What We're Reading ~ 9/26/12

Michael Mauboussin on improving investment decision making [Fool]

Interesting viewpoint: the biggest myth in the stock market today [Business Insider]

How this market is a castle on a cloud [Reformed Broker]

Latest longs and shorts from Karsch Capital [ValueWalk]

Ray Dalio on Bridgewater's competitiveness index [CNBC]

Good read: On how Warren Buffett views cash [Globe & Mail]

The 9 stocks Tiger Cubs love [Benzinga]

How good an investment were the bailouts? [Big Picture]

The limits of direct experience in an investor's education [Abnormal Returns]

Jim Chanos on shorting [Santangel's Review]

Regulatory and advertising concerns take center stage [FINalternatives]

John Paulson thinks SEC filings are a waste of time [AR+Alpha]

Appaloosa said to hold USAirways equity, AMR debt [Bloomberg]

Hedge fund redemption requests hit 2012 high in September [HedgeWorld]

Playing a game of economic survivor [Institutional Investor]

Hedge funds play catch up after missing rally [Reuters]

Psychological biases in decision making [HBR]

Notes From Mohnish Pabrai's Annual Meeting

A reader sent in notes from Mohnish Pabrai's annual meeting that recently took place.  He runs Pabrai Investment Funds and tries to emulate Warren Buffett with his value approach.

Pabrai currently has around $540 million under management and detailed a post mortem on some of his past holdings, revealing his mistakes were: 1) permanent loss of capital, 2) mistakes of omission and 3) selling something to buy something else and the exited business does better.  Pabrai has seen 13.3% annualized returns since inception.


Question & Answer Session

Q: You don't use explicit leverage but you have lots of leveraged investments in the portfolio?

A: Munger says 4 stocks is diversified.  If you owned the best apartment building in town, the highest quality business, Ford dealership, and other, you will do pretty well.  Bet in financials is around 25% of fund.  Munger says you can't invest in financial services companies without understanding ethos of management.


Q: Sectors to avoid?

A: Avoid what you can't understand and he doesn't like industries with rapid change (like technology or biotech).


Q: Life's 3 most important decisions?

A: Person he married, father started and bk'ed 15 companies in 15 industries.  Father identified gap but then he was eternal optimist.  Mohnish went from engineering to marketing.  Then his father pushed him out to start an information company.  Read Buffett by Lowenstein in 1994 and a light went on.  Leverage time using investing in businesses and let other guys run the business.


Q: Other idea generation tools besides 13F filings?

A: Cloning is a powerful concept.  Reverse engineer trades.  Third Avenue, Long Leaf Partners, Leucadia, Fairfax, Manual of Ideas are all places to look.


Q: Number of portfolio positions expanded after 2008 and now back to concentrated, why?

A: His natural tendency is to be concentrated.  He was shell shocked and there were a ton of big ideas available back then.  Good ideas are now scarce so better off making a good sized bet rather than 1% or 2% positions.  He holds cash now - any money put to work in late 2008 could have been a 4x.


Q: If things are cheap, why hold so much cash?

A: Not a flood of great ideas.  If he finds more he'll put it to work.  He's looking for 4x or 5x return to get interested with muted risk.


Q: QE3 how does it change what you do?

A: Bernanke doesn't need to announce QE4... it is 500 billion per year.  Not a macro guy but fairly in favor of what Bernanke has done.  Fed good at breaking ability but better than fixing things.  Don't see inflation currently but do see signs of significant unemployment.


Q: Do you model businesses, such as discounted cashflow?

A: Entrepreneurs don't use spreadsheets.  3 or 4 factors are important to each business: just focus on those factors.  Spreadsheets give you an imprecise guess of precision.



For more on this investor, we've posted up Pabrai's thoughts on investment checklists as well as his take on how you can invest like Warren Buffett.

Mick McGuire's Marcato Capital Management Files 13D on Syms, Now Trinity Place Holdings

Mick McGuire's hedge fund firm Marcato Capital Management just filed a 13D with the SEC regarding the former Syms entity, now known as Trinity Place Holdings (TPHS).  Per the filing, Marcato has disclosed a 27.9% ownership stake in TPHS with 4,645,287 shares.


Syms Chapter 11

Retailer Syms Corp (SYMSQ) recently emerged from Chapter 11 as Trinity Place Holdings.  Per the 10-month bankruptcy, the company closed its retail stores (including Filene's Basement), liquidated inventories and redeemed all stock owned by Marcy Syms.

The funds needed to exit bankruptcy were supplied via the sale of $25 million worth of new common stock.  Marcato took part along with DS Advisors, and Esopus Creek Value Fund.

Trinity Place now emerges with commercial real estate and intellectual property.  Shares still trade over the counter, but now with a new symbol TPHS.

At present, the fine print of the 13D says that Marcato does not have any plans or proposals.  The filing also notes that Mark Ettenger (a consultant of Marcato) is on the board of directors.

In a separate Form 3 filed with the SEC, Marcato also discloses that they own 71,184 participating interests whose return is tied to the value of TPHS common stock. 


About Marcato

Readers should be familiar with Marcato as we've covered how McGuire previously worked at Bill Ackman's Pershing Square before starting his own fund.  Like Pershing, Marcato focuses on fundamental research and often employs activist investing.  While Pershing often focuses on large caps, Marcato's focuses seems to be on midcaps.

McGuire was named one of Institutional Investor's "Rising Stars" this year.  And we've covered how Marcato has been involved in CXW, pushing for a REIT conversion.

Next week, McGuire will be presenting investment ideas at the Value Investing Congress in New York along with David Einhorn, Bill Ackman and many more hedge fund managers.  Perhaps he'll talk about TPHS, but we'll have to wait and see.  There's still time to register for the event here.


About Trinity Place (Formerly Syms)

Per the company's press release, Trinity Place Holdings' "current business plan includes the monetization of 16 commercial real estate properties and the development of 28-42 Trinity Place in Lower Manhattan. The company also plans to explore the licensing of its intellectual property, including its rights to the Filene’s Basement trademark, the Stanley Blacker and Maine Bay brands, the intellectual property associated with the well-known Running of the Brides event, and An Educated Consumer is Our Best Customer slogan."

SAC Capital Boosts Stakes in Magellan Health Services and Bill Barrett Corp

Steve Cohen's hedge fund firm SAC Capital just filed two 13G's with the SEC:

Magellan Health Services

SAC filed a 13G regarding its stake in Magellan Health Services (MGLN) and per the filing, SAC has revealed a 5% ownership stake with 1,380,530 shares.

They've substantially increased their holdings in MGLN since the end of the second quarter as they only held 16,300 shares then.  Trading activity on September 21st took them over the regulatory threshold required to file.

Per Google Finance, Magellan Health Services is "engaged in the specialty managed healthcare business. The Company provides services to health plans, insurance companies, employers, labor unions and various governmental agencies. It provides managed behavioral healthcare services, radiology benefit management services, and drug benefits management services."


Bill Barrett Corp

Second, the hedge fund firm also ratcheted up its position in Bill Barrett Corp (BBG).  They now show a 5.5% ownership stake in the company with 2,659,491 shares. 

This is an increase of around 827% in their position size since the end of the second quarter as they only owned a small position back then.  The SEC filing was required due to portfolio activity on September 20th.

