Friday, November 1, 2013

Sohn London Conference Notes 2013: Hohn, Armitage, Tangen, Gaonkar & More

The 2013 Sohn London Conference just took place and MarketFolly has notes below.  The event featured hedge fund managers presenting their latest investment ideas benefiting paediatric cancer and childhood disease research.

Sohn London Conference Notes 2013

Chris Hohn – The Children’s Investment Fund  

Following on from last week’s disclosure that TCI had bought a large part of the UK’s privatised post office, Royal Mail, in the secondary market, Hohn pitched two more privatisation ideas. He said that governments are the worst manager and that there are huge efficiency savings to be made in the aftermath of a privatisation.

Idea 1: Aurizon (Australia)  - Aurizon, formerly QR National, is a publically listed rail company in Australia. According to Hohn, Aurizon’s CEO, Lance Hockridge is a winner. Recent returns have been about 10% per year with 6% volume growth per year. The cost cutting potential is huge. Large scale redundancies are already underway. Aurizon was privatised with no debt, which Hohn said was ridiculous. Hohn implied that he has been pressing the company to re-lever and that he had had some success. Aurizon can have a double digit dividend within a couple of years. The company is a play on the Austrailian commodities market and the Chinese and Indian economic growth.

Idea 2: Long EADS  - Hohn noted that the company has had a bad record with investors – no one has made money for 30 years. Sometimes it pays to study the history of a company. He believes that the EADS will double and then triple profits in the coming years. Airbus is now competing well with Boeing. There is no chance of new competitors breaking into the market as safety concerns keep new entrants out. Pricing is increasing. Costs are falling as suppliers are squeezed for the first time. EADS is committed to 3.75bn euro of stock buybacks over the next 18 months. EADS 10x multiple can close the gap on Boeing’s 15 x multiple.

John Armitage - Egerton Capital  

Idea 1: Long Nordea (Sweden)  - Armitage said that Nordea is a simple, low risk stockpick which he referred to as a ‘teddy bear stock’ because it allowed him to sleep well at night. Nordea is the leading Scandinavian bank – being #1 or #2 in most Nordic countries. Nordea performed well in the financial crisis. The bank does not look for dynamic growth in earnings and that is its strength. Boring is good in the banking sector. Nordea will grow moderately in the future. Its market has oligopolistic qualities. Loan loss rates will drop for a prolonged period of time. Nordic banks are much better capitalised than their European or US counterparts. The dividend is likely rise over time.

Idea 2: Long Ocwen (OCN)  - Armitage said that whilst his first pick had been simple and straightforward, Ocwen was a far more complex and complicated situation. Ocwen is a mortgage servicing business which sits at the core of the difficulties that the US housing sector has faced since the financial crisis. In the US, mortgages are packaged and turned into bonds. Many of the loans made over the last decade or so are delinquent and have needed to be modified or foreclosed. Big banks have been overwhelmed and are often too unfocused to carry out the mortgage servicing task that Ocwen specialises in. Ocwen has a good technology platform which he referred to as a dialogue engine. It profiles a borrower’s ability to pay back mortgages. Making the appropriate loan modifications is a key driver of success or failure. Ocwen’s founders own 22% of the business. There will be growth in income from the existing portfolio of loans. They are producing $1.1bn of FCF. Some of that money will be used for stock buybacks which have recently been agreed. Ocwen are well placed to make acquisitions. Armitage believes that Ocwen will be able to deploy their existing expertise and technology to diversify into new markets such as car loans and subprime.  Note that Steve Eisman also pitched OCN at the Invest For Kids Chicago conference this week as well.

Nicolai Tangen – AKO Capital  

Idea: Long Experian  - Experian is the largest credit bureau in the world. It has a strong balance sheet and strong organic growth at 7%. They have lifted margin growth by 700 basis points in the last 6 years. Tangen believes margins will continue to increase in the future. Experian is selling credit data in more and more countries and the great thing about credit data is that you can often sell the same data several times. Demand for credit data has risen since the financial crisis as regulators have forced banks and other financial institutions to become more discerning about who they lend to. The rise of the internet and E-commerce is also creating demand for credit data. Experian has a significant moat as there are no other global players, just regional competitors. There are three players in the US but only 2 players in other countries. Experian is a safe play in as much as it has counter-cyclical qualities. Its gearing is falling rapidly as the cash keeps coming in.

