Friday, June 14, 2013

Jeff Saut & Scott Brown: Characteristics of Market Breakouts From Big Bases

Raymond James' market strategist Jeff Saut and chief economist Scott Brown have just released their 'Gleanings' report highlighting various charts that pull together economics, fundamentals, and quantitative analysis regarding the market.

The biggest point they've highlighted is that the market has a history of making 'big bases' and then ramping higher.  Saut points out that there have been four big bases that have exceeded 12 years since 1900:

- 1906 to 1924, 18 years
- 1929 to 1955, 26 years
- 1966 to 1982, 16 years
- 2000 to 2013, 13 years

Saut notes that, "Investor behavior reflects an underlying distrust or disinterest and is characterized by underinvestment in equities.  This results in a rebound that is relentless, providing little opportunity to buy on pullbacks."

With these long built up bases and the breakouts that often follow them, Saut highlights some common fundamental characteristcis:

- Rebound from high unemployment
- High government interest payments on debt
- Low investor allocation to equities
- Extremely high/low interest rates (alternates)

Embedded below is the Raymond James slideshow presentation, 'Gleanings: June 2013':

You can download a .pdf copy here.

For more from these gentlemen, head to Jeff Saut on the odds of a new secular bull market.

Michael Price's Presentation From The London Value Investor Conference 2013 (Video)

Last month, we posted up notes from the London Value Investor Conference 2013.  The event was a big success raising money for the charity Place2Be.  The conference has released video of the presentation from MFP Investors' Michael Price and we've embedded the video below:

For more from the event, be sure to check out notes from the London Value Investor Conference.

What We're Reading ~ Hedge Fund Links 6/14/13

No wind in sails of long/short equity [AllAboutAlpha]

Paulson gold fund down 54% this year [FINalternatives]

Why George Soros likes Japan [WealhDaily]

Hedge fund liquidations slow, fees weaken in Q1 [Boston Biz Journal]

Hedge fund marketing: 3 must know rules [ValueWalk]

Rival hedge funds hope to feast on SAC Capital redemptions [Reuters]

Goldman Sachs tops prime brokerage ranking [HFIntelligence]

Demand for alternative assets grows among investors [FT]

Risk, returns & regulation big topics at the EuroHedge summit [HFIntelligence]

Little reason for lack of transparency in hedge funds [FTAdviser]

Charting hedge funds' long term gains [WSJ]

Sony holdings blurred by Third Point swaps [Bloomberg]

Analyzing Dan Loeb's stock picks [Old School Value]

Institutions take divergent paths in revamping hedge fund portfolios [P&I]

Fund of hedge funds fight for survival [FT]

TiVo bump shows how hedge fund lawyers gain edge in court [Bloomberg]

Wednesday, June 12, 2013

What We're Reading ~ Analytical Links 6/12/13

Buffett, Robertson, Cooperman & more: words of wisdom from 18 wealth wizards [Forbes]

Why value investing works [ValueWalk]

Interest rates are rising [NYTimes]

Confidence kills predictions [Index Universe]

Tempted by for-profit education stocks? Read this [Forbes]

Look for insider buying from women [Economist]

Pricing a house is easier than pricing a home [WSJ]

Why 3% mortgage rates are a thing of the past [CNN]

The importance of expectations [Oddball Stocks]

Short sales dropped in the second half of May [WSJ]

A rising star emerges at Berkshire Hathaway [WSJ]

Why Pandora (P) bought an FM radio station [The Hill]

AstraZeneca (AZN): the long slog [FT]

A look at Crimson Wine Group (CWGL) [Barrons]

Bill to legalize internet poker introduced in Congress [Fox News]

Paying for performance [P&I]

Glenview Capital Seeks Removal of Health Management Associates "Poison Pill"

Larry Robbins' hedge fund Glenview Capital yesterday filed an amended 13D with the SEC on shares of Health Management Associates (HMA).  Their position size remains unchanged.  However, we recently highlighted how Glenview sought Hart-Scott-Rodino clearance to buy more HMA.

Glenview's latest amended 13D asks for the company to remove its poison pill.  Glenview writes,

"As previously disclosed by the Issuer, the Issuer adopted a “poison pill” rights plan that limits any shareholder and its affiliates and associates from acquiring beneficial ownership of more than 15% of the Shares of the Issuer.  The Reporting Persons urge the Issuer to redeem the poison pill, or at a minimum, amend the poison pill to increase the percentage of stock a person would be permitted to own without triggering the poison pill to a 25% threshold."

