Thursday, June 5, 2008

Starting a position in Millipore (MIL)

I had written back in my 13f hedge fund analysis of Blue Ridge Capital here that I thought it was interesting that they started a new position in MIL last quarter and brought it up all the way to the #4 fund holding. I was intrigued, so I started my research on the company. And, what do you know, we might have found a winner. Jeffrey McLarty had actually written about MIL here in his breakdown of the water etf PHO. And, although he didn't necessarily like MIL as a play on water, he said he was intrigued by the company itself and decided to revisit the name later.

I really wanted in this name, but it has had a big run over the past few months. So, now coming up on close to a 50% retracement of that move, its time to dip my toe in the water with 1/4th of my total position in MIL that i'll be assembling. I'm flagging this as a buying opportunity mainly because the chart sets up wonderfully here and as I said, its retraced some of its move. (Click the chart to enlarge it). But, besides that, if you look at the blue circles I have drawn on the chart you will see some commonalities. First, at the very top in the RSI. The RSI is in a current uptrend, making higher lows and higher highs, obviously bullish. Additionally, each drop of size in the RSI has signaled a buying opportunity. Secondly, looking at the second set of circles on the stock chart itself, we see that MIL has dipped to support and buying support is always a wise move. The first dip was obviously a double bottom, as signaled by the neon green line I've drawn in there around $65. This double bottom is also significant as it signals the place at which I would really like to load up on shares. And, it gives us a clean stop if we put it below that double bottom. Thirdly, moving down to the blue circles within the stochastics. You will see that each time the stochastics have crossed below 20 into oversold territory, it represents a buying opportunity. Combine all the above with the fact that MIL has completed almost a 50% retracement of its last major run, and you've got the combination for a great entry point.

So, with that said, I'm beginning my position in MIL with 1/4th of my position size here maybe slightly prematurely at $69.34. I'll be back with another post later as to why MIL makes a great investment in the first place. But, just wanted to get this on people's screens as I know some were interested in this name due to the fact that Blue Ridge Capital added it as a new holding, and added it with conviction. When Griffin brings a holding all the way up to the fund's 4th largest holding all in 1 quarter, you know he's up to something.

Oil... $120 is the make or break point. I expect a bounce

Wanted to touch on oil here since its such a big part of the markets these days. Currently, its pulling back and expectedly so. It was due for a pullback, but now we are approaching a very important make or break point: $120. As you can see in the chart above, every dip in oil has been a buying opportunity. And, interestingly enough, each dip has dipped all the way to the most recent peak and then bounced off that peak. Because, after all, that peak used to be past resistance. But, once we blasted through it, it became future support. For some reason I can't get my graphics to show up on the chart but do me a favor and just mentally draw a line horizontally across the $120 mark. There you will see where the pullback is headed. And, if look at the peak in the end of April, where does it sit? Yep, right at $120. Here's the deal, I'm short-term bearish on oil simply because it needs to pullback even more. All you hear about now is consumers complaining about $4 gasoline. So, with demand in the US (one of the biggest consumers of crude) decreasing, oil needs to pullback in price. Pure supply and demand economics. But, here's the catch. You can't expect that to happen because markets can remain irrational longer than you can remain solvent. So, I am *fully* expecting a bounce at $120 if we even get that low. Traders, speculators, you name it, they will all be rushing into this name on a beautiful technical bounce off of past resistance/now future support, as well as the moving averages. I've drawn the exponential moving average in red and the simple moving average in blue, since I know various people use various averages. But, this shows that both are right around $120. It's an imperative level and just wanted to make sure everyone had seen it. Not to mention, stochastics are oversold at current levels, implying a bounce. I don't usually look at stochastics on commodities in general, I typically use them just for stocks. But, its worth mentioning as it also backs up the argument for a bounce at $120.

