Friday, January 28, 2011

Follow A Hedge Fund Manager's Portfolio

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Portfolio Manager Background

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Research Example: Apple (AAPL)

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What We're Reading ~ 1/28/11

RenTec's quant master Jim Simons speaks [Dealbreaker]

On the topic of hedge fund herding [AbnormalReturns]

Funny post: insight from top newsletters [Reformed Broker]

Lessons from 2010 [KirkReport]

Mark Cuban: Wall Street's new lie is asset allocation [BlogMaverick]

The ideal position size [SINLetter]

Summary of Barron's roundtable [StoneStreetAdvisors]

Emails suggest Bear Stearns cheated clients out of billions [TheAtlantic]

Do you believe in the Bernanke put? [Humble Student of the Markets]

Comprehensive overview of market sentiment [Trader's Narrative]

John Paulson recaps big bets [Dealbook]

For small hedge funds, success brings new headaches [Dealbook]

A rare bearish piece on Apple (AAPL) [WSJ]

Paulson's new fund seeks dollars in the desert [Marketwatch]

Back to the future with Clarium Capital's Peter Thiel [National Review]

Bullish on Waste Management (WM) [Seeking Alpha]

Update on Tiger Global's private equity funds [Bloomberg]

Tiger's Robertson seeds Nezu Asia funds [Reuters]

Thursday, January 27, 2011

Zeke Ashton on Centaur Capital's Investment Approach: Interview

Zeke Ashton is the founder of Centaur Capital Partners in Dallas, Texas. He focuses on long/short equity value investing and has compounded at 16% per annum since inception in 2002. His interview focuses on his non-traditional entrance into the hedge fund industry as well as his focus on 'hated' stocks.

Ashton started out in the Treasury and risk management consulting business. And, like so many value investors, he later shifted to investing after discovering Warren Buffett. Ashton actually worked at The Motley Fool for a while where he refined his skills with the basics and crafted his own investing style.

Ashton started with less than $1 million but attracted the likes of Whitney Tilson (of hedge fund T2 Partners) as an investor. Today, he manages $110 million and we've covered Ashton's presentations at the Value Investing Congress as well.

Centaur's Investment Approach

Ashton likes a concentrated portfolio, but not extreme concentration. He likes the 20-stock model and while he does short, he is long-biased. He often holds 20 longs and 6-8 shorts. Typically, he avoids cyclical and leveraged businesses and prefers companies that hold a lot of cash and generate a lot of cash.

The hedge fund manager's picks are often found in a pocket of opportunity nestled between growth and value. The stocks Ashton typically invests in don't grow fast enough to attract growth investors and aren't cheap enough for deep value players. As Ashton says, "boring is beautiful."

OpalesqueTV sat down with Ashton and the video interview is embedded below (email readers come to the site to view it):

We've posted up some other great hedge fund interviews, including Phil Goldstein of Bulldog Investors and David Gerstenhaber of Argonaut Capital.

Kleinheinz Capital: Inflation is Biggest Threat to Emerging Markets

John Kleinheinz's hedge fund Kleinheinz Capital recently sent out its year-end market commentary and 2011 outlook. The focus? Emerging markets and why inflation is the biggest threat to the belief that those countries can rebalance global growth.

Emerging Markets / Developing Economies

In the hedge fund's third quarter commentary, Kleinheinz said Russia is the cheapest emerging market. Their commentary this time around focuses on developing nations in general. They feel that food inflation is a large threat as it causes social unrest. However, the most important reason inflation is a concern is because,

"if developing economies cannot grow at above trend levels in a non-inflationary way then the whole proposition that these economies can gently rebalance the world economy may be untrue. The above average rates of growth in markets like China may simply be the result of trade surpluses that arise from lower cost of labor and fast monetary growth spurred by large domestic and foreign investment in capacity. Without real productivity advances and a migration to higher value-added products and services, which would allow higher incomes, the citizens of those countries cannot be expected to upgrade to a Western lifestyle that favors consumption over savings."

End of Bull Market in Treasury Bonds?

Another interesting focus of Kleinheinz's year-end letter is the notion that the three decade long bull market in US Treasuries is over. In the past, Kleinheinz held some bonds as a hedge. However, they sold out of those positions in the third quarter of last year.

