Friday, June 15, 2012

Mark Rachesky's MHR Fund Joins Carl Icahn in Activist Navistar Stake

Today, Mark Rachesky's activist oriented MHR Fund Management filed a Form 3, Form 4 and 13D with the SEC regarding shares of Navistar International (NAV).

Per the activist 13D filing, MHR Fund Management has disclosed a 13.6% ownership stake in Navistar with 9,335,837 shares.  This stake consists of common stock as well as numerous share forward transactions (right to buy) with various counterparties. 

The filing was made due to activity on June 7th.  MHR started acquiring shares of NAV in the open market in late May and the bulk of their purchases came between $26-27 per share.  Their right to buy forward transactions have a price per share of $25.5399.

The 13D contains the standard boilerplate that Rachesky's firm has acquired a stake because it feels the company is undervalued and they may seek to engage with discussions with management.

Carl Icahn Involved Too

Rachesky is now the company's largest shareholder, just ahead of Carl Icahn.  Icahn has also previously filed a 13D on the company. 

It just so happens that Rachesky previously was a managing director for Carl Icahn's investment vehicles as well.  Icahn was recently named as one of the top 25 highest earning hedge fund managers of 2011.

Icahn originally launched his bet on NAV back in late 2011 and he has been the top shareholder until Rachesky came along.  Icahn also recently boosted his stake to almost 12% of the company, purchasing shares around $24.xx.  However, he originally purchased his stake at prices between $35-40.  As such, the bulk of his investment has an unrealized loss at current prices. 

It seems the two activists are angling for a larger industrial giant to take a stake in the company or perhaps partner with Navistar.  Icahn has also been allowed by the company to put his directors up for election to the board this year.

While Icahn has made some progress, it will be interesting to see if the two activist investors' combined forces can spark more change.

About MHR Fund Management

Rachesky received his B.S. in molecular aspects of cancer from the University of Pennsylvania and an M.D. from Stanford University School of Medicine. Additionally, he also holds an MBA from the Stanford Graduate School of Business. Prior to founding MHR Fund Management, Rachesky previously worked as a senior investment officer and managing director to Carl Icahn. 

About Navistar International

Per Google Finance, Navistar is "a manufacturer of International brand commercial and military trucks, IC Bus (IC) brand buses, MaxxForce brand diesel engines, Workhorse Custom Chassis (WCC) brand chassis for motor homes and step vans, and Monaco RV (Monaco) recreational vehicles (RV), as well as a provider of service parts for all makes of trucks and trailers."

Highfields Capital Boosts Carter's (CRI) Stake, Shifts CoreLogic (CLGX) Stake to Passive Investment

Jonathon Jacobson's hedge fund firm Highfields Capital recently filed two 13G's with the SEC on Carter's (CRI) and CoreLogic (CLGX).

Carter's (CRI)

Per the filing, Highfields Capital has disclosed a 5.5% ownership stake in Carter's with 3,270,163 shares.  The filing was made due to portfolio activity on June 4th.

This marks almost an  85% increase in their position size in the name since the end of March. It also moves up Highfields as one of the top holders of the stock in addition to the likes of Viking Global and Matrix Capital.  Just a few months ago, we highlighted how Viking raised its stake in Carter's.

Per Google Finance, Carter's is "a branded marketer of apparel for babies and young children in the United States. The Company owns two brand names in the children’s apparel industry, Carter’s and OshKosh. Its Carter’s brand provides apparel for children sizes ranging from newborn to seven. OshKosh brand provides its line of apparel for children sizes newborn to 12. Its Carter’s, OshKosh, and related brands are sold to national department stores, chain and specialty stores and discount retailers."

CoreLogic (CLGX)

The second filing is a 13G from Highfields on CoreLogic indicates they have a 7.6% ownership stake in the company with 8,149,719.  This stake is unchanged from their last filing and the main reason they've filed is because their stake has shifted from an activist stake (with a previous 13D filing) to now a passive one (13G filing).

The hedge fund has withdrawn its nominees to the company's board after the company itself nominated three new directors and the chairman agreed to step down this year.  It appears as though the fund was mainly seeking members with more relevant business experience and it looks like they've achieved that.

