of Brown Brothers Harriman gave the case for longs of Dentsply (XRAY) and Energy Solutions (ES) in a presentation entitled "Quality and Value".

Be sure to check out all of our notes from the Value Investing Congress.

Timothy Hartch (Brown Brothers Harriman)

Embedded below is his full slideshow presentation:

Dentsply (XRAY): Number one company in the dental industry, trades at a discount to “intrinsic value.” Sells consumables to dentists, equipment to labs, and orthodontists. Very attractive industry. Aging population, rising standard of care in emerging markets, private pay in the US.

Big secular story is instead of pulling teeth in emerging markets, they are saving teeth. Dental is private insurance, or out of pocket, so supply and demand determine prices. Over time, there have been 1-2% price increases on top of volume growth. Very fragmented supply market, XRAY has number one, but fewer than 10% market share, can keep making tuck-in acquisitions. Customers are very fragmented, 2-3 person dental offices- no buying power.

Competitive advantage: scale, dominant brands, 2800 person sales force, customer relationships.

Key risks: macro economic weakness, large presence in Europe, integration of Astra Tech acquisition, still recovering from disruption of Japanese supplier.

Revenue declined 2% in 2009. Average rate is 6-7% growth rate over last 20 years. Stock flat over last 5 years, down from 40 to 32 recently on Europe fears.

Valuation: Currently trades at $32, has a $44 target price, 13x 2012 FCF. He says multiple doesn’t look that low, but for this high quality, steady business, this is a good price.

Energy Solutions (ES): Stock has been in total collapse since LBO IPO’d the company. Number one nuclear waste disposal company in the US. Disposal city an hour outside of Salt Lake City. Near-monopoly for disposal of commercial nuclear waste in the US, 95% of it goes through this site in Utah. It has a 30-year remaining life for the current facility.

May have contracts in Japan for their clean up. They have life-of-plant contracts with 84 of 104 reactors in the US. Other 20 they do business. Doing the dismantling of the Zion plant owned by Exelon. There are 12 waiting to be dealt with, and several plants are closing over the next few years.

Obvious risks: political risk, waste risk. Leverage, but generating 40M in cash flow to pay down debt.

Potential Upside: additional contracts with the other 20. Acceleration in large component removals. International opportunities.

Stock trades at $3, they say value $8+ with low single digit revenue growth, modest de-levering.

Q&A Session:

1. How does XRAY create value? Answer: further small acquisitions they can roll up, and stock buybacks

2. How do they measure/predict intrinsic value? used EBAY as an example, they like it, own it now, say intrinsic value over 40. Steady business is easier for them to value.

3. Why XRAY vs. Henry Schein? XRAY is leading manufacturer, not only distributor. Likes the Henry Schein as well.

4. ES public at $23, now $3, how does it get back to $8? Answer- it was promoted as a growth story and the volumes declined instead of growing. Nuclear industry is under a cloud, but this is actually an opportunity for them.

About Timothy Hartch: He manages the fund that won Lipper 2008 large cap fund of the year in 2008.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Vladimir Jelisavcic on DryShips Convertible Bonds: Value Investing Congress Presentation

At the Value Investing Congress today, Vladimir Jelisavcic of hedge fund Longacre Fund Management gave a presentation entitled "DryShips Convertible Bonds: Dislocation & Deep Value Opportunity".

Be sure to check out all of our notes from the Value Investing Congress.

Vladimir Jelisavcic (Longacre Fund): DryShips (DRYS) Convertible Bonds

Embedded below is his full slideshow presentation:

He gave a presentation on the distressed debt of DryShips (DRYS), saying that the company's drillships are valuable unique vessels and that capital expenditure in deepwater drilling continues to grow.

Dryships: originally a dry bulk vessel company, owns 46 dry bulk ships, 12 tankers, and 9 ultra deep-water rigs (not all completed). The rigs are the driver of the business, as dry bulk shipping business declines. Tight market for the newest ultra-deep drill ships. Booked for next 2 years.

Key point of thesis is demand is high and supply tight for these rigs, and DRYS owns several. Says day rates are expected to rise, which has led some owners to hold off their supply to wait for better deals. $15/share price x 130M is $2B mkt cap, gets to $5B EV. So about $637M value per drilling units, a discount to recent $800M-1B per unit private market value based on recent transactions.