Mala Gaonkar, Lone Pine Capital  

Mala Gaonkar is a co-portfolio manager at Lone Pine, a role she has held since 1998.

Idea: Long Qualcomm (NAS: QCOM)  - 3G & 4G wireless data and voice standards create two thirds of the business. The other one-third is from chips. Expect more unit growth in the smart phone market than most people assume. It will double in the next three years. Generally speaking, we will replace our smartphones more quickly than many analysts assume. The active broadband market is not yet mature. Royalty rates are resilient. QCOM has far more patents than their competitors. They will be able to diversify into new mobile devices in the future.  

Julian Sinclair – Talisman Global Asset Management

Idea 1: Long Tata Motors -  Sinclair valued Jaguar and Land Rover at around $17bn, the same as Tata’s market cap. Jaguar and Land Rover make up about 80% of Tata’s net worth so you get the other 20% for free. Jaguar and Land Rover are quintessential British brands. They are now competing well with the big German luxury brands in terms of quality and reliability. Tata is producing more reliable cars than it used to and that has been backed up by recent JD Power surveys. Tata is trading at 6x earnings. Sales are expected to expand by 20% during the next five years. There is potential for the share price to double Tata can even attain the double digit margins that Porsche has achieved. Tata is growing top line and bottom line simultaneously. Tata is also has potential as an emerging market recovery play.

Idea 2: Shared Appreciation Mortgages (SAMs)  SAMs are a form of mortgage backed security created in the late 1990s by banks like Barclays and Royal Bank of Scotland in the UK. Sinclair sees SAMs as the last great post-crisis credit trade. If house prices go up by 2-3% they will pay out 11% and if prices go up by more they will pay out even more. SAMs have a defensive quality too. If house prices were to fall by 5% SAMs would still pay out a similar return to Gilts (UK government bonds).

Eashwar Krishnan – Tybourne Capital Management  

Eashwar Krisnan spent 12 years as a Managing Director and Senior Analyst at Lone Pine. In 2007, he moved to Hong Kong to set up and manage Lone Pine’s operation in Asia. He set up his own fund  Tybourne Capital in 2012. Tybourne focuses mostly on equities in the consumer, financial and TMT   sectors in Asia.

Advertising in India is 20x cheaper than in the US. Over time the gap will narrow. TV dominates advertising spending in Asia. There is a favourable environment for investing in commercial TV businesses in Asia at the moment. Indonesians watch an average of 5 hours Television per day. He likes companies run by owner operators with skin in the game. Advertising growth rates can grow at double digits for many years.

Idea 1. Long Media Nusantara Citra MNC (Indonesia). Nusantara has 42% of audience share; it’s the industry price leader.

Idea 2. Long Surya Citra Media (Indonesia). Surya has 22% of primetime TV. It develops and owns content, which produces high returns on capital.

Idea 3. Long Zee Entertainment Enterprises (India)  - Zee is the #2 provider after Star owned by Fox (Tybourne hold Fox stock too). Zee will be a beneficiary of digitalisation. Two-thirds of TV viewers in India receive an analogue signal at present.

Idea 4. Sun Investments (India). Sun is the #1 player in Southern India.

Ross Turner – Pelham Capital  

Ross Turner was an equity partner with Lansdowne Partners and set up Pelham Capital in 2007.

Idea: Long DCC Plc  - DCC was listed in Ireland but has transferred its main listing in the UK. It is a distributions services company with a large energy division – oil and LPG. This part of the business is straightforward involving the pickup of the product from terminals and distribution to the customer. In oil distribution in the UK, they are the only distributor with a national network giving them a dominant market position. DCC have developed their market position through bolt on acquisitions. The LPG market is more consolidated but they have greater pricing power there. Europe only makes up 15% of DCC’s income, but they are beginning to make in-roads via the same strategy of bolt on acquisitions. DCC is a stable business with a strong competitive position. Turner believes the valuation is still attractive as no one takes into account the continued impact of the acquisitions. He   sees 15% earnings growth per year going forward.