Robbins' fund is also evaluating potentially planning or proposing changes to the company's Board of Directors.  They intend to meet with potential nominees and other interested parties (HMA management, other shareholders, etc) regarding this matter.

The saga plays on.

A Tale of Two Gas Stations: Long Susser Holdings, Short CST Brands

The following is a guest post from Tsachy Mishal of TAM Capital Management, who presents a look at a gas station pair trade, if you will.  Tsachy also runs the blog Capital Observer.

Market Folly readers will recall that hedge fund Scout Capital recently disclosed a position in CST Brands and this write-up presents a different viewpoint.

A Tale of Two Gas Stations: Susser Holdings & CST Brands

Susser Holdings (SUSS) and CST Brands (CST) both operate gas stations with convenience stores attached. Susser Holdings came public in 2006 with private equity backing, while CST Brands is a recent spin-off from Valero (VLO). On the surface a spin-off would seem far more attractive than a private equity backed IPO, but looks can be deceiving.


Over 80% of Susser’s gas stations are located in Texas, the second fastest growing state in the US. CST’s gas stations are located across the southern US and Canada, with about a third being in Texas. CST mentions Texas numerous times in their Form-10 as a stand out economy and a driver of growth From the CST Form 10:

"The economy in Texas has fared better than many other parts of the U.S., partly supported by a solid economy, a relatively stable housing market and strong population growth and job creation. We have also benefited from the significant increase in economic activity in Texas that has resulted from the increased oil and gas drilling activity in Texas. We have a large number of convenience stores in Texas, and these operations have benefited from the increase in population resulting from employees of the oil and gas industry who have moved to Texas to support that industry."

On the basis of location, Susser has a clear advantage over CST with a much greater percentage of its gas stations being in Texas.

Susser earns the majority of its profits from convenience store sales while CST Brands is more heavily dependent on fuel sales. In 2012 59.7% of Susser’s gross profits came from merchandise sales, while 40% of CST Brands’ gross profits came from merchandise. The reason for this is that Susser’s average convenience store footprint is 3,600 square feet, while CST’s average footprint is 2,200 square feet.

Susser’s larger footprint allows it to sell fresh food and earn more from its convenience stores. CST Brands realizes that it is preferable to have a larger convenience store footprint and is planning larger footprints for its new stores but that doesn’t help its existing store base.

CST’s heavy dependence on fuel sales is a negative for a number of reasons. As Americans have been driving less and driving more fuel efficient cars, fuel usage in the US has been declining. By contrast, convenience store sales have been steadily increasing. Additionally, 2012 was an abnormally profitable year for fuel sales that is unlikely to be repeated.

As oil prices decline, gas stations are slow to lower prices. The $35 oil price decline in the second quarter of 2012 was a bonanza for gas station owners. In 2012 fuel gross margin for CST brands increased by 2 cents a gallon or $40 million, primarily as a result of this extreme downside volatility in fuel prices.

It is very unlikely that we see such an extreme move in oil prices this year. As a result, year over year fuel gross margin should decrease by close to 2 cents a gallon resulting in lower year over year earnings and EBITDA for all gas stations with a disproportionate effect on CST Brands due to its reliance on fuel sales.

Operation Performance

In 2012, Susser had same store merchandise sales growth of 6.6% and per store fuel gallon growth of 5.8%. CST does not provide historical same store sales numbers but does provide “per store” figures. In 2012 “per store” merchandise sales actually showed a slight decrease while per store fuel gallon sales showed a less than 1% increase.

In the first quarter of 2013 CST provided SSS figures for the first time and showed US SSS down 1.6% compared to Susser growing 4.2%. This is likely attributable to CST’s older stores and larger dependence on cigarette sales, which have been in secular decline. Cigarettes make up 40% of merchandise sales for CST compared to 19% for Susser. Dollar stores have recently moved into this category, which will increase pressure. Susser has clearly enjoyed superior operating performance to CST Brands.


The Susser family has been in the gas station business since the 1930’s. Sam L. Susser, the CEO, joined the company in 1988, when Susser operated five stores and had revenues of $8.4 million. Sam Susser grew up in the gas station business, has 25 years of experience and a proven track record.

Kimberly S. Bowlers is the CEO of CST Brands. Below is her bio from the CST Form 10:

"Ms. Bowers was elected Chief Executive Officer and President of CST effective January 1, 2013. Ms. Bowers served as Executive Vice President and General Counsel of Valero from October 2008, and previously served as Senior Vice President and General Counsel of Valero since April 2006. Before that, she was Valero’s Vice President–Legal Services from 2003 to 2006. Ms. Bowers joined Valero’s legal department in 1997. Ms. Bowers was elected to the board of directors of WPX Energy, Inc. on December 30, 2011."

