Friday, February 8, 2013

What We're Reading ~ Hedge Fund Links 2/8/13

If you missed it earlier this week, here are the analytical links and below are links with updates from around the hedge fund industry:

Hedge Fund Links

David Einhorn's email exchange with Henry Blodget re: Apple [Business Insider]

Baupost navigates a tough year yet still profitable [II]

John Paulson 'exploring' AngloGold split to increase value [Bloomberg]

Tiger Global quietly sells gun stock [Forbes]

Henry Swieca's protege prepares fund opening [WSJ]

Maverick's Steve Galbraith set to launch new fund [CTPost]

Managers' increased beta exposure points to improved risk sentiment [HedgeWeek]

Merrill Lynch fund managers' survey [Short Side of Long]

New hedge fund launches reach pre-crisis highs [HF Intelligence]

Maverick Capital launches Maverick Select Fund [II]

Profile of Legg Mason's Bill Miller [VLSinvest]

Top pension funds put more into hedge fund strategies [PIOnline]

Smaller funds are better [PIOnline]

Prime brokerage rankings for new hedge fund launches [HF Intelligence]

Who's to blame for your investment manager's underperformance [Business Insider]

Columbia Business School Graham & Doddsville Newsletter: Interview With JANA Partners

The Winter 2013 issue of Columbia Business School's Graham & Doddsville is out and it features interviews with JANA Partners' Barry Rosenstein and Scott Ostfeld, where they talked about their investment style.

Also featured in the newsletter:

Daniel Krueger of Owl Creek gives an intriguing interview on investment process and pitches Leap Wireless (LEAP).

Frank Martin of Martin Capital Management on his top-down approach and the importance of limiting losses.  He also has two books, Speculative Contagion and A Decade of Delusions. 

Russell Glass of RDG Capital on his private equity oriented style and the influence of Carl Icahn.

Jon Friedland of Amici Capital on how he finds investment ideas.

Highlights From JANA Partners' Interview

On important lessons Rosenstein's learned:  "But from Asher (Edelman), I probably learned more important skills.  These had more to do with taking risks while not blinking and remaining fearless.  I give him a lot of credit.  He wasn't the most technically savvy guy, but he had great instincts and he never showed fear, even if he felt it at times.  That was important lesson."

After experience in private equity, Rosenstein founded his hedge fund and his first investor was Lee Cooperman (of Omega Advisors).  JANA started with $17 million and by 2007 it had over $8 billion under management.

On how activist investing impacts portfolio construction:  "Our highest conviction ideas are the ideas where we have the most impact on the outcome. Those are our activist ideas which tend to be our largest and highest returning posi- tions in the portfolio. You’re also, frankly, doing a lot of work on these posi- tions, so you want to bene- fit from that work by mak- ing it a large position. So our portfolio can be a bit more concentrated."

On JANA's approach:  "In our approach, we're extremely disciplined. I don't want to be only an activist because then you force things and the quality of your ideas is diluted. We don't ever have to be an activist here. We can just invest in event-driven situa- tions. For something to be an activist play, all of the criteria have to be present for us. We came up with this rubric we call V-cubed, which is Value, Votes, and Variety of ways to win. Basically, we have to be comfortable buying in at a valuation that provides us with a margin of safety, irre- spective of any activism we will attempt to initiate and that may be unsuccessful. We have to be comfortable that if it really came down to a vote that we would have shareholder support. And variety of ways to win – you want to make sure that there's more than one lever you can pull in case circumstances change.  In my experience, if you have all three of those checked off, you're guaranteed victory.  If you're missing one of them, there's a good chance you're going to lose.  We're extremely judicious."

On mistakes Rosenstein's learned from: "I’ve made so many mistakes I can't even think about it. I'll give you one thing that's not an investing concept, but something that I've come to realize that might be helpful. Being po- lite to people and treating people with respect is good business. It's not just a good thing to do, it actually inures to your benefit as well."

