Monday, February 28, 2011

Jeff Saut: Putting Money to Work in Stocks, But Correction Not Over

Market strategist Jeff Saut is out with his latest commentary and begins with a focus on oil. Unrest in the Middle East has caused prices of black gold to surge from $84 to over $100 per barrel and this is worth keeping an eye on. Turning to his latest stance on the stock market, he thinks the correction is not yet over, even after last week's sell-off.

He writes,

"The recent stock 'high' was accompanied by the most bullish stock sentiment since the DJIA's peak in October 2007 (69% 'Bulls' according to Market Vane); as well, the Volatility Index (VIX/19.22) recorded its lowest reading since the summer of 2007 (read: too much complacency). Ladies and gentlemen, it is rare to see those kind of extreme readings worked off in a mere three sessions. So yeah, I believe the correction has more to run, yet I continue to think it is a mistake to become too bearish."

As such, Saut has gradually begin to put money to work in stocks during the pullback. He sees the intermediate trend as up and thinks you should buy stocks on your watch-list during further sell-offs.

He points to his own watch list and highlights some of the stocks that have held up best like Skyworks Solutions (SWKS), Stanley Black & Decker (SWK), Tempur Pedic (TPX), and Williams Companies (WMB). For the investment thesis on WMB and to see why hedge funds have been buying, we featured the stock in the equity analysis section of the new issue of our Hedge Fund Wisdom newsletter that was just released.

Embedded below is the latest investment strategy from Jeff Saut:

You can download a .pdf copy here.

Warren Buffett's Annual Letter 2010: Key Takeaways

Warren Buffett is out with his 2010 annual letter to Berkshire Hathaway (BRK.A / BRK.B) shareholders. The media has quickly pounced on one key sentence in the letter where he writes, "Our elephant gun has been reloaded, and my trigger finger is itchy." This has spurred a tsunami of speculation as to what company he might buy next. While this is notable language, we also wanted to highlight some of the takeaways from Buffett's letter as noted by fund managers:

- Buffett thinks a housing recovery could begin within the next year or so. In addition to unemployment, housing is one of the key pieces to fully solving the economic puzzle.

- Since we track fund manager holdings on the site, readers will be intrigued to know that you can buy shares at the same level (or even below) what Buffett paid for them in Conoco Phillips (COP), Kraft (KFT), Sanofi Aventis (SNY), and Munich RE. You can view the rest of Buffett's investments in our newsletter.

- While Buffett has been optimistic about the US for a while now, his enthusiasm is as strong as ever.

- Buffett stood by his mantra of 'buying when there's blood in the streets' during the financial crisis and the results showcase why this is a prudent strategy. He spent around $15 billion after Lehman Brothers failed and those investments are now paying off.

Turning back to Buffett's mention of potential acquisitions, you'll recall that Berkshire bought Burlington Northern Santa Fe as it acquired the entire railroad operator after owning a partial stake. He has made it clear that Berkshire needs more major acquisitions like this.

Some investors have argued that Buffett will have to look at private companies for acquisitions due to Berkshire's behemoth size. Will he pursue a public company he already owns a stake in? A public company he has yet to purchase shares of? A private company? Let us know your thoughts in the comments. For Warren Buffett's 2010 annual letter, you can download a .pdf copy here.

For more great resources on one of the greatest investors of our time, check out:

- Warren Buffett's recommended reading list
- Great investing advice via the top 25 Warren Buffett quotes
- Buffett's worst trade
- Compilation of Buffett's partnership letters
- A multi-decade look at Buffett's career

Friday, February 25, 2011

Lone Pine Capital Buys, Sells Ashmore

Stephen Mandel's Lone Pine Capital recently purchased more of one security and sold some of another. First, due to a 13G filed with the SEC regarding portfolio activity on February 14th, Lone Pine now shows a 5.8% ownership stake in (CTRP). The hedge fund currently owns 7,893,233 American depositary shares.

This is a 83% increase in their position size as they owned 4,312,650 shares at the end of 2010. The company's shares recently sold-off after its first quarter revenue missed estimates. Lone Pine most likely utilized this drop to add to their position.

Second, the hedge fund firm also sold some Ashmore (LON:ASHM). After owning 6.21% of the company in January of 2009, Lone Pine has slowly reduced its stake to now under 3% of shares outstanding. Ashmore recently agreed to buy 63% of Emerging Markets Management for around $96 million in cash and $29.9 million in new stock.

Since this now falls below the regulatory threshold for reporting, we won't know if Mandel's hedge fund firm sold completely out of the name, or if they still hold a small position. One thing is clear though, they've steadily reduced exposure over the past two years. To see the rest of their positions, we recently updated Lone Pine's portfolio in the new issue of our newsletter.

Per Google Finance is "a travel service provider for hotel accommodations, airline tickets and packaged tours in China. It also sells packaged tours that include transportation and accommodations, as well as guided tours in some instances. The Company aggregates information on hotels and flights and enable its customers to make hotel and flight bookings."

"Ashmore Group plc (Ashmore) is engaged in providing investment management services. The Company is a fund manager across six core investment themes, such as external debt, local currency, special situations, equity, corporate high yield and multi-strategy."

Whitney Tilson Goes Activist on LECG Corp (XPRT)

Whitney Tilson and Glenn Tongue's hedge fund, T2 Partners, has filed an activist 13D with the SEC regarding shares of LECG Corporation (XPRT). Due to portfolio activity on February 14th, T2 now shows a 5.24% ownership stake in the company with 2,001,148 shares.

This is a substantial increase in their position as they only owned 614,816 shares at the end of 2010. All told, this marks a 225% boost in their stake. Their activist filing contains the normal boilerplate that they believe the company is undervalued and represent an attractive investment opportunity. The hedge fund currently does not have a present plan or proposal.

A press release from LECG could explain why T2 has become active:

"On February 7, 2011, the Company announced that it had received a non-binding indication of interest from an undisclosed company with a view toward entering into a definitive acquisition transaction for the entire firm. The Company is disclosing today that FTI Consulting, Inc. provided the non-binding indication of interest. The negotiations with this party are now focused on the possible acquisition of several specific practice groups within LECG and not an acquisition of the entire firm. LECG believes this alternative, whether with the identified party or one or more other parties, may be the most viable path for the Company to raise capital to address current liquidity concerns."

In other T2 Partners portfolio activity, we detailed how Tilson covered his Netflix (NFLX) short position. Some investors have always opined that a short-seller capitulation could possibly mark a top in a stock. While NFLX shares are down ever since Tilson covered, the market as a whole has seen weakness as of late. You can read why T2 cut short exposure as well.

Per Google Finance, LECG "provides services through its experts and professional staff whose skills and qualifications provide the Company the opportunity to address unstructured business and public policy problems. LECG delivers independent expert testimony and original authoritative studies in both adversarial and non-adversarial environments."

Kyle Bass Buys Seahawk Drilling (HAWK)

Kyle Bass' hedge fund firm Hayman Capital has disclosed an 8.4% ownership stake in Seahawk Drilling (HAWK) with 1,000,000 shares. Hayman filed this information via a 13G with the SEC per portfolio activity on February 15th, 2011. This is a new equity position as they did not own equity as of December 31st, 2010.

We've covered Bass on the site before, but if you're unfamiliar with him, he has gained notoriety over the years due to his prediction of not one, but two 'bubbles.' First, he predicted and profited from the subprime crisis. Second, he was one of the first to call for sovereign defaults and that thesis has gained steam over the past year. For our prior coverage on this hedge fund manager, check out Bass' presentation at the Value Investing Congress.