Convertibles also attractive, he didn’t put too much time into the numbers. Showed the converts chart- collapsing. He figures they have 166% asset coverage. He believes that DRYS 5% convertibles are a good investment.

The dry bulk shipping sector has been beatdown lately, but Jelisavcic argues there's fundamental value there. He also pointed out that DRYS owns 75% of Ocean Rig (ORIG). ORIG has a market capitalization of $2 billion and DRYS has a market cap of $1 billion.

Q&A Session:

What happened to corporate bond market? He says hedge funds own 15% of the securities, compared to only 3% of stocks, and they sell out very quickly.

About Vladimir Jelisavcic: He co-founded Longacre Fund Management in 1998 with John Brecker and Steven Weissman. They were previously members of the high-yield group at Bear Stearns. It's worth noting that Longacre recently announced they'd be winding down some of their funds by the end of the year, though they will still manage certain products.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Jim Chanos: Beware the Global Value-Trap (Presentation From Value Investing Congress)

At the Value Investing Congress today, Jim Chanos of hedge fund Kynikos Associates talked about various companies to short in a presentation entitled "Beware the Global Value-Trap!"

Be sure to check out all of our notes from the Value Investing Congress.

Jim Chanos (Kynikos Associates): Short Exxon Mobil (XOM), GameStop (GME) & ITT Educational (ESI)

Embedded below is his full slideshow presentation:

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Chanos' entire presentation focused on “how value investors can avoid value traps.” He went from basics things to watch for, to his current specific short themes.

Value Stock Traits
: Predictable, consistent cash flows, defensible business, don’t need superior management, low/reasonable valuation, margin of safety, reliable transparent financial statements, “analyzable.”

Classic Short Selling Themes

1. Booms that go bust, debt-driven asset inflation; real estate in US, telecom overbuild, far east real estate now. Cyclical: Sometimes cycles become secular. Autos, airlines. Overly dependent on one product. Coleco, renewable energy. Illegal does not equal value. Be careful- they often look deceptively cheap. Online Poker.

2. Consumer fads

3. Technological obsolescence: Probably killed more value investors in last 20 years than any other. Examples: Minicomputers, Eastman Kodak, Video Rental. The cash flows drop off faster than you think they do. At some point, cash flows hit a tipping point, and drop precipitously.

4. Structurally flawed accounting: Free cash flow/Run by accountants. Tyco example. Be “Triply careful” whenever management pulls out some metric that they define- such as cash flow. Be careful when they keep pointing to a metric they like. Accounting issues. Confusing disclosure. BFT. Nonsensical GAAP. Sub prime lenders example.

5. Selling $1.00 for $2.00

6. Rapid Prior Growth: “Law of large numbers” Telecom build out example. When tech shift occurs, old metrics that value investors use are totally irrelevant.

7. Value Traps

Other Traits of Value Traps

Marquis management. New CEO as a savior- it is often the business that exits with its reputation intact. Conseco example. Keep doing your work. Look at their incentive- often they win no matter what.

Famous investors: In every great stock market disaster or fraud, there is always one or two great investors invested in the thing all the way down. Enron, dot-com, banks, always "smart guys" involved all the way down. Don’t let your work stop because a smart guy is in the stock. It always happens, even the best make mistakes.

Appears cheap only using management’s metric. EBITDA example. Almost every major business needs depreciation, capital deprecation, if you don’t consider this, you are cheating yourself. Cable TV example. Stocks have done nothing for years because they always quote EBITDA only, in a capital-intensive business.

Ignore restructuring charges at your own peril. Eastman Kodak. Those charges were actual charges, and they never fixed the revenue line. Yet investors used management metrics and ignored the real situation.

Growth by acquisition. Tyco, roll-ups. Be very careful. Earlier today David Einhorn said to short Green Mountain Coffee Roasters (GMCR) and pointed out that the company has largely grown through acquisition.

Buying low growth low P/E businesses with expensive high P/E stock should be a huge red flag. Be careful when you see big write-downs because management is claiming to be conservative, they are banking some earnings. Rely on a “supranational put”- government will bail me out.