Since then, they've begun "tactically shorting bonds ... until we become more certain about the timing and magnitude of a secular decline in longer dated bonds."

Japanese Yen

On the other side of the spectrum, the hedge fund has also started short positions in the Japanese Yen and Japanese government bonds. The rationale behind the play?

"Simply put - because Japan cannot afford to let its interest rates go higher, its currency will likely go lower to adjust interest rate differentials, slowing trade surplus and dwindling savings."

Readers will recall that hedge fund colleague Kyle Bass is short Japanese government bonds as well.

At the end of 2010, here were Kleinheinz's Top Holdings:

1. Apple (AAPL)
2. Research in Motion (RIMM)
3. China Mobile (CHL)
4. Veeco Instruments (VECO)
5. Monsanto (MON)
6. Hong Kong Exchange & Clearing (HK:0388)
7. LUKoil Holdings
8. Google (GOOG)
9. Major Drilling Group (MDI)
10. Yahoo! (YHOO)

From the third quarter to the fourth quarter, the most notable change in the upper echelon of their portfolio was Baidu (BIDU) falling just outside of the top 10 and their position in VECO ramping up a few spots.

Since inception, the fund has seen a compound annual growth rate of 26.6%. Intriguingly, you can replicate Kleinheinz's portfolio via Alphaclone. Investing in Kleinheinz's top 10 US equity holdings returned 19.5% 2010 compared to the hedge fund's actual performance of 22.86% (get free access to Alphaclone here).

To conclude, we'll leave you with a quote from John Kleinheinz's letter that stuck out the most: "A broad correction in stock market multiples will only occur if ten year U.S. government bond rates exceed 5% and corporate earnings growth slows to low single digit levels."

Wednesday, January 26, 2011

Phil Goldstein of Bulldog Investors on Activist Investing: Interview

Phil Goldstein and Andy Dakos of Bulldog Investors approach markets from a value investing bent and often employ activist strategies. Since 2001, their Full Value Partners LP has returned 10.03% annualized net.

Goldstein actually started working as a civil engineer and didn't start his investment career until his late 40's. He started managing money on the side in 1992 and finally pursued his passion full-time. He and Steve Samuels started Opportunity Partners with $700,000 and joined up with protege Andy Dakos.

While originally focusing on closed-end funds trading at discounts to net asset value (NAV), the firm eventually transitioned to focusing on other plays that traded at large discounts to intrinsic value, including REITs and operating companies. They also began to focus on using activist strategies as a catalyst to unlock value. In particular, they honed in on liquidity events such as asset sales, mergers, etc.

Nowadays, they see opportunity in junior gold miners (not because of macro theses, but rather sheer discounts). Also, they see opportunity in mergers and acquisitions (M&A).

Embedded below is the video interview with Phil Goldstein and Bulldog Investors from OpalesqueTV (email readers come to the site to watch):

For other great hedge fund manager interviews, check out David Gerstenhaber of Argonaut Capital on risk management.

Why A Hedge Fund Manager Sold Sprint Nextel (S)

The following is extracted from Amit Chokshi's Kinnaras Capital Management fourth quarter letter:

"Investors may also be curious regarding the divestiture of Sprint-Nextel ("S"), our highest conviction holding in 2010. When Greenlight Capital founder David Einhorn revealed a stake in Sprint Nextel in early December (a few weeks after we had sold), I received a few "what do you think about that" emails, not surprising when one considers Greenlight Capital's 21.5% annualized return since inception in 1996. One of the reasons I sold S was simply due to a flurry of much more attractive prospects that arose in Q3. The limited capital we control allows us to invest in any segment of the market and I wanted to take advantage of that opportunity in Q3.

Nonetheless, I would have considered holding on to a small stake in S if I had greater confidence in its management team, marketing efforts, and competitive dynamics. When establishing our stake in S in early 2010, one component of my investment thesis was the head start S had on its rivals in deploying next generation ("nextgen") cellular capabilities. S's 4G service is provided through its majority stake in Clearwire ("CLWR"). S would also be releasing two spectacular phones using Google's Android Operating System in the summer -- the HTC EVO ("EVO") and Samsung Epic. Sales data was demonstrating that Android phones were gaining considerable momentum and the EVO and Epic were two of the most widely anticipated smartphones of 2010.