His position in HAWK is intriguing because the company just agreed to an asset purchase with Hercules Offshore (HERO). HERO is buying 20 jackup rigs and related assets from HAWK for $25 million and 22.3 million shares of HERO. This cash infusion will be used to pay HAWK's debtor-in-possession (DIP) loan which the company secured in connection with its bankruptcy. You can head to the Special Situations Monitor for an analytical look at the situation here.

Also, Hercules Offshore is up big today after receiving an upgrade from Credit Suisse. They highlight that HERO is just around the corner from covenant relief.

Per Google Finance, Seahawk Drilling "operates a jackup rig business that provides contract drilling services to the oil and natural gas exploration and production industry in the Gulf of Mexico."

Ken Griffin's Citadel to Sell E*Trade Financial (ETFC)

Ken Griffin's hedge fund Citadel Investment Group plans to sell a ton of its shares in E*Trade Financial (ETFC), a company it had aided in the past. As the company's largest shareholder, Citadel is planning to sell over 27 million shares.

Keep in mind that even after Citadel divests its almost 9% equity stake, they still own a sizable chunk of convertible debt. If converted, this would ratchet their stake to almost 30% ownership. But this is not the first time Griffin's firm has sold shares, as Citadel sold ETFC back in late 2009 when shares traded around $1.20 per share. Since then, the shares have undergone a 1:10 reverse split and shares trade around $15.85 today.

The company underwent turbulent times during the financial crisis as it strayed from its stock brokerage roots and into the mortgage market right at the peak. After slowly but surely returning solely to its core business, the company still sits in limbo as shares are only up around 2% over the past year.

Hedge fund legend Leon Cooperman and his Omega Advisors are long E*Trade and see it as a potential takeover target. (To see the rest of Omega Advisors' portfolio, head to our new issue of Hedge Fund Wisdom). This seems to be the common investment thesis on ETFC as many investors argue it could be a prime asset to bigger houses like TD Ameritrade (AMTD) or Charles Schwab (SCHW). This thesis has not played out over the past few years (obviously). Perhaps activity in this regard would be spurred once interest rates start to rise, as this would help improve brokerage profitability.

Per Google Finance, E*Trade Financial is "a financial services company, which provides online brokerage and related products and services to the individual retail investors, under the brand E*TRADE Financial. It also provides investor-focused banking products, sweep deposits and savings products, to retail investors."

What We're Reading ~ 2/25/2011

What top hedge funds have been buying [Hedge Fund Wisdom]

Free e-book on Texas HoldEm Investing [Texas Hold Em Investing]

Latest letter from Greenstone Value Opportunity Fund [Distressed Debt Investing]

Citigroup (C) offers attractive risk-reward [Greg Speicher]

Video: How Berkowitz got comfortable with Citi [Morningstar]

Summary of a recent talk with SAC Capital's Steven Cohen [Dealbook]

How Stevie Cohen changed my life [James Altucher]

Hedge funds buying more municipal bonds [CNBC]

Sum of the parts valuation of Yahoo (YHOO) [Minyanville]

Buffett says pricing power more important than good management [Bloomberg]

Passport Capital sees oil prices holding up [WSJ]

Bank loan funds drawing interest [InvestmentNews]

For more great links, scroll through this linkfest [AbnormalReturns]

Tuesday, February 22, 2011

New Issue of Our Hedge Fund Wisdom Newsletter Just Released

The new issue of's Hedge Fund Wisdom newsletter has just been released! Created in collaboration with other hedge fund analysts, our 90 page issue is your complete guide to what top hedge funds have been buying, selling and why. It is published four times a year (February, May, August, November). Included in this issue:

- Portfolios of 25 top hedge funds (2 new funds added this quarter)
- Expert commentary on each fund's new portfolio
- Equity analysis of 5 stocks hedge funds bought in the quarter
- Consensus buy/sell list

Hedge fund manager portfolios in this issue include:

Seth Klarman (Baupost Group)
Warren Buffett (Berkshire Hathaway)
David Einhorn (Greenlight Capital)
Stephen Mandel (Lone Pine Capital)
David Tepper (Appaloosa Management)
Bill Ackman (Pershing Square Capital Management)
Bruce Berkowitz (Fairholme Capital)
Chase Coleman (Tiger Global Management)
John Burbank (Passport Capital)
Leon Cooperman (Omega Advisors)
Dan Loeb (Third Point)
John Griffin (Blue Ridge Capital)
John Paulson (Paulson & Co)
Lee Ainslie (Maverick Capital)
Julian Robertson (Tiger Management)
George Soros (Soros Fund Management)
Roberto Mignone (Bridger Management)
Chris Shumway (Shumway Capital Partners)
Richard Perry (Perry Capital)
Larry Robbins (Glenview Capital)
Andreas Halvorsen (Viking Global)
Carl Icahn (Icahn Capital)
Thomas Steyer (Farallon Capital)

... and we added 2 new funds this quarter: Barry Rosenstein's JANA Partners & Alan Fournier's Pennant Capital.

Take advantage of our introductory pricing! Click the 'subscribe' button and then on the next page look for the "Pay using your credit or debit card" link at the bottom. You can also pay via PayPal. If you would like to pay via check, please email us:

1-Year Subscription (Save 17% with this option!): $199 per year

Quarterly Subscription: $60 per quarter

Friday, February 11, 2011

Jeffrey Ubben To Speak at the Value Investing Congress: 35% Discount

The Value Investing Congress will take place on May 3rd & 4th in Pasadena, California. Activist investor and CEO of ValueAct Capital Jeffrey Ubben will be speaking at the event (along with many other hedge fund managers). Market Folly readers receive 35% off admission.

Ubben's firm manages $5 billion and has earned a net annualized return of 13.5% over the last ten years. He typically focuses on undervalued companies in the healthcare, technology, and information services sectors.

Speakers confirmed for the event thus far include:

- Jeffrey Ubben (Value Act Capital)
- David Nierenberg (D3 Funds)
- Rahual Saraogi (Atyant Capital India)
- Whitney Tilson & Glenn Tongue (T2 Partners)
- Michael Kao (Akanthos Capital)
- Kian Ghazi (Hawkshaw Capital)

...and other speakers will be added as well.

Hurry because the discount expires in 7 days! To receive a 35% off the event, click here and use code: W11MF6.

Corsair Capital Management's Letter: Q4 2010

Jay Petschek's Corsair Capital Management is out with its fourth quarter letter. In it, we see that Corsair finished 2010 up 15.4% which ironically is the exact same number as their compound net annual return since inception.

Highlighting their overall market view, Petschek writes, "as we believe post-recession equity markets are generally driven by the direction of earnings, which in turn is driven by economic growth, the markets seem to have room to move higher."

Portfolio Positions

Corsair singles out their position in LyondellBasell (LYB) in the letter as they believe the stock still trades at a discount to its peers. You'll recall that Dan Loeb's Third Point owns LYB in size as well. The company announced a dividend policy and plans to optimize its capital structure.

Petschek also highlights their stake in CapitalSource (CSE) as the company continues its transition from an over-leveraged REIT into a bank. Corsair believes shares are still undervalued and likes the company's debt repurchases and share repurchase plan.

Their letter also focuses on their position in Aon (AON). The hedge fund notes that the integration of Hewitt will create shareholder value and further entrench the company's dominant position in human capital solutions. We penned an in-depth analysis of AON in our last issue of our Hedge Fund Wisdom newsletter as many hedge funds had accumulated shares in past quarters. Click here for a free sample issue.