Current Value Traps

Liquidating Trusts: Integrated oil companies. Cost structure grown dramatically; finding and development up from $5/bbl to $22/bbl. Production $5/bbl to $15/bbl. Cost of marginal barrel of oil is up and rising, $37 all-in now, where oil bottomed out in 2008/9. Gas has opposite problem. Monster acquisition in gas area. Exxon Mobil (XOM): FCF dropping off, not even enough to cover its cash needs. Also applies to other national oil companies, look even worse.

Digital Distribution Destruction: video games. Will follow music and movies, to digital distribution. Gamestop (GME): Looks cheap, has lots of stores, in a terrible business. Will appear cheap all the way down. As bandwidth and wireless speed increases, the value of their brick and mortar will collapse, just as it has with movies and music. Also other video rental. (Coinstar (CSTR) perhaps? Didn’t say the name.)

"Mis-education" For-Profit Colleges: Now they look cheap as value investors pile into them, says gainful employment didn’t have teeth. “Can’t think of a more predatory business in the US right now.” Congressional support is waning. 90% of the loans are federal loans, and default rates are skyrocketing, was 20% in 2009, now heading toward 30%. Serious line item in the federal budget now. ITT Educational (ESI): Have an off-balance sheet entity. Cohort default rate 22.4% and rising, one of the most expensive tuition of the colleges. Bulls say Republicans will give them cover, but now Republicans have started to walk away- General Petraues' daughter has been investigating the abuse of soldiers.

Nationalistic Commodity: Be careful- they are down a lot and appear cheap, especially Iron Ore, down from $200 to $150-160. Problem is it was $30 forever. Commodities look cheap, but not if you look at longer-term charts. Leveraged to Chinese growth. Vale (VALE): Looks cheap, but in Brazil, which isn’t your friend as a shareholder. VALE is building its own Navy, which they don’t expect to have a positive rate of return.

China Bubble: Chinese State Banks. Underground lending is a significant risk. CDSs went from 30 bp to 200 bp in the summer. PRC sovereign fund said they would be buying stock in these banks. They are instruments of state policy; they are not there to maximize shareholder wealth. They are cheap, but there are many lurking time bombs. They were recapitalized twice in last 12 years even during strong economy in PRC. The refrain in China is “yes there is a lot of silly stuff going on, but the government won’t let anything happen.” Agricultural Bank of China (HKEX.1288): Cheap, but half the capital is bogus. Chinese banks are very levered. PRC this year will expand credit outstanding by 35% of GDP; it was 25-30% each year for 4 years, 100% of GDP. “The only westerners in history that ever got a dollar out of China were the Opium dealers, and they had the British Royal Navy behind them.”

Q&A Session:

1. Commodity boom not supported by China, what about India? Chanos says India is self-sufficient in Iron Ore, and China demand is 50-80% of many of the commodities.

2. China: real estate sales volume was down 40-50% in golden month. Prices haven't fallen, but transactions always dry up first. High-speed rail crash was a psychological hit- even if only 5% of GDP, it was a source of pride for China. Corners being cut, this crash highlighted to the public that there was a cost to the “growth at all costs” mentality in China.

3. When asked about Japanese bonds, Chanos added some humor to his talk by saying, "we only want to piss off one Asian country at a time."

About Jim Chanos: He manages the short-selling focused hedge fund Kynikos Associates. We've covered how Chanos thinks China is a bubble and that he is also targeting alternative energy, shorting Vestas and First Solar.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Guy Gottfried's Long The Brick Presentation from Value Investing Congress

At the Value Investing Congress today, Guy Gottfried of Rational Investment Group talked about his long position in The Brick (TSE:BRK) in a presentation entitled "Prospecting for Value in the Great White North".

Be sure to check out all of our notes from the Value Investing Congress.

Guy Gottfried (Rational Investment Group): Long The Brick (TSE:BRK)

Embedded below is his full slideshow presentation:

Gottfried started by talking about Canada's general economic situation: 11 years of budget surpluses price to recession, lowest debt-to-GDP and fastest growth in G7, world’s strongest banking system for 4 straight years, no bank required bailout during financial crisis. Less sophisticated stock market than US, value investing not practiced, investors obsessed with resource stocks, yet miners are actually only 1/3 of the stocks on the TSX.

