Friday, May 9, 2014

What We're Reading ~ Hedge Fund Links 5/9/14

The rich list: highest earning hedge fund managers of the past year [II Alpha]

Hedge fund managers paid too much? [Pension Pulse]

Why do investors love large hedge funds? [All About Alpha]

On navigating a big ship [Research Puzzle]

The case for alternative mutual funds [HF Intelligence]

UK dominates European hedge fund assets by wide margin [P&I]

Does big money hurt hedge fund returns? [Barrons]

Rising interest rates will hurt these hedge funds [Barrons]

Greenlight asked SEC for delay on disclosure of Micron stake [Dealbook]

FPA's Romick hoards cash, sees few opportunities [Reuters]

Sotheby's, Loeb end fight over board [Dealbook]

High frequency trading hurts hedge funds [Marketwatch]

"My time on the sell side" [A Wealth of Common Sense]

ValueAct Steps Down From Valeant Board, To Trim Position

ValueAct Capital filed an amended 13D with the SEC regarding their position in Valeant Pharmaceuticals (VRX).  Per the filing, they note that Mason Morfit will be stepping down from the board of directors.

The key takeaway here is that ValueAct says they're doing this in order to trim their position size because they have a "practice of reducing portfolio weightings in companies where we no longer serve on the board of directors."

Their current stake is valued at approximately $2.5 billion and the letter specifically references that they'd like to still maintain "more than $1 billion in shares."  As far as the timetable of their sales, the letter hints that they might choose to sell some of their stake "later this year."

Mason Morfit's Letter to Valeant

Here's the full letter of his resignation:

"Dear Mike, 

I am hereby resigning effective today as a director of Valeant Pharmaceuticals International. 

As you know, ValueAct Capital has been a shareholder of Valeant Pharmaceuticals since 2006 and I have been a member of the board of directors since 2007. My team and I are proud to have worked with you and to have been a part of tremendous value creation for all shareholders. As I have told you, after seven years on the board of directors, and with my new position on the board of directors of Microsoft, the time has come for me to reallocate my time to other board work. The company is in an extremely strong position and I feel good about the future of Valeant. 

Due to the company?s strategy, there have been very long periods during which we have not been able to buy and sell shares. Most recently, ValueAct Capital has been restricted from selling any shares in Valeant since June 2013, during which time the stock has risen from $85 to $135. Beginning in February 2014, I expressed to you and the board my desire to manage down this position in our fund (currently approximately $2.5 billion out of our $14 billion in assets under management). By resigning today, with the Allergan transaction in the public domain and with Valeant?s earnings report later this week, this will create an opportunity for ValueAct Capital to sell if we choose (of course depending on stock price) later this year. Serving out the remaining term of my board service, could potentially create additional delays and complications, particularly if Allergan enters into negotiations with Valeant. 

To reiterate, we are making a portfolio management decision, not a decision about Valeant?s fundamental business, future performance or the merits of the Allergan deal.  ValueAct Capital has a practice of reducing portfolio weightings in companies where we no longer serve on the board of directors. We have done this consistently since our inception in 2000. That being said, after my resignation we still plan to be large Valeant shareholders for some time. We currently plan to hold more than $1 billion in shares and Valeant should remain one of our top positions. I wish you, your team and my board colleagues all the best and look forward to many more years of extraordinary performance.  Sincerely,  /s/ G. Mason Morfit"

For more on ValueAct, head to Jeff Ubben on Valeant in his recent interview as well as Mason Morfit's lecture on activist investing.

Glenview Capital Boosts Flextronics Stake

Larry Robbins' hedge fund firm Glenview Capital has filed an amended 13G with the SEC regarding their position in Flextronics (FLEX).  They've disclosed they own 11.86% of the company with 70.1 million shares.

The filing was made due to activity on May 5th and this marks an increase of 9.95 million shares since the end of 2013 when they owned 60.1 million shares.

If you missed it, Larry Robbins just pitched ideas at the Sohn Conference as well.

