Friday, October 5, 2012

Kyle Bass on Europe & How He's Investing Now: Interview

Continuing coverage of hedge fund appearances from the Barefoot Economic Summit, we also wanted to highlight Kyle Bass' interview on CNBC.  The Hayman Capital founder touched on Europe and how he's positioning his portfolio.

Bass noted that global money printing has made it a difficult investing environment.And regarding Europe, he says that:  "You will still see the European dominoes fall, I don't think there's any way around it."

Bass then elaborated that:

"The world sits in a place where it hasn't ever been before.  It's the largest peace-time accumulation of debt in world history ... The reason it's so difficult for us to understand what the playbook looks like going forward: we've never been here before."

Bass Long RMBS

As to how you invest given this worldwide mess, Bass says: "in our portfolio we have more than half our portfolio invested in subprime and Alt-A bonds." 

He thinks housing is going to flatten out (not going up anytime in the near future, but not going down either).  He feels you still have to flush out the shadow inventory (which he argues is still high).

As to how else he's positioned his portfolio:

"In our portfolio, we actually own what we call event-driven situations in either credit or equity and the way that we hedge our kind of the corpus of our portfolio is - the Black Scholes model of options pricing dramatically misprices optionality at secular turning points.  So there is enormous convexity in various areas of the world and we can spend just a small amount of capital and have enormous convex positions.  And I believe all the convexity in the world is in Japan."

On Investing "Not To Lose Money"

If you're approaching investing with the mentality of simply not losing money, Bass argues you need to own producing assets, something that's "nailed down."  He cited apartments, oil wells, and gas wells as examples.

When prodded about gold, Bass said he simply views it as a surrogate currency and doesn't think the gold standard will return anytime soon.  He still thinks you should own it among all the other currencies, but he doesn't know what percentage allocation is appropriate.

Embedded below is the video of Bass' interview:

Earlier today we posted John Burbank's interview from the same summit where the Passport Capital founder said he was negative on the US economy.

John Burbank Says Go Long High Quality Stocks, Short Speculative Ones: Interview

Passport Capital founder John Burbank appeared on CNBC and gave his thoughts in an interview with David Faber from the Barefoot Economic Summit.  Burbank basically said that while he has a negative view on the economy, his trade is essentially to go long high quality stocks and short speculative companies.

Burbank believes there's essentially a 'lack of growth' not yet reflected in equity prices.  He doesn't think all parts of the US are in a recession yet, but we're "very close."  We've covered how Passport had been net short with their negative viewpoint.

He thinks that everyone buying dividend stocks and yield chasing has created a new dynamic.  Burbank said:

"My view is that after '08, all that government spending and central bank liquidity tried to push things back together and push everything up higher and for '09, 2010, and 2011, everything traded together.  Last year things started separating. 

You see the separation now and a recognition that we're not going to have the growth that we thought.  I call it the 'great separation.'  I think what's happening is that the really high quality, well managed, well governed dividend paying companies are going to be treated as an asset class that's priced off of these other available yield instruments.  While speculative companies, things that really need the economy to do well, things that aren't that well managed, that don't pay dividends etc, are going to stay poor.

I basically would be long high quality, leading companies which generally in the United States and then short speculative companies that rise into Fed announcements but then fall away."

Embedded below is the video from John Burbank's interview:

For more on this investor, we've also highlighted Passport's thesis on Saudi equities.

Bill Ackman on GGP, Procter & Gamble, and His Mystery Short: Interview

Pershing Square Capital Management founder Bill Ackman recently appeared on CNBC Squawk Box to talk about his positions in General Growth Properties (GGP), Procter & Gamble (PG) and dropped a hint about his newest short position.

General Growth Properties (GGP)

Ackman again talked about how Brookfield Asset Management (BAM) is trying to slowly takeover GGP without paying a premium.  Ackman is pushing for Simon Property Group (SPG) to buy GGP.  A background on the situation is provided in Ackman's letter to GGP.  And then an in-depth look at his proposal was posted in Bill Ackman's presentation from the Value Investing Congress if you missed it.

Procter & Gamble (PG)

Of his newest investment, Ackman says there's not a culture of efficiency.  He argues the company's fat and bloated.  The company has a solid board of directors and he's already met with them and will look to see what they can do about helping improve things.

Ackman's Newest Short

We highlighted at the Value Investing Congress how Ackman teased the crowd that he had a new short position but did not reveal it.  He gave a hint in this interview, saying: "it's a good for America short ... as soon as the company goes out of business, the country will be better off."

Embedded below is Bill Ackman's interview video:

For more from this investor, check out Bill Ackman's recommended reading list.

Thursday, October 4, 2012

What We're Reading ~ 10/4/12

The Value Investors: Lessons from the World's Top Fund Managers [Ronald Chan]

The world's biggest hedge fund you have never heard of [Zero Hedge]

Investors are safer when they think for themselves [Value Perspective]

Ex-Maverick Cap partner Steve Galbraith preps major launch [AR+Alpha]

Wanting to hedge and wondering how [All About Alpha]

The coming dividend tax hike [World Beta]

Why John Paulson's hedge fund is still in business [ValueWalk]

Contango Oil & Gas: opportunity for natural gas bulls [RationalWalk]

Activist investors: do they really help? [InvestorPlace]

What if Google had a hedge fund? [Harvard Business Review]

What QE3 means for your portfolio [MicroFundy]

An inside look at JCP's new retail strategy part 1 & part 2 [Peridot Capitalist]

Amid soft returns, hedge funds return to roots [WSJ]

Chase Coleman's Tiger Global up 22% this year [Reuters]

Insurers and the interest rate challenge [SwissRe]

Investors are still yield hunting [Reuters]

Walter Schloss' 16 Factors Needed to Make Money in the Stock Market

Today we present rules of investing from Walter Schloss, founder of Walter & Edwin Schloss Associates LP.  He was one of the best investors of our time with over 15% CAGR between 1956 and 2000 and unfortunately passed away early this year.

In an old document dated March 10, 1994, Schloss outlined the following principles for becoming better investors

16 Factors Needed to Make Money in the Stock Market

1.  "Price is the most important factor to use in relation to value."  

Warren Buffett's famous quote is the perfect complement: "price is what you pay, value is what you get."

2. "Try to establish the value of the company.  Remember that a share of stock represents a part of a business and is not just a piece of paper." 

Indeed, Warren Buffett has long preached this principle as it's important to set your frame of mind and how you look at things.

3. "Use book value as a starting point to try and establish the value of the enterprise.  Be sure that debt does not equal 100% of the equity. (Capital and surplus for the common stock)."

4. "Have patience.  Stocks don't go up immediately." 

Value investors everywhere live by this adage but many prominent long/short hedge funds also focus on the concept of 'time arbitrage': waiting for the market to come to the same realization you have regarding the valuation/opportunity of a specific security.

5. "Don't buy on tips or for a quick move.  Let the professionals do that, if they can.  Don't sell on bad news."

Modern hedgies might argue against that last sentence because sometimes bad news is a warning sign of more impending problems at a company.  At the very least, bad news usually merits further due diligence. 

Leon Cooperman of Omega Advisors takes this concept one step further by outlining his rules for portfolio managers: if you have conviction in a name and it's down, buy more.

6.  "Don't be afraid to be a loner but be sure that you are correct in your judgment.  You can't be 100% certain but try to look for weaknesses in your thinking.  Buy on a scale and sell on a scale up."

The key in this rule is to look for weaknesses in your thinking.  As Warren Buffett's partner Charlie Munger says, "invert, always invert."  Examine the variant perception and the bear case if you're long a company.  The best investors focus on the downside even more-so than the upside.

7. "Have the courage of your convictions once you have made a decision."

A very important and often under-mentioned aspect of investing.

8. "Have a philosophy of investment and try to follow it.  The above is a way that I've found successful."