Advice from Ostfeld:  "A hypothetical 'A' in the investing world, the point at which you are performing at the highest level, only requires being right more than half the time. The truth is investing can be very frustrating, diffi- cult, unpredictable, and gru- eling. So you should only pursue the career if you have the passion, if you’re intellectually curious, and if you’re committed to it, be- cause at every turn, you can be very quickly humbled. That’s the nature of the business."

Embedded below is the Winter 2013 issue of Columbia Business School's Graham & Doddsville newsletter:

For past worthwhile interviews from the newsletter, we posted up Joel Greenblatt's interview in Graham & Doddsville as well as interviews with Jim Chanos and Julian Robertson.

Thursday, February 7, 2013

Notes From Charlie Munger's Daily Journal Meeting

Some of you may be unaware that Warren Buffett's partner at Berkshire Hathaway, Charlie Munger, has aided in the management of The Daily Journal (DJCO) portfolio where he's the Chairman.  Munger spoke yesterday at the Daily Journal meeting and the following notes are courtesy of Alex Rubalcava.

Notes From Charlie Munger's Daily Journal Meeting

- Munger talked about the embedded options in the public notice papers he bought for Daily Journal... Phoenix public notice paper generated "thousands of percent" return for Daily Journal

- "Many of you people are here because you're investment groupies, not Daily Journal shareholders."

- "I don't think anyone on the board or management of General Motors had one shred of guilt for destroying 100% of the equity of the greatest company in America."

- "It's hard to predict which comfortable two company duopolies will become ghastly competitive miasmas."

- Munger on ratings agencies: they were selling opinions, not guarantees.  But in front of a jury the internal emails will cause trouble.

- Munger, quoting Buffett "I'm waiting for a list of business that we declined because it was morally beneath us."

- On why other CEOs can't copy the Berkshire Hathaway (BRK.A) operating model: "They came to power at 58 and they're gone at 63."

- "I think the idea that everyone can have wonderful results from stocks is inherently crazy.  Nobody expects everyone to succeed at poker."

- "I made zero transactions in my PA (personal account) last year."

- Munger praised Pabrai for copying Buffett's Partnership model down to the last comma

- Question on BYD, Munger calls up Li Lu to talk: BYD compounded at 75% since its founding 15 years ago.  Talked about engineering, problem-solving culture at BYD.  Munger on it: "I don't want to compete with 180,000 young Chinese.  I'd rather partner with them."

- There was a question on why he's chosen not to disclose what's in the DJCO investment portfolio.  Munger says "many of you have already figured out what's in our investment portfolio."

- Munger recommended a book: A Universe out of Nothing by Lawrence Krause

- Munger is bearish on retailing, saying he switched from name brand toothpaste to Kirkland Signature (COST private label)

- Question: have you changed your investment philosophy due to macro concerns?  Nope

- Warren Buffett recommended a book to new Berkshire portfolio manager Todd Combs, called The Outsiders by William Thorndike.  Munger recommended it with enthusiasm.

- Munger talked about pricing power as the mark of a great investment.  (We've highlighted how pricing power is what Buffett is often looking for in an investment)

For more resources on this great investor, be sure to check out:

Charlie Munger and Warren Buffett's secrets to investing success.

- Charlie Munger on the psychology of human misjudgment

- An interview with Munger

David Einhorn Urges Apple Shareholders To Oppose Company's Proposal, Wants Perpetual Preferred Security

David Einhorn's hedge fund Greenlight Capital submitted a notice of exempt solicitation today via the SEC where they urged Apple (AAPL) shareholders to vote against proposal 2 at the company's annual meeting on February 27th.

The main reason for this?  Einhorn wants to see Apple issue perpetual preferred securities, a concept we highlighted via that link.

In the statement, Einhorn says that,

"We believe Apple must examine all of its options to unlock the growing value of its balance sheet for all shareholders.  Over the past several months, we have had an ongoing dialogue with Apple regarding one option to do so, namely the creation of a new security, a perpetual preferred stock that would be distributed at no cost to Apple’s existing shareholders, and would provide an attractive, sustainable dividend while preserving Apple’s financial resources to pursue its business strategy."

Greenlight sees this as a way to improve Apple's poor capital allocation policy.  After all, the company has around $137 billion in cash (or $145 per share).

