Wednesday, October 24, 2012

Julian Robertson on What Stocks He Likes Now: Interview

Tiger Management founder Julian Robertson made his rare television appearance for the year on CNBC yesterday and talked about how now is a time to put money to work in the market.

He thinks the economy and overseas worries are having a big effect on investors.  So many investors are frightened about Asia and Europe that they've almost "lost their way" without realizing that many great companies are trading at great prices.

He feels that this market is good for hedge funds because their namesake allows them to hedge against uncertainty and these potential risks.  However, he worries that some managers have hedged too much and they won't benefit unless there's a big fallout in the world economy.

What Stocks Robertson Likes

Robertson cited Apple (AAPL) as great company trading at a great value, something he says rarely happens.  He said, "Apple is now probably somewhere around 14-15 times next year's earnings, it's very, very reasonable for the kind of growth you can get."

Facebook (FB) was another stock Robertson mentioned as he likes the social media exposure and admires Mark Zuckerberg.  However, he does not "really know enough about the stock" to own a position.  He cited "younger people" that he's in partnership with as having owned Facebook early on back when it was private.  We'd assume he's referring to Chase Coleman's Tiger Global.

Robertson says he's looking for great companies and he's invested in a European airway company: Ryanair (RYAAY) as they're the low-cost provider.  He also likes Rolls Royce (LON:RR or RYCEY on the pink sheets) because many people see it as a luxury automobile when in reality it is a great supplier to the aerospace and other industries.  Steve Mandel's Lone Pine Capital has been an owner of Rolls Royce.

In terms of financials, Robertson cited Capital One (COF) and Ocwen Financial (OCN).  The latter, he says,  is a mortgage servicing company that he thinks has a lot going for them.

Robertson argues that steel companies AK Steel (AKS), US Steel (X), etc are overvalued and we'd need to see the economy really takeoff to warrant those multiples.

Embedded below is the video of Julian Robertson's interview:

For more on this legendary investor, head to Julian Robertson's thoughts on the hedge fund industry past & present as well as his past extensive interview with Columbia Business School.

East Coast Asset Management on Investment Process: Q3 Letter

Christopher Begg is out with East Coast Asset Management's third quarter letter to investors.  Entitled "Inventing a Flying Machine," the letter discusses investment process, something we try to focus on in addition to tracking hedge funds.

On Investment Process

Market Folly is a big proponent of saying that "investing is a continual education" and so today we learn from Begg who writes that, "In order to produce superior compounded returns over time I believe one must not only have a differentiated view but more importantly a differentiated investment process."

East Coast uses checklists to 'invert' their thinking and how they see an investment.  While they will be drawn to something that has cheap valuation, they want to look at why it's priced cheaply.  This falls directly in line with what Charlie Munger likes to say: "invert, always invert."

East Coast looks for a margin of safety in each investment and try to drill down an investment to the critical data points that drive the company's underlying fundamentals.

3 Types of Investments They Focus On

East Coast categorizes their investments in three ways:

1. Compounders - These typically have the longest duration and highest return potential.

2. Transformations -  These benefit from tailwinds either due to secular dynamics or a business' competitive advantage.  They note that many investors often don't have the patience or investment timeframe for these to pay-off.  These could also be labeled 'time arbitrage' plays, a type of investment the likes of John Griffin at Blue Ridge Capital makes.  East Coast has more than two-thirds of their portfolio allocated to compounders and transformations.

3. Work-outs -  These are investments that trade at a discount for whatever reason and they look for this gap to close.  These types of names typically have catalysts and are often invested in by various hedge funds.  East Coast allocates less than a third of their portfolio to these ideas.

Where East Coast Looks For Ideas

Here's their list of places to start:

- Market sell-offs
- Post-bankruptcy reorganization
- Spin-offs
- Industry transformations
- Political and economic clouds

We'd also toss in that in addition to during proprietary research, it doesn't hurt to look at what other investors are doing as well.  Bruce Berkowitz of Fairholme Capital has recommended this as it's a great place to find ideas to do further due diligence on as well.  Tracking hedge funds is the main purpose of MarketFolly.

Lastly, East Coast emphasizes the importance of thorough research.  They recommend finding competitors of the company you're looking at and talking to people involved in each respective industry to gauge the dynamics and competitive landscape.

Embedded below is East Coast Asset Management's Q3 letter:

For more from this firm, we've also posted up East Coast on what defines a great business as well as their past letter on mispricings.

Larry Robbins Buys More Tenet Healthcare Shares

Larry Robbins' hedge fund Glenview Capital filed another Form 4 with the SEC revealing further purchases in Tenet Healthcare (THC).  We just posted up about how Glenview was buying THC shares last week.

The latest filing indicates that Glenview purchased an additional 200,000 shares of THC on October 19th at a weighted average price of $23.53.  This brings their total ownership to 13,839,339 shares.

To see why this hedge fund has been buying, check out why Glenview likes Tenet.

The company recently completed a 1:4 reverse stock split and confirmed they'd be buying up to $500 million in stock, issue $800 million in new debt, and use $400 million toward potential acquisitions.