Warren Buffett obviously says to "stick to your circle of competence" and Peter Lynch says to "invest in what you know" in his golden rules of investing.

9. "Don't be in too much of a hurry to sell.  If the stock reaches a price that you think is a fair one, then you can sell but often because a stock goes up say 50%, people say sell it and button up your profit.  Before selling try to reevaluate the company again and see where the stock sells in relation to its book value.  Be aware of the level of the stock market.  Are yields low and P-E ratios high.  If the stock market historically high.  Are people very optimistic etc?"

10. "When buying a stock, I find it helpful to buy near the low of the past few years.  A stock may go as high as 125 and then decline to 60 and you think it attractive.  3 years before the stock sold at 20 which shows that there is some vulnerability in it."

11.  "Try to buy assets at a discount than to buy earnings.  Earnings can change dramatically in a short time.  Usually assets change slowly.  One has to know how much more about a company if one buys earnings."

12.  "Listens to suggestions from people you respect.  This doesn't mean you have to accept them.  Remember it's your money and generally it is harder to keep money than to make it.  Once you lose a lot of money it is hard to make it back."

This is what strives to provide on a daily basis.  There are many great investors out there, so why not at least see what they're up to and use it as a starting point to do further research?

13. "Try not to let your emotions affect your judgment.  Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks."

Surprised this rule isn't higher up on his list, but then again he was a patient value investor so this probably wasn't a problem for him.  This was our top answer for advice for new investors.

14.  "Remember the word compounding.  For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 yrs, taxes excluded.  Remember the rule of 72.  Your rate of return into 72 will tell you the number of years to double your money."

15. "Prefer stocks over bonds.  Bonds will limit your gains and inflation will reduce your purchasing power."

16.  Be careful of leverage.  It can go against you."

Example: see the financial crisis of 2008 as the perfect example: Look at where Lehman Brothers' 31:1 leverage landed them.

For those of you who want a copy of Schloss' original document from 1994, it's embedded below:

For more wisdom on becoming a better investor, see these great resources we've compiled:

- Top 25 Warren Buffett quotes

- Peter Lynch's golden rules of investing

- Leon Cooperman's 14 attributes that make a good portfolio manager

- George Soros' best investment advice

- Lessons Dan Loeb learned as an investor

- Bruce Berkowitz's checklist for investing

- Peter Lynch on using your edge

Wednesday, October 3, 2012

Dan Loeb's Third Point Q3 Letter on AIG, Greek Government Bonds, Murphy Oil

Dan Loeb's hedge fund firm Third Point released its Q3 letter to investors today and in it they talk about how they've increased positions in high conviction ideas.

Third Point writes,

"Following an analysis of our performance for the past several years, we have both reduced our overall number of positions and increased the concentration of capital invested in our 'best ideas.'"

Long Greek Government Bonds

Loeb's firm, showing its street cred, quotes rapper Tupac Shakur in regards to their new position in Greek Government bonds which we posted about earlier today: "I'm tryin' to make a dolla outta fifteen cents."

Long Murphy Oil

Third Point originally bought in the second quarter and recently filed for approval to increase their position ("should we so desire").  The hedge fund looks for Murphy to take four steps to improve things:

1. Spin-off its retail business
2. Sell its Canadian Natural Gas assets
3. Sell its 5% stake in the Syncrude Oil Sands project
4. Complete UK refining business exit

Long AIG

Loeb originally purchased shares in March of this year as the government sold down its stake in the company.  As detailed in Third Point's most recent exposure report, AIG is their 2nd largest holding.

While they originally bought it under a 'forced selling' thesis, they quickly realized that the investment was actually a post-reorg equity with upside.  Third Point continued to buy AIG in the Treasury's offerings as well as in the open market.

Embedded below is Third Point's Q3 letter detailing their investment thesis on the above positions:

To learn more about this investor, Dan Loeb is profiled in the book: The Alpha Masters.

Notes From Value Investing Congress 2012 Day 2: Einhorn, Ubben, Roepers & More

Day two notes from the Value Investing Congress 2012 in New York are now posted.  We've also added slideshow presentations from the hedge fund managers that were available.  Click the links below to view:

Day 2

David Einhorn (Greenlight Capital) - Short Chipotle & GMCR, Long General Motors & Cigna

Jeff Ubben (ValueAct Capital) - His favorite investment ideas

Alex Roepers (Atlantic Investment Management) - His 5 stock picks

Bob Robotti (Robotti & Co) - On building an investment thesis

Lloyd Khaner (Khaner Capital) - Presentation on turnaround investing

Glenn Tongue (Deerhaven Capital) - Presentation on AIG & Iridium

Contest Winner -Ryan Fusaro presentation on Jack in the Box

Day 1:  If you missed it, here are links to notes from the first day as well (featuring presentations from Bill Ackman, Barry Rosenstein & more)

*** P.S.: Head's up for readers: They're offering a 50% discount to the next Value Investing Congress in May in Las Vegas.  The sale ends tonight (Wednesday).  Click here to register and use discount code: S13MF.  This is the absolute lowest price you'll see.

Dan Loeb's Third Point Discloses Greek Government Bonds & Murphy Oil Stakes

Dan Loeb's Third Point Offshore Fund was up 3.4% in September and is now up 10.9% year-to-date for 2012.  The fund manages $4.7 billion and has seen 17.2% annualized returns.  Takeaways from their latest exposure report are below, including newly disclosed stakes in Greek Government Bonds and Murphy Oil (MUR):

Top Positions As of End of September

1. Yahoo! (YHOO)
2. American International Group (AIG)
3. Gold
4. Apple (AAPL)
4. Murphy Oil (MUR)
4. Greek Government Bonds (GGB)

The last three positions are all noted by Third Point as "positions of approximately equal size."

The main takeaway in this month's exposure report is that Third Point has disclosed a position in Greek Government Bonds.  In the past, we had highlighted how Third Point owned Portuguese bonds.

The hedge fund also revealed a stake in Murphy Oil (MUR). While this is the first time it has been listed on the exposure report, Third Point also filed an amended 13F with the SEC yesterday disclosing that they actually owned MUR in the second quarter.  So this isn't a stake they just went out and bought new in September and that's worth drawing attention to given that MUR has spiked from a low of $44 at the end of Q2 up to almost $56 currently.

AIG is now their 2nd largest holding.  They originally bought AIG in the second quarter, ratcheted up their stake in August, and it appears to have increased (or appreciated over other holdings) in September.  The government has been selling down their stake and institutional buyers have been gobbling shares up.

Net Exposure Levels

In equities, Third Point is now 41.7% net long (73.6% long and -31.9% short), up from 35% net long the month prior.  The hedge fund has slowly and steadily increased net long exposure since the summer sell-off.

In credit, Loeb's firm is net long 30.4%, largely unchanged from months prior.

Geographically, Third Point is net long the Americas at 79% (up from 75%).  The most evident change is they've gone from net short -7% EMEA to net long EMEA 2% over the past two months.  They've also slightly reduced their net short exposure to Asia, going from -10% to -8%.

For more from this hedge fund, check out Third Point's Q2 letter.  Loeb is also featured in the new book from this year: The Alpha Masters, which we recommend reading.

Tuesday, October 2, 2012

Value Investing Congress Notes & Presentations 2012: Ackman, Einhorn, Rosenstein & More

Today and tomorrow we'll be posting up extensive notes from the Value Investing Congress 2012 in New York. 