So, buy oil on the dip to $120 for a trade at the very least. Place your stops below that and call it good. If it breaks below your stop then it's time to get short because then oil is heading lower and will have made a technical breakdown. You can play oil with ticker USO which is the US Oil Trust (think GLD but for Oil). Or, you could play it through the deep sea drillers like RIG, DO, ATW, etc. I'd recommend USO simply because the chart is identical to $WTIC (crude), so you've got clear entry/exit points. Whereas on RIG etc you've got to monitor the price of oil yourself and then set conditional buy/sell orders on those stocks once oil hits a certain price, triggering your order to buy/sell RIG or whatever oil company you choose to play it with.

Also, just wanted to throw in some commentary from oil greats Richard Rainwater and T. Boone Pickens. If you're unfamiliar with Rainwater, he's down in Texas and was famous for striking it big on heavy bets on Disney as well as heavy bets on the appreciation of the price of oil. He and Boone share the Peak Oil Theory belief. At any rate, Rainwater says he's short-term bearish on oil, and he makes the right case in this Time article here.

Boone Pickens also spent some time talking to Time magazine about oil (and his odd position in Yahoo YHOO). You can check out that video here.

Wednesday, June 4, 2008

Hedge Fund Tracking: Atticus Capital's 13F (Timothy Barakett)

(Note: Before reading this update, make sure you check out the preface to the series I'm doing on Hedge Fund 13F's here)

Atticus Capital is a $13 billion hedge fund ran by Timothy Barakett. In 2005, Atticus' funds were up a combined 45%. And, they finished well over 30% for 2006. Barakett founded the firm at age 26 in 1995 and focuses on taking large, concentrated positions in companies. One of Atticus' most famous investments was Phelps Dodge, a miner which was bought out by Freeport McMoran (FCX). At one point, Atticus owned more than 9% of Phelps. And, they continue to hold their position in what is now the combined FCX. Barakett received his BA in Economics from Harvard and his MBA from Harvard as well. Its very evident that Barakett employs macro based investment theses. Once he has decided on what the trend is, he will find the best company within that trend and he will place a big bet. And, when needed, he will step in and take an activist role, ensuring the company is performing to his liking. And, much more often than not, he wins.

I love covering Atticus simply because their investment style is the most similar to mine that I have found thus far, in terms of hedge funds. (Well, minus the activist part since I'm a measly retail investor haha.) I will be detailing the changes to Atticus' portfolio as referenced in their latest 13F filing, which shows the portfolio changes they made last quarter. I won't be going into as much detail on Atticus as I have on the ex-Tiger Management funds (Lone Pine, Blue Ridge, Maverick) simply because Atticus has fewer, more concentrated positions. So, I'll cover the major moves and give the jist of what's going on in their portfolio. Just remember that this is by no means all their positions; they have some more, but they are literally tiny positions. With Atticus, you want to be placing your money with their big bets. These are just the bigger/notable moves that they made.

New Positions:
AngloGold Ashanti (AU) 918,000 shares
Newmont Mining (NEM) 1,022,400 shares
Visa (V) 7,799,500 ipo shares

Added to:
Genomic Health (GHDX) increased by
Goldfields (GFI) increased by

Reduced Positions:
CSX Corp (CSX): sold out of all their CSX shares, and sold half of their CSX calls.
Freeport McMoran (FCX) Shares: reduced from 16,393,273 shares to 11,523,563 shares
Freeport McMoran (FCX) Calls: reduced Calls position from 10,014,400 shares through calls to 2,214,900 shares through calls
Mastercard (MA) Shares: reduced from from 4,093,290 shares to 3,621,683 shares
Mastercard (MA) Calls: reduced Calls position from 1,594,600 shares through calls to 194,600 shares through calls
Norfolk Southern (NSC) Shares: reduced from 5,634,016 shares to 1,921,900 shares
Norfolk Southern (NSC) Calls: reduced Calls position from 203,600 shares though calls to 0 shares through calls
NYSE (NYX) Shares: reduced from 15,261,911 shares to 13,955,540 shares
NYSE (NYX) Calls: reduced Calls position from 7,251,400 shares though calls to 0 shares through calls
Occidental Petroleum (OXY): reduced from 9,428,982 shares to 7,414,900 shares