Per Google Finance, Flextronics is "is a global provider of global supply chain solutions, through which the Company designs, build, ship and services a packaged electronic product to original equipment manufacturers (OEMs) in the markets, which include High Reliability Solutions (HRS), which is consists of its medical, automotive, defense and aerospace businesses; High Velocity Solutions (HVS), which includes its mobile devices business, including smart phones, and consumer electronics, including game consoles, high-volume computing business, including notebook personal computing (PC), tablets and printers; Industrial and Emerging Industries (IEI), which is consists of its household appliances, equipment, and industries businesses, and Integrated Network Solutions (INS), which includes its telecommunications infrastructure, data networking, connected home, and server and storage businesses."

Wednesday, May 7, 2014

What We're Reading ~ Analytical Links 5/7/14

Charlie Munger's essay on wisdom as it relates to investment management [Ycombinator]

A pitch on Altisource Portfolio Solutions [Value Venture]

Is Barnes & Noble the next Gamestop? [MicroFundy]

Notes on the Outsider CEOs [Student of Value]

Alibaba files to go public in the US [Yahoo Finance]

All the western companies you'd have to combine to get something like Alibaba [Quartz]

US home ownership rate falls to lowest since 1995 [Bloomberg]

The financial vulnerability of Americans [House of Debt]

Why has student debt increased so much? [Vox]

Tax avoidance: the Irish inversion [FT]

Pay TV field could shrink with AT&T interest in DirecTV [LA Times]

As Netflix resists, most firms try to befriend Comcast [NYTimes]

On online video ads [NYTimes]

On the world of peer to peer lending [NYTimes]

Warren Buffett didn't belch at Coke pay plan [Bloomberg]

Philippe Jabre Interview: Columbia Business School's Graham & Doddsville

Columbia Business School is out with the Spring 2014 issue of its Graham & Doddsville newsletter.  In it, they interview Philippe Jabre of Jabre Capital as well as Arnold Van Den Berg and Jim Brilliant of Century Management.  It also profiles H. Kevin Byun of Denali Investors and Eric Rosenfeld of Crescendo Partners.

Additionally, pitches from the Pershing Square Challenge are presented.  MBA students presented longs of Allegion (ALLE), Carnival (CCL), Clean Harbors (CLH), Naspers (JSE:NPN) and a short of Cablevision (CVC).

The full issue is below, but here's some select quotes from Jabre's interview:

Jabre talks about starting his own firm and notes that,

"Before you start a  hedge fund you have to  follow the right steps. I  always tell people it's the  same as if you are a doctor,  architect, or lawyer opening  a practice. I first joined a  bank, then after ten years I  joined Lehman Brothers.  Then, with a group of four  partners, we spun off from  Lehman Brothers and  created GLG. And then  after that, I created my own  fund. You follow the steps  so people will follow you.    I remember after business  school I wanted to create  my own fund at age 25. My  father told me if you want  to lose money, go lose  money at other people's  expense. You can't become  a fund manager unless  you’ve lost a lot of money  and survived. So JabCap was  a normal evolution when I  started it seven years ago. A  lot of clients followed  because I had a very good  track record at my prior  funds over the previous  fifteen years and that made  it easier. But you need a  track record and you need  to have clients. The barriers  to entry are very high today  and what people look for is  a track record and the  experience of managing  money unsupervised. And  that's a very difficult concept that you learn with time."

Jabre on opportunities: "So the key thing is to find  things that have done nothing for ages and  suddenly there is an event  that you need to be the first  to understand or appreciate.  And this is where you have a huge opportunity to outperform."

Embedded below is the Spring 2014 issue of CBS' Graham & Doddsville newsletter:

For more from Columbia Business School, be sure to check out their interview with Maverick Capital's Lee Ainslie in a previous issue as well as their interview with Li Lu.

Soros Fund Discloses Sinclair IS Pharma and Spansion Stakes

George Soros' family office Soros Fund Management has disclosed two new positions recently.

Sinclair Pharma

First, Soros has revealed a new stake in London listed Sinclair IS Pharma (LON:SPH).  Due to trading on May 2nd, Soros now owns 5.02% of Sinclair's voting rights.