Mas Siddiqui – Naya Management  

Before founding Naya in July 2012, Mas Siddiqui was a partner at TCI Fund where he was responsible for global investments in credit and equities. Previously he was Managing Director at Canyon Partners.

Idea 1: Long Salvatore Ferragamo (Italy)  - Salvatore Ferragamo creates, develops and produces clothes and shoes for men and women and fragrances and eyewear. Despite being based in Italy, only 25% of its sales are in Europe. Sales in emerging markets are larger and this should continue as the EM consumer becomes better off. They are growing top line growth and they have scope to increase their prices. Salvatore is an ‘undermanaged company’ with plenty of room for improvement. Labour costs are 50% higher than its peers and they could reduce them. He did not say whether he had been pressuring the company for change but it seems quite possible given his background at TCI and his take on the company. The company has a clean balance sheet and is considering a large return of cash via a special dividend, which Siddiqui indicated is being sought by family owners who hold a 60% of the stock.

Idea 2. Short Essilor International   - Essilor is an ophthalmic optics company based in France. It is a world leader in the manufacturing of lenses for glasses. Using FCF and organic growth, Siddiqui believes the company is wildly overvalued. Naya’s research shows that brands do not have much impact in the lenses market. New digital production techniques will cut costs and lead to deflation in the sector. Competition from Zeiss and Hoya will intensify.

Bruno Rocha – Dynamo Capital  

Rocha started by using data from Dimson, Marsh and Staunton’s data set (see the Credit Swiss   Yearbooks) to argue that there is no relationship between GDP and equity returns. In fact he said that the data suggested that slow growing countries produce better equity returns that fast growing counties. Rocha said that what goes for countries is true too for business sectors where growth in earnings is different from growth in earnings per share. Slow growing countries and companies can create better returns for investors than fast growing countries and companies.

Idea: Long Anheuser Busch Inbev (BUD) -  In the beer business, Rocha showed that contrary to popular wisdom, Inbev was more profitable in wine drinking France than in beer drinking Germany. Rocha noted that there are only four big beer companies left in the western world. Inbev has economies of scale allowing it to benefit from the mature, consolidated markets.

Andrew Weiss – Weiss Asset Management  

Intriguingly, when Andrew Weiss was introduced it was suggested that his presentation at Sohn London was the first time he had ever spoken to a large investment audience as he normally prefers to address academic gatherings. Weiss then pitched one of his own funds as his investment idea.

Idea: Long Weiss Korea (LON: WKOF) - Weiss Korea invests in the listed preferred shares of companies incorporated in South Korea.  Andrew Weiss said that there are four things going for the investor in South Korea. Firstly stocks are cheap. Secondly, there is potential for future economic growth as the demographics are good; the workforce is well educated; the road, rail and internet infrastructure is sound; there is low debt to GDP and good natural resources. Thirdly there are catalysts to change including changes to the regulatory environment in favour of shareholders. Fourthly, there are exceptional access products like preferred shares. In Korea preferred shares are similar to ordinary shares but without the voting rights. Preferred stock tends to trade at a large discount to ordinary shares in Korea. 

For more hedge fund conference coverage, check out notes from other recent events:

- Invest For Kids Chicago notes: Lasry, Eisman, Cooperman & more

- Great Investors Best Ideas notes: Price, Akre, Pickens & more

- Excellence in Investing San Francisco notes: Burbank, Billick, McGuire & more

- Value Investing Congress notes: Ubben, Smith, Yacktman, Roepers & more

Thursday, October 31, 2013

What We're Reading ~ Analytical Links 10/31/13

A look at TransDigm Group (TDG) [Brooklyn Investor]

Repeatedly burned, short sellers avoid momentum stocks [Reuters]

Liberty Global: On the European empire John Malone's built [BusinessWeek]

Michael Lewis on the next crisis [BusinessWeek]

For once mighty Sears, pictures of decay [Dealbook]

Amazon and the profitless business model fallacy [Eugene Wei]