Heading into 2010, S would be the first to 4G with a significant lead time over its rivals, had two highly rated phones that could compete against any of the top smartphones, had a very compelling price point relative to other carriers, experienced massive improvements in customer service, and had already demonstrated success in rationalizing parts of its business to drive operational improvements. S also faced few financing constraints with most of its debt maturities far into the future. The stock was cheap across a number of valuation metrics and had a number of catalysts in place that could drive improvements in valuation.

Here's where the train started to get off the tracks. The telecom business is highly competitive and I believe companies have to go for the jugular when it comes to advertising to demonstrate their key strengths over their competitors. For example, Verizon ("VZ") directly mocks AT&T's ("T") network coverage in its television ads, leading the viewer to believe that VZ has the best coverage while T has overpriced and weak network coverage. S intended to release the EVO in June and a number of third party sources considered it to be the best smartphone available. S had for the first time a legitimate top-shelf product and had also developed a very competitive pricing plan offering far more value to a subscriber relative to VZ and T. I had expected some aggressive and smart advertising to promote the EVO functionality and S phone plans directly against its competition.

Instead there appeared to be little to no advertising until the final two weeks of the release and the marketing was very mundane. Effective marketing "shows" rather than "tells" and the EVO commercials were far too convoluted, doing nothing to effectively demonstrate the powerful capabilities of the phone. The video below is one of the initial EVO commercials and should illustrate my point (email readers will need to come to the site to view the videos):

I felt S had squandered a huge opportunity when there were no other competitors to market leading up to the introduction of the EVO and from that point on I began to question S's advertising efforts. For example, S runs advertisements before the coming attractions start in movie theaters. As theaters are usually pretty empty before the coming attractions start, I would wonder how effective the use of these ad dollars were in attracting new subscribers. I also was skeptical of the company's sponsorship of CBS's NFL halftime show and sponsorship of the Sprint Cup for NASCAR. My personal view was that S could be far more effective with advertising that demonstrates what its network and exclusive phones could do rather than spend ad dollars on blanket sponsorship.

The next problem arose with S's handling of CLWR. CLWR is majority owned by S but was also competing directly against its parent company by offering CLWR-branded service as well as specific connection devices such as the iSpot which competed against the S Overdrive. Considering that CLWR burns considerable cash, much of it from S, it was bizarre that S sat idly by for so long allowing CLWR to use S cash to develop products to compete against its parent. In Q4 it became apparent that CLWR would need more capital setting up additional tension between S and CLWR.

At this point S needs CLWR as it provides S with its 4G service but CLWR will still require billions to further expand coverage in the US. It will be challenging for S to fund CLWR's needs while also executing its own capital spending plans. S took far too long to decide to rationalize its iDEN and CDMA networks but it intends to start in 2011. This project will require billions and excludes the roughly $2B+ needed on maintenance capex and FCC license expenditures. These are not immaterial expenditures considering S generates under $6B in EBITDA.

What exacerbates this problem is that competitors are now coming to market with 4G services. While S had a large lead in terms of time, it squandered that lead with ineffectual marketing and poor management of CLWR. The company has a compromised operational and financial strategy and is now facing competition with far better marketing and deeper resources.

For example, S marketing executives could learn a lot from T-Mobile. T-Mobile has released some excellent ads which are exactly what I envisioned S would have done but did not. The T-Mobile ads copy the "I'm a Mac, I'm a PC" commercials Apple developed whereby T-Mobile goes directly after AT&T and the iPhone, highlighting AT&T's poor network performance and limitations of the iPhone 4. S could easily have done similar ads but for whatever reason, S CEO Dan Hesse has been reluctant to highlight any design and operational advantages the EVO and Epic have over the iPhone or the S network has over competitors. T-Mobile has had no such qualms and it would be little surprise if sales of T-Mobile 4G devices (even though T-Mobile really does not have 4G) accelerate due to the smart advertising (video below):

Aside from T-Mobile, VZ is also beginning to market its 4G service. VZ has the deepest pockets of US telecoms and will be rolling out its coverage network at an aggressive clip while S and CLWR struggle to address financing and operational aspects. In addition, 4G smartphones appear to be slated for wide availability across carriers in 2011. While the EVO and Epic were two of the best phones released in 2010, there are a host of very impressive phones set to be released in 2011 such as the Motorola Droid BIONIC, Samsung 4G LTE Smartphone (nextgen Galaxy S), and HTC Thunderbolt. What will make this challenging for S is the cost subsidies associated with increasingly advanced phones will not be as easily absorbed by S relative to its peers as the Company's current plans yield lower ARPU relative to its peers. This could result in further margin pressures.