Per Google Finance, Bill Barrett "explores for and develops oil and natural gas in the Rocky Mountain region of the United States."

We've posted up other portfolio activity from SAC Capital here.

Highfields Capital Discloses Liberty Ventures Stake

Jonathon Jacobson's hedge fund firm Highfields Capital just filed a 13G with the SEC regarding shares of Liberty Ventures (LVNTA).  Per the filing, Highfields now owns a 5.8% ownership stake in LVNTA with 1,482,738 shares.

This is a brand new position for the hedge fund and the filing was made due to portfolio activity on September 12th.  Liberty Ventures is a tracking stock that was created in August to track certain assets of Liberty Interactive (LINTA).

LVNTA shares track Liberty's ownership interests in various entities such Expedia, TripAdvisor, and many more companies.  Shares of LINTA, on the other hand, track the businesses of Liberty such as home shopping network QVC.  Shareholders of LINTA received LVNTA shares in the tracking stock separation.

Liberty Rights Offering

It's unclear if Highfields acquired some of their LVNTA shares via the LINTA spin or not.  Highfields did not disclose a LINTA stake at the end of Q2 in their most recent 13F filing, but they could have easily purchased shares before the split. 

This is important mainly because Highfields' trading activity date on their SEC filing matches the date of Liberty Ventures' rights offering commencement.  Yahoo Finance has an explanation of this:

"On August 9, 2012, in connection with the creation of its new Liberty Ventures tracking stock, Liberty Interactive distributed subscription rights to purchase share of Series A Liberty Ventures common stock (each, a Series A Right). Each whole Series A Right entitles its holder to subscribe, at a per share subscription price of $35.99, for one share of Series A Liberty Ventures common stock pursuant to a basic subscription privilege, and also entitles the holder to subscribe for additional shares of Series A Liberty Ventures common stock pursuant to an oversubscription privilege.  The rights offering will commence on Wednesday, September 12, 2012, and will expire at 5:00 p.m., New York City time, on Tuesday, October 9, 2012, unless extended by Liberty Interactive Corporation"

The rights offering commenced on September 12th and trades under symbol "LVNAR."  It will expire at 5pm EST on October 9th (unless extended by Liberty). 

We've previously covered other portfolio activity from Highfields here.

Ray Dalio on QE3, Gold, China, Europe, Economy & More (Interview)

Bridgewater Associates founder Ray Dalio appeared on CNBC this morning for a rare interview.  Bridgewater manages $130 billion and is listed as the top hedge fund by net gains since inception.  Here's a summary of Dalio's thoughts from this morning as well as the videos:

On QE3 and the US Dollar

Dalio said that QE3 was a good plan.  When you ease interest rates,  it stimulates private sector credit growth.  And then after that you utilize quantitative easing.  He feels the US dollar is squeezed due to lots of dollar denominated debt, but after this squeeze he says it's going to decline in the near-term.




On China

The hedge fund titan points out that China can have 6% growth and still think that's depressing all while the US has 2% growth.

Just yesterday we posted about how Jim Chanos is still short China.  And of course we've also highlighted the China hedge fund bear thesis.



On Gold

He says "it should be part of everyone's portfolio to some degree because it diversifies the portfolio."  He likens gold to an alternative version of cash and over the long term he says it's better than cash.  "Money can be produced, but gold is somewhat limited."



On Europe

Bridgewater's founder says there's going to be a "managed depression" in southern Europe in the next few years, and thinks we'll see both a combination of monetary policy (money printing) and a deleveraging and restructuring of debt over there.  He says the euro is "likely" to stay together and it is controlled by southern Europeans, though there's more risk for the currency in later years.



On His Biggest Worry

He worries about social distortion and another leg down in various economies causing them.  He notes that deleveragings can be painful and we've posted up Dalio's in-depth look at deleveragings before.


On a Possible Downturn in the US Economy

The Bridgewater founder said that the odds of an unmanaged downturn are "comparatively low."  He likens it to flying on a plane where you could hit an air pocket and that's when problems could arise. 


Dalio's Rules of Investing

He says, "I don't get caught up in the moment.  I think so many people are reactive and they see things in a very short-term way."  He goes on to say that, "almost all important events never happened in your life."  He looks at what's happened in the past and uses that as a template for rules for each scenario essentially saying 'if this happens, do that.'



Dalio is profiled in the new book The Alpha Masters which we recommend reading.  For even more thoughts from Bridgewater's leading man, check out this recent in-depth interview with Dalio from a few days ago.

Kyle Bass' Hayman Capital Discloses Sealy Stake

Kyle Bass' Hayman Capital Management this morning filed a 13G on shares of Sealy (ZZ).  Per the filing, Hayman has disclosed a 5.9% ownership stake in ZZ with 5,644,245 shares.

This appears to be an increase in Hayman's stake in the company.  In their most recent 13F filing detailing portfolio activity as of June 30th, Hayman disclosed ownership of Sealy 8% senior secured third lien convertible notes due July 2016 (ZZC) worth almost $8 million at that time.

Back then, they did not report an equity stake at the time.  The filing today was required due to portfolio activity on September 10th.

Per Google Finance, Sealy is "engaged in the consumer products business and manufacture, distribute and sell conventional bedding products, including mattresses and box springs, as well as specialty bedding products, which include latex and visco-elastic mattresses."

For more from Hayman's manager, we've posted up thoughts from Bass at the SALT conference earlier this year.

Jim Chanos Still Short China, Talks Other Positions (Interview)

Jim Chanos appeared on CNBC this morning to share his latest thoughts on the market and his positioning.  The Kynikos Associates hedge fund founder said that 20% of his global short fund is China.  We've posted up the hedge fund China bear thesis before as Chanos notes it's a credit boom over there.

Why He's Short China

He's been quite patient with his China short and it's paid off.  He noted that "we get criticized that China's not in smoking ruins ... we've done just fine."  Chanos says that corporate profits are imploding in the country.

He points out that while China's exports are important, their imports are also very relevant to watch.  While the trade export balance has been decreasing (not a new phenomenon), capital is also leaving and that's a new development Chanos drew attention to.

Lastly, he notes that he wouldn't trust any accounting in China and he could spend an hour talking about that issue alone as corporate accounting is that bad over there.

Chanos' Other Shorts

In regards to what else he's been shorting, he continues to dislike Hewlett Packard (HPQ).  He's long Microsoft (MSFT) and Oracle (ORCL) as hedges to that stake.

Chanos again addressed the notion of global value traps (his presentation via that link).  He says you want to be short printers and ink.  The cloud is fundamentally changing the tech landscape.

On the financial side, he likes to use the term "deleveraging credit python,"  noting that China, Europe, and the US are the three to watch.  In banking, they're long JPMorgan (JPM) and Citi (C).  For the other side of the coin, we recently detailed why Bill Ackman sold Citi.  Kynikos has also been short Chinese and Spanish banks.

Back in 2007 and 2009, Chanos was short healthcare but he no longer is short.  Though he says that longer term, healthcare is a huge issue.

Embedded below are the videos from Chanos' TV appearance this morning.  Video 1 on China:



Video 2 on tech companies & banks:




For more from the well known short seller, check out:

- Chanos on the psychology of short selling

- Chanos on the power of negative thinking

The Investor Sentiment Wheel

This is a classic for all investors.  The investor sentiment wheel illustrates the various emotions investors experiences during an investment cycle.  Of course, most investors panic at the bottom and sell low and then turn around and buy high.