Corsair Capital Management's full letter and their investment write-up on Neo Material Technologies (NEM) is embedded below:

You can download a .pdf copy here

If you missed them, we've posted up a plethora of hedge fund letters recently, including:

- Maverick Capital's letter
- John Paulson's year-end letter
- Dan Loeb & Third Point's Q4 letter
- JANA Partners' letter
- Greenlight Capital's commentary
- Summary of Perry Capital's letter
- Xerion Fund's 2011 strategy
- Summary of Kleinheinz Capital's letter

Why Whitney Tilson Covered Netflix Short Position (NFLX)

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners has covered its short of Netflix (NFLX). Last week we detailed that T2 had cut short exposure and was re-examining how they executed their short book. At the end of the day, they decided not to short stocks purely on valuation and to shift their focus back to buying cheap stocks.

Three Reasons For Covering Netflix

Tilson says that they're no longer confident in their short thesis on NFLX and he lays out three primary reasons as to why they've covered:

1. The company's latest earnings "weakened key pillars of our investment thesis, especially as it relates to margins."

2. Their channel checks and survey of NFLX subscribers indicated higher usage of NFLX's streaming service.

3. The Netflix CEO's letter to short-sellers made them re-examine their assumptions

The full letter detailing Tilson's rationale for covering his short position in Netflix is embedded below:

You can download a .pdf copy here.

Some contrarians will look at this event and exclaim that the 'last of the short-sellers has capitulated' so it's finally time to short NFLX. Just keep in mind that a sizable portion of NFLX's float is still shorted. While Tilson has been a public short, he is by no means the last short to cover his position. For a contrast of his 'before and after,' here's why Tilson was short Netflix in the first place.

What We're Reading ~ 2/11/11

Hedge fund Level Global shutting down, conversation with COO [Dealbreaker]

Hedge funds gain 0.29% in January [AbsoluteReturnAlpha]

Tablet comparison: PlayBook vs Streak vs iPad vs Xoom [ReformedBroker]

Is the high yield bond market looking frothy? [Pragmatic Capitalism]

Taking a look at muni-bonds & MUB [ResearchPuzzle-Pix]

The hedgies charged with insider trading [BusinessInsider]

Harbinger dumps last Inmarsat shares [FINalternatives]

Great old interview with RenTec's Jim Simons [AbsoluteReturnAlpha]

Oaktree's Howard Marks calls for prudence [Dealbook]

Berkowitz throws the gauntlet in battle over St. Joe [Fortune]

Get ready for rising rates, falling bonds [Barron's]

Bond market lessons [Contrahour]

Hedge funds appeal dismissed Porsche lawsuit [Reuters]

Tough times for the Tiger Cubs [Institutional Investor]

Can we trust TIPS? [The Economist]

Bond trading 101 [BondSquawk]

Brutally honest letter from Nokia's (NOK) CEO [Engadget]

Thursday, February 10, 2011

Maverick Capital's Lee Ainslie on Impact of Fund Size on Returns

Maverick Capital's founder and manager Lee Ainslie recently sent out his year-end 2010 letter to investors. In it, we learn that Maverick's main fund returned 11.2% for 2010, while its Levered Fund returned 30.1%. You can see how they stack up against others in our post on 2010 hedge fund returns.

Since inception in 1995, the Maverick Fund has seen 14% annualized returns and Maverick Levered has returned 22.7% annualized. Be sure to check out what Maverick has been investing in via our newsletter (new issue coming out very soon).

Impact of Fund Size

In his letter, Ainslie highlights that "maintaining a significant critical mass is very advantageous to our ability to generate returns on a sustainable basis. Of course, this is also contrary to conventional wisdom which holds that size is the enemy of performance." He then lays out the common concerns with fund size and addresses them one by one.

Concern: Decreasing Investment Universe
Rebuttal: Their investable universe is defined as stocks with a market cap of at least $1 billion that trade at least $10 million per day. This universe has grown more than five-fold since 1995.

Concern: Loss of Agility
Rebuttal: "The average daily volume of the largest stocks in the world has grown almost ten-fold since 1995." Maverick's median position has averaged anywhere between one and two days of trading volume over the last 12 years.

Concern: Sizing of Investments Determined by Liquidity
Rebuttal: Ainslie argues that, "Maverick has always had, and always will have, positions whose position sizes are constrained by liquidity concerns. However ... such positions have never comprised a substantial portion of our portfolio, and growth in market liquidity has actually led to a reduction in Maverick's exposure to such less liquid positions."

Overall, he claims that these 'concerns' are less relevant considering that equity markets are not static. In John Paulson's year-end letter, the fund manager also extolled the benefits of running a hedge fund of size as well.

To wrap up his argument, Ainslie brings out a study done by Roger Ibbotson of Yale back in 2006. The conclusions drawn in the study summarized by Ainslie are that "the largest 20% of hedge funds have slight advantages over 80% of funds of lesser size. Secondly, the largest 1% of funds have substantial advantages over smaller funds."

Here's a breakdown of annualized performance of hedge funds by size from 1995-2009:

Largest 1% of hedge funds: 10.1% annualized return
Largest 5%: 8.6%
Largest 10%: 8.7%
Largest 20%: 8.9%
Largest 50%: 8.0%
Smallest 50%: 7.5%

Embedded below is Maverick Capital's fourth quarter 2010 letter to investors which also talks about generating short alpha:

You can download a .pdf copy here.

To see Maverick's latest investments, subscribe to our Hedge Fund Wisdom newsletter as the new issue comes out in a little over a week.

Wednesday, February 9, 2011

Dan Loeb Concerned About Consensus Bullish View: Third Point's Year-End Letter

Dan Loeb's hedge fund Third Point is out with its 2010 year-end letter to investors and the most notable aspect of it is that Dan Loeb will no longer be authoring the letter going forward. He is doing so "in order to keep our views proprietary and maximize time spent on investing."

2011 Outlook

Third Point expects a continued global recovery, high commodity prices, and an increase in mergers and acquisitions activity (M&A). However, Loeb is cautious about one thing, writing, "Our greatest concern is the growing consensus around the bullish view we have held since April 2009. Therefore, we welcome sharp corrections like the two we had last month."

Focus on Paper Companies

We've highlighted how Third Point likes post-reorganization equities. While they own chemical company Lyondell Basel (LYB), the hedge fund also has exposure to various paper industry plays. Third Point's letter reveals that they initiated a new position in NewPage in the fourth quarter ("a performing credit under distressed pressure").

Loeb also reveals that he owns a position in Bowater, otherwise known as AbitibiBowater (ABH), a company that just emerged from bankruptcy and will soon also be classified as a post-reorganization equity.

Third Point also details their position in Smurfit-Stone Container (SSCC) and we've highlighted how hedge funds are active in SSCC and oppose the proposed takeover. Further rationale behind Third Point's interest in the paper industry is outlined in their 2010 year-end letter to investors, embedded below:

You can download a .pdf copy here.

For more on Loeb's hedge fund, we also just detailed Third Point's latest positioning & exposure levels.

Dan Loeb & Third Point's Latest Positioning & Exposure

Dan Loeb's Third Point Offshore Fund recently released its January performance and the fund was up 3.9% for the month compared to a 2.4% return in the S&P 500. To date, Third Point has seen 18.9% annualized returns with a low correlation to the market (0.42).