Per Google Finance, CoreLogic is "a provider of property, financial and consumer information, analytics and services to mortgage originators and servicers, financial institutions and other businesses, government and government-sponsored enterprises. CoreLogic’s data, query, analytical and business outsourcing services help its customers to identify, manage and mitigate credit and interest rate risk. It offers its customers a databases of public, contributory and data covering real property and mortgage information, judgments and liens, parcel and geospatial data, national coverage eviction information, non-prime lending records, credit information, and tax information, among other data types."

About Highfields

Jacobson founded Highfields in 1998 after previously serving as the senior equity portfolio manager at Harvard Management Company. Highfields is an $11 billion value-oriented firm that doesn't want to swing at every pitch, but rather just the fat ones where they can hit home runs.  We've previously highlighted Jacobson's thoughts on whether there's alpha in asset allocation.

For more on this hedge fund, you can read Highfields' thesis on one of their top holdings: Sallie Mae here.

Our Answers From a Financial Blogger Panel on Investing

This week Abnormal Returns hosted a series of questions on investing and asked a panel of financial bloggers to give their answers.  We were honored to be included and have posted our answers below as well as links so you can see the answers from the other panel members as well.

Question: If you had a son or daughter just beginning to invest, what would you tell them to do to best prepare themselves for a lifetime of good investing?

Answer: "Take emotion out of the equation.  If you can think and act rationally when others do not, that’s an advantage.  Never stop learning… the best investors will tell you that investing is a continual education."  Check out others' responses here.

Q: Considering all the topics you have written about, which you you think is most underappreciated or overlooked by the majority of investors?

A: "Knowing which hedge funds to track.  Many people want to know what SAC Capital, RenTec, and Soros Fund are investing in.  The problem is hedge fund tracking only works if you’re following the right funds.  People get caught up in the big names when realistically SAC trades too frequently, RenTec is a quant (who knows why they buy anything) and Soros holds hundreds of positions.  People want updates on the ‘famous’ names, overlooking advice to the contrary."  See what everyone else answered here.

Q: If you could work, without pay, with any investor or trader for one year, who would it be? 

A: "John Griffin of Blue Ridge Capital."  Check out what other investors people picked here.

Q: What piece of wisdom or advice do you most wish you had ignored?

A: This question makes you really think and we honestly couldn't come up with an answer.  There are some creative responses from others here though.

Q: In the past year what book, article or blog post changed the way you think about an important topic?

A: "Philippe Laffont (hedge fund Coatue Management) talked about his concentrated portfolio approach which makes you think about position sizing and focusing on your best ideas."  Everyone else submitted their choices here.

Q: What asset would you feel most comfortable buying and holding for the next ten years?

A: "Unconventional answer: Invest in yourself.  That’s one 'asset class' you have the most control over."  See everyone else's answers to this question here.

Thanks again to Abnormal Returns and be sure to click that link to scroll through the site to read all the responses from the panel on each question.

Thursday, June 14, 2012

Eric Sprott on the Recent Volatility in Gold

Seeing how gold has seen volatility as of late and numerous top hedge funds hold physical gold, we thought it would be prudent to check in with one of the most outspoken gold advocates: Eric Sprott of Sprott Asset Management.

After all, gold is one of Dan Loeb's top holdings at Third Point.  David Einhorn of Greenlight Capital has long held physical gold as a top stake.  And we highlighted in April how John Burbank's Passport Capital had been buying gold.

So what do investors make of the latest volatility?  Eric Sprott and Shree Kargutkar put out an interesting note on the precious metal on June 8th:

Sprott on Gold

"There have been key devel­op­ments in the phys­i­cal gold mar­ket over the last few weeks which we feel are worth highlighting:

1) The Chi­nese gold imports from Hong Kong in April, 2012 surged almost 1300% on a YoY basis. Total gross imports for the month of April were 103.6 tonnes and the net imports were 66.3 tonnes1. It is not the data for April alone which has caught our eye. There has been a stun­ning increase of gold imports through Hong Kong for export into China over the past 2 years. Between May 2010 and April 2011, China imported a net 66 tonnes of phys­i­cal gold through Hong Kong. Between May 2011 and April 2012, that num­ber jumped to 489 tonnes. This rep­re­sents an increase of 640%. 