Other notable holders of Sinclair Pharma include the Toscafund which was set up by Martin Hughes and is now managed by Johnny de la Hay with 26.8% of voting rights and Lansdowne Partners with 11.03%.

Per Google Finance, Sinclair IS Pharma is "a specialty pharmaceutical company focused on treatments in dermatology, wound care, oncology support and critical care through surface technology and delivery systems. It has presence in five European markets and a marketing partner network across developed and emerging markets."

Spansion (CODE)

Second, Soros Fund has started a new position in Spansion (CODE).  Per a 13G filed with the SEC, Soros has revealed they own 5.11% of the company with over 3 million shares.  This is a brand new position and the filing was required due to activity on April 25th.

Per Google Finance, Spansion is "a designer, manufacturer and developer of Flash memory semiconductors. The Company focuses on a portion of the Flash memory market that relates to flash memory solutions for microprocessors, controllers and other programmable semiconductors that run applications in a range of electronic systems. These electronic systems include automotive and industrial, computing and communications, consumer and gaming. In addition to flash memory products, the Company assist its customers in developing and prototyping their designs by providing software and hardware development tools, drivers and simulation models for system-level integration. Spansion’s products are designed to accommodate various voltage, interface and density requirements for a range of applications and customer platforms. Spansion's product designs are based on its two-bit-per-cell MirrorBit technology and floating gate NOR flash memory technology."

For more, check out George Soros' best investment advice.

Tuesday, May 6, 2014

Sohn Conference Notes New York 2014: Einhorn, Tudor Jones, Shumway, Laffont & More

Below are notes from the 19th annual Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  As always, top hedge fund managers pitched their latest investment ideas to benefit pediatric cancer research.  Here's this year's edition.

Sohn Investment Conference Notes: New York 2014

David Einhorn (Greenlight Capital): Short Athena Health

Bill Ackman (Pershing Square): On GSE's Fannie/Freddie

Philippe Laffont (Coatue Management): Long Liberty Global

Chris Shumway (Shumway Capital): Short the CNH, long Moody's

Larry Robbins (Glenview Capital): Long Humana, WellPoint, Monsanto

Paul Tudor Jones (Tudor Investment Corp): On the macro environment

Michael Novogratz (Fortress Investment): The case for Brazil

James Grant (Grant's Interest Rate Observer): On Russia and Gazprom

Jeff Gundlach (DoubleLine): Short homebuilders

Zach Schreiber (PointState Capital): Long refiners Valero & Marathon

Mariko Gordon (Daruma Capital): 3 long ideas

Dan Ariely (Duke University): On the psychology of money

Investment Contest Winner: Michael Guichon: long Fiat

And if you missed it earlier, we also posted up notes from the Next Wave Sohn Conference.  This was the mini-conference that took place before the main event where emerging managers pitched their latest ideas.

David Einhorn Short Athena Health: Sohn Conference Presentation

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is David Einhorn of Greenlight Capital who pitched Athena Health (ATHN) as a short.

David Einhorn's Sohn Conference Presentation

Short a "Bubble Basket" as mentioned in Greenlight's Q1 letter

Deep dive into one of the companies without disclosing the others.

Athena Health (ATHN): Could fall 80% or more from recent peak. Provides software, services for practice management, claim processing.  Stock up big since the IPO.   He plays a video of selected clips of Jonathan Bush, the CEO which makes him looks really loopy, spouting off a bunch of buzzwords: SaaS, mobile, social, crowdsourcing, platform, monetize.

Have to believe revenues compound 18% per year for 15 years for it to be worth what it trades at today.  More clips showing the CEO who really seems foolish. They aren't really a software company, they are doing the work, reading the faxes, scanning documents, and storing them.

Should really compare this to ADP - business process outsourcing industry.  These businesses have 6.7%  to 14% operating margins.   Base case drops to $43 when you take out revs/doc which is too high, and margins too high.

Then he compares to EPIC which is winning in this space.  They are the standard - not the single digit cloud e-health records. (EHRs) More clips of the CEO that make him look a bit like a lunatic, almost like a parody.  Industry consolidation will shrink the market for ATHN, and they may lose more share to EPIC. 