*** Update: All notes are now online as well as each hedge fund manager's slideshow presentations where applicable.  Click the links below to view:

Day 1

Bill Ackman (Pershing Square) - His presentation on 3 of his holdings

Barry Rosenstein (JANA Partners) - Presentation on his current activist idea

Guy Gottfried (Rational Investment Group) - Two small cap bargains

Mick McGuire (Marcato Capital Management) - 3 ideas with hidden value

Whitney Tilson (T2 Partners) - His 3 favorite stocks right now

Kian Ghazi (Hawkshawk Capital) - Quenching thirst for value

Zack Buckley (Buckley Capital) - His latest short

John Mauldin (Millennium Wave) - Finding value in an upside down world

Day 2

David Einhorn (Greenlight Capital) - Short Chipotle & GMCR, Long General Motors & Cigna

Jeff Ubben (ValueAct Capital) - His favorite investment ideas

Alex Roepers (Atlantic Investment Management) - His 5 stock picks

Bob Robotti (Robotti & Co) - On building an investment thesis

Lloyd Khaner (Khaner Capital) - Presentation on turnaround investing

Glenn Tongue (Deerhaven Capital) - Presentation on AIG & Iridium

Contest Winner -Ryan Fusaro presentation on Jack in the Box

*** P.S.: Head's up for readers: They're offering a 50% discount to the next Value Investing Congress in May in Las Vegas.  The sale ends tomorrow (Wednesday) night.  Click here to register and use discount code: S13MF.  This is the absolute lowest price you'll see.

David Einhorn's Presentation on General Motors, Cigna, Chipotle & GMCR: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of David Einhorn of Greenlight Capital.  His talk was entitled 'Kicking the Tires' where he covered a range of topics, but mainly pitched General Motors (GM) and Cigna (CI) as longs and Chipotle (CMG) as a short.

"Do your homework and kick the tires." It's not the answers that make you good in this business, it's the questions you ask. Talked about how Green Mountain Coffee Roasters (GMCR) was down 6% as he spoke during his presentation last year, but the point is it dropped right away, before people listened to the slides.  So he says you must do your own work.

Einhorn also mentions Herbalife (HLF), talks about him asking questions on the conference call. Because he said people were worried about the quarter.  Says he was quite surprised by the reaction.  Caris actually downgraded the stock based on the probability he was short. 

He mocks investors for not doing the work, but just trying to blindly follow him.    DO YOUR OWN WORK!  This is something we try to emphasize on MarketFolly.  Tracking hedge funds is a great way to find ideas, but only use it as a starting point.  Due diligence is key.

Einhorn's 4 Ideas This Year

1.  Long General Motors (GM): Remains an "ugly duckling" due to long investor memories, government ownership overhang and weak Europe division.

Bull case: Fixed cost structure improved. Pension risks overblown, unfunded liability may have narrowed by several billion, rising interest rates would help, too.  No required pension contributions until at least 2019.  Balance sheet cleaned up, brand quality improving across the board, improving pricing. $23.09, $42B, cash is 3/4 of the market cap.  $70B in tax shields; no taxes in US for a decade. EV is actually only $6B when you take these things out. $6.6B in EBIT this year, P/E depressed due to cash hoard earning nothing.  Consensus is too low, SAAR may be higher than street.

GM is #1 in China and growing faster than industry.  Europe is a problem and should restructure to at least break even by 2015. Government stake is an opportunity, not an overhang. US demand is 16M units:  Scrap is 13.2M units/year in a normal year. Ave age is now 11 years, up from 9 a decade ago.  5.5% scrap rate implies 19 year average life. Population growth alone is 2M units of annual demand. Recessions cause less vehicles per driver, but it rebounds as economy does.  This is 500k units/year. His SAAR is 16M units, not peak, but midcycle. Implies 315k incremental units for GM, $1.00 per share eps. 60% of units new in 2013/14 vs. 23% in the last 2 years. 2013 Cadillac ATS- "Esquire Car of the Year"

Does not believe European losses will persist indefinitely. $42B market cap, $32B cash, and $6B revolver.  So $38B total liquidity.  What should it do with its cash?  Government has 50M shares.  Repurchase of these is accretive, even at $30 per share, costs $15B.  $53 is break-even, so no sale will occur before election.  If Obama is re-elected, he may be willing to sell at a loss. Otherwise, they could still do a large open market buyback instead. 2014 "taxed" earnings could be $6 in 2014, $8 cash earnings.  This is midcycle, not peak result, so deserves a better multiple.

2.  Long Cigna (CI):  Lots of work. Have to understand HMOs, then Obamacare, then how it influences CI.  Then you have to understand their non-HMO businesses. Investors don't like HMOs now.  Earnings are hard to predict from Q to Q.  Obamacare scares investors.

Scary things: Humana (HUM), Wellpoint (WLP), Healthnet (HNET) all missed this year.  Obamacare: capped profits, risk of financial penalties 

Bull case: Secular growth, high barriers to entry, big players have scale already.  Still, ROE has been strong over time. CI is the best performer in the group.

Things that won't affect HMOs: Greek debt, Europe, China slowing, etc. They reprice annually so they always make money.  Obamacare is just "a homework problem" that can be analyzed. Also has Group Disability/Life and International business. 82% is non-risk bearing ASO business.  PBM is a potential high multiple sale GDL segment is consistent source of earnings despite weak employment trends. International is for multinational corporations' employees living overseas.

Trades at 7.7x 2013E, at a discount to sector which is cheap already.  You can see further comments from Einhorn on Cigna in Greenlight's Q2 letter.

3.  Short Chipotle (CMG):  Trades at 35x, nosebleed valuation. Average sector multiple is 22x. Compares to PF Chang, Boston Market.

Restaurant business:  low barriers to entry, Obamacare brings additional costs since they don't currently provide health care for employees, summer drought affects costs in coming periods.

The biggest near-term challenge: A resurgent Taco Bell (part of Yum Brands ~ YUM).  Most analysts think Taco Bell is low-end quick service restaurant, and CMG competes with higher end Panera.

He did a survey of CMG customers, and they actually visit Taco Bell almost as much.  Taco Bell SSS up 12% last year, while CMG missed. Taco Bell has more locations and cheaper menus. Taco Bell has decided to compete directly with CMG with their "Cantina Bell" menu which is almost exactly the same, but with 35% lower prices. 2/3 of CMG customers that tried Cantina Bell thought it was good; almost 1/2 liked it as much or more. Makes sense, Taco Bell has more money, locations, and can just add the Cantina Bell menu items to blunt CMG competition. Lots of insider selling as well.

4.  Short Green Mountain Coffee Roasters (GMCR):  He believes there is still accounting fraud. CEO said they had an investigation, but only took 23 days. Cites the SBUX "Verismo" system. Agreement for K-cups with SBUX is vague- how long?  CAPEX/sales is very high, 9-11-13% of sales, vs. industry average of 3.3% He also says a price war is coming, and GMCR generated no FCF during it's years as a monopolist.  Thinks the stock has further downside.  You can view Einhorn's presentation on GMCR from last year if you haven't seen it.

Question & Answer Session:

Does he like Yum Brands (YUM)?  Likes Taco Bell, but KFC in China may hurt too much. Not long.

Future price for CMG?  He says "we don't have to worry about that, we just think risk-reward favors the downside." GM, is government stake affecting sales?  He says they will sell sooner rather than later, and they are a passive role.  Chevy Volt obviously not going well and it's a tiny part of GM's business.

Anything on Moody's (MCO)?  Still thinks it’s a short, lawsuits are very persistent.

What about Apple (AAPL)?  His opinion unchanged

He's short steel, which he says is a hedge in a way, and lower steel prices are good for autos.

On Cigna (CI)?  "Less than 1% of the business is individuals"

Comments on St. Joe (JOE)?  Says they finally had a conference call, sales are zero, says you should listen to it.  Management, other than CFO, were too busy to take questions.

Embedded below is Einhorn's slideshow presentation from the Value Investing Congress: 

(.PDF coming soon)

Check out the rest of the hedge fund presentations from the Value Investing Congress.

Jeff Ubben's Favorite Investment Ideas: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of Jeff Ubben of ValueAct Capital, which manages around $8.5 billion.  His presentation was entitled 'Avoiding Complexity and VAC Circle of Life.'