Back in 2008 and then again in 2009, we posted up this picture of investor psychology illustrated.  

A new rendition has been created by Trustable Gold who sent us this new graphic on the roller coaster that is investor sentiment, embedded below:




What's your take on where we're at currently in the cycle? Obviously Ben Bernanke and QE3 throw another wrench into the equation encouraging "risk on."

What We're Reading ~ 9/19/12

Starboard Value takes activist stake in Office Depot [Dealbreaker]

The JOBS act will have minimal impact on hedge funds [ValueWalk]

Active management and personal responsibility [Abnormal Returns]

Hedge funds have been punished for being too defensive [PragCap]

Throwback: the hedge fund fantasy football league [Reformed Broker]

A family is not a portfolio [All About Alpha]

The David Einhorn effect [WSJ]

A pitch on AIG [Alpha Vulture]

Profile on Magnetar Capital's Alec Litowitz [AR+Alpha]

Vodafone's crown jewel [MicroFundy]

You'll get crushed shorting FairPoint Communications [AR+Alpha]

Hedge fund association asks for clear rules on verifying investor accreditation [Herald]

Q&A with Wilbur Ross [The Deal]

Investors turn to hedge funds for larger advice role [ManagedFunds]

How Jeff Boyd took Priceline from dot-bomb to highflier [Fortune]

A review of the new Richard Gere movie Arbitrage [Detroit Free Press]

Glenview Capital Adds to Tenet Healthcare Position: Why They Like THC

Larry Robbins' hedge fund Glenview Capital just filed an amended 13G with the SEC regarding their position in Tenet Healthcare (THC).  Per the filing, Glenview has now disclosed a 12.68% ownership stake in THC with 52,823,831 shares.

This marks a 28% increase in the number of shares they own.  Due to the disclosure dates, they've added these shares between July and September.  The 13G from today was filed due to trading activity on September 14th.

Why Glenview Likes Tenet

On the heels of the Affordable Care Act (ACA) passing, Tenet was one of Glenview's core holdings.  The hedge fund originally started its stake in THC back in March.  Their thesis is essentially that for-profit hospitals are entering a "growth on growth" phase due to expanded health insurance coverage.

In the free sample of our quarterly newsletter, we highlighted the following:

"Robbins laid out his long thesis for hospitals by pointing out that EBITDA has grown every year for them as they offer 9% CAGR, 1% admission growth, and 2% leverage.  He says hospitals benefit from Medicaid eligibility as it reduces bad debt expense ... Robbins points out that it's unlikely that the government could unilaterally take a for profit hospital's profits from reimbursement."

Consensus EPS growth for 2011-13 for THC had been around 28% while Glenview expects 41% from 2011-2014.  Glenview also believes that meaningful share repurchase opportunities and/or tuck-in acquisitions are possible.

As of the end of Q2, the hedge fund also owned other companies in the space, including: HCA (HCA), Health Management Associates (HMA), and LifePoint Hospitals (LPNT).  That said, THC does seem to be their largest position in the segment and shares recently hit 52-week highs.

Per Google Finance, Tenet Healthcare is "an investor-owned health care services company whose subsidiaries and affiliates own and operate acute care hospitals, ambulatory surgery centers, diagnostic imaging centers and related health care facilities. Its core business is focused on providing acute care treatment, including inpatient care, intensive care, cardiac care, radiology services and emergency medical treatment, as well as outpatient services."

To see what other positions this hedge fund owns, check out the latest issue of our premium newsletter.

Peter Lynch's Principles & Golden Rules of Investing

Peter Lynch ran Fidelity's Magellan Fund for 13 years and was regarded as one of the most successful investors during his tenure.  Lynch outlines the broad gist of his investment philosophy with various pearls of basic wisdom in his book, Beating the Street. 

Last week we detailed Lynch on using your edge in investing.  This time we wanted to focus on some more of his advice, taken both from "Peter's Principles" and his "Golden Rules of Investing":


Peter's Principles

- "Never invest in any idea you can't illustrate with a crayon"

-"You can't see the future through a rearview mirror"

- "When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds."

- "The best stock to buy may be the one you already own."


Peter Lynch's Golden Rules of Investing

- "You have to know what you own, and why you own it."

- "Never invest in a company without understanding its finances.  The biggest losses in stocks come from companies with poor balance sheets.  Always look at the balance sheet to see if a company is solvent before you risk your money on it."

- "Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether."

- "Time is on your side when you own shares of superior companies. You can afford to be patient –even if you are missed Wal- Mart in the first 5 years, it was a great stock to own in the next 5 years. Time is against you when you own options."

You can find the rest of Lynch's principles & rules in his book Beating the Street.


And to learn more about this great investor, check out his other book One Up On Wall Street and our recent post: Lynch on using your edge in investing.

Morgan Creek Capital Asks: Is China A Real Estate Bubble?

Michael Hennessy, Managing Director at Morgan Creek Capital Management, has penned an interesting piece entitled, "China: A Real Estate Bubble, Or No Trouble?"

In it, he dives into the hot debate and notes that China's situation is different than the US in that it was fueled by public development whereas the US was fueled by private development.

In the end, Hennessy concludes that, "it is clear that China's economy is slowing; however, this seems to be fully discounted in valuations, and rather severely at that."

Kynikos Associates' Jim Chanos has been an outspoken bear on China (and in particular their property market). We've also posted up the hedge fund bear thesis on China.

Below are Hennessy's thoughts on whether or not China is a real estate bubble:




Hat tip to Zach for digging this up.

Children's Investment Fund: Thesis on New Position in Safran

Yesterday we posted on commentary from Children Investment Fund's Q2 letter.  Today, we're highlighting a write-up from Christopher Cooper-Hohn on one of the fund's newer investments: aerospace equipment provider Safran.

Safran: Sum of the Parts Analysis

"70% of the company’s value is in their civil engine business, which is a 50:50 JV with GE, called CFMI.

The engines that they make power narrow-body aircraft (100-220 passengers). This is an attractive business as competition is limited. If you buy a Boeing 737 you have to buy an engine from CFMI and if you purchase an Airbus A320 you have a choice between CFMI or IAE (a company controlled by Pratt and Whitney).

Once an engine has been sold, Safran benefits from spare parts sales. Margins on engines are very low as they are sold close to cost price, but margins on parts are high (60%+) and engines consume roughly 3x their initial value in parts over their lifetime. This parts business is highly protected as the FAA (and other regulatory bodies) prevent the use of unauthorised parts in engines, so the supply of third party parts is low (about 3% of the total) and will likely decline as leasing companies are against their use (they reduce the resale value of the plane). Another attractive feature of this market is that many of the engine parts (so called LLPs, or Life Limited Parts) have to be changed after a certain number of flights as there are strict rules pertaining to aircraft maintenance.

There is a typical 8-10 years lag between when an engine is sold and when it first requires servicing (it is at service that spares are used). After the first service, engines require regular maintenance for the rest of their 25 year life. Safran have sold 10,300 engines over the last 10 years and of these, only 700 have generated spare parts revenues. The total installed base of engines is approximately 18,000 and fewer than half of these are generating spares revenues for Safran. As the age of the engine fleet matures, spares revenues will increase rapidly.