Bubble stocks: best reason to own them is they keep going back up.  When they stop going up, they become falling knives.  There is a huge gap between this and when value investors will be interested in them.   Then he closes with a clip of the CEO bragging that they are trading at 21,000 times earnings, and that they are not worth that and that he forgot the question.

CRM, CNCR, ULTI, N, VEEV, WDAY, NOW were all on Einhorn's slide - maybe his bubble basket?  Basically all cloud/SaaS stocks.

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Mariko Gordon: Long Electronics For Imaging, H.B. Fuller, Pacira Pharmaceuticals (Sohn Conference Presentation)

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Mariko Gordon of Daruma Capital who pitched three ideas: Electronics For Imaging (EPII), H.B. Fuller (FUL) and Pacira Pharmaceuticals (PCRX).

Mariko Gordon's Sohn Conference Presentation

Talked about how everyone has short holding periods of stocks now. Three ideas.

Long: Electronics for Imaging (EFII).  Conversion from analog to digital printing. Company makes large-scale inkjet printers for printing tile, facades, even surfboards. Razor/blade model.  They were not selling ink, but will be soon.  $60 PT, 20x $3/share in 2016. 

Long: HB Fuller (FUL).  Specialty adhesives company. Cut 13 plants down to 7, 1400 employees down to 1000.  Reduced SKUs by 45%.  Only 15% EBITDA margin target though.  $70 PT, stock is $45 now. Bull case target is $90, needs more growth.

Long: Pacira  Pharma (PCRX).  Pain killer medicine..  Costs 100x more than the generic. Lasts up to 72 hours, vs other up to 8 hours. Drug is Exparel. PT $150, stock is $70 now.  Early stage company now, based on 10% market share. $250 bull case PT on 20% market share.

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Paul Tudor Jones on Macro Trading Environment: Sohn Conference Presentation

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Paul Tudor Jones of Tudor Investment Corp who talked about the macro trading environment.

Paul Tudor Jones' Sohn Conference Presentation

"Manic depressive trading in a volatility-compressed world."

Macro trading has been as difficult as he can recall it ever in his career. He spent several charts bemoaning the lack of interest rate changes and fixed income volatility. Even stocks and FX have had very low volatility over the last 2-3 years.

Bad for macro guys who need volatility to trade. According to his models, US bonds should be shorted April 2015, based on a July 2015 rate hike.

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Bill Ackman On Fannie & Freddie: Sohn Conference Presentation

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Bill Ackman of Pershing Square who pitched going long Fannie Mae (FNMA) and Freddie Mac (FMCC).

Bill Ackman's Sohn Conference Presentation

IDEA: Fannie Mae (FNMA), Freddie Mac (FMCC).  $3.89 now.  Same pitch he gave at CSIMA a few weeks ago.  Says his slides will be online. Fannie and Freddie were "stolen from investors."

Should recap it, do like AIG case, get the government out of it. Say full taxed net income could be $17 per share. Need to raise $183B of capital, which you get in 7-10 years from their net income. PT: $23 stock, $47 on bull case.

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

James Grant on Russia & Gazprom: Sohn Conference Presentation

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is James Grant of Grant's Interest Rate Observer who said to go long Gazprom in Russia.

Jim Grant's Sohn Conference Presentation

In trademark bow tie as always. "No disclaimer, I'm just going with the First Amendment." "Successful investing is having people agree with you - later."

IDEA: Gazprom long.  Listed in London.  Owns 17% of the world's gas reserve, the economic instrument of Putin's foreign policy.  HLF without Carl Icahn.  Donald Stirling with a London ticker.  Opposite of TSLA. Well hated, very out of favor. 32% operating margins.  Endless list of reasons to be bearish. Russian government owns 50% of shares.   Then he compares FB's corporate governance, with dual class share structure to Gazprom.   Trades at 2.4x 2014 earnings.  That is after taxes, and "after stealing."

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Zach Schreiber Long Refiners Valero & Marathon: Sohn Conference Presentation

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Zach Schreiber of PointState Capital and talked about how he expects crude oil prices to fall.  He thinks the refiners benefit and pitched Valero (VLO) and Marathon Petroleum (MPC).