Ubben's Stock Ideas

CB Richard Ellis (CBG):  Dominant market share, 50% recurring revenue, does real estate leasing.  Ubben pointed out that outsourcing is in the first innings and that the company is one of only 2 that can scale it.

Moody's (MCO):  He doesn't like traditional financials, hard to value assets, or retailers.  Yet he likes MCO.  Says high moat and limited competition, pricing power.  55% recurring revenue and a big M&A cycle coming.  Then he showed slides from the company's pitch book (Einhorn disparaged MCO earlier in the day).  Ubben said MCO is "schmuck insurance" and at the end of the day their ratings are a currency.  We previously detailed when Ubben went activist on MCO back in 2011.

Valiant Pharmaceuticals (VRX):  A branded generics play.  We recently posted up why Ruane Cunniff & Weitz Funds like VRX.

Motorola Solutions (MSI):  This is his biggest position.  He says the big thing here is to drive the payout ratio.  It's going slow and steady but he thinks there's an opportunity for them to actively help the company. 

Other stocks he mentioned:

Adobe (ADBE)

CR Bard (BCR)

Sara Lee

Halliburton (HAL)

Learning From His Mistakes:

1. Valuation.  Just math, require 10% per year.
2. Leverage.  Make sure it's appropriate for the cyclicality of the business.
3. Bad Governance.  Don't go looking for a problem to fix.
4. Complexity.  Need easily identifiable drivers.  Simpler, the better.

For more from this hedge fund manager, we've posted up Ubben on activist value investing.

Embedded below is Ubben's slideshow presentation from the Value Investing Congress: 

Check out the rest of the hedge fund presentations from the Value Investing Congress.

Ryan Fusaro's Presentation on Jack in the Box: Value Investing Contest Winner

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of Ryan Fusaro, who won the VIC contest and a spot to present his idea.  He presented a long of Jack in the Box (JACK).

The Value Investing Challenge Contest gave investors an opportunity compete with their ideas.  There were three finalists:

- Matthew Kirk (Lonestar Capital Management): Long Cincinnati Bell (CBB)
- Steven Wood (GreenWood Investors): Long Fiat (F.MI)
- Ryan Fusaro (Lioneye Capital Management): Long Jack in the Box (JACK)

Long Jack in the Box (JACK)

Fusaro won and pitched Jack in the Box (JACK) in his talk entitled 'Thinking Outside the Box."  He started with some history that JACK has refranchised from 25% in 2005 to 75% today.

- Incomplete financial reporting
- Potential margin improvement
- Great brands
- Cost structure hasn't caught up with franchise model

He touched on how JACK owns Jack in the Box but also owns Qdoba, which has typically been too small to really matter but is now worth $580m by itself and value could be unlocked with a spin-off.  Think McDonald's (MCD) when it spun-off Chipotle (CMG).  JACK also owns real estate.

Fusaro says there's a growth business embedded in a value business and also touched on unlocking real estate value.

Embedded below is Fusaro's slideshow presentation from the Value Investing Congress: 

Check out the rest of the hedge fund presentations from the Value Investing Congress.

Glenn Tongue's Presentation on AIG & Iridium: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of Glenn Tongue of Deerhaven Capital.  His talk was entitled 'Time Arbitrage.'

Tongue used to be Whitney Tilson's investment partner at T2 Partners, but they've separated their funds but still share the same office.  Here are his two ideas:

Long AIG (AIG)

"Even better investment today."  Trading at 50% of book value, multiple catalysts to get them there in the next 12-18 months.  Opportunity because of the lingering taint from the crisis. Book value up by 11% since May, stock up only 5%.

$33.26 stock, $52B market cap, $104B book value.  1.4% short interest.  In Jan 2011 90% owned by US Govt.  June 2011 down to 82%, down to 65% in 2012. Then in Sept 2012, Treasury sold $21B, now only 16% owner today.  $8.5B stake owned by US government now. AIA sale is $5B cash inflow, ILFC $6-8B, and CFO of about $5B.  They can use half of that to buy in the US government stake, which would add 10% to book value.  An accretive exercise.

Of the $21B sold by the treasury, AIG bought $5B back. A while back the problem/bear case was "it's too complicated, hard to understand." 

Now, 2 segments are 90% of the business:
- P&C insurance Chartis.  45M clients, diversified across geographies and products.  Comps are ALL, CB, CNA, Travelers.

- US Life and Retirement SunAmerica.  19M clients, annuities and life insurance products.  Comps are LNC, MET, PRU, UNM. Typically trade at 0.7x book.  

Sum of the Parts Valuation

SOTP analysis gets $49 to $77 per share for AIG, 50-130% premium to market price.

Chartis: $48 book value, value $43 to $62
SunAmerica $36 book, value $25 to $40
United Guaranty   value $1.73 to $2.48
ILFC  value $7 to $10
AIA stake value $5
Other value minus $5 to plus $1 Total $49 to $77 value for all.

Risks: Highest scrutiny of any company, no incentives to overstate book value. Derivative risk, the old AIGFP, was $1.8 trillion of exposure, now down by 97%.  Some Europe business, CEO may leave soon, Super Cat risk, some derivatives

Catalysts: Treasury sales overhang Sale of non-core assets Use some leverage to boost returns Shift to offense from defense: AIG can focus on growing the business fading of institutional taint 

Another way to play it: 75M warrants.  Strike $45; expire 1/19/2021 Also subject to anti-dilution adjustments for various events, including adjustment if cash dividends exceed $0.67 per year.

We've highlighted how numerous prominent investment managers own AIG in size (most notably Bruce Berkowitz's Fairholme Capital) and recently disclosed how it's one of Dan Loeb's top holdings.

For more on AIG, head to the latest issue of our Hedge Fund Wisdom newsletter for further equity analysis on this name.

Long Iridium (IRDM)

Listed at $9.00 through a SPAC transaction, stock fell to $8, but business value may have doubled. Deeply misunderstood, attractive business, competitive advantage, new optionality through Aireon, compelling valuation, recent financing removes uncertainty. 87M shares, $730M market cap, $500M net debt, EV $1.24B, EV/EBITDA 5.9x, while comps trade at 8-9x Rev $384 in 2011, op EBITDA of $190, in 2012 Rev/EBITDA $393M/$210m. 

Owns 66 in-orbit satellites.  Serves 576k customers.  DoD is 23% of revenue.  This is only a niche product, for maritime, aviation, and government markets. Cover 100% of the earth's surface.  Other player is Inmarsat, twice their size.  Iridium stronger in handset, Inmarsat is more on the land-based.

Rev growing 15-24% over last 5 years. MSS market is $1.4B market.  Different competition: Thuraya GEO no polar or hemisphere coverage. LEO technology, lower earth orbit, so the satellites spin around the earth, smaller, faster communications with the handsets.  M2M (Machine to machine) is fastest growing area.  Strong leverage in model, key is to drive service revenues and subs. 

Must replace current satellite which will cost $3B! Tongue says "they'll never have $3B of debt, they are generating cash flow."  He says debt level peaks at 4-5x EBITDA in 2015.  At that point, company can drop a multiple point per year in leverage. Is the $3B investment worth it?  Should grow about $10-19B of EBITDA through 2030.  

Aireon: new business opportunity; a global air traffic control system. Possible $4 per share for Iridium on this alone. 

Stock recently collapsed from $9 to $7.  Due to a filing in which the company said in a 10q that they would have to raise $100M in amount equal to the unexercised portion of the warrants.  This was a short-sellers dream, but they fixed it last week with a $9.43 strike $100M convertibles. Swapped out the old warrants.  Convert arb players are causing short-term pressure on the stock. 

Price targets? If trading at 8x EBITDA, $12.50, up 60% from today's price. By 2016, or 2017, on those multiples, $17.50 to $22.50.