Equity Exposure

In equities, Loeb's hedge fund has its highest net long exposure in basic materials at 16.4% net long. Their second highest exposure comes with a 12.9% net long position in the consumer sector. In total, Third Point is 68.9% long and -7.9% short, leaving the fund 61% net long.

Credit Exposure

Loeb is 31.1% net long credit with his largest exposure in mortgage backed securities (MBS) at 19.3% net long. He is also 12.3% net long distressed and -10.1% short Government bonds.

Top Positions

As of the end of January, Third Point's top positions remain unchanged from previous months:

1. Gold (physical)
2. Delphi (multiple securities held)
3. Chrysler (multiple securities held)
4. Potash (POT)
5. Lyondell Basell (LYB)

Top Winners & Losers

Third Point's portfolio attributed positive performance in the month to shares of Potash (POT), Smurfit-Stone Container (SSCC), Massey Energy (MEE), NXP Semiconductor (NXPI), and Aveta. We recently highlighted how Third Point opposes SSCC's takeover and other hedge funds have been active in the name as well. SSCC is one of the many post-reorganization equities found in Loeb's portfolio. Last year we cited how Third Point likes post-reorg equities and just recently we noted that John Paulson likes them too.

Regarding his position in NXP Semiconductor, Loeb highlighted NXPI in a recent letter. The company is involved in near field communications and is seen as a prime play on mobile payments. Third Point also saw solid performance from its position in Massey Energy as the company received a takeover offer from Alpha Natural Resources (ANR).

Positions that negatively affected Third Point's portfolio last month include Gold, Brenntag AG (ETR:BNR), Mead Johnson Nutrition (MJN), African Barrick Gold (LON: ABG), and Accuride (ACW).

To learn to invest like this hedge fund manager, check out Dan Loeb's recommended reading list.

Bill Ackman's Investment Thesis on J.C. Penney (JCP)

Bill Ackman's hedge fund Pershing Square Capital Management held its annual investor dinner recently and went through a slideshow of their investments. In particular, they highlighted their activist position in retailer J.C. Penney (JCP). In the past, we'd posted up Ackman's potential JCP real estate thesis. This time around, we've got rationale direct from Pershing Square.

Ackman began purchasing JCP shares at $20.01 in late August, 2010. Pershing filed their activist 13D on JCP in October and then J.C. Penney promptly proceeded to hire bankers. The hedge fund's cost basis on JCP is $25.28, but that excludes options (we've broken down Pershing's JCP stake here). Shares of JCP today trade north of $35 per share. Below we'll take a glance at Pershing's slides on JCP.

Investment Thesis

According to their annual investor dinner slideshow, Pershing Square "recognized in JCP an opportunity to invest in a cyclically depressed national retailer at a significant discount to fair value." While shares of J.C. Penney are up almost 10% from Ackman's cost basis, he still sees shares as inexpensive when you consider the company's asset base and earnings power.

Ackman's thesis on JCP can be summed up in the points below:

- "Cheap relative to trailing earnings (adjusted for year end cash and non-store real estate portfolio): The stock currently trades at only 4.9x 2010 EBITDAP."

- "Sales productivity and margins remain depressed creating material leverage to a recovery. Sales per square foot are at 2002 levels. 2006 EBITDAP was ~50% higher than 2010 level."

- "Company's reported pension expense masks true cash flow."

- "JCP owns substantial core and non-core fee and long-term leasehold real estate interests."

- "Vornado brings relevant experience in retail and real estate and is a party we've worked well with in the past." If you're not familiar, Vornado Realty Trust (VNO) also bought a large stake in JCP.

And today in an interview on CNBC, Andrew Ross Sorkin asked Ackman what he thought J.C. Penney was worth. Ackman's response? "Somewhere meaningfully higher than where it trades." He also said that the company's margins and revenues are lower than where they could be.

Shareholder Activism

And in recent developments, Ackman joined J.C. Penney's board. When he first took the stake, it appeared as though JCP was going to push back against Ackman's activist advances. The hedge fund manager notes that activism often requires patience and that was the case here. Pershing Square has been involved with a long list of companies on the activist front and have built up credibility as an agent of enacting change. To see Ackman's latest portfolio, sign-up for our newsletter as a new issue will be out in a little over a week.

Below you'll find a slide of Pershing's typical sources of opportunities for activism:

(click to enlarge)

For more on their investment style, head to our profile of Pershing Square.

David Einhorn Acquires BioFuel Energy Shares (BIOF)

Greenlight Capital hedge fund manager David Einhorn just filed an amended 13D and Form 4 with the SEC regarding his position in BioFuel Energy (BIOF). Per the amended 13D filing, Einhorn now shows a 40.8% ownership stake in BIOF with 42,818,004 shares. We've also recently posted other Greenlight portfolio activity for those interested.

David Einhorn's various investment entities (Greenlight Capital funds) have purchased an aggregate of 19,626,775 shares of common stock and 11,307,729 shares of Class B common stock. These shares were purchased via rights offering and the net investment made in the private placement was $17,323,322.24.

It appears as though BioFuel used the proceeds from the rights offering and private placement to repay a subordinated loan and bridge loan. Readers will recall that both David Einhorn and Dan Loeb's Third Point provided BIOF the bridge loan.

Here is a full breakdown of how the BIOF shares are allocated among various Einhorn entities:

(click to enlarge)

Per Google Finance, BioFuel Energy "produces and sells ethanol and its co-products (primarily distillers grain), through its two ethanol production facilities located in Wood River, Nebraska and Fairmont, Minnesota."

For more from this hedge fund manager, be sure to check out David Einhorn's recommended reading list.

Lansdowne Partners Increase Gartmore Stake

Paul Ruddock and Stephen Heinz's hedge fund Lansdowne Partners recently filed a disclosure in UK markets regarding portfolio activity. Due to trading on February 1st, Lansdowne now hold 10.05% of Gartmore's (LON: GRT) voting rights or equivalents via a combination of shares and contract for difference (CFDs ~ we've penned a primer on CFDs here).

Back in November 2010, we highlighted that the hedge fund had built up a 6% holding just days after one of Gartmore's star fund managers, Roger Guy, had resigned. Lansdowne has added to their position in sizable fashion in recent months. For other activity from this prominent hedge fund, we posted about how Lansdowne reduced a short position.

Per Google finance "Gartmore Group Limited is a United Kingdom-based company engaged in the provision of fund management services. The Company is a traditional equity and alternative asset management firm, whose mutual funds, alternative funds and segregated mandates are distributed to clients in the United Kingdom, Continental Europe, North America, Japan and South America."

Stay tuned as we'll be posting up the latest letter from Lansdowne later this week on

Tuesday, February 8, 2011

David Einhorn's Recommended Reading List

David Einhorn is the manager of hedge fund firm Greenlight Capital. He has returned 21.5% annualized and is well-respected in investing circles. At a recent event, Einhorn interestingly admitted that he did not read books all that often, but he did have a few suggestions for investors. Here is David Einhorn's recommended reading list:

- You Can Be a Stock Market Genius by Joel Greenblatt: Einhorn joins the copious amount of other hedge fund managers that have recommended this book. It takes a look at catalyst-based investing including spin-offs, mergers, risk arbitrage, and more.

- Margin of Safety by Seth Klarman: This hard-to-find and out-of-print book is a must for aspiring investment aficionados. It is written by one of the most successful hedge fund managers of our time and so it's no surprise that Einhorn recommended it.

- Liar's Poker by Michael Lewis: This is an insider's account of what really happens on Wall Street and is one of the most popular financial books out there.