In other words Ms. Bowers, the CEO of CST Brands, has been a lawyer her entire career and has little operating experience. I’m certain she was a very capable lawyer but that does not make her a capable CEO. If experience counts for anything, then Susser has the superior management.


Considering that Susser has the superior store locations, a superior business mix, superior performance and superior management one might conclude that Susser should trade at a premium to CST Brands. One would be wrong. Susser Holdings trades for less than 6.3 times EV/LTM EBITDA, adjusting for their ownership in SUSP (slide 21).

CST Trades for roughly 8 times EV/LTM EBITDA. Instead of trading at a premium Susser trades at a greater than 20% discount to CST Brands. This does not take into account that had CST been a public company they would have incurred additional expenses. Additionally, on a forward basis I believe Susser trades at a greater than 30% discount to CST Brands.


CST Brands is a case of “You Can Be A Stock Market Genius” gone awry. In investors haste to buy a “spin- off” they have valued a poorly performing company at an undeserved premium to one if its closest, better performing peers. There are too many geniuses out there right now.


CST Brands has not given any forward guidance so investors have had to create their own earnings models. Many investors seem to have simply extrapolated forward an increase in earnings and EBITDA from 2012 to 2013 for CST. This ignores the one time bonanza in fuel margins in 2012 ($40 million) and the increased costs of being a public company ($20 million). When CST reports second quarter earnings it should become clear that estimates are pie in the sky.

Full disclosure: TAM Capital Management is long Susser Holdings (SUSS) and short CST Brands (CST).

Embedded below is a .pdf copy of TAM Capital's thesis:

We've posted some other investment theses from TAM Capital here.

Soros Fund Discloses New Position in 1Spatial

George Soros' family office Soros Fund Management has disclosed a new stake in London listed 1Spatial (LON: SPA).  Due to trading on June 10th,  Soros Fund owns 7.78% of 1Spatial’s voting rights.  This is a brand new position for the firm.     

Per Google Finance – “1Spatial Plc, formerly Avisen plc, is a holding company. The principal activity of the Company is the development and sale of information technology (IT) software along with     related consultancy and support. The Company operates in four segments: Head Office, Avisen,     Storage Fusion and 1Spatial. 1Spatial Holdings plc (1Spatial Business) is a software development     company, which provides location based software and related services. Avisen, the Company’s     management consultancy business, focuses on providing global companies. Storage Fusion is     the author of Storage Resource Analysis (SRA), which provides analytics for enterprise storage     environments through a SaaS service. The Company’s operations are located in the United Kingdom,  Ireland, Australia and Europe. On November 28, 2011, the Company acquired the entire interest of     1Spatial Business. On April 1, 2011, the Company sold its wholly owned subsidiary Inca Software     Limited.”

We've also highlighted other recent portfolio activity from Soros here.

Tuesday, June 11, 2013

Attention Market Folly RSS Subscribers: Google Reader Is Shutting Down, Here's How To Still Receive Our Posts

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Jeff Ubben's ValueAct Adds to Willis Group Holdings (WSH) Position

Jeff Ubben's activist hedge fund ValueAct Capital recently filed Forms 3 and 4 with the SEC regarding their position in Willis Group Holdings (WSH).  Per the filings, ValueAct now shows an ownership stake of 17.9 million shares.

ValueAct acquired 568,400 additional WSH shares on June 6th at prices ranging from $38.90 to $39.04.  We've also recently posted about a new stock ValueAct has bought.

Per Google Finance, Willis Group Holdings "provides a range of insurance brokerage, reinsurance and risk management consulting services to its clients worldwide. It has market positions in the United States, in the United Kingdom and, directly and through its associates, in many other countries. It is recognized in providing specialized risk management advisory and other services on a global basis to clients in various industries including aerospace, marine, construction and energy."

Bruce Berkowitz Cuts MBIA Stake, Exits Orchard Supply Hardware Position

Bruce Berkowitz's firm Fairholme Capital recently filed two 13G's with the SEC.  Here's a breakdown of his latest portfolio activity:

Cuts MBIA Stake Again (MBI)

Fairholme filed a 13G with the SEC on MBIA (MBI), disclosing a second round of share sales.  Two months ago, we highlighted when Fairholme initially sold MBIA shares

Back then, they sold 11 million shares.  Today, we see that they sold even more shares.  Fairholme now shows a 1.2% ownership stake in the company with only 2.25 million shares.  The 13G was filed due to activity on May 31st. 