Embedded below is Tongue's slideshow presentation from the Value Investing Congress:

Check out the rest of the hedge fund presentations from the Value Investing Congress.

Bob Robotti's Presentation on Calfrac Well Services: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of Bob Robotti of Robotti & Company Advisors.  His presentation was entitled 'Building an Investment Thesis.'

Calfrac Well Services (CFW)

Robotti follows classic value investing tenets.  His pitch was Calfrac Well Services (CFW) traded on the TSX.

$1.3B EV, oil services, 90% of revenue is from fracking. Says 80-100% upside on stock if natural gas demand remains flat.

Bear case is well known, low gas prices, oversupply of equipment. He gave a long presentation on the impact of cheap gas in the US, which should also help chemical companies.  (This is basically Nancy Lazar at ISI argument, very similar.)

Price target is double the current price, from $24 to $47.  Models revenue up about 53% from here.

Embedded below is Robotti's slideshow presentation from the Value Investing Congress: 

Check out the rest of the hedge fund presentations from the Value Investing Congress.

Alex Roepers' 5 Investment Ideas: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of Alex Roepers of Atlantic Investment Management.  His presentation was entitled 'Corporate Action, Activism & Takeovers: Gaining Momentum.'

Atlantic: $1.8B in AUM, concentrated in 5-7 core positions in US.  Investment grade, mid-sized.  Uses significant minority positions, 2-7% to for shareholder activism.  Strict buy/sell discipline, buy 7x EBIT, sell around 11x.  1-2 year holding period is typical.  Largest fund 5-7 stocks, that’s it!  Averaged 18.5% annually over 20 years vs. 8.5% for the SPX.  

On Investor Activism

Last year he said environment was good for corporate action, activism and takeovers (JANA's Barry Rosenstein agrees).  Today we have:

1. Attractive valuations, because people are VERY gun-shy due to market crashes.
2.  Strong balance sheets now, much better post-2008
3.  Private Equity under pressure to put capital to work
4.  Super low interest rates, easy to make acquisitions
5.  Moderate organic growth due to economy; "Need to buy growth"
6.  Some hostile in M&A, nowhere near record levels of past  

Earnings yield of SPX is 6.8% vs. 1.8% 10 year treasury.  Expect the decade long outperformance of bonds to reverse; stocks will outperform next ten years.  He also showed the same chart of fund flows of investors pulling money from stocks into bonds.  "You will have phenomenal returns in equities if you pick your stocks right."  

PE firms have $400B in dry powder for buyouts. VIX is greatly reduced, which helps create environment more buyouts. Japanese and Chinese are stepping up cross-border M&A.

Atlantic's Approach:

1. Sufficient size and liquidity. >$1B to move the needle, but <$10B or it's too big to get a deal done 2.  Strong strategic franchises with high barriers to entry
3.  Attractive valuations: <8x ebit="ebit" forward="forward" nbsp="nbsp" p="p">4.  Strong balance sheets: EBITDA> 4x interest expense
5.  Predictable and recurring cash flows, high MRO content
6.  Low insider ownership <10 blocking="blocking" by="by" family="family" held="held" management="management" nbsp="nbsp" or="or" p="p" shareholders="shareholders">7. Noticeable activity in a sector; e.g. chemicals, mining equipment
8.  Liquidity.  Take 2-7% ownership stakes, no board seats, so proxy battles
9.  Write detailed shareholder engagement letters and have active discussions with management  

Recap of last year's investment ideas: ENR up 5%, ASH up 59%, FLS up 63% (sold it), MTX GY up 22% (sold it), and ATO FP up 53%.

Roepers' 5 Investment Ideas

Energizer (ENR).  $75.43, $4.9B market cap.  47% of business is batteries; the other 53% is personal care products: Schick shaving, Hawaiian tropic skin care.  Margins should be higher; eps should be $7.50 up from $6.00.  Target price is about $100 in 6-12 months.  

Rockwood Holdings (ROC).  $49.  $3.9B market cap. Specialty chemical company.  Lithium, Advanced Ceramics, TiO2, Surface treatment, Performance additives.  Stock trades on the TiO2 business, but they should IPO or spin this segment.  Real bull case here is Lithium, 8% organic growth without the electric car.  #2 lithium producer in the world.  Sum of the Parts (SOTP) to get valuation.  Catalysts are IPO of TiO2 business. Target price $70/share in 12-18 months based on 10x 2013e EBIT.   

Clariant (CLN VX).  Swiss conglomerate.  Disposal group, pigments, oil and mining services.  Being restructured, de-levering now.  46% capital appreciation potential in a year.  

FLSmidth (FLS DC), Danish mining supply company.  Concerns about China slowing.  Cement, Customer service for mining, and non-ferrous metals.  They help mining companies set up operations.  33% upside at DKK 467/share in 12-18 months.   

Joy Global (JOY).  $59.41.  Coal mining equipment.  Coal is out of favor.  Half surface mining, half underground.  Actually though, a lot of coal buying out of the most green countries, Japan and Germany.  Growth industry, but not in the US as much.  But he says all the switching from coal to gas that could happen, has already.  Stock has dropped in half this year on China slowdown and emergence of natural gas in the US.  Says 2013 is the trough year, but it will grow over time.  Their only competition was bought for 13x by CAT.  Very likely takeover candidate. Price target is $105 in 12-18 months based on 11x FY13E EBIT, 77% upside.

Q&A Session

1.  Why did ENR not do well?  Part of it was FX, the Euro. Also they've been slow and shareholders have become disenchanted with management.

2. Still own Owens Illinois?  They own 6.5% of the company, number one glass bottle maker in the world.  40% of business from Europe, demand a bit slow and FX issues, but trades at only 6x next year P/E and they are paying down debt.  Trades at only $18 now.

3.  Will JOY survive the "war on coal?"  It still generates 35-40% of the electricity in the US.  Gas prices coming up. US segment is only 22% for JOY.  He says when being activist "I'll fade out of the stock when you achieve X, Y and Z" which makes people listen to them.

Embedded below is Roepers' slideshow presentation from the Value Investing Congress: 

Check out the rest of the hedge fund presentations from the Value Investing Congress.

Lloyd Khaner's Presentation on Jamba Juice: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of Lloyd Khaner of Khaner Capital.  His talk was entitled 'Turnaround Investing - Swinging at Good Pitches.'

Khaner: 21 years, outperformed S&P 500.  Lost 6.5% last year.  Lost 14% in 2008. Made 63 successful turnarounds over the years.  Half large cap. Everything but biotech ("too hard").

Starbucks (SBUX) was his 2009 pick. Update on SBUX: it was midteens in 2009 when they pitched it, now $50 range.  Questions now on their new store growth- China, India.  Says they have a good person turning around Europe.  US store refresh on track.  "Verismo" product is not focused at GMCR K-cups, rather Nespresso. "La Boulange" bought concept to upgrade their food.  New concept of juice "Evolution Fresh."  His thesis is they are not over-expanding like they did last cycle. Deep management bench. Says stock could take a pause here in the 50s for a year or so. 

On Turnaround Investing

Common mistakes in turnaround investing:

1.  Swinging at bad pitches.  Too hard to do.
2.  Swinging too early.  Timing!
3.  Not swinging at all- fear and loathing (airlines, etc.) 

Bad Pitch #1:  Too Much Debt Balance sheet myopia, disadvantaged with customers, suppliers, competition.  Over 70% debt to capital- don't swing at this pitch 

#2: weak/non-turn around management.  Pass on it. 

#3:  weak/impaired industry. Becoming obsolete, irrational pricing, expensive financing.  Talent leaves, and never comes in.  Dying industry: don't do it!   Ted Williams analogy: he knew his exact batting average based on his hitting zones.  They did same thing. Zones to avoid: weak management, excess debt, dying industry.   Even at a good turnaround pitch, timing is everything. 