His long idea was The Brick (TSE:BRK) and Brick Warrants (BRK.WT). It's a specialty retailer of furniture, appliances, mattresses, etc. $2.45 price, 140m shares. It has 3 segments: corporate retail. 177 stores in Canada, financial services: extended warranties sold at stores, credit insurance on proprietary credit card, $22m FCF franchising: 58 stores, franchise fee and ongoing royalty of 2.5% of sales, $4m FCF (smallest, but fastest growing segment).

It trades at 6.2x FCF, market valuing core retail chain at below zero. Strong balance sheet, good business, insiders buying shares on open market. Mismanagement and financial distress in the past, paid too much of cash flow in dividends, and was in distress when recapitalized in 2009. Issued 12% debentures, and 100M warrants, now has $100M in cash, has turnaround specialist CEO. Operations have recovered, but stock has not.

Why so cheap? Investors burned by near-death experience, illiquid due to heavy insider ownership, no institutional following.

Very recognized brand in Canada, economies of scale in furniture and appliances. Financial services is durable business, even in 2009 sales held up. Good lead shareholder- Prem Watsa of Fairfax, the “Warren Buffett of Canada”. Bill Gregson CEO has a history of successful retail turnarounds- focus on costs, not growth. Cut its shares outstanding by 20% through “cashless exercise offer” for warrants. 13 senior execs and directors have bought shares on open market. Company now has $100M in cash, will end year with no net debt; overcapitalized, could buy back 20% of its shares, even with $50M still in the bank, boosts FCF by 27%. Valuation: 6.2x P/FCF. With operational improvements and repurchases, you get company at 4.2x P/FCF.

Q&A Session:

1. Why is it a good business? He says they've improved logistics

2. Aren't Toronto and Vancouver housing markets still very strong? Answer is even if business slows down, you're getting the retail business for free anyways.

3. T2 Partners' Whitney Tilson pressed him on the housing bubble in Canada - Gottfried admitted that real estate is overvalued, but it doesn't pose the same risk as the US did, due to less crazy mortgages.

About Guy Gottfried: He founded Rational Investment Group and focuses on a risk-averse, research-intensive strategy. He is a value manager and prior to founding his firm was an analyst at Bruce Berkowitz's Fairholme Capital.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Joel Greenblatt: The Big Secret For Value Investors (Presentation From Value Investing Congress)

At the Value Investing Congress today, Joel Greenblatt of hedge fund Gotham Capital gave a presentation entitled "The Big Secret For Value Investors".

Be sure to check out all of our notes from the Value Investing Congress.

Joel Greenblatt (Gotham Capital): Value Investing

He started out with a review of the concepts in his book, The Little Book That Still Beats the Market. He says you want stocks that are “cheap and good” and used the Compustat database to rank them by the two measures. Cheap: EBIT/EV. Good: EBIT/ (Net WC + Net fixed assets) (return on tangible capital).

Updated results through 2009: Decile 1: +15.2%, bottom decile: -0.2%. For 20 years ending 12/31/10: SPX annualized 9.1%, 11.8% on equal weight, “Value 1000” value-weighted index is 16.1%. Same Beta as SPX, same std dev. 1.01 Beta vs. 0.99 SPX.

Now, the current situation, and the meat of the presentation: A week ago, the Russell 1000 had average FCF of 9.2% (in the 94th percentile toward cheap!) Looking backwards, cheaper than 94% of periods over the last 20 years and that correlates with a 15-20% return over next one year (market up 5% over week since slide finished) "on only 10-15% left, but still pretty nice."

Average FCF of Value 1000 a week ago was 13.7% and was cheaper than 93% of the last 20 years, which correlates with a year forward return of 30-35% for value index. Greenblatt said that "Not only is the market cheap, but the value stocks are even cheaper."

Large cap long/short portfolio is in the 82% percentile- very big spread between long and short opportunity. ROIC long 59.4%, shorts 4.8%. Arguments against stocks being cheap (playing devils advocate): one argument is that we are at peak operating margins, but he showed a graph that indicated it is unclear what the real mean operating margins should be. The second argument is return on tangible capital continues to climb. In addition, outsourcing of factories, moving to a service economy, so tangible capital may not be the right way to look at it, and again it's unclear where the mean level is. He also showed a graph of tangible capital per dollar in sales is declining to 35 cents from 50 cents, 20 years ago.