A write-up on Emerald Oil (EOX) [Dedwardssays]

Trucking companies inching toward using natural gas as fuel [WSJ]

The new reality of international bonds [Vanguard]

Time to buy former retailing darling Tesco [Institutional Investor]

GlaxoSmithKline's China conundrum [FT]

Moats widen for railroads & luxury goods [Morningstar]

Eastman Chemical: specialty chemical for commodity price [Seeking Alpha]

Current tech euphoria in Silicon Valley isn't exactly like 1999 [WSJ]

Great Investors' Best Ideas Conference Notes 2013: Price, Akre, Gabelli, Pickens, Russo & More

Below are some brief notes from the 7th annual Great Investors' Best Ideas Conference in Dallas benefiting the Michael J. Fox Foundation for Parkinson's Research and the Vickery Meadow Youth Development Foundation.

Notes From Great Investors' Best Ideas Conference

Michael Price (MFP Investors): He pitched three ideas:  long Hospira (HSP), long Songbird Estates (SBD.LN) and long Dolby Labs (DLB).  HSP has seen value guys buying it, transitioning away from growth investors as the investor base changes.  The company has good free cash flow and he thinks the stock can hit $60.  His thesis on Songbird is a discount to NAV story (around 30%).  Dolby (DLB) has a ton of cash and no debt with huge royalty streams (80% of revenue).  As tablets and PCs continue to grow, they'll make money.

Chuck Akre (Akre Capital Management):  His picks were Moody's (MCO) which he likes due to its oligopoly position, solid return on equity and pricing power,  as well as O'Reilly (ORLY), the auto parts supplier which recently bought CSK Auto and the integration has gone well and now they're buying back shares.  His presentation also focused on how you should stick with your circle of competence and acknowledge when you're unsure of things. Focus on 3 things in a business:  growth of capital (high ROIC), good management, and solid reinvestment (how they used past FCF).  The price you pay is very important.

T. Boone Pickens (BP Capital):  He pitched Diamondback Energy (FANG) which he likes for its growth potential, no debt and a lot of cash.  He also likes Basic Energy Services (BAS) as excess capacity has been taken out.  He also touched on his picks from last year: National Oilwell Varco (NOV) which he still likes, as well as Pioneer Resources (PXD), almost a double and he likes the Permian basin acres (continues to like this stock as well).

Karen Finerman (Metropolitan Capital Advisors):  She pitched North Atlantic Drilling (NADL.NS) traded in Norway which was a spin-off from Seadrill (SDRL).  The spread between non-Norway rates and Norway rates is very big and many contracts already locked in.  She likes the cheap valuation, big dividend (potential for it to grow), says there's limited downside due to the backlog. There's also a catalyst with an IPO coming for a US listing and it won't be too dilutive. 

Tom Russo (Gardner, Russo & Garnder):  He pitched Nestle (NSRGY) and Berkshire Hathaway (BRK.A/B).  It seems like Russo always pitches Nestle when he speaks somewhere.  He's a global value investor and is looking for companies like See's Candies and invests for the long-term.  They have a lot of European companies in their portfolio and like market volatility as it provides opportunities to long-term investors.  The last major portfolio buys they made were AB Imbev (BUD) and Mastercard (MA) 3 years ago.

Mario Gabelli (Gabelli Funds):  He presented Cablevision (CVC) as a potential buyout candidate with John Malone (and Charter Communications) active and pushing for consolidation.  Will the Dolans sell CVC?  Argues that the company is worth up to $23 in a buyout, versus current levels of around $16.

Caroline Cooley (Crestline Investors):  She's focused on event-driven plays.  She specifically mentioned Macquarie Infrastructure (MIC) which is involved with infrastructure building, has a nice yield and could see it head higher.  It's undervalued because it cut the dividend in '09 and has limited sell-side following. says this story is probably in the middle innings.

Tom Gayner (Markel):  He pitched General Electric (GE).  He pitched the same stock at GIBI in 2007 when it was $40 and now the stock's at $25.  They still own shares and now have a $23 cost basis.