When entering 2010, S has a number of tangible opportunities and I felt if the company successfully executed on these, operations would improve significantly and thus yield a better valuation for the stock. S had its chances but I believe they missed what was essentially the one "open year" they had to increase subscribers with a relatively light competitive field. As Q3 and Q4 passed, the window between S and its competition was virtually eliminated. I expect that 2011 will be a year where its deeper pocket rivals like VZ flex their muscles and offer 4G services with other attractive smartphones. S may still pay off handsomely for investors but I felt we had better places to invest and that the outlook for S was getting increasingly more challenging.

Disclosure: Author manages a hedge fund and managed accounts with no position in any of the companies mentioned above. "

The above was extracted from Amit Chokshi and Kinnaras Capital Management's fourth quarter letter.

David Gallo's Valinor Starts Stake in Swift Transportation (SWFT)

David Gallo's hedge fund firm Valinor Management just filed a 13G with the SEC to disclose a brand new position in Swift Transportation (SWFT). Per portfolio activity on December 16th, 2010, Valinor shows a 7.3% ownership in SWFT with 5,380,312 shares.

This is a brand new position for the hedge fund as Swift Transportation's initial public offering (IPO) took place on December 16th and Valinor most likely purchased shares in the IPO. The company recently reported a $48.3 million loss in the fourth quarter and attributed much of its loss to debt refinancing transactions and IPO related expenses.

Earlier this week we detailed some other recent portfolio activity from Valinor as well for those interested.

Per Google Finance, Swift Transportation "formerly Swift Holdings Corp., is a transportation services company and a truckload carrier in North America. As of September 30, 2010, the Company operated a tractor fleet of approximately 16,200 units comprised of 12,300 tractors driven by company drivers and 3,900 owner-operator tractors, a fleet of 48,600 trailers, and 4,500 intermodal containers from 35 terminals positioned near major freight centers and traffic lanes in the United States and Mexico."

Keep tabs on the latest hedge fund movements with our analysis of the latest SEC filings.

Bill Ackman Joins J.C. Penney's (JCP) Board

Pershing Square's Bill Ackman recently appeared on CNBC and discussed the latest activity regarding his investment in J.C. Penney (JCP). Ackman will join JCP's board along with Vornado Realty Trust's (VNO) chairman Steven Roth. The retailer will also close some stores and get rid of its catalog business.

You'll recall that Ackman took an activist stake in JCP back in September. At the time, we also noted Vornado's sizable concurrent position as well. It appears as though the activist gears are in motion as the two attempt to shake up the large retailer. In the past, we opined that JCP was potentially a real estate play, but Ackman subsequently quashes that notion in the interview. While he acknowledges that the company has valuable real estate assets, he notes that they will 'live or die as a retailer.'

At the end of the interview, the hedge fund manager also mentions that he still has not sold any of his General Growth Properties (GGP) position either. This has been his most successful investment ever as he turned $60 million into $1.6 billion for his investors (and more).

Embedded below is Ackman's interview in CNBC (email readers will need to come to the site to view it):

We'll be detailing any recent portfolio activity from Pershing Square and analyzing their holdings in our new issue of Hedge Fund Wisdom that will be released in a few weeks.

Monday, January 24, 2011

Nelson Peltz's Trian Fund: Latest Portfolio Activity

Nelson Peltz's Trian Fund Management recently filed an amended 13D with the SEC regarding shares of Tiffany & Co (TIF). Due to portfolio activity on January 20th, 2011, Trian has disclosed a 4.95% ownership stake in TIF with 6,260,809 shares.

Tiffany & Co (TIF)

This is a decrease in their position as they reported their recent sales in a Form 4 with the SEC. Peltz's firm sold TIF shares on January 18th, 19th, and 20th at weighted average prices ranging from $57.9484 to $59.2843, with the bulk of their sale coming at the latter price. In all, Peltz recently sold 600,000 shares of Tiffany & Co.