2) Cen­tral banks from around the world bought over 70 tonnes of gold in April, 2012. Data from the IMF showed devel­op­ing coun­tries such as the Philip­pines, Turkey, Mex­ico and Sri Lanka were sig­nif­i­cant buy­ers of gold as prices dipped.

3) Iran pur­chased $1.2B worth of gold in April, 2012 through Turkey. As the devel­oped nations con­tinue devalu­ing their cur­rency at the expense of devel­op­ing nations, coun­tries such as Iran, China and Mex­ico are forced to look at alter­na­tive stores of value.

4) After twenty years of lack­lus­ter returns and stag­nant bond yields, Japan­ese pen­sion funds have finally dis­cov­ered the value of invest­ing in gold. The $500M Okayama Metal and Machin­ery pen­sion fund placed 1.5% of its assets into gold bullion-backed ETFs in April in order to "escape sov­er­eign risk"4.

5) Bill Gross writes, "Soar­ing debt/GDP ratios in pre­vi­ously sacro­sanct AAA coun­tries have made low cost fund­ing increas­ingly a func­tion of cen­tral banks as opposed to pri­vate mar­ket investors. Both the lower qual­ity and lower yields of pre­vi­ously sacro­sanct debt there­fore rep­re­sent a poten­tial break­ing point in our now 40-year-old global mon­e­tary sys­tem. […] As they (investors) ques­tion the value of much of the $200 tril­lion which com­prises our cur­rent sys­tem, they move mar­gin­ally else­where — to real assets such as land, gold and tan­gi­ble things, or to cash and a fig­u­ra­tive mat­tress where at least their money is read­ily acces­si­ble". Is the bond king rec­om­mend­ing gold? YES, YES YES!

6) The Gold Min­ing ETF, GDX, has seen strong inflows in the past 3 months. The num­ber of units out­stand­ing have increased from 162.5M to roughly 187M between March 1, 2012 and May 31, 2012. This rep­re­sents an increase in assets of almost $1.2B in a span of 3 months. It is worth point­ing out that for a major­ity of this three months period, GDX, and by exten­sion the gold min­ing com­pa­nies were expe­ri­enc­ing sig­nif­i­cant declines in their mar­ket values.

We believe there has been a mate­r­ial change in the gold invest­ing land­scape. The HUI, which is the Gold Bugs Index, is now up over 20% from its lows since May 16th, 2012. The slide in gold equi­ties seems to be sub­sid­ing as a foun­da­tion for a strong move upwards is set. New buy­ers, rep­re­sented by the Chi­nese, cen­tral banks, Japan­ese pen­sion funds and the Ira­ni­ans, bought almost 140 tonnes of gold in April alone. To put this into per­spec­tive, the annual gold pro­duc­tion is approx­i­mately 2600 tonnes. China and Rus­sia pro­duce around 500 tonnes of gold annu­ally, which never makes it to the open mar­ket. This leaves about 2100 tonnes of gold pro­duc­tion annu­ally for the rest of the world.

When buy­ers rep­re­sent­ing 140 tonnes of new demand enter a mar­ket which only has 175 tonnes of monthly sup­ply, we are left won­der­ing about two things:

1) In a bal­anced mar­ket, where is the source of sup­ply to the new buy­ers going to come from?

2) How can a new buyer of size get into the gold mar­ket, which is already bal­anced, with­out sig­nif­i­cantly impact­ing the price of gold? The answer is fairly obvi­ous. When demand out­strips sup­ply, prices move higher. These sig­nif­i­cant macro changes in the sup­ply­de­mand dynamic of the gold mar­ket should pro­pel the price of gold to new highs."  

For more from this fund manager, we've also highlighted Sprott's previous commentary on how 2012 is the year of the central bank.

Soros Fund Adds to Shutterfly (SFLY) & Digital River (DRIV) Convertibles

George Soros' family office Soros Fund Management recently filed a 13G on shares of Shutterfly (SFLY) and a Form 4 on Digital River (DRIV) with the SEC.