For more conference notes, we also posted up notes from Invest For Kids Chicago (Lasry, Eisman, Cooperman).

Keith Meister's Corvex Management Files 13D on Fidelity National Financial

Keith Meister's activist hedge fund Corvex Management filed a 13D with the SEC regarding shares of Fidelity National Financial (FNF).  They've disclosed a 7% ownership stake in the company with 17,435,547 shares.  This is a brand new position for them.

Their stake includes an aggregate of 14,601,900 shares underlying call options, so that's worth noting. Over 8.1 million of these shares are represented by calls with a $15 strike and August 29, 2014 expiration.  Over 6.4 million shares are via October 31, 2014 calls with a $16 strike.  Shares of FNF currently trade around $28.

Meister's activist filing says that they are "supportive of the Issuer's announced acquisition of Lender Processing Services" and they have had and may continue to have discussions with management.  The filing was made due to activity on October 21st.

Per Google Finance, Fidelity National Financial is "a holding company. FNF, through its subsidiaries, provides title insurance, mortgage services and diversified services. FNF operates in four segments: Fidelity National Title Group, Remy, Restaurant Group and Corporate and Other. The Fidelity National Title Group segment consists of the operations of FNF’s title insurance underwriters and related businesses. The Remy segment is a designer, manufacturer, remanufacturer, marketer and distributor of aftermarket and original equipment electrical components for automobiles, light trucks, heavy-duty trucks and other vehicles. The Restaurant Group segment consists of the operations of ABRH. The corporate and other segment consists of the operations of the holding company."

We've covered Corvex's past portfolio activity here.

Tiger Global Adds to Carter's Stake

Chase Coleman and Feroz Dewan's investment fund Tiger Global just filed an amended 13G with the SEC regarding their stake in Carter's (CRI).  Per the filing, they've disclosed an 8.2% ownership stake in CRI with 5,653,031 shares.

This marks a 41% increase in their position size since the end of second quarter.  They bought over 1.6 million shares and the event date that required the filing was October 24th, the same day CRI shares were down 8% after reporting earnings.

Prior to this filing, Tiger Global was already one of the largest institutional holders of Carter's shares, and now they own even more.

Numerous other prominent hedge funds we track have also been long CRI shares as of Q2, including Viking Global, Hound Partners, Pennant Capital, Corvex Management, and Glenview Capital.  In a few weeks, we'll see who remains long as of the end of Q3.

Per Google Finance, Carter's is "is a branded marketer of apparel for babies and young children in the United States. The Company owns two brand names in the children’s apparel industry, Carter’s and OshKosh. Its Carter’s brand provides apparel for children sizes ranging from newborn to seven. OshKosh brand provides its line of apparel for children sizes newborn to 12. Its Carter’s, OshKosh, and related brands are sold to national department stores, chain and specialty stores and discount retailers."

For more on this hedge fund, we've posted some other recent Tiger Global portfolio activity here.

Wednesday, October 30, 2013

Invest For Kids Chicago Notes 2013: Lasry, Eisman, Peltz, Cooperman & More

The fifth annual Invest For Kids Chicago conference just took place and MarketFolly has notes from the event which featured tons of prominent hedge fund managers presenting investment ideas to benefit charities.

Notes From Invest For Kids Chicago 2013

- Marc Lasry (Avenue Capital): Long JC Penney & Connacher Debt

- Lee Cooperman (Omega Advisors): 4 long ideas

- Steve Eisman (Emrys Partners): Long Ocwen Financial & Altisource Portfolio Solutions

- Nelson Peltz (Trian Fund): Presentaiton on Mondelez

- Dinakar Singh (TPG-Axon): 2 investment ideas

- Sam Zell (Equity Group Investments): Real estate thoughts

- Jeff Gundlach (DoubleLine): His presentation

- Mark Kingdon (Kingdon Capital): Thesis on Boeing & Aegerion Pharma

- Steve Kuhn (Pine River Capital): Pitch on American Capital

- Rick Rieder (BlackRock): His presentation

- Stephen White (Castle Union): Pitch on Avid Technology

- Peter Zaldivar (Kabouter Management): Long Hotel Shilla

Marc Lasry Long JC Penney Debt: Invest For Kids Chicago Presentation

Next up in our notes from Invest For Kids Chicago 2013 is Marc Lasry of Avenue Capital.  He pitched J.C. Penney (JCP) as a long at the event.