- Fooling Some of the People All of the Time by David Einhorn: While Einhorn did not recommend his own book, we wanted to include it as it details his short selling battle with Allied Capital and features a foreword by Joel Greenblatt. After all, there's only a handful of books out there penned by prominent hedge fund managers.

For recommended reading lists from other top hedge fund managers, be sure to check out these other resources:

- Seth Klarman's recommended reading list

- Books recommended by Dan Loeb

- Hedge Fund Blue Ridge Capital's recommendations

- Warren Buffett's recommended reading list

Leon Cooperman Optimistic About Equities, Concerned About Employment

Legendary investor Leon Cooperman of Omega Advisors recently appeared on CNBC to give his take on the markets. The hedge fund manager oversees $6 billion and founded his firm after working at Goldman Sachs for 25 years.

Omega Advisors is currently optimistic and argues that the United States is not akin to Japan and won't see a lost decade. Cooperman highlights that while the consensus view is optimistic, many people aren't invested that way. He points to outflows in the equity market and inflows to the bond market as people seek stability after a tumultuous ride through the financial crisis.

Omega Advisors is currently 80% net long. This is much more long-oriented than the average hedge fund exposure levels. Cooperman is now the second subsequent major hedge fund manager to come out and say that he's optimistic on the markets. Appaloosa Management's David Tepper is also optimistic.

Cooperman Sees New Economic Expansion

Cooperman says that, "We're eighteen months into a new economic expansion. The average economic expansion has lasted five years. There's still plenty of runway." Now while he is optimistic regarding the future, he obviously acknowledges that things don't go straight up and he could see a potential market correction in February. However, after that, he is optimistic over the long haul provided we see improvement in unemployment numbers.

Hedge Fund Manager Prefers Equities Over Bonds

Cooperman says that, "stocks, at worst, are the best house in a bad neighborhood and if by some miracle this whole game works and we deal with fiscal issues long-term and stop kicking the can down the road, then I think stocks are the best house in a good neighborhood."

Below is the video of Cooperman's thoughts on equities and email readers will need to come to the site to view it:

Cooperman Likes Energy and Financials

Cooperman rattled off a few energy names he owns including Denbury Resources (DNR), Williams Companies (WMB), and McMoRan Exploration (MMR). Just last week we highlighted that Barry Rosenstein's hedge fund JANA Partners bought WMB as well.

In the financial sector, he likes Sallie Mae (SLM), JP Morgan (JPM), and singles out E*Trade Financial (ETFC) as a potential takeover target. The hedge fund manager also likes Teva Pharmaceutical (TEVA) which has a 20% return on equity and is a growth business trading at 11x earnings. Lastly, he mentions that he's long General Motors (GM) and Ford (F) too, as there's a lot of positive operating leverage there.

Embedded below is the video of Cooperman's thoughts on specific sectors:

And here is the final video with Cooperman's expanded comments:

Omega Buys Energy XXI Shares

Additionally, Omega Advisors just filed a disclosure of recent activity in UK markets regarding their purchase of shares in Energy XXI (LON: EXXS). Per the notification, Omega Advisors has disclosed a 5.9% ownership stake in Energy XXI with 4,062,380 shares. This is due to portfolio activity as of December 31st, 2010.

While Cooperman has purchased the EXXS shares traded in the UK, shares of Energy XXI are also traded on the Nasdaq under ticker symbol EXXI as well. Per Google Finance, Energy XXI "is an independent oil and natural gas exploration and production company with operations focused in the United States Gulf Coast and the Gulf of Mexico."

To view Cooperman's latest investments, subscribe to our Hedge Fund Wisdom newsletter as we'll reveal his portfolio in our new issue that comes out soon.

Monday, February 7, 2011

Hedge Funds Active in Smurfit-Stone Container (SSCC)

Dan Loeb's hedge fund Third Point LLC and Barry Rosenstein's JANA Partners have filed a 13D and 13G respectively on shares of Smurfit-Stone Container (SSCC). Smurfit-Stone recently received a takeover bid from Rock-Tenn (RKT) worth roughly $38 per share in a cash and stock deal. Late last week we detailed that a consortium of hedge funds opposed Smurfit-Stone's takeover.

Third Point

According to SEC filings, Third Point has disclosed a 2.46% ownership stake in SSCC with 2,250,000 shares as of their February 1st portfolio. Loeb's hedge fund has filed in cooperation with Royal Capital Management (who owns 3.04% of SSCC) and Monarch Alternative Capital (who owns 3.47% of SSCC). This consortium of hedge funds collectively oppose the takeover.

While these hedge funds received the majority of their shares in Smurfit-Stone's recent reorganization, they've also been buying shares in recent months. Third Point had purchased shares of SSCC on the open market throughout December 2010 and even bought 250,000 shares as recently as February 1st after the takeover was announced (at prices of $37.5680 and $37.7497).

In their SEC filing, Third Point argues that the $38 per share valuation is inferior. According to an attachment to Third Point's disclosure, "we wonder just what numbers Smurfit’s board was looking at when it approved the Merger? This is the critical question, because if Rock-Tenn had been willing to pay 6.1 times the more appropriate Adjusted EBITDA of $938 million, and if an appropriate value had been ascribed to the NOL, Smurfit’s shareholders would receive nearly $44.00 per share of Common Stock in the Merger."

They also highlight that, "precedent containerboard transactions over the last decade had a median TEV to EBITDA ratio of 7.7x." Such a valuation would make shares of SSCC worth more like $59 per share.

JANA Partners

In a separate 13G filed with the SEC, Barry Rosenstein's hedge fund JANA Partners has disclosed a 5.7% ownership stake in Smurfit-Stone Container (SSCC) with 5,230,591 shares per their portfolio as of January 26th, 2011. Back on September 30th, 2010, the hedge fund only owned 521,479 shares, so this is a whopping 903% increase in their position size. We recently detailed some of JANA's new positions as well for those interested. While JANA is an activist oriented firm, this filing marks a passive SSCC stake.

While it's speculation on our part, it seems that JANA potentially acquired their new shares after the Rock-Tenn (RKT) takeover deal was announced and saw SSCC shares as undervalued. Since JANA did not file an activist 13D, it's unclear if they oppose the current deal. We're inclined to assume they're likely to side with Third Point's consortium. Under this scenario, you'd essentially have 14.67% of SSCC shares owned by hedge funds that oppose the takeover.

For more specifics of this deal, head to the hedge funds' letter of opposition to the deal.

Lee Hobson's Highside Capital Starts MIPS Technologies Position

Lee Hobson's hedge fund firm Highside Capital just filed a 13G with the SEC regarding shares of MIPS Technologies (MIPS). Due to portfolio activity on January 26th, 2011, Highside has disclosed a 6.2% ownership stake in MIPS with 3,100,000 shares. This is a brand new position as the hedge fund did not own shares as of their last portfolio disclosure.

Hobson graduated from Princeton University and earned his MBA at Harvard Business School. He founded his Dallas, TX based hedge fund after working for Lee Ainslie's Maverick Capital. Highside employs a long/short equity strategy and invests in public markets.

Per Google Finance, MIPS Technologies is "a provider of processor architectures and cores that power some of the home entertainment, communications, networking and portable multimedia products. The Company’s technology is used in markets, such as mobile consumer electronics, digital entertainment, wired and wireless communications and networking, office automation, security, microcontrollers, and automotive. MIPS customers are global semiconductor companies and system original equipment manufacturers (system OEMs)."

Keep up with all of the latest moves from prominent managers with our hedge fund tracking posts.

