T2 Partners Bullish on Automatic Data Processing (ADP): Latest Investor Letter ~ market folly

Thursday, October 21, 2010

T2 Partners Bullish on Automatic Data Processing (ADP): Latest Investor Letter

In an industry typically shrouded in secrecy, Whitney Tilson's fund bucks the trend. Why? He recently said that, "we choose to share some of our ideas and analyses publicly not for marketing or ego reasons, but because it helps us make money for our investors, in three primary ways: a) when it is widely known that we have a position in a particular stock, we often hear from other investors who share valuable information or analyses; b) invariably, some people have the polar opposite view of a particular stock and, in sharing it with us, they can help us identify things we might have missed in our analysis; and c) when we share our ideas, it creates reciprocity and others share their best ideas with us."

Tilson and Glenn Tongue's hedge fund, T2 Partners, is out with their September letter to investors. T2 recently started a new position in Automatic Data Processing (ADP), citing high switching costs for customers, 20% operating margins, and solid management. He also points out that it is 4x bigger than its closest competitor. Bill Ackman's hedge fund Pershing Square started a new position in ADP during the second quarter as well, which we highlighted months ago in our newsletter Hedge Fund Wisdom.

Assessing the full situation, Tilson points out that ADP's growth has stalled and the stock isn't necessarily "cheap" as it trades at 17.4x trailing EPS. Tilson believes low interest rates and unemployment are weighing on the stock in the near-term but it is poised to outperform over the long haul. You can read the full thesis in Tilson's letter below.

We also see that T2 Partners remains short a basket of for-profit education stocks even after the recent declines. Tilson feels that these companies will face big challenges from new regulations, continued bad publicity, and a sharp cut in their long-term profit growth.

Over the months, we've detailed how the for-profit education space is a battleground amongst hedge funds. Richard Blum's hedge fund Blum Capital has been buying ITT Educational (ESI). Steve Eisman of FrontPoint Partners led the charge against these companies with his original presentation, "Subprime Goes to College." Tilson continues to share Eisman's view (for the time being at least).

Embedded below is T2 Partners' latest letter to investors where they detail the bull cases for Automatic Data Processing (ADP) and Iridium (IRDM):

You can download a .pdf copy here.

Secondly, we've also included a link to T2 Partners' presentation from the Value Investing Congress, entitled "Our View of the Market, An Update on the Housing Market, and Two Stock Ideas." The two investments they detail include BP (BP) and Liberty Acquisition/Grupo Prisa (LIA). You can download a .pdf copy here.

Finally, we've posted summaries of the various speaker presentations and you can view comprehensive notes from the Value Investing Congress here.

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