This means they've reduced their position by almost 93% since the end of the first quarter.  As our premium Hedge Fund Wisdom newsletter pointed out, shares of MBI skyrocketed in May from $10 to $16 on news of a $1.6 billion cash settlement with Bank of America to settle a dispute over faulty mortgage securities.

Shares have since slid down to $13.75, but this has been another big winner for Berkowitz as he started his MBIA position back in 2010.  We also posted up Berkowitz's thesis on MBIA for those interested.

Per Google Finance, MBIA "together with its consolidated subsidiaries, operates the financial guarantee insurance businesses in the industry and is a provider of asset management advisory services. These activities are managed through three business segments: United States public finance insurance, structured finance and international insurance, and advisory services. The Company’s United States public finance insurance business is operated through National Public Finance Guarantee Corporation and its subsidiaries (National), its structured finance and international insurance business is primarily operated through MBIA Insurance Corporation and its subsidiaries."

Exits Orchard Supply Hardware Stores Position (OSH)

Berkowitz also filed a 13G on shares of Orchard Supply Hardware Stores (OSH), revealing that he has sold completely out of the position.  The filing was required due to activity on May 31st. 

This was only a tiny position for Fairholme to begin with.  Berkowitz owns Sears Holdings (SHLD), and Sears spun-off Orchard Supply in December 2011 so that's how he initially got the shares.

Per Google Finance, OSH is "a specialty retailer primarily focused on homeowners with repair, maintenance and improvement needs. The Company operates in one segment and provides a merchandise mix, which consists of various product categories, including repair and maintenance, lawn and garden and in-home products. The Company's repair and maintenance category consists of plumbing, electrical, paint, tools, hardware, and industrial products. Its lawn and garden category consists of nursery, garden, outdoor power and seasonal products."

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

Monday, June 10, 2013

Byron Wien's 20 Lessons Learned Throughout His Investing Career

Byron Wien is Vice Chairman at Blackstone and prior to that worked at hedge fund Pequot Capital and Morgan Stanley.  Earlier this year, he released an addendum to his usual commentary about lessons he's learned in 80 year investing career.  His words of wisdom are below:

Byron Wien's 20 Lessons Learned

1.  Concentrate on finding a big idea that will make an impact on the people you want to influence.  The Ten Surprises, which I started doing in 1986, has been a defining product.  People all over the world are aware of it and identify me with it.  What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year-end.  If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.

2.  Network intensely.  Luck plays a big role in life and there is no better way to increase your luck than by knowing as many people as possible.  Nurture your network by sending articles, books and emails to people to show you’re thinking about them.  Write op-eds and thought pieces for major publications.  Organize discussion groups to bring your thoughtful friends together.

3.  When you meet someone new, treat that person as a friend.  Assume he or she is a winner and will become a positive force in your life.  Most people wait for others to prove their value.  Give them the benefit of the doubt from the start.  Occasionally you will be disappointed, but your network will broaden rapidly if you follow this path.

4.  Read all the time.  Don’t just do it because you’re curious about something, read actively.  Have a point of view before you start a book or article and see if what you think is confirmed or refuted by the author.  If you do that, you will read faster and comprehend more.

5.  Get enough sleep.  Seven hours will do until you’re sixty, eight from sixty to seventy, nine thereafter, which might include eight hours at night and a one-hour afternoon nap.

6.  Evolve.  Try to think of your life in phases so you can avoid a burn-out.  Do the numbers crunching in the early phase of your career.  Try developing concepts later on.  Stay at risk throughout the process.

7.  Travel extensively.  Try to get everywhere before you wear out.  Attempt to meet local interesting people where you travel and keep in contact with them throughout your life.  See them when you return to a place.

8.  When meeting someone new, try to find out what formative experience occurred in their lives before they were seventeen.  It is my belief that some important event in everyone’s youth has an influence on everything that occurs afterwards.

9.  On philanthropy my approach is to try to relieve pain rather than spread joy.  Music, theatre and art museums have many affluent supporters, give the best parties and can add to your social luster in a community.  They don’t need you.  Social service, hospitals and educational institutions can make the world a better place and help the disadvantaged make their way toward the American dream.