Investment Pitch on Jamba Juice (JMBA)

Only $208M market cap, sells about 1M shares/day 1990 IPO as SPAC, then March 2006 merged with Jamba Juice Company. 790 stores, 60% franchised, half in CA.  90 Jamba Go Stations, 40 international locations.  Building a CPG brand in 35k stores. Stores are small, 1200-1400 sq. ft., $700k average unit volume.  Lunch and afternoon is 50% of business.  Business spread evenly all day. Store only operating margin 20-23% and rising. Attachment rate (non-core products) is 20% Stores cost $265k-400k to build.

JambaGo is a self-serve unit for schools, institutions.  400-500 of these will be in public schools by the end of this year. No debt.  29M cash, management has turnaround experience, industry is growing.

The Whys?

Why did private equity save this company with cash in 2008? Why still improving comps despite competition from MCD? Why are they able to install JambaGo into public schools?

Their food is great, healthy, fairly affordable, for all ages, mom friendly, kid friendly, CPG brand in 35k locations, will be 50k by EOY2012. 

Risks: spike in food costs.  Speed of Service is slow, takes 5-10 minutes, limited seating in stores. 

What went wrong? Past management team was weak.  Too many employees 10k in stores, 250 in overhead, grew too quickly- in 2009 opened 99 on base of 600. Stores got run-down, dirty.  SSS dropped 8.1%.  Margins declined.  EPS and FCF negative in 2006, 7, 8.  Used short-term debt to fund the company. 

James White brought in Dec 2008 to turn it around.  Was SVP at SWY, and SVP at Gillete, worked for Jim Kilts, who turned G around. Three year plan:  hire new execs, retain talent, eliminate debt, reduced headcount at stores, refranchise company owned stores, forgo revenue at first to improve margins, improve food quality, clean the stores, expand the menu, extend the brand. He did all of this in 3 years.  Eliminated debt (converts) Closed 67 underperforming stores, refranchised 174 stores.

New goals: 4-6% SSS OM 20-23% SG&A flat. 40-50 new US locations JambaGO in 400-500 institutions Thesis:  eps positive $0.05, ROIC positive for first time in 5 years. 

New plan is about growth. Worldwide 3700 units, 400% growth, 1000 international.  Pipeline of 320 units already. 40 units now.  Double each year for a few years. JambaGO: 1500 by EOY2013. CPG royalties up to 10M from 3M this year. 

Valuation: Three year turnaround.  "Turnaround valuation" makes it look expensive. ROIC positive in 2012, 5-10%, up 2.5%/ year He predicts: eps .05 this year, 2013 22cents, 2015 50 cents If 15x eps, for 50 cents in 2015, $7.50 stock.   Timing is right, stock up from $1 to $2 already, but turnaround has progressed a lot already and potential to $5-6.

Question & Answer Session: 

1. Threat of competition of people making smoothies at home?  There is competition, that's why they are opening more stores.

2.  How do they source investments?  Usually they see the company first, other times CEO first.

3.  JCP?  He doesn't own it now.  Says it will be at least a 3 year turnaround.  Says they may have to go back to couponing; "that's retail."  Whitney Tilson mentions that before Johnson came in, 99.8% of items they sold were at some sort of discount.

4.  SHLD?  He doesn't own it, no turnaround CEO, over 10 years since they've taken care of it.  Asset value is a different question, but their segment of retail is very competitive.  Not a turnaround for a lot of reasons.

Embedded below is Khaner's slideshow presentation from the Value Investing Congress:

Check out the rest of the hedge fund presentations from the Value Investing Congress.

Monday, October 1, 2012

Bill Ackman on General Growth Properties, J.C. Penney, Procter & Gamble at Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Bill Ackman of Pershing Square Capital Management.  His talk was about General Growth Properties (GGP) and the need to stop Brookfield Asset Management (BAM) from acquiring it.

General Growth Properties (GGP)

$19.48 stock, 5% cap rate.  Long-term contracts.  85% recurring revenue, 3% rent escalators per year.  Even during Great Recession, and GGP's bankruptcy, NOI only dropped 10%. Up from $15 to $20 out of bankruptcy, spun off HHC. Stock fell later in 2011, collapsed to $12.50 last summer.

Very interesting saga about how Simon Property Group (SPG) and Brookfield Asset Management (BAM) and Pershing all tried to do a deal with the company (we posted Ackman's letter to GGP).

This summer, Pershing filed a13D requesting a financial advisor to look a selling the company.  Board rejects the idea.   Ackman contends that director Patterson isn't independent, so 5 of 9 board members are conflicted.  He says if status quo continues, BAM will get control of the company without paying a premium. Says GGP will always have a "Brookfield Discount."

Says SPG may still be interested in buying GGP even though he says he won't do a deal.  Ackman says shareholders benefit from a merger with SPG, it's less risk, and has synergies.  He details the synergies of a deal with SPG:

Incremental NOI, etc.  Saves overhead costs of almost $110M per year.  Says $350-590M in incremental cash flow, with a multiple, several billion of value.  Says 86% stock/14% cash deal makes sense, pay 29% premium.  Accretion of 5.4% from day one.  Deal is $29 equivalent price by end of the year, up from about $20 today.  Dividend also goes up, 51% increase to shareholders.  Lower leverage, more liquid.  He assumes SPG stock will also go up.

Ackman claims BAM was filing prospectus in the meantime, to buy the company themselves.     His solution:  the board of GGP should form a independent committee, hire independent financial advisors, to salvage the control premium.

Q&A:  How do you expect the board to do this, since they've already dismissed it outright? He says they didn't understand what they were being presented.  "Properly informed" he says they will respond correctly.

J.C. Penney (JCP)

Updates on JCP?  Says very few people followed them in GGP, because is was unconventional.  Same with JCP, it there is enormous skepticism. Says JCP is building "a mall within a mall" and 85% of their stores are in malls with $300/sq ft and above, B+ malls.  SSS down 20% in 1H12 and will be in 2H12 as well.  The shops are working, but it takes time. Also, easier comps next year.  You have to think more than 3 months ahead, it's interesting.  Also, killed the dividend, which was unpopular.

What if the JCP strategy doesn't work?  Issue is how do you get them in the store?  A free haircut is better than a coupon of 50% off an inflated price. 

Procter & Gamble (PG)

He's long PG - why does he like it?  Says company has bloated cost structure, organization gotten more complex.  Company instead of cutting costs, raised prices to protect profits, and started to lose market shares.  He has attributed these issues to senior management failings.  If CEO doesn't turn things around soon, they will have to look outside to find a new CEO.  


Best short idea?  waiting to put on more, will share it publicly after they fill their position.  (As you'll see in our past profile of Pershing Square, shorting is less common for them to begin with).

For more on Ackman, we've posted an excerpt from his Q2 letter on why he sold Citigroup.

Embedded below is Ackman's slideshow presentation from the Value Investing Congress:

Be sure to check out the rest of the presentations from the Value Investing Congress.

John Mauldin on Value Investing in Age of Uncertainty: VIC Presentation

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of John Mauldin of Millennium Wave Advisors.  His talk was entitled 'How Will the Elections Affect the Endgame?  Finding Value in an Upside Down World.'

He's not a stock picker, but a macroeconomic thinker and writer (author  of "Thoughts from the frontline" a newsletter.

Differences between uncertainty and risk: Uncertainty is the "unknown unknowns" the term used by Rumsfield.  The things we don't even know we don't know.   Investors are obsessed with risk.  We can model it, it makes us feel like scientists.  We have more ways to quantify risk, yet me walked into 2008 missing the obvious.  We think we can model risk. Surprises aren't only the bad things, but the good things (like the invention of the iPhone? or the steam engine)

In 1850 the number one job in the USA was a farm worker, in 1900, it was personal servant.  The cheapest thing was to hire a laborer to do the hand labor.  Uncertainty comes in all forms.  The problem with uncertainty is you can't model it.