Removed Positions:
Inverness Medical (IMA)
Monsanto (MON)
Moody's (MCO)
Praxair (PX)
Research in Motion (RIMM)
Verisign (VRSN)


Breakdown: Alright, so after checking out the major moves from Atticus' portfolio, its very clear to see that Barakett is putting big bets on gold through the miners themselves. It appears as if they were taking profits from their long held Phelps Dodge (now FCX) and applying that cash to pick up and add to other miners. The weird thing here is that FCX, although their name has "Gold" in it, is mainly a copper producer. These other miners they added are mainly gold miners. So, since we cannot see commodity holdings through the 13f's, I would bet that Barakett owns some gold. Because otherwise, his choice to play this thesis through the miners baffles me, because he is exposed to the company specific risk. He has protected himself somewhat by diversifying amongst the miners, spreading his risk around. But still, a puzzling move to me. While I agree that the US faces heavier inflation fears than construed by many, his bet on the miners is taking some time for me to digest. I do not see the Gold etf GLD in his portfolio, so I would guess that he owns some of the actual commodity. That is, unless, he sees something completely different in the miners themselves. Clearly though, he was buying the dip in gold. And, although he takes some profits in FCX, it still continues to be the fund's #1 holding. Note though, that his position size in these miners pales in comparison to his various other top fund holdings, ie: the gold miners are not massive holdings in his portfolio, save for FCX, which is a copper play anyways, so there's a difference.

They got their hands on a massive allocation of Visa (V) ipo shares, and so that has undoubtedly paid off. I'm sure they will sell a little bit to take some profits, but hold the vast majority, as they have done with Mastercard (MA). It is very apparent that Barakett is a big believer in MA's global presence and expansion. He sold a little MA, but again, not substantial enough to be more than profit taking. After all, MA is up huge. V fits right in there with that same thesis so it makes sense for him to add in mass on the ipo where he got the shares dirt cheap (damn you!). His position in MA is worth twice as much as his position in V (in $ value). Look for him to possibly even add even more V on any dips.

What I haven't necessarily detailed here is Atticus' massive position in the rails. Although they sold out of most of their CSX, they have absolutely HUGE positions in BNI and UNP (in fact, they are the fund's #4 and #1 holdings respectively). So, they have slowly but surely traded out of CSX over the past few quarters in favor of BNI and UNP. No surprise here, as almost every smart guy on wall street is in big on the rails.

Ahh NYSE (NYX), good ole NYX. This is a pretty massive position for Atticus, still in the top 10 of holdings even though they've been selling some off. As a recent shareholder myself, I know the pain they must be feeling. The thesis behind investing in NYX makes perfect sense and I'm right with Barakett on it. But, it seems as if this is going to take much longer to play out than he has imagined. He's been reducing his position size a little bit to reduce his risk, considering he must have been taking quite a big hit from this position. We'll see if he has dwindled it down even further next quarter. If that's the case, it might be time to re-evaluate NYX as there might be fundamental problems with this name.

Barakett continues to play oil through Conoco Philips (COP) and Occidental Petroleum (OXY). Although he sold off some OXY, he still has a pretty large position. I would guess he was just taking profits in that name, as it is up pretty significantly. His position in COP is larger anyhow.

Other odds and ends worth pointing out is Atticus' tiny position in Clean Energy Fuels (CLNE). Sound familiar? Yep, this is Boone Pickens' company. And, Boone Pickens' BP Capital has a pretty hefty position in his own company too. Just thought that was interesting. Also worth noting is that Atticus has a pretty sizable stake in Crown Castle (CCI). I was puzzled as to why Maverick Capital had sold out of their CCI last quarter, but its reassuring to see Atticus still holding a large position in it. Having done more research on it over the past week, it really makes sense to me as an investment and I really am dumbstruck as to why Maverick sold it off. Also, just like practically every other well known hedge fund, Atticus holds decent positions in all 3 of the major Brazilian banks: Unibanco (UBB), Banco Bradesco (BBD) and Banco Itau (BBD). Typically, it seems that most hedgers have bigger bets on ITU and BBD. But, Atticus is the inverse in that their position in UBB is the size of their position in BBD and ITU combined. These are three of the staples for any Brazilian index fund. And, with good reason. These names are very compelling due to their positioning in a blossoming Brazilian financial scene. I haven't been in these names ever since I sold out to take profits, but am definitely at looking to get back in. I'm invested in a Brazilian index fund for my retirement account, but I need more Brazil exposure in my macro investment account.