While Apple has started paying a dividend and initiated a 'nominal share repurchase program,' Einhorn still feels there's more room for improvement.

As such, Einhorn calls for AAPL shareholders to vote against proposal 2.  We'll have to wait and see if his call to action is successful.  The full statement can be found via the SEC.

Citadel Ramps Up Trina Solar Stake

Ken Griffin's hedge fund firm Citadel has filed a 13G with the SEC on shares of Trina Solar (TSL).  Per the filing, Citadel now owns 6.2% of the company with 252,438,400 shares. 

This is a markedly increased position for the hedge fund as they only owned just over 22,000 American Depository Receipts (ADR) of the company back at the end of the third quarter.  This new disclosure was required due to portfolio activity on February 1st.

Per Google Finance, Trina Solar is "an integrated solar-power products manufacturer based in China with a global distribution network covering Europe, North America and Asia. The Company produces standard monocrystalline photovoltaic (PV) modules ranging from 165 Watts to 185 Watts in power output and multicrystalline PV modules ranging from 215 Watts to 240 Watts in power output. Trina sells and markets its products worldwide, including in a number of European countries, such as Germany, Spain and Italy."

Wednesday, February 6, 2013

What We're Reading ~ Analytical Links 2/6/13

Continuing our new linkfest format, we'll feature analytical links on Wednesdays(below) and hedge fund news/updates on Fridays.

Analytical Links

Cash is a bad habit most investors need to kick [Abnormal Returns]

Is the secular bear market coming to an end? [The Big Picture]

On investment style agnosticism [Reformed Broker]

"Where does the money come from?" [Dealbreaker]

5 ways to be the best investor you can be [Marketwatch]

US private sector deleveraging: where are we? [The Big Picture]

Amazon, Apple and the beauty of low margins [Eugene Wei]

The Amazon dilemma [MicroFundy]

Understanding Apple requires an analysis of fundamentals and psychology [II]

2 things about high yield bonds investors must understand today [CFA Institute]

What's inside America's banks? [The Atlantic]

The importance of equity buybacks [BCA Research]

Equity allocations rise to highest level since July 2011 [AAII]

Mortgage crisis lingers on at Citigroup and Bank of America [Dealbook]

A profile on Mars Incorporated [Fortune]

Youngest American woman billionaire found with In-N-Out [Bloomberg]

Tuesday, February 5, 2013

Crispin Odey Starts Car Phone Warehouse Position

Crispin Odey's hedge fund, Odey Asset Management, has disclosed a new position in London listed Car PHone Warehouse (LON:CPW).

Due to trading on January 29th, Odey hold the equivalent of 5.03% of Carphone Warehouse's voting rights.  They hold 2.77% via contracts for difference (CFD) which are explained via that link.

Odey typically buy stocks that have undergone a large price decline or at least a significant pullback, but in this case they purchased Carphone Warehouse around its 12-month high.  CPW does trade on a very low trailing P/E ratio and this may have been one of the factors that attracted Odey.

For more activity from this hedge fund, see Odey's portfolio activity.

Per Google Finance, Carphone Warehouse Group plc "principally consists of a 50% interest in the  Best Buy Europe Group and a 46% interest in Virgin Mobile France. It is involved in the management  of these businesses. The Company’s other assets consist of property, cash and loans receivable. The  Company’s Property comprises four freehold properties in London and the north of England. During  November 2011, it launched the Global Connect business, which is a profit share agreement with  Best Buy Co., Inc.”

Eton Park Capital Reduces Numerous UK Positions

Eric Mindich's hedge fund firm Eton Park Capital has reduced its disclosed positions in the UK market in the last six months without disclosing any new ones.  They've reduced the following holdings below the disclosure threshold of 3% during last year:

- Lohnro (LON: LONR)
- Daisy Group (LON:DAY)
- Sable Mining (LON:SBLM)
- Blackstar Group (LON:BLCK)
- Britvic (LON:BVIC)
- 3Legs Resources (LON:3LEG)
- Cove Energy (LON:COV)

The only remaining disclosed stakes we have in our records for Eton Park are a position in Burford Capital at 8.76% and Goldenport Holdings at 4.49% (LON:GPRT) at last disclosure.  Apparently there has been some press speculation about possible redemptions though we've not been able to confirm anything.