Trian originally filed its activist 13D on Tiffany back in February 2007. Their latest amended 13D contains standard boilerplate stating that they intend to continually review their investment.

Peltz's Background

Peltz is a well-known activist investor and takeover titan. Additionally, he is the former owner of Snapple and graces the Forbes' billionaire list. Interestingly enough, Peltz never received his college degree. He attended the Wharton School at the University of Pennsylvania, but left to work in his family's business of selling food.

He attributes one of his most valuable lessons to his father, who simply said, "get sales up and keep expenses down." He has obviously incorporated this advice into his everyday work with turning around companies. In potential targets, Peltz likes companies to have the following attributes: a good franchise, low leverage, and strong free cash flow. Peltz runs Trian with his business partner, Peter May, who has been with him since the Snapple days.

Wendy's Arby's Group (WEN)

Peltz's Trian also owns a sizable position in Wendy's Arby's Group (WEN) and the fast food company has just announced that it is putting the Arby's sandwich chain up for sale. Arby's originally merged with Wendy's back in 2008. Trian owns over 24% of the company.

In other portfolio holdings, Trian owns sizable chunks of Legg Mason (LM), H.J. Heinz (HNZ), Family Dollar (FDO), and State Street (STT). Given Peltz's background, it should come as no surprise that he mainly focuses on the food industry.

Head to our hedge fund portfolio tracking to see what stocks managers have been active in lately.

Per Google Finance, Tiffany & Co is "a holding company and conducts all business through its subsidiary companies. The Company’s principal subsidiary, Tiffany and Company, is a jeweler and specialty retailer whose principal merchandise offering is fine jewelry. The Company also sells timepieces, sterling silverware, china, crystal, stationery, fragrances and accessories."

Per Yahoo Finance, Wendy's Arby's "through its subsidiaries, operates as the owner and franchisor of the Wendy's and Arby's restaurant systems."

Hedge Fund Valinor Management Adds to DSW Inc (DSW)

David Gallo's hedge fund firm Valinor Management just filed an amended 13G with the SEC regarding its position in DSW Inc (DSW). Due to portfolio activity on January 12th, 2011, Valinor has disclosed a 9.8% ownership stake in DSW with 1,634,361 shares.

Valinor has boosted its position size by 64%, buying 637,834 more shares over the past three and a half months. At third quarter's end (September 30th, 2010), they owned 996,527 shares. In other recent portfolio activity from Gallo, we've highlighted Valinor's new position in Cott (COT) as well.

Gallo's firm is named after lands inhabited by immortal souls from the books of J.R.R. Tolkien. Before founding Valinor, Gallo was at Roberto Mignone's Bridger Management and earned his MBA at Harvard Business School.

Per Google Finance, DSW Inc is "a branded footwear specialty retailer. As of January 30, 2010, the Company operated 305 shoe stores in 39 states in the United States. The Company offers an assortment of dress, casual and athletic footwear for women and men, as well as accessories through DSW stores and"

For the latest in hedge fund portfolio activity, scroll through our coverage of SEC filings.

Strategist Jeff Saut on Fear, Hope, & Greed

Market strategist Jeff Saut's weekly commentary reiterates much of his stance that we've detailed over the past few weeks. He is cautious but a buyer of dips. And as we saw late last week, hedge fund manager David Tepper is also cautious but optimistic.

Simply put, Saut feels a pullback anywhere in the neighborhood of 3-10% is coming. The problem, of course, is that he's been waiting for a few weeks now. Saut revisits the age-old stock market cycle of fear, hope, and greed to illustrate his stance. He says that,

"I revisit the Fear, Hope and Greed cycle this morning not because I think we are approaching the Euphoric zone, but because I continue to believe we are near the Optimism level and therefore due for anywhere between a 3%-10% correction. Still, any pullback is probably for buying."

However, he is keen to sit patient and wait for his 'fat pitch' just like Warren Buffett would. Buffett's famous quote goes as such:

"In this game the market has to keep pitching, but you don't have to swing. You can stand there with the bat on your shoulder for six months until you get a fat pitch."

Classic words of wisdom from the Oracle of Omaha and we've detailed Warren Buffett's top 25 quotes if you're looking for more insight.

Embedded below is Jeff Saut's weekly investment strategy on the cycle of fear, hope, and greed:

You can download a .pdf copy here.