Per the 13G filing, Soros Fund has revealed a 6.78% ownership stake in Shutterfly (SFLY) with 2,426,272 shares.

This is a massive increase in their position as they only owned 150,000 shares at the end of March.  In total, they've boosted their holdings in SFLY by 1,517%.  The filing was made due to portfolio activity on May 30th.

Per Google Finance, Shutterfly is "an Internet-based social expression and personal publishing service that enables consumers to share, print and preserve their memories its technology, manufacturing, Web-design and merchandising capabilities. The Company provides a range of personalized photo-based products and services that allow consumers to upload, edit, enhance, organize, find, share, create, print, and preserve their memories. It generate revenues by producing and selling professionally bound photo books, greeting cards and stationery, personalized calendars, other photo-based merchandise and prints ranging in size from wallet-sized to jumbo-sized 20x30 enlargements."

Digital River

Soros Fund also filed a separate Form 4 with the SEC regarding their position in Digital River.   Soros has acquired $18.5 million worth of 2.00% convertible bonds due November 1st, 2030 that are convertible at any time.  These were acquired on June 7th and 8th with a conversion/exercise price of $49.131.

After all was said and done, the Form 4 says that Soros owns $232 million worth of these derivative securities.  Just a few weeks ago we highlighted how Soros was acquiring Digital River bonds and that trend has continued.  The family office originally purchased a stake back in March of this year.

Per Google Finance, Digital River is "engaged in providing end-to-end global e-commerce and marketing solutions to a range of companies in software, consumer electronics, computer games, video games, and other markets. 

To see the rest of Soros Fund's latest equity portfolio, head to our Hedge Fund Wisdom newsletter.

Ricky Sandler's Eminence Capital Buys More MicroStrategy (MSTR)

Ricky Sandler's hedge fund firm Eminence Capital have filed a 13G with the SEC regarding shares of MicroStrategy (MSTR).  Per the filing, they have disclosed a 5.5% ownership stake in the company with 470,825 shares.

This marks a 140% increase in their position size since the end of March.  The hedge fund previously owned 195,991 shares.  The filing was made due to portfolio activity on June 1st.

At the end of the first quarter, Eminence was already one of the top 10 largest holders of the stock, but now they're around the third largest.

For more activity from this fund, we've highlighted a stock Eminence has been short.

Per Google Finance, MicroStrategy is "a worldwide provider of enterprise software platforms for business intelligence, mobile intelligence and social intelligence applications (apps). The Company operates in two segments: core business intelligence software and services, and other. The MicroStrategy BI Platform delivers reports and dashboards to business users via a Web interface and mobile devices."

We've also previously highlighted Ricky Sandler's presentation on CME Group (CME).

Wednesday, June 13, 2012

Free Excerpt From The Alpha Masters: Ray Dalio The Global Macro Maven

Today we're pleased to present a free excerpt from the excellent new book, The Alpha Masters.  The publisher has released Chapter 1 on Ray Dalio of Bridgewater Associates entitled "The Global Macro Maven."

Written by CNBC's hedge fund specialist Maneet Ahuja, the book profiles and interviews some of the top hedge fund managers in the game and we've reviewed it here.

Enjoy the free excerpt from the book embedded below, Chapter 1 on Ray Dalio:

And after getting hooked on that chapter, you'll undoubtedly want to read the rest of the book which features other chapters on David Tepper, Dan Loeb, Bill Ackman, John Paulson, Jim Chanos and more. 

You can get a physical copy of The Alpha Masters as well as the Kindle e-book version here.

What We're Reading ~ 6/13/12

On screening for value investments [Aswath Damodaran]

Update on the latest macro trends [Reformed Broker]

A look at Francesca's Holdings (FRAN) [LongShortTrader]

Hedge funds: do some mislead their investors? [BBC]

Is Trip Advisor's (TRIP) growth story just beginning? [Sigma Swan]

Davidowitz says J.C. Penney is the new Sears [Daily Ticker]

2 keys to investing: pickiness & persistence [NYTimes]

Macroeconomics of Chinese kleptocracy [Bronte Capital]

It isn't all about alpha [All About Alpha]

Hedge funds saw $5 billion outflow in April [Reuters]