Some of companies currently in the value 1000: Gamestop (GME), Aeropostale (ARO) ~ (Revolting companies, you’d never want to buy, he joked), Hewlett Packard (HPQ) ~ terrible, but selling at 5x eps, Dell (DELL), Microsoft (MSFT), General Dynamics (GD), Wells Fargo (WFC), and Merck (MRK). For every name, he mentioned why they are terrible, only half-joking. Part of the reason this works is “it’s really hard to buy these companies.”

He says that the current fixation on short-term returns causes managers to avoid buying cheap companies, because they need the ones that are doing well right now. Buying these stocks with very low expectations gives you a chance for asymmetric returns on the upside if they do even a little bit better than expected. He expects this “time arbitrage” will continue to be exploitable. He is very optimistic for the next year.

Q&A Session:

1. Role of dividends? He's indifferent in his strategy.

2. How does he incorporate financials now, he used to exclude them? He now ranks the financials separately, and adds to index if they are cheap, but he didn’t give what metrics he used.

3. Question about Michael Burry. (Background: In “The Big Short”, writer Michael Lewis made Greenblatt out for a villain for taking money from Burry even as Burry was right.) Greenblatt was a little annoyed by the question: “Michael Lewis has never let the facts get in a way of a good story. What they got wrong in the book is Burry wanted to side pocket both mortgage and corporate CDS... we did not want him to side pocket the liquid corporate CDSs … only reason we took money from him was we were getting redemptions.”

4. Where does he see the market now? He’s not a market timer, but he would argue for raising exposure to stocks now if asked.

5. Can you use the value screen and really juice returns by using further fundamental analysis? Answer: we were small, had 6-8 concentrated names, that’s why we made 40% returns - it’s impossible on large amounts of money or a very diversified portfolio. This solution is good for a very diversified portfolio, same beta as the market and beats the SPX. We’ve tried, but haven’t been able to beat the indexed approach. “We’re pretty good at picking stocks, so it’s hard to do.”

6. Large cap stocks are pretty cheap, this is an interesting time- HPQ at 5 times earnings. Bond bubble, even bigger than the stock bubble- which is crazy. Still plenty of opportunity in special situations for smaller funds.

About Joel Greenblatt: He manages Gotham Capital and saw 40% annualized returns for 20 years. He's the author of the new book The Big Secret for the Small Investor: A New Route to Long-Term Investment Success. And for aspiring investors, numerous prominent hedge fund managers such as Seth Klarman have recommended Greenblatt's other book: You Can Be a Stock Market Genius.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Ricky Sandler's Long CME Group (CME) Presentation from the Value Investing Congress

At the Value Investing Congress today, Ricky Sandler of hedge fund Eminence Capital talked about his long position in CME Group (CME) in a presentation entitled "Go Big; Go High: The Opportunity in Large Cap Quality Equities".

Be sure to check out all of our notes from the Value Investing Congress.

Ricky Sandler (Eminence Capital): Long CME Group (CME)

Embedded below is Sandler's full slideshow presentation:

Sandler's firm manages $2.9b and are bottom-up stockpickers, long and short. They average 120% long, 70% short and always run net long. They lever longs and use shorts to help ride out volatility. Currently, Eminence is 131% long and 65% short and he thinks stocks are cheap now as he has more than average exposure.

They avoid low quality businesses regardless of price. Shorts: structural or secular challenges to business or industry, obsolescence. They avoid high quality businesses/valuation-only shorts.

Opportunity in large caps today: underperformed Russell by 6.6% per year over last 10 years. Biggest companies are now trading at 11.5x P/E vs. 14x historic. Bulls say cheap, and VERY cheap vs. interest rates. Bears say stocks aren’t that cheap if you cut future earnings estimates.

Timing? “We started 2 months ago, we’re there, and this move up is just the beginning.” Earnings will slow, dividends increasing in importance. Right now there is no premium for “quality” stocks - trading at 11.3x P/E vs. his “junk stocks” trading at 14.3x (not sure how he defines “junk stocks.”) The good stocks only outperform 54.1% of the months, but 500 bp per year.