Although it is easy to see the long term spare parts revenue trend, short term forecasts (3-18 months) are difficult as airlines have some latitude as to what kind of servicing to do. For instance, they can minimally service an engine such that it will fly for another 12 months before coming in again or they can service it so that it will remain on the wing for another 4 years. Airlines can also cannibalise their own spare engines for parts and ground engines which require work rather than servicing them.

As the airline industry has been cash strapped for the last 2 years, spares revenues have not grown since 2009 despite the increasing maturity of the fleet. However, there is a limit as to how much maintenance can be deferred and the pent-up demand for the last two years will have to be addressed at some point.

The future also seems bright. The next generation of narrow-body aircraft is composed of the 737 MAX and the A320neo. The 737 MAX will 100% be powered by CFMI and the A320neo will be powered by CFMI and by Pratt and Whitney. It is important to note though that the engine orders that Safran is booking today will likely be delivered in 2018 and first generate profits for the company in 2028. The strong growth that we expect in profits over the next 12 years is predicated on engine sales which have already happened.

Safran’s valuation is very attractive. The company trades on 9x 2012 EV/EBIT and 13.6x earnings, falling to 11.4x 2013 earnings which is a low absolute valuation compared to peers (aerospace companies typically trade on an average of 15x 2012 earnings) and given the growth in spares revenues.

On a Sum of the parts basis, we value the company at €52 per share with 85% upside. The majority of this value is the engine business (€40 per share) and this values the business at €1.4m per engine which is less than the €2.1m per engine that Pratt and Whitney recently paid Rolls Royce for their stake in IAE (IAE engines are directly comparable to CFMI ones). This difference is probably due to our more conservative assumptions as we discount spares earnings back at 10% pa whereas Pratt and Rolls Royce may have used a lower rate. Using our numbers, there is compelling upside and it is more likely that we are under rather than over-estimating the embedded value of the flying fleet."


For more from this fund, be sure to head to excerpts from Children's Q2 letter.

Farallon Capital Discloses New Stake in Horizon Pharma

Thomas Steyer's hedge fund firm Farallon Capital has just now filed a 13G on shares of Horizon Pharma (HZNP).  This is a brand new position for the hedge fund as they did not report ownership back in the second quarter.

Farallon has disclosed a 5.4% ownership stake in the company with 1,883,071 shares.  The SEC filing was required due to portfolio activity on September 7th.

Per Google Finance, Horizon Pharma is "a biopharmaceutical company that develops and commercializes medicines to target unmet therapeutic needs in arthritis, pain and inflammatory diseases."

Children's Investment Fund on News Corp, Union Pacific & Walt Disney: Q2 Letter

The Children's Investment Fund manages approximately $4.7 billion and has returned 15.7% annualized.  Year to date through the end of the second quarter, they were up 16.39%. 

Founded by Christopher Cooper-Hohn, Children's has assembled quite a concentrated portfolio and we wanted to highlight some excerpts from their second quarter letter.

Children's Top 10 Positions as of Q2 

1. CESP: 18.2% of fund NAV
2. News Corp: 18.1%
3. Lloyds Bank Bonds: 17.9%
4. Japan Tobacco: 16.8%
5. QR National: 13%
6. Red Electrica: 9.7%
7. Porsche SE: 9.6%
8. Coal India: 8.6%
9. Walt Disney: 8%
10. Enagas: 7.3%


Railroads: QR National & Union Pacific

Children's owns QR National where the thesis has been focused on a transition from government-run entity to private company.  Management is focused on improving operating performance and achieving growth through investment. 

Children's expects the balance sheet to re-leverage over time, anticipating aggressive share buybacks (inclusive of any selling the government might do with its remaining 34% stake).  Of the stake, Hohn writes,

"With 7-8% normalised unlevered free cash flow yield, considerable volume and legacy contract re- pricing, we believe QR should compound at above 20% pa medium term returns. QR’s significant hard asset backing and very conservative balance sheet limit the downside of the investment. We believe the fair value of the asset is approaching double the current share price."

They also own a stake in Union Pacific (UNP) and while they see coal headwinds continuing there, they believe the company can grow EPS at 13% for the next several years and generate an IRR of 15%. 


On News Corp

Given that News Corp is one of their largest positions and many other hedge funds own it, we wanted to highlight Children's commentary on the name.  They're fans of the company's impending split and write:

"At the end of the quarter, the stock is on 11x forward earnings on our numbers and 6.5x EBIT. Low double digit net income growth driven by affiliate fees and re-transmission consent, and supported by the expectation of continued buybacks drives 20%+ net income growth and a 30% midterm IRR without a re-rating. We believe that as the market grows increasingly comfortable with the improved corporate governance at News Corp, the stock can comfortably achieve a 13-14x earnings multiple which 2 years out would point to a $37-40 target price compared to $22 today."


On Walt Disney

Lastly, Children's likes that the Parks segment will see capex programs slow down and think the company will see margin leverage.  They write,

"In the near term, margin recovery in the Parks and share buybacks will drive EPS growth up to near 20% for the next few years. We forecast EPS of $3.6 in the upcoming year and $4.2 in the following year. On a 14-15x multiple, this should give a share price trading target of around $60."



For more hedge fund Q2 letter excerpts, we've posted up:

- Eminence Capital on Google

- Scout Capital on Anheuser-Busch InBev

- Bill Ackman on why he sold Citigroup

Ray Dalio In-Depth Interview on a Myriad of Topics

Bridgewater Associates founder Ray Dalio recently gave an hour-long interview at the Council on Foreign Relations where he touched on a myriad of macro, economic, and investing topics. 

It's rare to get such an in-depth look from one of the world's top investors, so instead of summarizing we highly recommend watching the whole interview with Dalio below:



Hat tip to PragCap for finding this.


We've posted tons of other great resources on Bridgewater below:

- Ray Dalio interviewed in the book The Alpha Masters

- Dalio on deleveragings

- Bridgewater the top hedge fund by net gains since inception

Strategist Jeff Saut On the Philosophy of Market Tops

Last week we highlighted commentary from market strategist Jeff Saut on performance anxiety that sets in when managers are underperforming their benchmarks.  This commentary was timely given that the market has rallied while many hedge funds have had low net exposure.

This time around, Saut logically shifts his focus to identifying market tops.  He quotes Justin Mamis on the topic:

"In the end, as the curtain comes down on the bull market you realize that the one rule about tops is not that they provide this or that signal, but that they come before anyone is ready."

Saut also points to further quotation from Mamis that tops are often found when investors are feeling "a comfortableness, a confidence, a conviction that whatever was happening - would continue."

Embedded below is Jeff Saut's commentary on market tops and his thoughts on the current market.   He's cautious (but not bearish) about entering new positions and ultimately thinks that the eventual dip will be bought and fuel another rally into year-end:




You can download a .pdf here.

Additionally, you can scroll through all of Jeff Saut's past commentary at this link.

Why Ruane Cunniff & Weitz Funds Like Valeant Pharmaceuticals (VRX)

We've seen past commentary from multiple managers on shares of Valeant Pharmaceuticals (VRX) and thought it was worth highlighting given that numerous respected managers own it.