Berkshire Hathaway sells some ResCap debt [CNBC]

Technicolor rejects higher JPMorgan offer [Reuters]

Advice from a newly-turned 60 year old [Herb Greenberg]

Tuesday, June 12, 2012

Bill Ackman & Pershing Square's Q1 Letter: On Canadian Pacific, J.C. Penney & Citigroup

Bill Ackman's hedge fund firm Pershing Square is out with its first quarter letter to investors.  The hedge fund is up 9.3% year-to-date and updates investors on its holdings in Canadian Pacific (CP), J.C. Penney (JCP), as well as Citigroup (C) and General Growth Properties (GGP).

Pershing highlights that they've started buying a new stake and have added a rare equity short, but they've declined to disclose any names.

In the letter, Ackman touched on the notion of time arbitrage, something he defines as "taking advantage of the opportunity for long-term profit offered when short-term investors sell due to disappointing short-term macro or business progress."

He says that this has been a big source of profits for the hedge fund and long-time readers will know this isn't the first time we've seen this.  John Griffin of Blue Ridge Capital has long classified investments as either time arbitrage or catalyst driven.

Ackman touches on J.C. Penney in-depth in the letter and we've also highlighted Ackman's JCP slideshow from the Ira Sohn Conference.

Ackman is also profiled and interviewed in the brand new book, The Alpha Masters.

Embedded below is Bill Ackman & Pershing Square's Q1 letter to investors:

For more hedge fund letters, head to:

- Greenlight Capital's Q1 letter

- Third Point's Q1 letter

David Einhorn's Greenlight Capital Adds to Seagate Stake in Size

David Einhorn's hedge fund Greenlight Capital has recently been out buying more shares of Seagate Technology (STX).  Per a 13G just filed with the SEC, Greenlight has disclosed a 5.4% ownership stake in STX with 23,114,026 shares.

Sizable Seagate Stake

These purchases mark almost a 59% increase in their position size since the end of March.  STX shares have fallen from a recent peak of around $32 in May down to current levels of around $22.75 (almost a 30% drop).  This new disclosure was made due to portfolio activity on June 1st.

This activity is interesting because Seagate was already one of Einhorn's top 5 holdings at the end of the first quarter and now they own even more shares.  Not to mention, STX is still trading around (or even slightly below) where Greenlight was recently buying.

Greenlight's Thoughts on STX

From Greenlight's first quarter letter, the hedge fund writes that,

"It is STX's normal practice on earnings calls to provide financial commentary looking ahead only one quarter.  However, in January, STX shared its financial outlook for all of calendar year 2012, forecasting revenues of $20 billion.  The prior consensus was for less than $15 billion.  A good chunk of the increased forecast comes from higher pricing enabled by the industry shortage following the floods in Thailand last year.

STX also announced that it would be using some of its excess cash to ramp up its stock repurchase program, with a target of decreasing outstanding shares by 25%.  When business conditions eventually normalize, the lower share count will enable STX to generate higher earnings per share.

Though the shares advanced from $16.40 to $26.96 during the quarter, the share price remains at a very low multiple of both near-term and longer term earnings.  Based on our somewhat more conservative revenue outlook in 2012, we expect earnings to reach $10-$15 per share this calendar year, before settling at an average of about $5 per share in future years when the industry shortage will have ended."

About Seagate

Per Google Finance, Seagate Technology "designs, manufactures, markets and sells hard disk drives. Seagate produces a range of disk drive products addressing enterprise applications, where its products are designed for enterprise servers, mainframes and workstations; client compute applications, where its products are designed for desktop and notebook computers, and client non-compute applications, where its products are designed for a range of end user devices, such as digital video recorders (DVRs), personal data backup systems, portable external storage systems and digital media systems."

For more resources on this hedge fund, head to David Einhorn's slideshow on use of preferreds as well as notes from Einhorn's Ira Sohn presentation.

John Paulson Sells More Delphi Automotive (DLPH)

John Paulson's hedge fund firm Paulson & Co just filed a 13G with the SEC regarding their position in Delphi (DLPH).  Per the 13G, the firm has reported a 9.98% ownership stake in DLPH with 32,764,336 shares.