John Burbank's Passport Capital Starts Yelp Stake

John Burbank's hedge fund firm Passport Capital filed a 13G with the SEC revealing a brand new position in Yelp (YELP).  Passport now owns 6.3% of the company with 1,065,261 shares.  They filed with the SEC due to portfolio activity on January 25th.

Just a few weeks ago, we highlighted how Robert Karr's Joho Capital had been adding to its YELP stake as well, as hedge funds have been buying shares.

Per Google Finance, Yelp "operates a directory services and social networking website. Its online community provides information on urban city guide. The Company is based in the United States and its information helps people to find places to eat, shop, drink, relax, and play. It also operates a search engine for finding restaurants, dentists and hairstylists. It provides a space for feedbacks and reviews of people regarding their experiences with local businesses and services."

For more on this hedge fund, we've posted up previous Passport Capital portfolio activity here.

Steve Mandel's Lone Pine Capital Adds to Charter Communications (CHTR) Position

Steve Mandel's hedge fund Lone Pine Capital filed a 13G with the SEC regarding its position in Charter Communications (CHTR).  Per the filing, Lone Pine has revealed a 7.1% ownership stake in the company with 7,216,285 shares.

This marks a whopping 2,100% increase in the number of shares owned since the end of the third quarter back in September of last year.  The filing was required due to portfolio activity on January 24th.

In other recent portfolio activity, we also detailed how Lone Pine ramped up its TripAdvisor stake as well.

Per Google Finance, Charter Communications is "a United States-based company that is engaged in the provision of broadband and cable communication services and solutions. The Company provides advanced video, including High-Definition programming and Digital Video Recorder service, high-speed Internet, and telephone services to approximately 5.2 million residential and business customers in 25 states."

For a rare look at insight directly from the Lone Pine manager, we've also posted up Steve Mandel's pitch on VeriSign.

Monday, February 4, 2013

Notes From CSIMA 2013: Columbia Investment Management Conference

Below are some notes from the recent 2013 Columbia Student Investment Management Association Conference (CSIMA).  The following is a guest post from CapitalObserver

Notes From CSIMA 2013: Columbia Investment Management Conference

(MarketFolly note: rules from the event prevent direct attribution to a specific speaker's comments.  However, we found the list of speakers on Columbia's website so you at least know who was presenting at the event.  Even though the comments are not attributed, we still thought there would be value in posting these notes given the quality of speakers.)

Seth Klarman (Baupost Group)
Bruce Berkowitz (Fairholme Capital) 
Jeremy Grantham (GMO)
Timothy Hartch (Brown Brothers Harriman)
Thomas Russo (Gardner Russo & Gardner)
Jane Siebels (Green Cay Asset Management)
Mark Cooper (PIMCO)
Jean-Marie Eveillard (First Eagle Investment Management)
John Spears (Tweedy Browne)
Jennifer Wallace (Summit Street Capital Management)
Bill Miller (Legg Mason)
Mason Hawkins (Southeastern Asset Management)
Christopher Davis (Davis Advisors)
Robert Koenigsberger (Gramercy)

Presenter A: Natural Resources 

Buy good resources in the ground, farmland & forestry. Natural resources are finite. Global warming is real. Oil is running out. Much more expensive to find new oil. Even the cheapest shale oil costs $60 to take out of the ground. Higher oil prices are a paradigm shift. It is different this time.

Presenter B: Universal Display (PANL)

OLED market (organic light emitting diodes). Smartphones & TVs are moving to OLED. Lighting will likely move to OLED. 25% of market cap short. Cheaper to manufacture, better & more efficient. Trades at 16 times 2014 estimates. Holds key patents in OLED market. Patents are where the hidden value is. Replacement value calculation is $24. Paying a 15% premium  to replacement cost for the best company in a growth market. The Qualcomm of the OLED market. $240 million in net cash + value of patents+ value of R&D + PP&E . Growth stock in value category trading close to replacement value.