10.  Younger people are naturally insecure and tend to overplay their accomplishments.  Most people don’t become comfortable with who they are until they’re in their 40’s.  By that time they can underplay their achievements and become a nicer, more likeable person.  Try to get to that point as soon as you can.

11.  Take the time to give those who work for you a pat on the back when they do good work.  Most people are so focused on the next challenge that they fail to thank the people who support them.  It is important to do this.  It motivates and inspires people and encourages them to perform at a higher level.

12.  When someone extends a kindness to you write them a handwritten note, not an e-mail.  Handwritten notes make an impact and are not quickly forgotten.

13.  At the beginning of every year think of ways you can do your job better than you have ever done it before.  Write them down and look at what you have set out for yourself when the year is over.

14.  The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons.  Short-cuts can be construed as sloppiness, a career killer. 

15.  Don’t try to be better than your competitors, try to be different.  There is always going to be someone smarter than you, but there may not be someone who is more imaginative. 

16.  When seeking a career as you come out of school or making a job change, always take the job that looks like it will be the most enjoyable.  If it pays the most, you’re lucky.  If it doesn’t, take it anyway, I took a severe pay cut to take each of the two best jobs I’ve ever had, and they both turned out to be exceptionally rewarding financially. 

17.  There is a perfect job out there for everyone.  Most people never find it.  Keep looking.  The goal of life is to be a happy person and the right job is essential to that. 

18.  When your children are grown or if you have no children, always find someone younger to mentor.  It is very satisfying to help someone steer through life’s obstacles, and you’ll be surprised at how much you will learn in the process. 

19.  Every year try doing something you have never done before that is totally out of your comfort zone.  It could be running a marathon, attending a conference that interests you on an off-beat subject that will be populated by people very different from your usual circle of associates and friends or traveling to an obscure destination alone.  This will add to the essential process of self-discovery.

20.  Never retire.  If you work forever, you can live forever.  I know there is an abundance of biological evidence against this theory, but I’m going with it anyway.

For more perspective from great investors, head to:

- Warren Buffett & Charlie Munger's secrets to investing success

- Lessons from Stanley Druckenmiller

- Andreas Halvorsen on investment process

- Mohnish Pabrai on checklist investing

- Jeremy Grantham's 10 investment lessons

Market Strategist Jeff Saut on the Odds of a New Secular Bull Market

Market strategist Jeff Saut is out with his weekly commentary and in it he features some prudent commentary on being 'early' in investing and how the crowd tends to move long after the optimum time.  Saut also talked about the odds of a new secular bull market taking place:

"Last December I pegged the odds of a new secular bull market at 20%-25%.  I have increased those odds over the past six months to where I now believe those odds are at 45%-50%, yet few investors believe it.  To be sure, most participants think there has to be a 'feel good' environment for a secular bull market to exist.  The reality is that when that 'feel good' environment occurs, you are typically in the late innings of a secular bull market.  Ladies and gentlemen, the equity markets do not care about the absolutes of good and bad, but rather if things are getting better or worse; and, things are definitely getting better!"

His point about 'few investors believing it' is certainly worth considering.  Longtime readers may recall our investor psychology illustrated post that shows how bull markets are often born with dire sentiment, rally with disbelief, and then peak with euphoria. 

If Saut is correct, then one could potentially compare the 2013 market to the 'skeptic' portion of a rally.  After all, many investors have spent 2013 wondering when the major pullback will come.

Regardless, Saut's full commentary this week is worth reading and it is embedded below:

You can download a .pdf here.

For more from this strategist, head to Jeff Saut on the market buying stampede as well as his thoughts on investor sentiment.

Ricky Sandler's Eminence Capital Raises VCA Antech Position

Ricky Sandler's hedge fund firm Eminence Capital has filed a 13G on shares of VCA Antech (WOOF).  Per the filing, Eminence has revealed a 5.4% ownership stake in with 4,805,516 shares.

This marks a 40% increase in the number of shares they own since the end of the first quarter.  The filing was required due to portfolio activity on May 28th.

Per Google Finance, VCA Antech is "a national animal healthcare company operating in the United States and Canada. The Company provides veterinary services and diagnostic testing to support veterinary cares. The Company operates in two segments: animal hospital and laboratory. Its all other category includes Vetstreet and Medical Technology operating segments. The Company's animal hospitals offer a range of general medical and surgical services for companion animals, as well as specialized treatments, including advanced diagnostic services, internal medicine, oncology, ophthalmology, dermatology and cardiology."

We also highlighted how Eminence started a new position in another stock recently as well.