Zach Schreiber's Sohn Conference Presentation

Stanley Druckenmiller gave him over half of his capital after he retired from Duquesne Capital.

IDEA: Short WTI/Long US Refiners.

Valero (VLO), Marathon Petroleum (MPC). They believe WTI crude will drop.  US oil production is growing very fast- same shale as the NG guys did.  US production will grow 1M bpd per year in 2014, 2015. 

Most everyone thinks WTI goes a lot higher, $33T long. Swelling inventories of Cushing crude.   There is a crude export ban, so they have to refine it.

Gulf coast refineries are maxed out at 96% utilization.  Can't import less, because of politics. Cash on cash IRRs are still high at these prices.  Long VLO, MPC.  10-11% FCF yields.  0.4x Debt to EBITDA.

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Larry Robbins Long Humana, WellPoint & Monsanto: Sohn Conference Presentation

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Larry Robbins of Glenview Capital who pitched HMO's long like Humana (HUM) and WellPoint (WLP) and also agriculture play Monsanto (MON).

Larry Robbins' Sohn Conference Presentation

They recapped his amazing calls at the conference, including shorting GM, and long the hospitals, which was a blockbuster trade.

Long ideas: Humana (HUM, WellPoint (WLP), Monsanto (MON).

He says "resist the temptation to think 2014 is different from 2013, just because the calendar has changed." Over last 2 years, high yield bonds yield dropped by 200 bps.

1. Cheap valuations on stocks, says SPX 16.1, 14.4x 2015.   
2. Lower systemic risk   
3. Corporate deployment- management and owners must "lift up."

Concept of "Convertible equity"  - an investment in a defensive secular growth business, that also carries call options on value-enhancing events.    Need to be more contrarian now. HMOs, and Monsanto, GMO provider are both out of favor.

Managed care. Myth 1: HMO profits are reason healthcare costs are too high. Fact: their profits were only 0.4% of al healthcare spending.  HMOs are the only sector of healthcare that haven't recovered. Pain is in the rear view mirror.  All headwinds turn neutral or to tailwinds over next 5 years. Greater exposure to Medicare and Medicaid- 22% from 9% in 2007.  New management in 4 of 5 biggest HMOs. (HUM, WLP, AET)

HUM: medicare advantage company. Baby boomers are aging, 4x the growth of overall population.  HUM taking share. Seniors like medicare advantage. HUM top-line growth 10-15% range. "Options:"   
1. PBM: outsource to another scale provider to reduce costs   
2. Cash use/returns on cash. 22% D/C ratio, could take on more debt to buy back shares or a small HMO.   
3. Retiree private exchanges.   
4. New markets.    
5. Long-term consolidation.

Base case PT: $143-152 Bull case: $194-207

WellPoint (WLP): traditional managed care. PBM sale ends in 2019.  Could unlock more PBM value as early as 2017.  PT $125-134 base case.

Monsanto (MON).  "In the real world, we cannot solve world hunger on an organic basis."  GMO seeds are best option for environment, and for feeding the world. Looks expensive at 19x this year, but it has new products that could $1.50-2.00 per share earnings. Near-monopoly position with multiple upside levers, Monsanto is suboptimally hoarding capital and value is trapped. 

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Philippe Laffont Long Liberty Global: Sohn Conference Presentation

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Philippe Laffont of Coatue Management who pitched Liberty Global (LBTYA/K) long.

Philippe Laffont's Sohn Conference Presentation

Tech Media Telecom investor.  Was at Tiger before founding Coatue.

IDEA1: Long Liberty Global. LBTYA. Similar pitch to last time, which was Virgin Media, which was bought by Liberty Global. (He's owned LBTYA for a while now).

Says  cable is best infrastructure for high-speed broadband.  Says Fiber is too expensive and wireless is too hard because you need expensive spectrum. NFLX is just rolling out in Germany, France.  It is 30% of the broadband in the US, and this trend will occur in Europe next. 