For example, the island dispute between Japan and China. It's tough to model because it's based on human nature, and we are irrational.

Lenin: "There are decades when nothing happens and there are weeks when decades happen."  "It's not the lion that you can see that's the problem.  It's the lion in the grass..."

Frederic Bastiat:  A law produces not only one immediate, seen effect, but the other effects which emerge only subsequently, they are not seen. It almost always happens that when the immediate consequence is favorable, the later consequences are disastrous and vice versa.

Mauldin's Macro Thoughts

Europe:  the trade imbalances will force a wage readjustment SOMEHOW.  The wages in Germany must go up, or the wages in Spain, Greece must drop.  "Europe is a disaster!!! there is no way they can get out of their present malaise, they are going to have a depression, the adjustment will be painful."  The problem is the policy mistake of forming the Eurozone 14 years ago.  It's just basic accounting, Spain can't balance it's budget until it balances its trade.

"Japan is a bug in search of a windshield.  They will have their issue in the next couple of years."

China: Can't keep investing 50% of GDP at 8% growth.    Pay attention to the macro but also look at secular trends, and still expect some positive surprises.  

America: In the US, we have to solve the deficit.  You have to raise taxes and cut spending.  No matter who's elected, it will take a compromise.  You can't run on this policy, yet they will do it after the election.

You can't model this economy.  But you can say, you can't spend more than you collect forever. He claims bond market will take over. (But now we have the worst budget situation, with record low interest rates- so everything economists say isn't happening)

He believes in the march of technology.  Biotech, robotics, telecommunications will all make progress.

He likes Monsanto (MON), says they have an edge, people will be eating in 20 years.    The value you can find is when you look "over" the current situation.   Europe mess will not change the march of technology, Asia growing, etc.

Long Term Trends

A few long term trends:

1.  End of the debt super cycle
2.  End of the secular bear market
3.  The millennium wave
4.  Demographic destiny.  Boomers will live a lot longer than expected.
5.  The rise of Asia and Decline of Europe (not just a China story). 

Question & Answer:

Since money velocity is dropping rapidly like it has been, you can increase the quantity without inflation.  Fed is trying to cause some inflation.  We can do this today, because we're deleveraging.  It's working today, only because the velocity hasn't turned yet, but it will.

What is the catalyst for Japan to unwind?  It's when japanese savings goes negative.  It's come down from 16% to 1%.  He says short the Yen, and long the japanese technology companies.  He says they'll print a massive amount of yen.

He's still bearish, thinks we will see new stock market lows, the secular bear market isn't over yet.  We WILL have another recession.

Embedded below is Mauldin's slideshow presentation from the Value Investing Congress:

Be sure to check out the rest of the presentations from the Value Investing Congress.

Mick McGuire's 3 Ideas With Hidden Value: VIC Presentation

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Mick McGuire of Marcato Capital Management.  His talk was entitled 'Perspectives on Book Value.'

McGuire was named a rising star in 2012 by Institutional Investor and he was previously an analyst at Bill Ackman's Pershing Square before launching his own fund and now manages around $750 million.

He sees a theme of companies owning significant assets which exceed the carrying value on the balance sheet. "Land,"  especially very old land.  Accounting rules, under GAAP, record land at cost, and it is valued at the lower of cost or fair value. It is only adjusted to mark it down, if value drops.  So it is almost never marked up on balance sheets.  So businesses with old holdings have land worth a lot more than they carry them for.

Here are his pitches that are all real-estate themed to some degree:

3 Ideas With Hidden Value

Alexander & Baldwin (ALEX):  One of Hawaii's oldest companies.  Owns commercial real estate in HI and CA.  $30/share, Market Cap $1.3B, EV $1.5B.  Revenue isn't the way to value it. Owns 7.9M sq ft of commercial real estate, and a pipeline of resorts/residential, 75,000 acres of land on Maui and Kauai.  Shows total assets of $1.43 on balance sheet, but only $832M in real estate value.

How to value their properties: Look at comps, or rental cash flow, commercial real estate worth about $442M.  mainland, similarly, get about $500M. So about $900M for real estate, about $22/share, but reduce for corp expense, so net $13.50/share, about 50% of current market value.

Active development projects are in Wailea, Kauai, still owns 100 acres in Wailea, worth about $1M/acre.  Kahului property, and highrise in Honolulu.  Total worth about $294M.   1000 acre master planned community on Kauai, up to 1500 units, selling for $1-4M each.  So JV interests another $400M,  means total, $30.00 of value, same as the share price.

You get the land "free."  What is it worth? They have 20% of Maui, and 15% of Kauai. It's mostly ag land, selling for $27k/acre. They have leased out some of the land, imply value of around $7k/acre. Will take many years to monetize the land, they use 100 years. Low value: $13.72/share to as high as $17.32 per share. Company strategy is to farm the land, waiting for  Total valuation: $43.70 to $47.30, up from $30.00 stock price today.

Q&A:  how about their corporate expenses?  They don't have a good handle on where it should be relative to where it is. "it's not an agenda item with me."  He says they've provided a lot of information to investors. 

Gencorp (GY):  Missile and rocket supply maker. $600M market cap. 11.5% FCF yield to the equity. Non core real estate holdings: carries it at $64.4M.   They said they are the largest shareholder.

Q&A:  What is the catalyst?  Says new CEO, attacked cost structure and capital structure complexity.  One questioner said they had about $300M in environmental claims.

Brookfield Residential Properties (BRP):Trading at $14.39, like ALEX, its value depends on how fast they monetize their land holdings.  62% of their balance sheet is raw land.  Yet they are considered a homebuilder.

"Positive carry call option on inevitable US housing recovery." Concerns about Toronto and Vancouver, which are priced at 6.5x and 8.9x median HH income, like the US was before the collapse.

When they value all the assets, they get approximately $2.2B of TBV, 58% increase in value, or stock move of around $44-55 per share, around 3x current share price!  No analysts covering the stock.

Q&A: Catalyst?  Analyst coverage would help.

Embedded below is McGuire's slideshow presentation from the Value Investing Congress:

Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

Zack Buckley Shorts Splunk: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Zack Buckley of Buckley Capital Partners.  His talk was entitled 'Is it 1999 Again?' alluding to the year when tech company valuations were sky high with bad business models

Buckley made a head-turning statement when he said he was long China frauds and visited 50 Chinese companies.  "When I went to China, I was long, when I came back, I was short."  He argued that shorting all the various Chinese frauds is "played out."

Short Splunk (SPLK)

The company monitors web traffic.  Revenue model: one-time fee for use of the software with a maintenance contract. Annual term fees to license the software, based on indexing capacity. IPO at $17, up 90% first day.  Now $36.72, $4.23B market cap, easy to short, P/TTM sales 27x, Trades at 271x street 2015 EBITDA.

Not just a valuation short, it has a business model problem: switching costs are very low for customers, very little patent protection. Not really a Software-as-a-Service (SaaS) business, since they sell a package.

Only 35% of revenue is recurring, still (CRM) trades at 8x sales, SPLK at 20x.  Lots of competition: SAP, EMC, ORCL. Squeezed by both huge listed competition, and small new VC-backed firms.

Potential price war, competition charges $34k for what they charge $120k for. 90% gross margin business with negative 10% operating margins. Also insiders are selling aggressively, filing a secondary right after they went public. 65 employees, directors, VC funds, CEO, CFO, CTO.  Lock-up ends in 2 weeks, 31M shares, Oct 15th.

Look at what happened at Groupon (GRPN), Zynga (ZNGA). Trades at 27x TTM, unprofitable.  Buyout unlikely, as comps were around 7-8x price/sales.  68% over-valued, could be a $12 stock.