Specific stock idea: long CME group (CME): Derivatives and futures exchanges company. Natural monopoly. 60% operating margins, ROC over 100%, 15%. Revenue growing 18% CAGR over last 10 years. One risk is regulators could change the rules of the game; this actually works in their favor, as they want more over the counter trading to go onto the exchanges. Many new products, such as weekly options, emerging markets currency like RMB. They benefit from fears about counterparty risks. $22 EPS in 2012, 14% CAGR over last 5 years, no net gain in stock price. Trades at 11x 2012 EPS.

In addition to Eminence, some of CME's top holders are John Griffin's hedge fund Blue Ridge Capital as well as Paul Ruddock & Steven Heinz's Lansdowne Partners.

About Ricky Sandler: He manages the $3 billion hedge fund Eminence Capital. Prior to founding Eminence he co-managed Fusion Partners. He employs a 'quality value' approach to investing and has typically been 120% long and 70% short but they've ramped up exposure lately because they believe the market is cheap (131% long, 65% short).

In our September hedge fund performance numbers post, we highlighted that Eminence was -2.7% in September and -8.77% for the year at that time.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

David Einhorn Short Green Mountain Coffee Roasters (GMCR): Value Investing Congress Presentation

At the Value Investing Congress in New York today, David Einhorn of hedge fund Greenlight Capital revealed he is short Green Mountain Coffee Roasters (GMCR) in a presentation called "GAAP-uccino".

Be sure to check out our notes from the Value Investing Congress.

David Einhorn (Greenlight Capital): Short GMCR

Einhorn famously gave a presentation on shorting Lehman Brothers a few years ago and shorting St. Joe (JOE) last year at the same conference. This year he's back with a short of GMCR. Whitney Tilson of T2 Partners has been short GMCR for a while as well.

Embedded below is his full slideshow presentation:

Einhorn began with company background and the well-known bull case. Green Mountain Coffee is a K-cup company with a razor-razor blade model; 95% of business is at-home use.

Bull case: 64 million households drink coffee, 1/3 buy K-cup machines, 2 cups per day, 15.5B k-cups, 0.15 profit per cup, get $1.4B profit, on 160M shares is $8 eps. Recognized brands like Starbucks, Dunkin Donuts will grow installed base, and bring higher margins. Management calls itself the “iPod of coffee.” Great income statement growth in last few years, aided by acquisitions. And the stock has done very well: 57x P/E, 35.6x next year estimated eps. Up 185% this year, best stock in SPX 1500.

Einhorn then moved onto criticizing the company: Poor transparency. Doesn’t even report lbs shipped, k-cup units, or precise Keurig brewers units. GMCR has cut their amount disclosure over time, which is what companies usually do when metrics are deteriorating.

Bear case: The opportunity is smaller than bulls believe. Attachment rate is smaller than bulls believe and is declining. They already have widespread distribution and brand awareness. Machines are expensive, $250 vs. $80 Mr. Coffee, or cheap $20 brewers. K-cups are much more expensive compared to buying the bags of coffee yourself, 60 cents per serving vs. as cheap as 5 cent per serving. This limits the actual available market to about 20M households, not 64M. Growth in retailers selling Keurig is slowing.

Attachment rate is declining or flat, only about 1.3 per brewer per day. GMCR doesn't disclose the attach rate!

Starbucks deal: non-exclusive and multi-year, in stores and at SBUX. Deal does not apply to next generation brewer - SBUX keeping its options open? About $0.22 estimated profit per K-cup. How will they split it? Using Smucker’s deal, can estimate that GMCR only got .06 of .17 total profit, to make the k-cups. Therefore, SBUX should get 2/3 of the 22 cents, leaving GMCR only 7 cents. In fact, SBUX deal could cannibalize their other K-cup sales.

GMCR hasn't generated much FCF. In fact, it's been negative for 4 years. Due to acquisitions and CAPEX, they are burning cash and expect to continue. ROIC only 16.3%, yet high multiple, doesn’t justify current stock price.

Competition/Patents: Bulls say patent expiration unimportant due to large market share. However, patents that keep others from making k-cups for the existing brewers may be expiring in 2012. Competitors will be able to produce k-cups!