Hedge Fund Activity

As of the end of the second quarter, prominent institutional owners of VRX include (in descending order): Ruane Cunniff, Jeff Ubben's ValueAct, Andreas Halvorsen's Viking Global, Glenn Greenberg's Brave Warrior, Lee Ainslie's Maverick Capital, and many more.  In the past, VRX has also made Goldman Sachs' VIP list of most important stocks to hedge funds.

Weitz Funds Commentary

While this perspective on Valeant is from June 30th, it still gives a good background of the story/thesis.

Weitz Funds' Portfolio Manager David Perkins, CFA penned the following note on VRX embedded below:





Ruane, Cunniff & Goldfarb Commentary

The well known manager of the Sequoia Fund holds quite a large position in VRX that has appreciated in value over time.  It initially started as a 6% position and has grown to a 10% position in the main fund.  They were the largest institutional owner of VRX as of the end of Q2.

They addressed their stake during their investor day back in May of this year.  Again, while dated, the comments still outline their rationale for owning shares:

"The reason that we still like Valeant is the reason we liked it in the first place. It is a pharmaceutical company that does not really function like a traditional pharmaceutical company. By that I mean most pharma companies, if you look at how much they spend on research and development might spend 10%, 15% or in the high teens as a percentage of sales on research and development. Last year Valeant did about $2.3 billion in sales and it spent $66 million on R&D, which is about 3% of sales. So instead of spending money on R&D, it spends money acquiring whole companies and/or products and other assets. And what it does is restructure those assets. So we think of it as a value investor in other companies or in the assets of other companies which are available for purchase.

The reason that Valeant can do that is that it has a good team at the top led by Mike Pearson, who has been an extraordinary and very aggressive manager. The types of returns that Valeant can generate by acquiring another company and cutting costs can be in the 15% to 20% range. Just to give you an idea of that, when Valeant merged with Biovail, Biovail was doing a billion dollars in sales, and management cut out — the year-end synergy target this year is $300 million to $350 million. Valeant is eliminating costs that represent 35% of sales. Because of the company’s tax structure, it pays taxes at very low rates. So a lot of that $350 million is going to flow through to the bottom line. You can generate huge returns if you do those kinds of deals. Last year Valeant acquired Ortho Dermatologics, Dermik, Sanitas, PharmaSwiss and a few other companies. In aggregate, these companies added another billion dollars in sales and the synergy target is $250 million. Again, a lot of that is going to fall through to the bottom line. So Valeant is generating really high returns by acquiring other businesses in the pharmaceutical industry.

One of the most attractive things about the company is that it is going to generate $1.3 billion in cash earnings this year and there are not many companies that can retain that amount of money and reinvest it at a rate of return of 15% to 20%, and we could potentially see Valeant doing that for a number of years. You can get a huge amount of growth if you can reinvest that amount of earnings at those rates of return. That is the main reason that we are excited about it."

The Case For Shorting Manchester United (MANU)

Today we present a guest post from Barbarian Capital (follow them on Twitter as well) with the case for shorting English Premier League football club: Manchester United (MANU).  Shares recently IPO'd and were priced at $14, below their expected range of $16-18.  Since then, MANU has drifted down to $12.xx, where it currently trades.

They write:

"Why?
-       Regulator shopping
-       Major corporate governance problems
-       Irrational Competition
-       Very poor track record of publicly traded soccer teams
-       “Peak” Man Utd: success, attendance, media content (+ the General Motors CMO firing over the Chevrolet/Man Utd deal)
-       Substantial “Key Person” risk
-       Credit risk
-       Very high valuation relative to other prominent soccer teams
-       Buried negative news for full FYE 6/2012 in the filing
-       Recent star transfer highlights capex danger; material but not filed with the SEC
-       Dearth of natural buyers

Apparent "Regulator Shopping"

If you found it unusual that one of the most storied teams in the history of soccer would do its IPO in the US, you’re not alone. MANU was rumored to be considering an IPO in Asia (as have a fair number of European luxury brands), and, yet, the deal was done in New York. This is akin to the NY Yankees IPOing in Moscow. The devil (pun intended) is in the details: Manchester United, founded in 1878, was able to qualify as an “emerging growth company” under the new JOBS Act that loosened the compliance requirements for smaller public companies. This is a clear case of regulator shopping and a major red flag, especially considering that the company is very well established and was publicly traded in the UK before the Glazer takeover. It is difficult to see an upside for the individual investor.

Major Corporate Governance Problems

There are a few points here. One is dual-class shares. While the Glazers want you to have all of the downside economic risk, they are keeping the high-vote Class B shares all to themselves. An outside investor cannot win from a dual-class structure, and there are plenty of abuse examples (NY Times, Dillards, Dover Motorsports, etc.) There is a large number of related party transactions, including, but not limited to Manchester United loans to the Glazers, consulting fees to the Glazers and the Glazers also being creditors to the club (they hold a certain percentage of the debt, obviously a conflict). Finally, only half of the IPO money went to the club for debt reduction. The other half was pocketed by the Glazers: if MANU has so much upside, why are they not keeping the shares?

The Competition is Irrational

Let’s spell it out: sports teams are billionaire hobby toys. They are not rationally run businesses: the owners will fund large losses due to expensive player contracts to win. Acquiring marquee players is a hamster wheel, year after year after year. As a shareholder in MANU, you are signing up to compete with the spending powers of Arab oil sheiks (i.e. Manchester City, current champions) or Russian oligarchs (i.e. Chelsea, a top 3 team over the last decade).  Eventually, the enthusiasm runs out but we are not there yet in the major European and US leagues (we’re seeing it on the fringes, like the bankruptcies of the Glasgow Rangers in the Scottish Premiership or the Phoenix Coyotes in the NHL or the LA Dodgers in the MLB). Good businesses spend little on capital expenditures on an ongoing basis, bad businesses spend a lot every year. Unfortunately, players are not warrantied like a machine is. Here’s Manchester United’s spend:

Publicly-Traded Soccer Teams Record

The track record of publicly traded soccer teams is an unmitigated disaster. Here is something from Saxobank analyst Sverrir Sverrirsson.

Most of the teams have had negative IPO-to-now/IPO-to-end return. From the positive teams, two are in the English Premiership, so they rode the big media money wave from the 1990s/2000s when the EPL was getting established.  I don’t know what to say about the Turkish teams (assuming the returns are in constant currency, not nominal Turkish lira returns). The performance of these IPOs is incontrovertible evidence (well, at least for me) that soccer team ownership is a hobby, not a business.

"Peak" Manchester United: Performance, Media Monetization, Sponsorships, Attendance

MANU's revenues are roughly split in 1/3rds: broadcast, commercial/sponsorships/licensing and attendance.  All are close to peak, in my view.

Simply put, MANU is a very successful but already a very heavily monetized brand. Unlike their cross-town rivals Manchester City who just won their first title in 40-50 years or (expected) up-and-comer Paris Saint Germain, MANU is a true dynasty. Here is a look at their performance: ask yourself, can it get any better?