Assumptions for bull case to work: 40% 5 year growth, 29% FCF margins, and 45x multiple.  FCF margins are 1/6 that level now.

Question & Answer

But revenue is doubling every year?  Yes, but the rate of growth is slowing. shorts have been wrong on CRM for a long time, is it the same?  He says if it does grow like that, maybe, but it has very little recurring revenue, whereas CRM has 90% recurring revenue with high switching costs.

Embedded below is Buckley's slideshow presentation from the Value Investing Congress:

Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

Whitney Tilson's 3 Favorite Stocks: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Whitney Tilson of T2 Partners.  His talk was entitled 'My Favorite Ideas.'

Tilson's 3 Favorite Stocks

1. Netflix (NFLX) - He was originally short, but now he's long.  He says the company reminds him of (AMZN) back around 2001.  He also feels it could be a takeover target.

"The most controversial, risky thing in my portfolio." Rallied 80% in first 6 weeks of this year.

Quick overview: only $3B market cap, 400M net cash, $3.5B TTM revenues, EV/rev trading at less than 1x sales, FCF TTM collapsed only $61M because company is reinvesting all of its profits back into the company.  28.3M subs, each EV/sub about $99.  28.7% short interest.

Bull case:  market leader, in a global business that is growing 30-40% per year.  Lots of talk about competitors, but no actual market share losses.  Investing in better content, and international expansion which is losing money.

Using hulu as a comp, a $2B valuation on 2M subs, values it at $1000 per sub. Says downside protection due to "bite sized" acquisition for a half dozen companies that would find it attractive. "Mother of all bidding wars would erupt." 

2. Berkshire Hathaway (BRK.A) - "Total opposite."  Brief update: trading above the 110% of book level. Core operating businesses "are going gangbusters."  Insurance up 65% this year, because last year had some super cat events.

How to value it? $106,700 investments per share, $8600 eps ex investments x 8 (12 p/e) multiple, get $175,500 intrinsic value, which is 32% up from today's price.  Intrinsic value calculations have typically led the stock price a bit, but quite correlated.

3. Howard Hughes Corp (HHC) - His third largest position, after BRKA, and AIG.  HHC owns 34 commercial, residential and mixed-use real estate properties in 18 states.  It was a spin-off of the harder-to-value assets from General Growth Properties (GGP).

Real estate company with no income or dividend, so no natural investors for it.  $2.7B market cap, $3.1B EV. Bill Ackman is chairman, insiders own 50% of stock, CEO bought $15M of warrants with his own money, not an option grant.

Owns: Summerlin residential in Las Vegas.  40,000 homes in the area, 5880 acres remaining to be sold.   Woodlands in Houston. 3669 lots left.  Not as bad as overall, they had their bubble much earlier.  Ward Center in Honolulu.  60 acres, 1M sq ft of leasable space.  "Unbelievably hot market in Honolulu."  Could do 5-8 residential towers with ocean views.  At peak, $18M/acre, they have 60 acres. South St. Seaport.  #5 visited site in NYC, 11 acres, major development, worth about $200-300M now. They will tear down Pier 17 and replace it with a glass enclosed building, with panels that can open in the summer. Great views from the roof, they will build it.

Very hard to value, have to use a variety of methods based on the specific property.  Low end, gets $67 (where it is now) and high end gets you $125 per share, almost a double.  Also inflation hedge, hard assets. Risk is real estate market declines again.  Need good execution. 

For more from this manager, we've also posted up Tilson's presentation on AIG from the last conference. 

Question & Answer

NFLX- will Apple stream?  He says they seem perfectly content to just sell content, not at the unlimited fixed price.  AMZN is a bigger threat, with their Prime offering.  He says use the hulu example, which has gotten very little traction despite massive investment.

How are his funds ytd?  "about flat"  Strong 1st Q, especially with NFLX, but in hindsight, should have taken more money off the table.  "Kicked the market's butt for 12 years, but gotten it kicked for last 2 years."

Macro Thoughts

Great Recession was worse than thought- for Q408, estimates were -3.8%GP, it has been revised to -8.9%!  Consumer confidence still well below pre-crisis levels.

Job growth anemic, barely over the 150k needed to keep up with population growth. Unemployment fell from 10% to 8.1%, but still way above 2000 4% level. Job losses have been more severe than any downturn since the Great Depression, and the recovery has been weak.  Lost 8 million jobs, 6% of all jobs, still 3.5% below late 2007 number of jobs.

Each recession has taken longer to recover, 1981, 1990, 2001 and now 2007 which hasn't recovered yet. Govt running biggest deficits since WW2. Over last ten years, median household income has declined slightly to $50.876.   Reason the recovery is so slow?  no residential investment, like we usually get.  Private sector jobs strong, but government jobs are in decline.  The story is tremendous weakness in housing spending and loss of government jobs.

Big picture summary:  US has tepid recovery, little market upside unless the economy gets much better.  Factors that could derail the recovery: Europe gets worse, US housing market turns down, China hard landing, sovereign debt crisis in Japan.  Much more concerned about these 4 than the US.

In his talk, he pointed out that it's absurd to own 10 year Treasuries at 1.65% when you can own high quality companies like Exxon Mobil (XOM), Microsoft (MSFT), ADP (ADP), and Johnson & Johnson (JNJ).  Fidelity, the behemoth fund manager, now has more money in bonds than stocks. Massive mistake by investors by doing rear-view mirror investing.

Embedded below is Tilson's slideshow presentation from the Value Investing Congress:

Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

Kian Ghazi's Presentation on Layne Christensen: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Kian Ghazi of Hawkshaw Capital.  His talk was entitled 'Quenching the Thirst For Value.'

Ghazi noted that he's decided to wind down his hedge fund after nine years after his "worst year in 2011" where they were down 11%.  Their only other loss was in 2008, down only 3%.  Prior to that, 7 year net return of 58% versus 30%.  They were focused on underfollowed, unloved, misunderstood small-midcap companies.

Layne Christensen (LAYN)

Ghazi argues there's limited downside here given that the company rarely trades below tangible book value.

$20.16 stock, $399M market cap, $36M cash, $120M debt, $483M EV.  LTM sales $1.1B.  Trades at 18x 2012 eps. #1 in water-well drilling in US.  #2 in sewer construction, repair, #2 in trenchless pipeline rehabilitation.

Two segments: Mineral Exploration. 24% of revenue.  Margins up to 18%, from 1.7% in 2009.  There are signs of weakness; major mining companies are cutting CAPEX. Two comps have guided down already.  Could hedge this segment by shorting Boart Longyear (BLY), or Major Drilling (MDI). 

Water infrastructure 76% of revenue, but only 25% of profit due to margin pressures. Only problem is 62% of revenue is from government.  Margins crushed down to 1.4%, last management team bid too aggressively, just to keep backlog up, so some mispriced projects that are causing losses.  CEO has replaced management in the region that had them.

Bull case is they get back to 4% margins; peers are at 6-8%.

Bears say mineral exploration business currently producing unsustainably high margins, miners already cutting back.  Margins in water segment are also getting worse, only 1% from 4-6% range.  Heavy exposure to municipalities; fiscal cliffs, budget pressures.

Variant view:  Can hedge mineral division with a pure play. Water segment problems are isolated to just 1 of 4 units.  There is a powerful margin recovery drivers in water segment; new CEO.  Spending on wastewater and drinking water are protected at the municipal level.

Downside support with attractive upside.  Trades at 1x tangible book, a good support level. Mineral division alone could be valued at $19/share.  Water could bet $10-15 share if they can turn it around.  Overall upside 60-90% if the story works.  Underfollowed.  CEO and insiders buying stock.

Price target:  basic bull scenario $32.  In best case, if everything works, and if margins return to 4% in troubled portion of water business, so can even get to $59 stock.

Embedded below is Ghazi's presentation from the Value Investing Congress:


Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.