Bruce Berkowitz & Bill Ackman: Summary of Their Harbor Investment Conference Talk

We're continuing our focus on the recent Harbor Investment Conference that took place late last week and wanted to point out a discussion between Fairholme Capital's Bruce Berkowitz and Pershing Square Capital Management's Bill Ackman. The two interviewed each other on their respective investments.

Below courtesy of our friends at is a guest post summarizing the managers' talk at the Harbor Investment Conference:

"Berkowitz of Fairholme Capital, was interviewed by Bill Ackman, the conference's Co-Chair, and he discussed why he's been long Berkshire Hathaway (NYSE: BRK-A) and Leucadia National Corp. (NYSE: LUK) for a long time. He bought both of them around 1985, for similar reasons. He liked the company's management, and he specifically liked Berkshire because he said that Warren Buffett was a "smart guy" who ran other people's money. He paid about $2,700 per share for each A share he owns.

Ackman of Pershing Square Capital, asked what Berkowitz's biggest investment error was of his career. Berkowitz responded by saying that his biggest mistake was trusting management, and not verifying them. He said that in order to verify management, you have to try to prove them wrong, and kill their thesis.

He also discussed some of his better investments, like Imperial Metals, which Berkowitz said he has no idea why it's doing well, it just is. He discussed his position in Wells Fargo (NYSE: WFC) in the late 1980's and early 1990's, and said that he really likes the banks now. He believes we are rebuilding now, and a lot of banks are trading below book value, with low valuations, and said that the worse the bank was perceived, the better it will probably wind up being. He owns positions in Goldman Sachs (NYSE: GS), Regions Financial (NYSE: RF), AIG (NYSE: AIG), CIT Group (NYSE: CIT), Bank of America (NYSE: BAC), Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) in the financial sector. Berkowitz said there is a black box risk to owning banks, but after three years, you can get an idea of who's going to do well. Berkowitz said he would own more of Goldman Sachs if he could, but as a mutual fund, he's forbidden by law.

Regarding AIG, he said that AIG is more respected in Asia than it is here, and he sees tremendous value in the company's remaining assets, which it has so many of. Berkowitz said that former AIG CEO Hank Greenberg was a serial acquirer of assets, and there is tremendous value still there. He said that the current AIG is trading below book value, and it's trading at a single digit P/E. A major reason why he likes AIG is the company won't have to pay taxes for quite some time, as the company lost over $100 billion in market cap."

To read about the rest of Ackman and Berkowitz's talk, we highly recommend heading to the full summary at Benzinga here.

Alex Klabin of Senator Investment Group Likes Valspar (VAL): Harbor Investment Conference

Today we're focusing on the latest investment theses from top hedge fund managers that recently presented ideas at the Harbor Investment Conference. Alex Klabin of Senator Investment Group sees value in Valspar (VAL). Instead of focusing on cyclical businesses, Senator is targeting defensive businesses for the foreseeable future. We had covered some of Senator's investment theses at a previous conference as well.

The following is a guest post from our friends over at summarizing the hedge fund manager's talk:

"Klabin, who has $3 billion dollars under management, said he believes that defensive businesses are trading at a discount of about 20% to where they should be trading, given historical valuations. He specifically mentioned looking at Merck (MRK), after the drug company missed earnings this week. Klabin said the company is probably full of bloat and there is a lot of fat that could probably be cut there.

Klabin said that expectations for defensive companies are very low, with only about 4% earnings growth, barely outpacing inflation.

The specific name he discusses at the conference is the Valspar Corporation (NYSE: VAL), which manufactures and distributes coatings and paints across the world. Klabin described the company as a combination of Sherwin Williams (NYSE: SHW) and a coating application company.

The company is a global leader in coating applications, with a 40% market share. Valspar makes the coatings on the inside of plastic bottles used for Coca-Cola (NYSE: KO) and other manufacturers. Without it, the acidic acid in the Coke would eat away at the bottle.

In the paint segment of the business, Klabin said he sees the quiet ability to raise prices for paint, and no one would notice."

To read the rest of Klabin's thoughts on the company, head to Benzinga for the full post here.

Mick McGuire of Marcato Capital Likes SFN Group (SFN): Harbor Investment Conference

The Harbor Investment Conference took place late last week and featured a bevy of hedge fund managers sharing their latest investment ideas. Mick McGuire of Marcato Capital Management was one of the speakers and his pick was SFN Group (SFN). Before founding Marcato, McGuire previously worked at Bill Ackman's Pershing Square Capital Management.

The following is a guest post from with a summary of McGuire's bullish case for SFN Group:

"Mick McGuire of Marcato Capital Management spoke at the Harbor Investment Conference yesterday and recommended SFN Group Inc (NYSE: SFN) to the audience.

McGuire, who is a former chairman of Borders (NYSE: BGP) is an activist investor in the midcap space, and he believes there is significant value in SFN Group. McGuire said that the market cap of SFN is equal to the enterprise value of this U.S. based staffing firm.

He likes SFN because its' normalized earnings power should exceed the historic levels, and it's trading at a lower earnings multiple.

The company owns a variety of different staffing firms, including Spherion and Tatum, as well as others. It staffs different types of employees, from the entry level worker, to a seasoned company executive. The company receives higher margins on higher paying jobs.

McGuire believes that a lot of companies could maintain a high percentage of temporary workers, as he believes that many companies will want to maintain employee flexibility, should unforeseen events occur in the economy.

With an enterprise value of only $550 million, and $100 million in expenses from SG&A removed, McGuire believes the company is poised to increase its value over time. The company also has a significant amount of net operating losses at both the federal and state levels, which should allow the company to double EBITDA over the next year. The only major expense the company has is capital expenditures, and the company recently made a major technology purchase for its systems, which should allow Capex spending to drastically slow down over the next few years. The increase in EBITDA goes straight to the company's free cash flow.

McGuire also mentioned that the company is buying back 5% of its stock, thanks in large part to the increase in free cash flow it's seeing.

McGuire said that he believes SFN has an implied stock price of $20.26 by 2012."

Benzinga has covered the Harbor Investment Conference extensively and we highly recommend reading their coverage of the event:

- David Darst of Morgan Stanley Likes "Global Gorillas"
- Craig Nerenberg of Brenner West Capital Likes CLO's
- Todd Sullivan Sees Value in Audiovox

Saturday, February 5, 2011

Hedge Fund Compensation Report

The pain of 2008 now seems like a distant memory for those working at hedge funds.

As the U.S. economy continues to recover at a slow pace, hedge fund managers are recording double- digit growth and outperforming the markets once again. According to Eureka Hedge, total assets in the industry are now on track to cross the historical high of US $1.95 trillion by end of 2011. The upside is showing in hedge fund pay.

The latest report on Hedge Fund Compensation revealed that hedge fund managers received double-digit increases in total compensation to match the fund's performance, primarily driven by big year-end bonuses. The annual industry report is based on data collected directly from hundreds of hedge fund managers and employees.

In contrast with 2009 compensation, that was essentially flat when compared to the year earlier, 2010 pay came in 10 percent higher. More than half expected a raise in total compensation with the average coming in at USD $326,000 and about one quarter expecting to earn between $300,000 and $500,000. The number of professionals expecting pay cuts decreased from 19 percent last year to 12 percent.

Investors have started asking more questions than in the past and the fund manager's track record is no longer enough to get them to part with their money. They want to know how the strategy is being executed and they want more transparency in the reporting and fee calculations as well.