Presenter C: Nestle (NSRGY)

Compounded at 15% total return since 1991 and can continue. Strong brands now affordable to quickly growing developing world.  Don’t like selling companies and incurring taxes. Prefer to own stocks that never need to be sold. There are numerous members of management that speak 5 different languages. Truly global company. Go find somebody at Kraft management that speaks 5 different languages. Were willing to lose money on R&D for years on Nespresso and are now making billions on it. Willing to make long term investments even if there is no immediate payoff.

Presenter D: Bed Bath & Beyond (BBBY)

Greater than 25% ROE. Reduced share count by 25% over past decade. Leading home furnishing retailer. The store to go to for middle & upper class families when moving into a new house/ getting married. Entrepeneurial culture.  Declining margins & threat from Amazon are legitimate concerns. Margins were unsustainably high  after Linens –N- Things, their primary competitor, went bankrupt. They are spending a lot on technology & opening  many new Buy Buy Baby stores.  Same prices as Amazon. People prefer to touch & feel these types of items before buying. 12 times FCF after net cash. 75% of conservative intrinsic value. No near term catalyst. 5 year holding.

Presenter E: Vishay Precision Group (VPG)

Vishay Precision Group (VPG) is an internationally recognized designer, manufacturer and marketer of: components based on its resistive foil technology; sensors; and sensor-based systems specializing in the growing markets of stress, force, weight, pressure, and current measurements. VPG is a market leader of Foil Technology Products, providing ongoing technology innovations in precision foil resistors and foil strain gages, which are the foundation of the Company's Force Sensors Products and its Weighing and Control Systems. The product portfolio consists of a variety of well-established brand names recognized for precision and quality in the marketplace.  Less than 5 times EBITDA to EV. Great list of customers. No near term catalyst. 5 year holding.

Presenter F: Investing Advice

·         Get away from the game of trying to figure out where the market is going to go. Buy value and companies you can hold for years. Buy companies that you can own even if a depression is around the corner

·         Government involvement is masking what companies could really earn without the training wheels. 2008 only emboldened regulators to get more involved. Treacherous investment conditions. Interventions are causing distortions & future disasters are being set up.

·         How firm is run: Learn from failures. Senior partners at firm work with new employees. Flat structure. Always allow new opinions and change.

·         Ridiculous short term orientation aided by investment committees & consultants. Ridiculous pressure to keep up with the market in the short run. Pressure of industry makes it hard to be a true long term investor. Clients who could redeem put tremendous pressure on a manager to perform short term.

·         The ability to take a long term view gives one an edge.

·         Fairly priced to expensive market for the better part of the last thirty years. Have been better bargains in distressed debt, distressed real estate. There have been chances to buy stocks but there were more opportunities elsewhere.

·         Get the right clients. It is better to have less clients that are more patient.

·         Act in clients best interest but ignore everything they say. The most terrible sounding investments that would scare the hell out of your clients is likely a great investment. When the news is worst about an investment it is likely the best opportunity.

·         Investing should be absolute, not relative. If there are no bargains then hold cash.

·         There will be a once in a hundred year storm every 3 to 5 years because of the amount of distortions by government.

·         You don’t need the entire market to be cheap to find bargains. Look hard. Be patient. Right now not many bargains in public markets.

·         Hard to analyze, highly complex situations offer opportunity.

·         Most of our investments stand on their own and we don’t hedge. Don’t care about market fluctuations. Not afraid of market risk. Sometimes hedge currency or interest rates.

·         Not expert in technology but after 2001 bought tech stocks trading under cash and doubled our money. Bought HPQ but should have just put it in the too hard pile.

·         Sometimes they speak to management with a cheap stock and ask them why they aren’t repurchasing stock at these cheap levels. Management answers that they bought higher & it didn’t work. Ridiculously annoying when management thinks like that.

·         The importance of having great clients. Investors called and wanted to put in more money because of the amount of bargains.

·         Intellectual honesty. Admit mistakes. Admit when you were lucky rather than smart. I make a lot of mistakes.