This marks a decrease in their position size by 28% since the end of March.  We've highlighted before how Paulson has been selling Delphi.  The most recent disclosures were made due to portfolio activity on June 7th.

John Paulson is profiled and interviewed (along with many other top fund managers) in the new book The Alpha Masters.

Per Google Finance, Delphi is "a global vehicle components manufacturer and provides electrical and electronic, powertrain, safety and thermal technology solutions to the global automotive and commercial vehicle markets. The Company operates through four segments: Electrical / Electronic Architecture; Powertrain Systems; Electronics and Safety and Thermal Systems."

For more from this manager, we've also highlighted Paulson's three long ideas from the Ira Sohn Conference.

Apple CEO Tim Cook's Lengthy Interview at All Things Digital Conference

CEO of Apple (AAPL) Tim Cook recently gave a lengthy talk at All Things Digital's Conference.  We wanted to highlight this because AAPL is the top stock held by hedge funds.

Not to mention, this is the lengthiest interview we've seen with him publicly.  We've embedded the video below, but for those who might not have an hour and forty minutes to sit and watch, we've highlighted the key takeaways:

On Innovation

Right from the start of the interview, Cook focused on how Apple always has been and will continue to be about innovation.  He says the products he's seen (but obviously can't talk about) that they're working on are phenomenal.

With the late Steve Jobs' passing, many investors questioned where the innovation would come from and we asked similar questions in our post on the Apple conundrum.  Cook says innovation is what the company will always be about.

On the Halo Effect

Cook himself pointed out the 'halo effect' that many analysts have recognized.  He said that when the iPod was released, it exposed Apple to customers in the developed world that didn't know about the company.  Those consumers then were exposed to Mac computers and many of them became customers there as well.

And when the iPhone came out, Cook says a similar phenomenon occurred, but this time more-so in the developing world: China, Middle East, Russia, and Latin America.

And now, he says they're in the first inning of the iPad because he thinks the tablet market can overtake the personal computer (PC).

On What Cook Learned From Jobs

Obviously, things at the company have changed since Tim Cook took over as CEO.  But of course Jobs taught Cook many things and he shared some of that wisdom at the conference. 

Of the things Jobs taught him, Cook said that focus is key, not only in running a company, but also in your personal life.  "You can only do so many things great... cast the rest aside."

Cook also revealed that when Jobs had a conversation with him about becoming CEO, he emphasized that he didn't want people to sit around and wonder "What would Steve do?" after he was gone.  Instead, he only desired that things be done right.

On some of the key differences between AAPL under Jobs versus Cook, the current CEO says, "we did the right thing by doing dividends and share buybacks."  But there will also be similarities as they'll continue to invest heavily in research and development.

Chinese Manufacturing

Cook also touched on how it makes sense for Apple to outsource certain aspects of their operation where they think others can do the same or better.  One area in particular is manufacturing as they've let others handle this while they focus their time on doing what they do best: creating and innovating.

And while the company outsources manufacturing, Apple still focuses on running the supply chain and the managing the operational aspects of the company.

On the TV Market

"This is an area of intense interest for us ... We're gonna keep pulling the string and see where it takes us."  

Cook kept talking about the current iteration of the Apple TV (set top box) and Walt Mossberg prodded for more information and wondered if they would make an actual television set instead.

Cook said that they key to any new product is figuring out what the key components are and how they could control them.  They want to make products where they can improve upon something and give people something that they would want.

Cook of course did not comment on what they specifically were doing in the television space aside from pointing to their current product and saying the area is very interesting to them.

On Potential Acquisitions

Instead of focusing on revenue streams of potential acquisitions, Cook says they like to focus on great people, great products and intellectual property instead.  He said they currently aren't looking at any big acquisitions, but he wouldn't rule them out.  They did not look at Instagram (Facebook purchased them).

Embedded below is Tim Cook's appearance at the All Things Digital Conference:

For hedge fund resources on Apple:

- Dan Loeb's investment thesis on Apple

- David Einhorn refutes bear concerns on AAPL

- Goldman Sachs VIP list of most important stocks to hedge funds

- The Apple Conundrum: when to sell?