Despite increased investor demands, hedge fund managers still have a business to run. Some are requiring limited liquidity (a more stable base of capital) and investors are seeing a reduced management fee structure in return. Performance fees, however, are still driving big bonuses.

The front page criticism of Wall Street bonuses has primarily discussed investment banks, but hedge funds are not immune to this criticism. Investors also want to see a bit more skin in the game; 12 percent of hedge fund professionals reported that they are now required to invest a portion of their bonus back into the fund.

The report reveals that the higher the overall earnings, the more bonus matters, especially for those in the highest pay ranges. The top earning hedge fund employees expect a full 80 percent of their cash compensation to come in the form of bonus payments, but these payouts are by no means in the bag. Fewer than one in five hedge fund employees reported having a guaranteed bonus.

(click to enlarge)

The 2011 Hedge Fund Compensation Report has grown to become the most comprehensive benchmark for hedge fund compensation practices in the industry. It is based on compensation data collected directly from fund professionals representing both large and small firms. Click here for the full Hedge Fund Compensation Report.

About the Author

David Kochanek is the publisher of and the hedge fund career site, Hedge Fund Jobs Digest, a web-based career service catering to investment professionals.

Friday, February 4, 2011

Third Point, Royal Capital, & Monarch Alternative Capital Oppose Smurfit-Stone Takeover

A group of hedge funds including Dan Loeb's Third Point, Royal Capital Management, and Monarch Alternative Capital recently penned a letter to Smurfit-Stone (SSCC) opposing the company's proposed acquisition by Rock-Tenn (RKT). The hedge funds collectively own 9% of SSCC and oppose Rock-Tenn's cash and stock bid that valued SSCC at $38 per share.

Smurfit-Stone recently emerged from bankruptcy and these funds received the majority of their shares through the restructuring process. The various hedge funds are pushing for shareholders to veto the deal. They feel the company can either do better as a standalone company or attract higher offers from Rock-Tenn or others in the packaging industry (such as Temple-Inland (TIN), Packaging Corp of America (PKG), International Paper (IP), MeadWestvaco (MWV), or KapStone Paper (KS)).

We'll have to see if their letter can shake things up and unlock further shareholder value in the stock. Embedded below courtesy of Dealbook is the hedge funds' letter to Smurfit-Stone (email readers visit the site to view it:

As we've detailed before, Third Point likes post-reorg equities and Smurfit-Stone is one of those positions. The hedge fund also has a sizable stake in recently re-listed Lyondell Basell (LYB). And just a few days ago, we highlighted how John Paulson likes restructured equities as well.

Shumway Capital Returns Capital to Investors, Will Manage Internal Assets

Chris Shumway's hedge fund Shumway Capital Partners sent out a letter to investors today notifying them that the fund will be returning capital to outside investors. The firm will live on, instead only managing internal capital. Shumway, who has seen 17% annual returns, is one of the widely regarded Tiger Cub hedge funds started by former members of Julian Robertson's Tiger Management.

Late last year, Chris Shumway announced that he would be stepping down from his Chief Investment Officer role. This initiated a wave of redemptions as investors in the funds became wary. Shumway writes,

"In a sense, these changes created more risk for many of you who committed to stay invested in SCP and makes short term results of the fund a primary issue for us all. As a result, it has become more difficult for us to focus on long term investing as we have for the last nine years, which I believe has been a main driver of our success."

It's obvious from the above that Shumway is not fond of Wall Street's and an investor's focus on short-term performance. We'd venture to guess that Shumway also somewhat tired of the 'corporate' nature of running a large investment firm. Catering to each investor's concerns meant less and less of his time was dedicated to investing.

Shumway isn't alone in his desire to focus on investing for the long-term. Fellow Tiger Cub manager Roberto Mignone of Bridger Management closed to new investors, effectively capping assets under management so that he could focus on investing rather than having to worry about running a large organization.

It will be interesting to see who stays behind at Shumway to manage internal capital and who leaves to start their own funds. There are already a few notable Shumway alums managing their own funds including John Thaler's JAT Capital, Anu Murgai's Suranya Capital Partners, and Matthew Crakes' Greenhart Capital. The reason we mention these established and potentially future Shum-alum funds is that some former SCP investors could potentially allocate capital there.

Shumway will return outside capital by the end of the first quarter, which undoubtedly means they'll be selling partial positions. Here are Shumway's top 10 holdings as of September 30th, 2010. We'll get an updated look at their holdings here in a few weeks, so keep in mind the below is quite dated:

1. Apple (AAPL)
2. Citigroup (C)
3. (PCLN)
4. Pfizer (PFE)
5. Las Vegas Sands (LVS)
6. Baidu (BIDU)
7. SPRD Gold Trust (GLD)
8. Target (TGT)
9. Air Products & Chemicals (APD)
10. BP (BP)

A screenshot of Chris Shumway's letter is posted below via ZeroHedge:

(click to enlarge)

It will be interesting to see what happens to Shumway's portfolio once outside capital has been returned and the fund is only managing internal capital.

Soros Fund Management Adds to Harvest Natural Resources (HNR)

George Soros' investment firm, Soros Fund Management, just filed a 13G with the SEC regarding shares of Harvest Natural Resources (HNR). Per portfolio activity on January 24th, 2011, Soros has disclosed a 5.94% ownership stake in HNR with 2,008,417 shares.

This marks a 241% increase in their position size as the hedge fund owned 588,100 shares at the end of September last year. In addition to Soros, one of the largest institutional holders of HNR shares is value investor Mohnish Pabrai.

Soros often takes stakes in energy and natural resource plays as we detailed their new stake in San Leon Energy and an increase in their position in Aurelian Oil & Gas as well.

Per Google Finance, Harvest Natural Resources is "an international petroleum exploration and production company. The Company focuses on acquiring exploration, development and producing properties in geological basins with proven active hydrocarbon systems. The Company holds interests in Venezuela, the Gulf Coast Region of the United States through an area of mutual intent (AMI) agreement with two private third parties, the Antelope prospect in the Western United States through a joint exploration and development agreement (JEDA), and exploration acreage mainly onshore West Sulawesi in the Republic of Indonesia (Indonesia), offshore of the Republic of Gabon (Gabon), onshore in Oman and offshore of the People’s Republic of China."

We'll be updating George Soros' latest portfolio in our new issue of Hedge Fund Wisdom due out in a couple of weeks.

What We're Reading ~ 2/4/11

Rules for shorting [Big Picture]

See also: Kathryn Staley's The Art of Short Selling [Amazon]

Video interview with value investor Vitaliy Katsenelson [Abnormal Returns]

Three ideas for the under-invested (reprise) [ReformedBroker]

Productivity: 12 steps to getting things done [KirkReport]

David Tepper cautious on Pittsburgh Steelers & markets [AbsoluteReturnAlpha]

Atticus' Tim Barakett backs macro fund launch [AbsoluteReturnAlpha]

Iridian Asset Management's latest letter [ZeroHedge]

Why Jamie Dinan worries about small hedge funds [Dealbook]

Video: Why Jim Chanos is short China [FT]

Chanticleer's letter to investors [MyInvestingNotebook]

Manager from Viking Global resigns [Bloomberg]

A technical overview of the market [Trader's Narrative]

Absolute Return Partners LLP letter [Scribd]

New investment screening tool [Zignals]

Tiger Asia disappointed with small 2010 gain [Bloomberg]

Profile on Meredith Whitney [Bloomberg]

Thursday, February 3, 2011

Perry Capital: Bargains Not As Plentiful, But Growing Amount of Event-Driven Opportunities

Richard Perry's hedge fund firm Perry Capital is out with its 2010 year-end letter to investors and Perry Partners International finished last year up 16.21% (more 2010 hedge fund returns here). Perry's letter places emphasis on the fact that they don't necessarily abide by economic forecasting as much as other market participants. Instead, they focus on event-driven value investing in both equities and debt and have seen an annualized rate of return of 12.28%.