Since MANU does not control the TV contracts (those are handled by the English Premier League for the EPL games and UEFA for the UEFA Championship League; in total, MANU is available for viewing in 210 countries), MANU can control only the “highlights and behind-the-stages” mobile product, ALREADY available in 42 countries. The mobile product has grown nicely, now accounting for GBP 16mm after doubling for two years in a row.  The EPL contract was re-signed in June 2012 (with MANU benefiting) and UEFA is sold country by country, so the danger of a blockbuster contract signing is low). 

“Peak sponsorship” is the other problem. MANU has been aggressively growing the roster of sponsors (i.e. Smirnoff is their Asian “responsible drinking partner”, whatever that is; DHL is a “training kit sponsor”; etc.).  The biggest chunk is the most visible sponsorship, the jersey. MANU’s revenue growth there is impressive:

But there is a MAJOR problem that I have not seen anyone in the mass media mention yet. Chevrolet will be their next jersey sponsor. However, GM’s head of marketing just got fired on the spot (!) over the MANU sponsorship deal, as he apparently tried to hide the true cost of the contract across a few accounts (until a whistleblower reported it). GM is one of the largest, most sophisticated ad buyers in the world, and if they balk at the MANU sponsorship costs, you can bet they are not the only ones.

MANU’s licensed products are already available in 130 countries, and are obviously very dependent on the team’s ongoing “star power”. 

The final revenue stream is gameday attendance and related. The problem there is that attendance for their home games is has been at 99% capacity for the last 15 years. Future ticket increases will only worsen the already tense relationship between the unwelcome ownership group and the team fans. The stadium was expanded in 2006, and any further expansion will be coming from the shareholders’ pockets. The question is not only capacity: MANU already plays close to the maximum number of games at home. The EPL is one of the larger leagues in soccer, and the team usually advances pretty far in all other tournaments (UEFA Champions League, the Carling Cup, etc.).

Key Person Risk 

MANU has exceptional key person risk. Right now, it is probably concentrated in their star strikers (no one pays to see a great defensive tackle) and their longtime coach, Sir Alex Ferguson. Injuries and the coach’s eventual departures will mean either worse results or big spending in the market to attract replacement talent. 

Credit Risk 

MANU carries GBP 360 mm in debt after the IPO proceeds. While not a crazy level of leverage, debt adds risk. The team paid a call premium to retire a portion of it with the IPO proceeds. 

Guidance for FYE 6/30/2012 Is Poor  

Under “Recent Developments” in their filing, MANU discuss a 3-5% revenue drop to GBP 315-320 mm due to fewer home games and lower UEFA TV revenue. EBITDA will be down 16-18% to under GBP 100 mm. Earnings would have been mildly negative, save for a GBP 28 mm tax credit.  So, EV/Revenues is at 5.2x and EV/EBITDA is at 16x. 

Relative Valuation 

MANU’s valuation is very high compared to the two closest publicly traded comparables, Borussia Dortmund in Germany and Juventus in Italy (both major championship brands in major media markets).  BVB.GR EV/Sales is 1.2x and EV/EBITDA is 4.1x, JUVE.IM has negative EBITDA and earnings; EV/Sales is 1.8x.  (Bloomberg data)  So, MANU is at 3-4x the relevant metrics of the comparables.  Should it trade at a premium? Sure. But should it be so high? Probably not. It is easy to see 50% downside from here, just as it easy to see 50% upside on “vapor”, why not?

Recent Transfer of Robin van Persie  

MANU spent GBP 30 mm in September 2008 to sign Tottenham striker Berbatov, who went on to become the top scorer in the league for 2010/11. Berbatov was benched for most of the 2011/12 season, and MANU lost the title to Manchester City on goal difference. MANU just paid GBP 22 mm to Arsenal for the 2011/12 league top scorer, Robin Van Persie. RVP is reportedly personally getting GBP 200k per week (GBP 10.4 mm per year). These are material expenses and material future liabilities that MANU has not (yet) filed with the SEC. You’d think that spending 20% of your EBITDA on a player and then promising him 10% for the year would be material. This situation illustrates a few of the problems highlighted here: constant capex spending on “stars”, high “key person” risks, lack of proper disclosure of material expenses and off-balance sheet liabilities. 

Dearth of Natural Buyers  

Who would own this stock? It is not clear to me who would be a natural, long-term, strong-hand buyer of the stock at these levels. One would have expected that a strong retail fan base would be good (as is the case with the Green Bay Packers “stock” or some of the Spanish teams) but the team IPOed in the US. While currently sizable enough, the non-US domicile and operations of the company, along with its problematic governance and looser financial control requirements, might keep some investors out. The drop in the IPO price to $14 from the initial range of $16-$20, along with Jefferies being lead left underwriter, makes me think that no one came to the party. The high borrow cost and lack of shares to short are also indicative of market pessimism.

Risks

- Irrational valuations can stay irrational for long periods of time
- Low float and high short interest make the stock prone to short squeezes
- One big name, well respected holder thus far (Soros Fund disclosed a stake at the IPO)
- The new Premiership TV contract not properly priced in, leading to a positive "surprise" forward projections
- UEFA Champions League advance (vs. the highly unusual group stage elimination last season) means more home games, thus "lapping easy comps"
- Stock trading on how the team is doing (and they usually do well)
- Stock purchases in the open market by an entity as a prelude to an outright exit by the Glazers

Disclosure: positioned to profit from a decline in the stock; the position can change at any time; information sourced primarily from the Securities Exchange Commission and other sources believe to be accurate; however the information here is presented without warranty for discussion purposes only.


Thanks again to Barbarian Capital for the guest post.  Be sure to follow them on Twitter as well.

With QE3, Some Interesting Facts About Gold

Given that Federal Reserve Chairman Ben "Helicopter Make it Rain Dollar Bills" Bernanke just announced QE3 (quantitative easing) that sent the price of gold higher yesterday, we were sent an interesting infographic with some facts on everyone's favorite precious metal.

For years now, we've highlighted how many prominent hedge fund managers have owned gold in some capacity (either physically, or via proxies like exchange traded funds GLD or IAU).

John Paulson started a gold fund as a bet against the US dollar.  Others bought gold as an uncertainty hedge.  Greenlight Capital's David Einhorn continues to own gold as a top holding.  And Third Point's Dan Loeb continues to own gold as his 2nd largest position.

Here's some notable recent facts about gold:

- Current market value of all gold is $8 trillion

- All available gold is equal to approximately half of the public debt of the USA

- US gold reserves amount to 77% of the national foreign exchange reserves

- China's gold reserves account for only 1.8% of its total reserves

- Annual gold consumption for investment: 1,640 tonnes (about 50 million gold coins)


And here's the infographic:

Source: Trustable Gold

Barron's Discount: 65% Off

Just wanted to pass along to readers that there's currently a Barron's discount for 65% off their print & online combo that includes 4 weeks free and a free iPad app.  You can get the 65% Barron's discount by clicking here.

Peter Lynch on Using Your Edge: Timeless Advice For Investors

A reader sent us an old article from Peter Lynch entitled "Use Your Edge."  If you're unfamiliar, Lynch is a well-known fund manager that ran billions in Fidelity's Magellan Fund for a long time and is also the author of One Up On Wall Street and Beating the Street.  Below we highlight some excerpts from the old article:

Invest In What You Know

Peter Lynch has long preached his old adage of "invest in what you know."  Lynch writes,

"This is where it helps to have identified your personal investor's edge.  What is it that you know a lot about?  Maybe your edge comes from your profession or a hobby.  Maybe it comes just from being a parent.  An entire generation of Americans grew up on Gerber's baby food, and Gerber's stock was a 100-bagger.  If you put your money where your baby's mouth was, you turned $10,000 into $1 million."