Comments on merger activity in cable and telecom: he expects more consolidation. TWC and CMCSA happening. Sprint and T-mobile? DirectTV and AT&T?

Liberty Global could be bought by Vodafone. AT&T could buy Vodafone and Liberty Global. CMCSA could buy Liberty Global. Liberty Global could add new assets. So LBTYA could double from $40 to $90 by 2018.

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Dan Ariely on the Psychology of Money: Sohn Conference Presentation

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Dan Ariely of Duke University who talked about the psychology of money.

Dan Ariely's Sohn Conference Presentation

Professor of Psychology and Behavioral Economics at Duke University. Best-selling writer.

His topic: the Psychology of money. Money spent has opportunity cost. Very hard psychologically to make good spending decisions. Wrong decisions:   

1. Think of it in relative terms rather than absolute terms. "For only $3000 more, can get X"    
2. The method of payment effects your decision.  "The pain of payment."  Cash or credit card. Paying with cash is more annoying than credit cards, because of the timing of payment   
3. Principle of fairness. Peak demand pricing annoys us. Locksmith that fixes your lock quickly - we think we pay too much. Money is incredibly interesting. We make lots of mistakes with money.  Design of electronic wallets is very important because they will effect how people save for retirement.

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Jeff Gundlach: Short Homebuilders (Sohn Conference Presentation)

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Jeffrey Gundlach of DoubleLine who argued that housing is declining and said to short homebuilders.

Jeff Gundlach's Sohn Conference Presentation

Pitch: Single Family Housing recovery is not happening.  Household debt fell only because mortgage credit dropped due to default.  Housing market has been supported by a surge in second lien financing and cash transactions.  Cash transactions are 50% of deals, up from 20% in pre-2008.  Existing home sales and new ones are weak. Housing starts have improved, but still below 1M per year.

Housing affordability isn't really that good now if you look at the long-term charts. There are no first-time buyers. Household formation is depressed. Young people are staying with parents much longer and have higher unemployment rates. Student loan debt is higher, another headwind. People moving rate has been in decline for decades. Still 19.4% negative equity nationally.

Generational preference shift - young people prefer to rent. He says home ownership rate will DECLINE further, not rebound like most people think. Says the rest of his career we will NEVER see 1.5M housing starts in a year again. IDEA:  Short XHB. 

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Chris Shumway: Short CNH, Long Moody's (Sohn Conference Presentation)

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Chris Shumway of Shumway Capital.  He pitched shorting the deliverable forward version of Chinese currency (CNH) and also pitched Moody's (MCO) as a long.

Chris Shumway's Sohn Conference Presentation

Shumway: Was at Tiger until 2002.  Grew funds to $8B, CAGR of 17%.  Now runs his own investments and seeds new funds.  First time speaker. Returned outside money in 2011, time horizon has extended - now does some private investments.

His macro views:  his main concern is if the global economy got going too quickly, inflation could take off which would choke off the whole cycle.  China deflation was good, because it meant the economy could grow, disinflationary for a long time.  Now "it feels a little bit strange out there."  Especially the damage to the growth stocks which have gotten crushed on no short-term valuation support.

Three big areas of concern now:   

1. The Fed.  Yellen dashed hopes of "considerable time" to making it 6 months before taper happens quickly.   

2. Russia.  Putin.  Risks are real.  A big risk, that is mispriced.   

3. China. China growth is slowing. Massive excess credit growth, 11% more than GDP.  Over time, it should be the same.  This is unsustainable.  Non-performing loans have skyrocketed.  Shadow banking is 44% of credit growth.  Much of the projects have no return.

IDEA 1:  Short the CNH. (deliverable forward version of Chinese currency.) Tracks the CNY with very little variation.  They have limited stimulus options left, and they all lead to more non-performing loans. Says GDP is growing 6% and decelerating, not the 7% stated.  Simplest way to fix this is currency devaluation.  Did this in 1994, from 5.5 to 9 CNY to the dollar.

IDEA 2: Moody's.  MCO. Long term after tax returns.  Ratings agency, and Investors Services.  A great business, straightforward story. Global duopoly, with third player Fitch.  Unrated debt costs you 150 bps in yield, costs only 5 bps to get rated.  81% ROE over last 10 years. Moodys covers 95% of the companies, S&Ps covers 92%, Fitch does 50%.