It's worth noting that Glenview has also owned other hospital/healthcare plays, including HCA (HCA), Lifepoint (LPNT), and Health Management (HMA).

Per Google Finance, Tenet Healthcare is "an investor-owned health care services company whose subsidiaries and affiliates own and operate acute care hospitals, ambulatory surgery centers, diagnostic imaging centers and related health care facilities. Its core business is focused on providing acute care treatment, including inpatient care, intensive care, cardiac care, radiology services and emergency medical treatment, as well as outpatient services."

Monday, October 22, 2012

Seth Klarman on Leadership: Video Interview

Baupost Group's Seth Klarman gave an intriguing guest lecture at Harvard's Psychology of Leadership course back in 2006.  Given his rare appearances, we wanted to highlight his thoughts on this topic below:

On Leading An Investment Firm

His most relevant thoughts were perhaps where he talked about leading an investment firm.  He noted that he talks with the non-investment team every quarter to make sure they're kept afloat about the firm's investment strategy.

He does this in order to make sure everyone in his organization is on the same page.  Klarman wants a business culture where people are willing to spend extra time to keep an eye out for mistakes.

Klarman says a good leader isn't afraid to fail.  Klarman also recommends finding a good mentor.  The latter is evident all through the hedge fund industry as you often see analysts and portfolio managers learn from talented investors and then go off to start their own firms.

The Baupost man also noted that turnover is a hidden cost in running a business since it takes time and effort to train them.  In the past we've posted up a profile of Baupost Group for those interested.

Moral Values For Leaders

Klarman also touched on moral values for leaders, noting that you have to play by the 'news test.'  What he means by that is you should live in a way that you would not be embarassed if something appeared on the front page of the news.  Fellow hedge fund manager Lee Cooperman also touched on this in his recent presentation on hedge funds and life.

Mistakes He's Made As A Leader

As an investor, it's obvious that learning from mistakes is a must.  Given Klarman's ability to do so as an investor, it should come as no surprise that he's also learned from his mistakes as a leader.  He advocated not to tolerate a "difficult person" for very long, even if they are talented.  It's clear that Klarman places a lot of value/emphasis on the moral character of his firm.

Embedded below is the video of Klarman's interview on leadership:

Hat tip to Valueprax for flagging this video.

For more from this legendary investor, be sure to check out notes from Klarman's book Margin of Safety as well as Klarman's recommended reading list.

John Griffin's Blue Ridge Capital Boosts Owens Corning Position

John Griffin's hedge fund firm Blue Ridge Capital recently filed a 13G with the SEC regarding shares of Owens Corning (OC).  Per the filing, Blue Ridge has revealed a 5.63% ownership stake in OC with 6,670,000 shares.

This marks a 162% increase in the amount of shares they own as the firm has added over 4.1 million more shares since the end of the second quarter.  This disclosure was required due to portfolio activity on October 9th.

Blue Ridge has purchased a few industrial and economically-sensitive stakes as of late and we posted about how Blue Ridge bought shares of Colfax (an industrial manufacturing company) and also increased its stake in Martin Marietta Materials (a materials producer).

Per Google Finance, Owens Corning is "engaged in composite and building materials systems, delivering a range of products and services. The Company’s products range from glass fiber used to reinforce composite materials for transportation, electronics, marine, infrastructure, wind-energy and other markets to insulation and roofing for residential, commercial and industrial applications. The Company operates in two segments: Composites, which includes its reinforcements and downstream businesses, and Building Materials, which includes its insulation and roofing businesses."

For more from this hedge fund, be sure to check out Blue Ridge's recommended reading list.

Carl Icahn Files 13D on Motricity (MOTR)

Corporate activist Carl Icahn has filed a 13D with the SEC regarding shares of Motricity (MOTR).  Per the filing, Icahn now owns a 30.73% ownership stake in the company with 17,466,277 shares.

This marks a 158% increase in the amount of shares he owns since the end of Q2 as detailed on his previous 13F filing with the SEC.  The new 13D was filed per activity on October 11th.

Breakdown of Icahn's Position

The purpose of the transaction is disclosed in the filing quoted below:

"On October 11, 2012, certain of the Reporting Persons were issued an aggregate of 44,098,926 units (the "Units") by the Issuer by exercising subscription rights to purchase Units, which subscription rights were distributed by the Issuer, for no consideration, in a rights offering to all of the Issuer 's stockholders on July 23, 2012 (the "Rights Offering").

Each Unit consisted of 0.02599 shares of the Issuer’s 13% Redeemable Series J Non-Convertible Preferred Stock (the "Series J Preferred Stock") and 0.21987 warrants, each warrant entitling the holder to purchase one share of the Issuer 's common stock at an exercise price $0.65 per share. The exercise price per Unit was $0.65. Therefore, in the Rights Offering, such Reporting Persons paid an aggregate cash exercise price of $28,664,301.90 to the Issuer and received an aggregate of 1,146,131 shares of Series J Preferred Stock and warrants to purchase an aggregate of 9,696,030 shares of the Issuer’s common stock."