Warren Buffett advocates a similar approach in investing in "your circle of competence."


Let Your Winners Run

Lynch then goes on to touch on another old Wall Street Adage: "let your winners run, and cut your losers."  He says that:

"It's easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds.  If you're lucky enough to have one golden egg in your portfolio, it may not matter if you have a couple of rotten ones in there with it.  Let's say you have a portfolio of six stocks.  Two of them are average, two of them are below average, and one is a real loser.  But you also have one stellar performer.  Your Coca-Cola, your Gillette.  A stock that reminds you why you invested in the first place.  In other words, you don't have to be right all the time to do well in stocks.  If you find one great growth company and own it long enough to let the profits run, the gains should more than offset mediocre results from other stocks in your portfolio."


On Growth Stocks

And given the propensity for many investors to focus on growth stocks these days, we thought it worthwhile to share Lynch's thoughts:

"There are two ways investors can fake themselves out of the big returns that come from great growth companies.  The first is waiting to buy the stock when it looks cheap.  Throughout its 27-year rise from a split-adjusted 1.6 cents to $23, Wal-Mart never looked cheap compared with the overall market.  Its price-to-earnings ratio rarely dropped below 20, but Wal-Mart's earnings were growing at 25 to 30 percent a year.  A key point to remember is that a p/e of 20 is not too much to pay for a company that's growing at 25 percent.  Any business that an manage to keep up a 20 to 25 percent growth rate for 20 years will reward shareholders with a massive return even if the stock market overall is lower after 20 years.

The second mistake is underestimating how long a great growth company can keep up the pace.  In the 1970s I got interested in McDonald's.  A chorus of colleagues said golden arches were everywhere and McDonald's had seen its best days.  I checked for myself and found that even in California, where McDonald's originated, there were fewer McDonald's outlets than there were branches of the Bank of America.  McDonald's has been a 50-bagger since."


On When to Exit the Market

Next, we wanted to highlight Lynch's rule for when to exit stocks.  He says that,

"The only time I took a big position in bonds was in 1982, when inflation was running at double digits and long-term U.S. Treasurys were yielding 13 to 14 percent.  I didn't buy bonds for defensive purposes.  I bought them because 13 to 14 percent was a better return than the 10 to 11 percent stocks have returned historically.

I have since followed this rule: When yields on long-term government bonds exceed the dividend yield on the S&P 500 by 6 percent or more, sell stocks and buy bonds."

Applying his rule to the current market, we see that long-term (20 year) Treasuries currently yield around 2.52%.  The S&P, on the other hand, currently yields around 1.9%, so Lynch would advocate staying in stocks. 


Advice For Investing $1 Million

Lynch says to find your edge and put the money to work via the following rules:

- Know the reason you bought the stock
- Pay attention to facts, not forecasts
- Look for a risk-reward ratio of 3:1 or better (know how much you can lose)
- Be patient
- Enter early (investing in growth companies in the 3rd inning)
- Buy cheap stocks not because they're just cheap, but because fundamentals improve


 For more wisdom from the former Magellan Fund manager, check out his books: One Up On Wall Street and Beating the Street.

Scout Capital on Anheuser-Busch InBev (BUD): Q2 Letter Excerpt

Adam Weiss and James Crichton co-founded Scout Capital in 1999 and now manage around $4 billion.  In their second quarter letter to investors, they touched on their new stake in Anheuser-Busch InBev (BUD) that they initiated in the first quarter.

They purchased shares thinking that domestic (US) beer demand was coming back and that the company would turn from paying down debt to share repurchases or dividends.  Scout also felt BUD was cheap at a 7.5% free cash flow yield which was trading at a discount to other consumer franchises.

Their thesis centered on the discount stemming from two disconnects: 1. fundamentals of the industry and 2. capital allocation.

1. On fundamentals, they felt that the Street was "confusing cyclical effects for secular ones" as many investors had modeled the negative trend of beer volume into the future.  Scout went the other way and assumed better employment would help US volumes.

2. On capital allocation, Scout's analysis pointed to Anheuser-Busch InBev being likely to allocate cashflow in a different direction than simply paying low coupon debt in order to keep its investment grade rating.  The hedge fund thought BUD could buyback 7-9% of its shares per year, something that wasn't being priced in.

However, Scout also noted that the company's management is very smart with allocating capital as BUD instead chose to purchase Mexican brewer Grupo Modelo for $20 billion just before the end of the second quarter.

Scout writes,

"Factoring in expected costs savings, we believe the acquisition adds 10%-15% to ABInBev’s 2013 EPS on a full-year, pro forma basis. This doesn’t account for the tremendous international growth opportunity for Modelo’s flagship Corona brand as part of ABInBev’s global distribution network, which we estimate could contribute an additional 2%-4% earnings accretion. While the stock rose 10% on the news of the Modelo deal, our earnings estimates increased even more, and we believe BUD valuation is still too cheap relative to the growth and quality. The current free cash flow yield of 7.5% continues to represent a 20% discount to global consumer staples stocks with similar growth."

As if Anheuser-Busch InBev wasn't already in a dominant position in the beer market, this acquisition further entrenched their status.

Weiss and Crichton then concluded that,

 "With the benefit of an improving U.S. beer market, upside to the cost and revenue synergies from the Modelo acquisition, and redeployment of excess cash flow toward buybacks, we believe ABInBev can compound free cash flow per share at around 15% for the next few years and generate total shareholder returns in the high teens, before any multiple improvement. On our 2014 free cash flow per share estimate of $6.50 and a peer-like cash flow yield of 6%, our two-year price target is $110 or 40% upside (including dividends) from the current level. BUD remains a core position."

Per their most recent 13F filed with the SEC, Scout disclosed over a $365 million position in BUD as of June 30th.  At that time, it was their largest disclosed US equity long.  This isn't the first time we've seen a hedgie's pitch on the brewer as Whitney Tilson's T2 Partners also made a presentation on BUD a few years ago.

For more hedge fund Q2 letters, this week we've also posted up:

- Eminence Capital bullish on Google

- Why Bill Ackman sold Citigroup

Howard Marks' Latest Memo: On Uncertain Ground

Memos from Oaktree Capital's Howard Marks have gained somewhat of a cult following and rightly so.  The investment manager often delivers pearls of wisdom to the investing masses and Warren Buffett has said that Marks' missives are some of his favorite reads.  Oaktree's leading man is out with his latest memo entitled "On Uncertain Ground."

And with that title comes a harrowing line where Marks writes, "The world seems more uncertain than at any other time in my life."  Such a warning can be quite ominous when you consider the history that Marks himself has seen over his lifetime.

Yet he rattles off a list of his current concerns, including:

- Europe
- US fiscal situation
- Concern over counting on further stimulus
- Low interest rates
- Outlook for China

Despite such warnings, Marks also intertwines some advice that many investors often forget: "in the investing world, doing nothing is doing something."  Indeed, many great managers have attributed their great gains to simply having patience and doing nothing.