Key: "It's a Bloomberg-like business."  Huge cost to have all the data, and they have it.   Corporate EBITDA growth grows at GDP,4%, pricing 4-6% per year. Europe adds 2-3%.  Get 10-13% revenue grower, with 100bps operating margin expansion.  Gets you operating income growth of 14-17%, 5% buyback, plus dividend gets 19-22% total return. Bear case:     1. Litigation.  6 years since Lehman crisis and still no lawsuit. (S&P had it)     2. Revenue growth rate is decelerating due to tougher comps.   Price target is $143 base, $171 upside.

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Michael Novogratz on Brazil: Sohn Conference Presentation

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Michael Novogratz of Fortress Investment Group who pitched a contrarian play of going long Brazil.

Michael Novogratz's Sohn Conference Presentation

Wrestled at Princeton (he was one of the people that helped get wrestling back in the olympics), 11 years at GS, was a helicopter pilot.  First time speaker. Spent time discussing the current macro environment.

Says it was partially the bad weather and expects volatility to remain low. Pitch: Long Brazil. It's been hard to make money there for the last 4 years.  Contrarian pitch- "things are so bad, that they are good."

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Sohn Investment Contest Winner Michael Guichon: Long Fiat

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is the winner of the Sohn Investment Contest.  Michael Guichon won.  He's an MBA student at Columbia and he pitched long Fiat.

Michael Guichon's Sohn Conference Presentation

David Einhorn, Bill Ackman, Michael Price, and Seth Klarman were judges. Finalists: Fiat, PENN, Intercontinental Hotel. Winner is 1st year CBS student. 

Fiat. Expected to trade on NYSE in Oct 2014. 90% upside, PT 16.50 euros. FCA: Fiat Chrysler Autos.  EV/EBITDA 3x.  Cheapest automaker in the world.  Also owns Ferrari/Maserati. 

Risk is continued weakness in legacy markets. 6th largest automaker globally. Bought Chrysler in 2009.  Paid $4.4B for a business that generated $3.1B in 2013. Synergies, common components, scale for R&D.

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Monday, May 5, 2014

Viking Global Almost Doubles ACADIA Pharmaceuticals Stake

Andreas Halvorsen's hedge fund firm Viking Global has just filed a 13G with the SEC regarding shares of ACADIA Pharmaceuticals (ACAD).  Per the filing, Viking has disclosed a 5% ownership stake in ACAD with over 4.95 million shares.

This means they've almost doubled their stake since the end of 2013 when they only owned 2.6 million shares.  The filing was required due to portfolio activity on April 24th.  Thus far this year, Shares traded as high as $32 before sliding down to as low as $15.64.  It currently trades around $20.

Per Google Finance, ACADIA Pharmaceuticals is "biopharmaceutical company focused on small molecule drugs that address unmet medical needs in neurological and related central nervous system disorders. The Company has four product candidates in clinical development led by pimavanserin, which is in Phase III development as a first-in-class treatment for Parkinson's disease psychosis. It holds worldwide commercialization rights to pimavanserin. In addition, the Company has a product candidate in Phase II development for chronic pains and a product candidate in Phase I development for glaucoma, both in collaboration with Allergan, Inc., and a product candidate in Phase I development for schizophrenia in collaboration with Meiji Seika Pharma Co., Ltd. The Company's clinical-stage product candidates include Pimavanserin, Alpha Adrenergic Agonists, Muscarinic Agonist and AM-831."

For more on this hedge fund, check out a rare interview with Andreas Halvorsen on investment process.

Next Wave Sohn Conference Notes: John Khoury, Jason Karp, Nitin Saigal, Ethan Devine, Will Snellings

The 19th annual Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK, has completed and we've posted notes from the event.  This year though the event featured a new addition: Next Wave Sohn.  This mini-conference was held before the main Sohn event and featured emerging managers pitching their latest investment ideas.  Here are those presentations.