GMCR has been buying out licensees and paying too much. Usually allocates 95-104% of the purchase prices to good will when buying them. Goal may have been to avoid competing with licensees when patents expire. Big deals with SBUX, Dunkin are to mitigate competition when patents expire. Only advantage they have is contract manufacturing, which is a lousy business. GMCR may instead create a totally new system to stop others.

Bear Case Summary: GMCR will no longer have monopoly on making the K-cups next September. Others will gear up to enter the market with much cheaper alternatives- they already have the equipment to do it (Crystal Lite maker example). There is lots of branded competition: Kraft, Nestle, and Maxwell House.

Bear case, vs. the bulls $9 eps estimate. Cut attach rate to 1.25 K-cups per brewer, add 20% private label penetration, cut profit per cut to 0.12 from 0.15, gets you $3.50 eps, not $9.00.

CAPEX: Spending a lot on CAPEX that is “unexplained.” As much as $186M in 2011- where is this money going? Next year it looks even worse, $431M in unexplained CAPEX based on their guidance. CAPEX growing faster than the business, when the opposite should be happening.

Recent summer quarter revenue was $717M, 100M higher than Street, all upside on K-cup sales. Historically, they’ve been very predictable. What happened? Implies attach rate soared by 11%, no good answers on the conference call.

SEC inquiry: Revenue recognition practices. Internal investigation exonerated the company. “We believe there may be a material issue.” Something fishy with MBlock, the third-party fulfillment company that handles their distribution and inventory. 51% of accounts receivable were to them. Einhorn’s people have interviewed witnesses who spoke of phony transactions that had revenue recognition issues. Former workers may have been fired for asking too many questions! The company uses excel instead of stronger ERP software; open to abuse and mistakes. Keurig was shipping stuff to themselves according to an interview. Believes this may explain the excess K-cups sold in the quarter. Significant problems with expired coffee. His interviews with ex-employees showed astounding levels of inventory discrepancies- shipping to themselves, expiring coffee, sales that never happened.

He says there's been a lot of surprises with recent accounting and he accused management of "shenanigans" (SuperTrooper anyone?) After his presentation, GMCR stock was down as much as 12%.

Conclusion: Market is smaller and more penetrated than bulls believe. Attachment rates matter and they are falling. $3.50 eps is more likely than $9.00. The patent expiration is a real problem. The March quarter was such a surprise that it was suspicious, especially in light of conversations with workers. GMCR did a big stock deal, where insiders sold, right after the 19% jump in the stock after the quarter. The accounting is aggressive, transparency is limited, and controls seem to have material weaknesses. GMCR is a serial issuer of stock for acquisitions, while insiders have sold in droves. Limited FCF, large number of warning flags here.

It should be noted that GMCR has largely been labeled a "momentum stock" and some of the top holders include hedge funds like Philippe Laffont's Coatue Management, Steve Cohen's SAC Capital, and John Thaler's JAT Capital.

Q&A Session:

1. MBlock owners or relationship? Unclear.

2. NPD data shows evidence of good growth - how do you reconcile this with what you find? "No doubt they are selling a lot of coffee. We have seen an increase in expired or nearly expired coffee."

3. Will the SEC do anything here? They've been here for a year, there is some hope.

4. Vodafone? Says the thesis is playing itself out.

5. Sprint, any change in outlook? They're trying to do a lot of things at once. Still like the stock, despite high amount of debt, company still has access to funding without diluting shareholders. Strategic asset to a number of large players. What they are doing now makes a lot of sense, if we are sufficiently patient, if anything goes right, we have a chance at an asymmetrical return.

6. Japanese bonds, surprised they've rallied? Yes, but Japan is in a tough spot due to so much debt and budget deficit, bad demographics (Kyle Bass of Hayman Advisors has been short Japanese JGBs).

In our September hedge fund performance numbers post, we highlighted that Greenlight was -0.76% in September and -6.16% for the year at that time.

About David Einhorn: He manages the $7 billion hedge fund Greenlight Capital. He is the author of Fooling Some of the People All of the Time which is a great read. We've also posted up David Einhorn's recommended reading list for all aspiring fund managers.

Earlier this year we also posted up Einhorn's presentation on Microsoft (MSFT).

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.