Perry's Targeted Investments

The hedge fund seeks to invest in securities that fall into various categories:

- "Capture most of the bell curve's area as a positive outcome for our investments"

- "Look for securities that do not suffer huge losses from unfavorable future economic outcomes (truncate the left tail)"

- "Buy securities that offer outsized rewards versus risk on favorable outcomes (bulging right tail)"

- "Find investments with little or no correlation to the economy that have positive expected value"

Looking Ahead in 2011

For this year Perry notes that, "Bargains are not as plentiful and dislocations are fewer today than a year ago. However, there is a growing amount of event-driven investing as we start 2011. Expectations about GDP growth and the market are almost euphoric ... This remarkable rally, as usual, has led investors to be more comfortable with the market at these higher levels than at the bottom. That is the nature of the market."

Potential Risks

As such, Perry Capital maintains numerous hedges on potential tail risk events. Baupost Group's Seth Klarman has done the same. Perry has protection against: European sovereign and banking issues, inflation in developing markets, and they are also concerned about the US Treasury and municipal bond markets.

Perry is not alone in their worry as we pointed out fellow hedge fund Kleinheinz Capital also thinks inflation is the biggest threat to emerging markets. Perry is particularly concerned about food and energy inflation and notes that increases in wage and input costs are resulting in higher finished product prices.

Fourth Quarter Portfolio

Below are excerpt's from Perry Capital's letter regarding some of their investments:

"Our position in Delphi equity continued to march higher. The company has performed quite well since exiting bankruptcy and, despite significant appreciation, we continue to hold our position. Delphi is well positioned as an automotive supplier - diesel, power train, safety and infotainment - with the best balance sheet in the industry." Market Folly readers will recall that Dan Loeb's hedge fund Third Point also owns Delphi.

"Universal American (UAM) was also one of our top performers in the fourth quarter. On December 31st, UAM stock increased approximately 40% on the news that CVS Caremark had agreed to acquire UAM's Medicare Part D plan for $1.25 billion. Subject to shareholder approval (likely in Q2 2011), UAM shareholders will receive $12.80-$13.00 for the Part D plan along with one share of the NewCo (remaining Medicare Advantage business), which will have approximately $8 per share of statutory capital upon separation."

Perry also had previously invested in Potash (POT) during the company's potential takeover by BHP Billiton (BHP). They exited their position before the Canadian government opposed the offer, anticipating (and jumping in front of) a potential heavy hedge fund sell-off. They were subsequently able to re-buy.

"We were able to re-establish a sizeable position after the arbitrage sell off at $138-139 per share, and hedged it using comparable companies that had traded up during the recent strong commodity price move. Fundamentals have continued to improve for Potash and we maintain a position in the shares." Dan Loeb's Third Point also has a sizable stake in Potash.

Lastly, Perry Capital invested in the AIA initial public offering (IPO), a wholly owned subsidiary of AIG (AIG). We've detailed how Bruce Berkowitz's Fairholme Capital also bought AIA in the IPO. Perry writes,

"AIA is a unique asset with hard-to-duplicate exposure to underpenetrated Asian markets that have had a high growth profile ... In our view, the IPO came at a meaningful discount to fair value due to i) its size, ii) poor execution during 2008-2009 due to issues associated with AIG, and iii) the AIG overhang caused by its remaining stake. Our investment paid off as AIA got rerated relatively quickly after the IPO."

That wraps up the main takeaways from the hedge fund's letter. Keep in mind of course that you can view Perry's latest portfolio in the new issue of our Hedge Fund Wisdom newsletter in a couple of weeks.

JANA Partners 2010 Letter: New Positions in Cablevision (CVC), Williams Companies (WMB)

Barry Rosenstein's hedge fund JANA Partners released its year-end 2010 letter and in it we see they've returned 14.3% annualized since inception in April 2001. JANA returned 8.4% last year and you can see how they stack up against others in our post on 2010 hedge fund returns.

New Positions

We'll start with the newest additions to JANA's portfolio as they fall in the special situations category. They like these companies now that they are considering value-maximizing moves.

Cablevision (CVC): This cable company caught their eye due to the announced spin-off of Rainbow Media (cable networks that include the hit show Mad Men). This tax-free transaction will take place by the middle of the year and JANA likes that this spin-off will leave a more pure-play cable company that could be a consolidation target.

Market Folly readers will recall that many hedge funds owned CVC earlier last year (including JANA) due to the company's spin-off of Madison Square Garden (MSG) in a value-unlocking event. We wouldn't be surprised to see more event-driven/catalyst aficionados purchasing this name for the same reasons JANA has.

Williams Companies (WMB): Rosenstein's hedge fund has previously owned this stock before and returned due to the CEO's retirement in October 2010. JANA says, "We expect that WMB will find a way to separate their large exploration and production portfolio from their pipeline assets."

Renault SA (RNO FP): JANA is looking for the company to set higher free cash objectives and to resume dividend payments.

Embedded below is JANA Partners' year-end 2010 letter where you'll also find updates on their stakes in TNT NV (TNTTY), Charles River Labs (CRL), and Convergys (CVG). Email readers come to the site to read the letter:

For other hedge fund letters, we've started to post a bunch of other prominent manager commentary including:

- David Einhorn's Greenlight Capital letter
- John Paulson's year-end letter to investors
- Summary of Kleinheinz Capital's letter
- Dan Arbess & Xerion Fund's 2011 strategy

David Einhorn Buys State Bank Financial (STBZ), Updates MI Developments (MIM) Stake

David Einhorn's hedge fund Greenlight Capital just filed two separate 13G's with the SEC. First, Einhorn has disclosed a brand new position in State Bank Financial (STBZ). Due to portfolio activity on December 27th, 2010, Greenlight shows a 6.6% ownership stake with 2,100,000 shares.

As we've detailed previously, the hedge fund has been somewhat busy as of late. They've started a new stake in BP (BP) and bought Sprint Nextel (S) as well.

Second, in the most recent wave of developments, Greenlight Capital has also filed a 13G regarding its position in MI Developments (MIM). Einhorn has disclosed a 12.3% ownership stake in MIM with 5,655,235 shares. This is the same amount of shares Greenlight owned back on September 30th, 2010 in their third quarter 13F filing.

So, their position size in MIM remains unchanged. In recent developments, the company has reached an agreement that ends Canadian billionaire Frank Stronach's control of MIM. This agreement eliminates the company's dual class structure (Stronach currently controls 57% of the vote). Stronach will cede control of MI Developments and $20 million in working capital in exchange for various assets including horse racing and gaming.

For more updates from the hedge fund manager, be sure to read Greenlight's year-end letter.

Per Yahoo Finance, State Bank Financial Corporation "operates as the holding company for State Bank and Trust Company that provides community banking services to individuals and businesses in the middle Georgia and metropolitan Atlanta markets."

Per Google Finance, MI Developments is "a real estate operating company. The Company is engaged in the acquisition, development, construction, leasing, management and ownership of an industrial rental portfolio leased primarily to Magna and its automotive operating units. The Company also owns land for industrial development and own and acquire land that it intends to develop for mixed-use and residential projects."