market folly

If there's one overwhelming theme we've seen from hedge funds as of late, it would be the 'long high quality large caps' trade. Whitney Tilson and Glenn Tongue's hedge fund T2 Partners further verify this with their latest bullish presentation on Anheuser-Busch Inbev (BUD), Microsoft (MSFT), and BP (BP). These are some of the largest companies in the world and T2 sees value in their shares. While value is the underlying theme, they are bullish on each respective company for very different reasons.

T2 Partners recently outlined their rationale with this presentation at the annual Value Investing Seminar in Italy. Keep in mind that T2 and many prominent hedge funds will be presenting their latest picks in October at the Value Investing Congress (special discount here). Now, Tilson and Tongue start their most recent presentation with Anheuser-Busch InBev (BUD). They cite that the company is a very high quality business with pricing power and a best of breed management team. A result of the merger between InBev and Anheuser-Busch, the company has density in major markets with high margins and high returns. Additionally, T2 points out valuation, writing, "Pro forma for deleveraging and synergies, (it) trades for 9.3x 2012 free cash flow." The company has beat its 30% EBITDA margin goal handily and has cut costs.

On Anheuser-Busch InBev, T2 Partners says, "you can currently buy BUD with an entry FCF yield of 10% for a business that can probably grow at GDP + inflation for a long time, giving you a long term IRR of at least 15% without any multiple expansion." We've previously covered a separate and specific T2 Partners presentation on BUD worth checking out as well.

Secondly, Tilson and Tongue argue that Microsoft (MSFT) is undervalued. They write, "MSFT's closing price on 7/12/10: $24.83, so assuming $2.40/share of FY 2011 earnings (midpoint of analysts' estimates and our own), plus $4 share in cash, here are possible stock prices and returns (plus there's a 2.1% dividend): 10x multiple = $28 stock = 13% return. 12x multiple = $33 stock = 33% return. 15x multiple = $40 stock = $61% return." They highlight the company has $4.24 cash per share, shareholder friendly capital allocation (buybacks & dividend), as well as a new product cycle in tow (Microsoft Office, Windows 7, etc). T2 Partners says that the rumors of Microsoft's demise are greatly exaggerated.

Lastly, Whitney Tilson and Glenn Tongue shift their views to the oil spill and a potential opportunity with BP (BP). Assuming a worst case scenario where BP owes $70 billion in liability, T2 Partners feels the company can easily earn its way out of these liabilities as its current operating income is estimated to be $34 billion in 2010 (BP has the fourth highest revenues and profits of the Fortune 500). Given the past precedents of oil spills, T2 also cites previous incidents including the Ixtoc blowout in 1979, the Gulf War oil spill in 1991, and the Exxon Valdez spill in 1989 where the negative impact for oil companies involved was less than feared. Overall, T2 feels that BP's balance sheet, cash flow generation, and recent asset sales to Apache (among other strategies) will allow them to weather this storm. You can find hedge fund T2 Partners' in-depth analysis of BP here.

And embedded below is the hedge fund's full presentation on these three large cap companies:



You can download a .pdf copy here.

To hear more investment ideas from T2 Partners and other hedge funds, be sure to check out the upcoming Value Investing Congress (with a special discount here). We've been covering a lot of the latest investment ideas from hedge funds disclosed in their most recent investor letters. For more recent picks, you can see the rest of T2's portfolio here and you can head to Perry Capital's latest letter here.