The main thing that strikes me overall about Atticus' portfolio is the conviction with which Barakett invests in the trends he really believes in. His portfolio has either a tiny stake in the stock, or a massive stake in the stock, hardly much in between. There are only a handful of names in his portfolio that fall in the "in between" category. And, this is after the fact that I've taken into account that the sectors he's bet big on have appreciated a lot in value. Even after subtracting what I gauge to be "fair profit" in those names, his original positions in those names are still among the largest in his portfolio. So, the argument that they are his largest holdings due to their large appreciation is a non-factor. He's got massive bets on in payment processing, precious metals/mining (FCX), oil, and the rails. I'll be keeping a close eye on which of the "smaller" holdings suddenly become elevated into a large holding. Because when that happens, Barakett has come to his next macro conclusion and will have acted swiftly.

Personal Favorites out of Atticus' Portfolio: MA, V, OXY, FCX, (NYX - even though its a death trap), UBB, ITU, BBD, CCI

Most interesting moves: Using some profits from FCX to load up on various gold/precious metal miners. I've never thought the gold miners themselves to be that great of investments. I only like FCX so much because its not really a gold company, they're much more of a copper and molybdenum story. Selling completely out of RIMM was also interesting... I'm sure he'll be back once those shares come crashing down again. But, he still has a decent sized position in Baidu (BIDU) for 'tech' exposure.

Note, of their positions, I'm long: MA, V, OXY, FCX, NYX, BNI

Names I want to research further: CCI, BBD, ITU, UBB, PAC

Look out in the coming days as I wrap up the hedge fund coverage with a few last 'notorious' funds and whales.

Tuesday, June 3, 2008


So, fresh off my post about owning MA and V as your play on financials, I receive this chart... what timing! Barry Ritholtz over at Big Picture has a nice graph (seen above) of banks that have accessed the fed's discount window. As you can see, this year has been record setting to say the least in terms of banks needing help. So, what's next? Implosion? Just another reminder as to why I want to avoid the financials in general and stick to best of breed in the space if you really feel the need to be in there. Some of these companies' balance sheets are giant mysteries, and Lehman (LEH) scares the crap out of me right now with all their level 3 assets or whatever. Click on the graph to enlarge it and get an up close and personal view of how "well-run" our banks are at the moment.

Monday, June 2, 2008

Why the only "financials" you need to own are Mastercard (MA) and Visa (V)

I love it when the media (especially those yaks on cnbc) always ask "Is now the time to buy the financials?!?!" Personally, I steer clear from most of them, except for a revered few. And, they don't even really count as true 'financials.' I'm talking about Mastercard (MA) and Visa (V). I want to preface this by saying that by no means do I recommend jumping into these names right now at these levels. They've had massive runs and undoubtedly are due for pullbacks. But, I just want to put it on your radar for when they eventually do pull back. I've been selling into the strength and only have a little bit of each left and am dying for a pullback to load up on these names. I'm starting to feel empty inside because I can't have full positions in these dominant companies haha.

(Side Note: Now, don't get me wrong, there are 2 ACTUAL financials that I like, US Bank (USB) and Goldman Sachs (GS). USB because of the strong 5% dividend and solid dividend growth, as well as a pretty cautious management team. They seem to have weathered the majority of the storm in terms of the credit crisis/housing woes, and the stock mainly trades sideways. So, I just pocket the dividend and write some covered calls on that badboy to create some nice cashflow. Treat this name almost like a CD or a high yield savings account (but higher yielding). GS, on the other hand, is by far the best of breed investment bank and they get dragged through the mud with the other banks due to guilt by association. In the long run, look for them to distance themselves from the pack and truly outperform. Look to really load up on shares around $160 or even $150 if it trades that low. GS and USB are the only "true" financials I touch with a ten foot pole.)