And Icahn's ownership stake is further broken down in an additional section of the filing that further explains the securities his investment entities own:

"In connection with the Rights Offering, the Reporting Persons were issued an aggregate of 1,146,131 shares of Series J Preferred Stock.  See item 4 above.  The Series J Preferred Stock is not convertible into Shares or any other series or class of capital stock of the Issuer.  The shares of Series J Preferred Stock generally do not vote with the Shares but have limited rights to vote as a separate class on any amendment to its terms and to certain transactions in which the shares of Series J Preferred Stock would receive or be exchanged for consideration other than cash or similar securities.  The Series J Preferred Stock also has the right to 40 votes per share and vote together as a single class with the Shares on the certain measures to protect the Issuer’s net operating losses and a change of the Issuer’s name, in each case, brought before the Issuer’s stockholders for a vote by April 9, 2013.

On a quarterly basis, the Issuer’s board of directors may at its sole discretion, cause a dividend with respect to the Series J Preferred Stock to be paid in cash to the holders (i) until October 11, 2017 in an amount equal to 3.25% of the liquidation preference, as in effect at such time (initially $25 per share) and (ii) thereafter in an amount equal to 3.5% of the liquidation preference, as in effect at such time. If the dividend is not paid in cash, the liquidation preference will be adjusted and increased quarterly by the amount of such dividend.  The Issuer may, at its option, at any time, redeem the shares of Series J Preferred Stock at a redemption price equal to 100% of the liquidation preference per share in effect at such time (initially $25 per share). The Series J Preferred Stock is also redeemable at the option of the holders, if the Issuer undergoes a Change in Control (as defined in the certificate of designations governing the Series J Preferred Stock)."

About Motricity

Per Google Finance, Motricity is "a provider of mobile data solutions and services that enable wireless carriers to deliver mobile data services to their subscribers. It provides a suite of hosted, managed service offerings, including mobile Web portal, storefront, messaging, and billing support and settlement, which enable wireless carriers to deliver customized, carrier-branded mobile data services to their wireless subscribers."

Carl Icahn was one of the top 25 highest earning hedge fund managers of 2011.

Third Point To Buy Stake In Greek Property & Land Company

Daniel Loeb’s hedge fund Third Point has entered into a deal to buy up to euro 45m worth of new shares in AIM listed property company, Dolphin Capital Investors (LON: DCI) . 

A Play on Greece

Dolphin Capital Investors are a large private owner of developable seafront land in Greece and Cyprus. Dolphin also holds a 50% stake in Aristo Developers, the largest holiday-home developer in Cyprus. 

This isn't Third Point's first foray into the mess that is Greece.  Loeb is long Greek government bonds, a position revealed in their Q3 letter.

Special Rights Issue

Via a special rights issue, Dolphin Capital Investors are offering Third Point the chance to buy between euro 30-45m shares at GBP 0.195 per share. At the close on October 18th, DCI’s shares were worth GBP 0.265 so Third Point has the chance to buy their shares at a discount.

When the offering announcement was made on October 3rd, DCI’s shares traded at GBP 0.229 but Dolphin’s shares did trade at around the offer price back in mid-September. It appears that the recent rally in Dolphin’s shares has been brought about primarily by Third Point’s involvement. 

If the rights issue is successful, Third Point will hold between 19-28.5% of DCI’s outstanding shares. If Third Point keep more than 15% of DCI’s outstanding shares they will be able to appoint a non-executive director. 

Only shareholders on the register as of October 10th are eligible to participate in the offering which is expected to take place on October 25th. The minimum investment will be £100,000. Members of the public are not eligible to participate. 

Before the offering could take place, existing shareholders had to agree the special Third Point rights issue at an Emergency General Meeting (EGM) that was held today (October 22nd). DCI’s admission document states that they may not issue shares at less than net asset value. As the shares were trading at a massive 78% discount to NAV, shareholders had to grant permission.  This permission was granted as the resolution "was duly passed" today.

The largest shareholders are BlackRock with 16.42%, Dolphin Capital (the manager) with 15.16% and Fortress Investment Group with 12.16%. 

About Dolphin Capital Investors

Taken from Dolphin Capital Investor’s website – Dolphin is a leading global investor in the residential resort sector in emerging markets and one of the largest real estate investment companies quoted on AIM in terms of net assets. Dolphin seeks to generate strong capital growth for its shareholders by acquiring large seafront sites of striking natural beauty in the eastern Mediterranean, Caribbean and Latin America and developing sophisticated leisure- integrated residential resorts.

Since its inception in 2005, Dolphin has raised €898 million of equity, has become one of the largest private seafront landowners in Greece and Cyprus and has partnered with some of the world's most recognised architects, golf course designers and hotel operators. 

Dolphin's portfolio is currently spread over approximately 63 million m2 of prime coastal developable land and comprises 14 large-scale, leisure-integrated residential resorts under development in Greece, Cyprus, Croatia, Turkey, the Dominican Republic and Panama and a 49.8% strategic participation in Aristo Developers Ltd, which is one of the largest holiday home developers in south east Europe with more than 60 smaller holiday home projects in Cyprus. Dolphin is managed by Dolphin Capital Partners, an independent real estate private equity firm.

For more on this hedge fund's activity, we've posted up Third Point's Q3 letter.