At the end of his piece, Oaktree's founder concludes that "Move forward, but with caution" is his investing mantra in the present day.

Embedded below is Howard Marks' latest memo: "On Uncertain Ground" where he opines on expectations, value, sentiment, and more:




You can download a .pdf here.

For more from this manager, we recently highlighted Marks' current favorite idea & investment strategy.

What We're Reading ~ 9/12/12

A broader definition of alpha [Abnormal Returns]

Notes from John Paulson's investor call [Reformed Broker]

Carl Icahn threatens Navistar board with proxy fight [Value Walk]

Tragedy of European Union & how to resolve it [George Soros]

Investment manager common missteps when meeting potential investors [HedgeWorld]

GMO: Death of equities greatly exaggerated [Guru Investor]

Hedge funds cleared to advertise under SEC proposal [BusinessWeek]

9 great quotes from George Soros [Ivanhoff Capital]

A defense of the hedge fund industry. Really. [CSMonitor]

Maverick Capital strategist Galbraith announces exit [FINalternatives]

Treasury cuts AIG stake below 50% [Dealbook]

The well known story of municipal bond defaults [Self Evident] 

Hedge funds are betting on disaster [CNNMoney]

Tiburon Research's report on retail sales [Retail Geeks]

Julian Robertson once offered Mitt Romney a job at Tiger [NYTimes]

Funny photo: Ben Bernanke as a child

JANA Partners Dumps Barnes & Noble Stake

Barry Rosenstein's hedge fund JANA Partners has completely exited its position in Barnes & Noble (BKS).  Per an amended 13G filed with the SEC this morning, JANA now shows a 0% stake due to trading on August 31st.

JANA originally took an 11.6% stake in Barnes & Noble back in April of this year and shares spiked 18% on the news at the time as investors hoped the activist firm would save the struggling bookseller.  We also posted up their JANA's thesis on BKS.

The value here is in the company's Nook e-reader platform and that's what JANA's thesis centered on.  John Malone's Liberty Media had also made a past investment in the company.  Then shares spiked as high as $26 on news of a BKS strategic partnership with Microsoft.

Since then, shares have continually drifted down and now trade at less than half that recent peak at $11.xx.  Back in April, JANA owned 7 million shares.  In their most recent 13F filing which disclosed positions as of June 30th, they only owned 4.1 million shares.  And now they've disclosed that they own 0 shares.

Perhaps JANA exited to focus on their new activist position in Agrium (AGU).  After all, Rosenstein in May said this is the best environment for activist investing he's seen.

Or maybe JANA saw a more compelling use of the capital than BKS and decided to shift it there.  Rosenstein will be presenting investment ideas at the Value Investing Congress in just over two weeks in New York City so we'll see what he pitches.  You can register to hear Rosenstein's ideas (along with David Einhorn, Bill Ackman & more) via this link.

Bruce Berkowitz's MBIA Investment Thesis: Case Study

Yesterday, we posted up Bruce Berkowitz and Fairholme Capital's investment thesis on Sears.  Today, we're presenting another case study from the money manager: their thesis on shares of MBIA (MBI).

In his fourth case study, Berkowitz looks at numerous catalysts for the insurance company:

Catalyst #1: National Public Finance Guarantee Corporation: A stand alone subsidiary of MBIA.  Judicial confirmation of MBIA's transformation could lead to an increase in credit ratings > lower expenses > capital raise > new municipal business.

Catalyst #2: De-risking: Continual reduction in structured finance exposures, declining claim payments on second-lien RMBS

Catalyst #3: Reimbursement for claims paid: Fairholme expects MBIA to recover at least half of the gross claims paid to date in a 2012 settlement or all in a 2013 trial.


Berkowitz then argues that market price of the stock is not equal to intrinsic value, highlighting the company's contingency reserves, owner's equity, run-off earnings, and positive trends.

Embedded below is Berkowitz's investment thesis on MBIA via his case study:





If you missed his other case studies, also check out:

- Berkowitz's thesis on Sears (SHLD)

- Fairholme's investment thesis on AIG

- Berkowitz's case on Bank of America (BAC)

Eminence Capital Bullish on Google: Q2 Letter Excerpt

Ricky Sandler's Eminence Capital is having a good year as they finished the second quarter up 0.1% net and year-to-date at that time were up 14.8% net.  This beats the S&P which returned 9.5% over the same period.  In his second quarter letter to investors, Sandler explains why he likes Google (GOOG).

The search engine giant is currently their largest long position at 10% of equity, but they also own out of the money call options so adding in this delta-adjusted exposure gives them a 15% position.

The Q1 issue of our Hedge Fund Wisdom newsletter back in May (get it for free here) highlighted that GOOG was a consensus buy among hedge funds in the first quarter as shares dipped from $660 down to $565.  After trading down/sideways in the second quarter, GOOG has ripped to new 52-week highs of $695 in the current quarter.


Why Eminence Likes Google

Sandler calls GOOG "one of the most compelling investment ideas we have ever seen" as he believes fundamentals will accelerate (though he also notes he's expecting near-term outperformance in the letter dated August 13th.  Since then, GOOG is up just over 8%).

He points to the company's large moat in internet search as very attractive and also highlights the company's Adwords product as compelling as it provides a high return on investment for their customers.

The Eminence founder goes on to write,

"Despite its maturity, Google is still growing revenue at 25% per year in large part due to continued improvements Google is making to the product and the ongoing secular shift of advertising from offline to online.

In addition, Google has underappreciated new advertising platforms in mobile, display and video that are approximately 10% of net revenue and are growing at 100% annually. We expect these tailwinds to help the company continue its revenue growth at very high levels and to become increasingly visible to investors. In total, Google trades 10-11x our estimate of economic earnings for 2013 (ex-cash and after stock compensation expense), a staggeringly cheap multiple for a company that is growing as quickly and is as well positioned for the future as Google."


For excerpts from other Q2 hedge fund letters, we've also posted up why Bill Ackman sold Citigroup.

Bruce Berkowitz's Investment Thesis on Sears: Case Study

Fairholme Capital's Bruce Berkowitz has released numerous case studies about his investments in the past and one of his latest features his investment thesis on his second largest position: Sears Holdings (SHLD).

In the past, we've also posted up Berkowitz's thesis on AIG (his largest position) as well as Fairholme's thesis on Bank of America.  His latest case study on Sears showcases the key pieces to the investment, including:

- Real Estate: vast property portfolio carried at low cost

- Operations: increasing cash flows through greater efficiencies and cost reductions

- Top Brands: revenue beyond Sears and Kmart

- Leadership: new team with proven success

- Liquidity: ample to meet all liabilities and opportunities

- Catalysts: changing winds


Fairholme's mantra is "ignore the crowd" and this investment certainly fits the bill.  Sears has been one of the more shorted names among hedge funds (who have piled on as the retailer struggles).  They simply wager that a turnaround is farfetched.

Berkowitz takes the other side of the trade and sides with Eddie Lampert, chairman of Sears (and a value hedge fund manager himself: ESL Investors/RBS Partners).  This presentation is intriguing mainly because it provides both a variant view for the short sellers and a long case for value investors.

Embedded below is Bruce Berkowitz's investment thesis on Sears via his case study:

For more from this investor, head to Berkowitz's checklist for investing.