The main thing that prompted me to post about MA and V has been SunTrust's analyst coverage of the names. Normally, I don't pay much attention to analyst estimates because half the time the analysts are wrong. But, I pay attention to these calls solely because time and time again, SunTrust has been ahead of the pack (and rightly so) in terms of realizing the true revenue that MA and V can grow. Notable Calls has been right on the money by flagging this for their readers. SunTrust now has a street high estimate for MA 2008 and 2009 EPS. Last week, SunTrust raised fical 2008, 2009, and 2010 EPS estimates for V. For V, they raise 2008 estimates from $2.04 to $2.11, 2009 estimates from $2.69 to $2.96, and 2010 estimates from $3.55 to $3.82. As you can see, these are pretty substantial boosts. Then they come right back this week and raise MA's estimates even higher. They boosted MA's 2008 estimates from $8.68 to $8.94 and 2009 estimates from $11.08 to $12.17. Once again, a pretty notable increase. SunTrust suggests that MA could see sustainable EPS growth of at least 20%, which is huge. The overall belief is that MA and V are seeing pricing power in their industry niche of payment processing with no credit risk. They have operating leverage (and are continuing to reduce operating costs) and are seeing massive volume growth. Voila - my investment thesis all along. Suntrust has an argument for those who say MA and V are rich in valuation now: They believe that this is due to the fact that analyst estimates are simply too low and flat out unrealistic.

This reminds me of the exact situation that has been occurring in the fertilizer segment of the agriculture trade. Analysts simply have too low of estimates and these companies are actually trading at much cheaper multiples than we think. 6 months later in the fertilizer game and analysts are STILL playing catch-up. Now, I don't think MA and V are seeing the kind of secular growth explosion that MOS or POT are obviously; but, at the same time, I definitely agree that analyst estimates are too low on MA and V and there is a secular trend building. SunTrust is the only analyst I'll follow on this group simply because they are leading the pack of analysts right now and until the others play catch-up, SunTrust is the only bank out there who "gets it." Through my time in the markets, I've found that certain analysts in each sector are just flat out better than others (surprise, surprise), and you've got to find those analysts and only listen to them. Listening to the others is just a truckload of garbage and noise. So, SunTrust is way ahead of the game here and look for others to follow suit once they crunch the numbers and take a look at what is really happening in the world of global payment processing and realize that their estimates are way too low.

The phrase "global payment processing" is all you really need to know about these companies. They are global stories and most of the growth is occurring away from American shores. Despite an economic slowdown/recession in America, MA and V continue to see huge revenue growth due to international consumers' willingness to use plastic rather than cash. The slowdown in spending from American consumers is not even a chink in the armor of these guys. Think of the rest of the globe as Americans 10 years ago. Eventually, everyone gets used to using debit/credit cards and starts carrying less cash. I can't underscore this point enough. The international opportunity for these names is huge. If they can get consumers in other countries to use their cards even HALF as much as American consumers, they will see record numbers.

Plain and simple, MA and V are payment processors who bear ZERO credit risk. If you want some credit risk, you can always go with some American Express (AXP), if that's your cup of tea. I can see the appeal there, and so does Blue Ridge Capital (seeing as they really loaded up on shares of AXP last quarter). But, I prefer MA and V due to the sheer volume of cards they have in consumers' hands worldwide. I want to stress again that I usually do not pay a ton of attention to individual analyst estimates. But, when you see a firm come out with street-high estimates, constantly leading the pack of analysts, it gets your attention. I think these guys are right on the money and that's why I wanted to point it out. They've been talking my investment thesis in these processors all along. Oh, and did I mention that Lone Pine Capital has a pretty hefty position in MA and V, as detailed here.

Disclosure - long MA and V at the time of writing, but have been selling into strength lately. Looking for a pullback of any size to really begin to add. Keep these names on your radar.