Next Wave Sohn Conference Notes 2014

John Khoury. Long Pond Capital 

Idea: American Homes for Rent (AMH).  REIT, buys houses, fixes them up and rents them out.   Debate is whether it is a good business or not. Bears say it is impossible to manage thousands of homes efficiently. Bull case: 95% occupancy, length of stay 2x that of apartments NOI margins at or higher than apartments. Doing securitization now at L+1.66 Levered up- "you want to own an asset when it begins to be securitized."

Currently 2.7% FCF yield, but with 45% net leverage get 7.0% FCF yield. "REITs do not trade at 7% FCF yields."   Apartment REITS trade at 5%, if this gets there, stock has $23 PT, 40% upside. "Free call option" is consolidation, they could roll up other businesses.  Still only 20% of 1% of the total market. $3T market opportunity.  Founder and management own $1B of the stock. Unlevered now, so limited downside if they are wrong.

Jason Karp.  Tourbillon Capital

Idea: Ctrip (CTRP) - Tourbillon: looks for durable themes, ideas that there is a different way to look at it (he's formerly of SAC). Chinese travel one of the highest probability growth themes on the planet. $7.5B market cap, $800M cash,  $48 now, LT price target $115-170.  Trades at 17-25x p/e.

China is largest global spender on international tourism, but low per capita. Thesis is travel spend per person will catch up with other countries. China is only 50% internet penetration, but already has 600M users, double the US population.  If CTRP just holds share, the revenue goes up 7.7x . They have 40% market share now. People always mismodel or underestimate the upside.

In 2009, sell side thought PCLN would do $9.19 eps in 2013, they actually did $41.00. PCLN went from $5.5B to $61.7B, up 10x in 5 years. CTRP is on similar trajectory, but their core market is growing faster.  Controversy: margins have declined because they are investing in their business in a battle with eLong. Mobile room nights went from 0% to 35% since 2012.  Problem is operating margins from 2007-2011 were 40%.  Now in the 20s, but he says it will expand back up since they will not be able to spend so much on the business simply because the topline is so big.

Ethan Devine. Co-PM of Indus Capital

Idea: Goldcrest. Listed in Japan.  Largest condominium developer in Japan. Trades at 0.50x book.  Condos in Tokyo.  Thesis is stock is cheap, despite how hot real estate is in Tokyo.  He focuses on global special situations.

Nitin Saigal. CIO at Kora Management

Idea: Bharti Infratel.  Originally thought it was a great short:  Unattractive Industry, Regulatory uncertainty, hurdles to scale, capital allocation concerns.   Bull case:   There is competition and was overdevelopment in the past, but supply has rationalized. 900M cell phones in India, only 90M smartphones. Data demand story- like the US, China. India just did a spectrum auction.  $7B market cap, 80k towers, 25% market share- has scale- nationwide tower network. Capital allocation has gotten better- dividend payout increased, disclosure better. Costs $50k to build a tower, one tenant 7.5% ROI, 3 tenants $15,500 annual revenue 25% ROIC.  Thinks it should trade  at 330 rupees/share, trades at 6% FCF yield, growing 15% per year, TEV/EBITDA 11X.  Kora is an emerging markets fund, based in NYC, but offices in China, India, and Sao Paolo  

Will Snellings. Founder of Marianas Fund. 

Idea: Jet Blue (JBLU). Two big changes: consolidation- top 5 players control 85% of capacity.  Cost curve shift- Southwest was destabilizing the industry, taking share because they had a cost advantage- which they no longer have. So industry is still below mid-cycle economics. Jet Blue has youngest fleet in industry- 8 years, low cost position and low ticket prices.  Has 7.5% of industry capacity- small enough to grow without disrupting industry stability.  2013: $758M op cash flow vs $4.5B EV, $2.8B market cap.  JBLU has materially underperformed the industry over last 2 years.  He worked at Ospraie while setting up his own fund.  Likes structural changes in businesses that make a bad industry become a very good one.

We've also now posted up notes from the main Sohn conference as well, featuring David Einhorn, Bill Ackman, Paul Tudor Jones and more.  So be sure to check that out as well.