Marc Lasry's Presentation at Invest For Kids Chicago 2013

•    Reason all the risk in the system is that LIBOR is that 25 bps
•    Supposed to generate a 40x RFR for get 10% per annum. But isn’t there risk there?
•    Why is that risk?

•    Idea #1 is J.C. Penney Debt
o    Why JC Penney? Convince to go and shop
o    Everyone believes JCP will file for bankruptcy
o    Bonds mispriced based on that assumption
o    JCP operates in 49 states (no Hawaii)
o    Slowing retail environment and they get rid of old CEO and bring in Ron Johnson
o    Ron Johnson took a bunch of risk
o    Coupons and promotions here historical
o    Prior to new strategy $17 billion in sales $1.4 billion of EBITDA yet goes to -$500 million of EBITDA
o    Able to raise $2.2 billion of new debt to get to $3 billion of debt and $2.5 billion on unsecured – but that have $2 billion of cash
o    Interest payments are $250 million so hard to file of bankruptcy
o    JCP survives unless the value differential
o    Make ~25% return per year for 2 years in debt so you are making 80x RFR due to the believe that JCP will file bankruptcy
o    Same stores sales are flat to up
o    So you are creating the company
o    Majority is telling you “you are wrong”
o    “Nobody likes noise and don’t want to deal with it and that creates opportunity”

While Lasry's talking about debt, numerous other prominent hedge funds have been in and out of JCP equity and you can scroll through that link to follow the saga.

•    Idea #2: Connacher Oil & Gas Bonds at 70
 o    Worth par over a year to a year and a year and a half
o    Pure oil sands company in western Alberta
o    Crude is at $90 a barrel and the price of crude was $45 in 2012
o    Keystone pipeline was delayed and so shipping crude was expensive by rail and they have reduced arbitrage from $16 per barrel in operating margin to $32 (should still rise)
•    Buying investment at 43% discount to NAV because the market doesn’t understand what Connacher is doing and create something at a big discount to a proven value (as opposed to under comps) 

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Lee Cooperman's 4 Long Ideas at Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Lee Cooperman of Omega Advisors.  He pitched four long ideas and gave his outlook on equities in general.

Lee Cooperman's 4 Long Ideas at Invest For Kids Chicago

•    Equities still best house in neighborhood but not as solid as 2011
•    Sallie Mae worth $32
•    Market in zone of fair valuation
•    All about multiple you assume for the market
•    15 to 16 multiple is fair so market reasonable fully valued
•    Series of numbers – S&P up 23% jumps out at investors
•    Close to 3 multiple expansion the last few years
•    Bull markets don’t die from old age they die from recessions
•    Bonds overvalued & people in process of going out risk curve
•    Stock very cheap relative to fixed income
•    1 to 3% inflation then 16ish multiple makes sense
•    HY index at 6% versus 25%
•    HY has no great fascination at the present time
•    1958 yield revered – bonds versus stock – quarter of S&P 500 now yield more than (government) bonds
•    Wouldn’t be surprised to see the 10 year bond at 5%
•    Bull markets end at overvaluation; 2nd phase of bull market - rising earnings rising dividends (currently late here); 3rd & final: exuberance/excess.  (We've posted Cooperman's 3 stages of a bull market before if you missed it)

•    Negative if (1) recession (2) valuation at danger zone – if go up 10% then we would be at this place (3) growth less than 1% or more than 3% (fed tapering),
•    Doesn’t believe PEs are materially higher – profit margins cyclical

•    Idea #1: Atlas Energy MLOP (ATLS)
o    “More of everything – dividend of 2x S&P.
o    Trading way below sum of the parts o    On top of 2 other publically traded MLPs
o    Thinks it’s worth $60
o    Cheap relative to comps
o    No CapEx and lots of FCF

•    Idea #2: Monitise (London), a position we've highlighted on the site numerous times before
o    1.5 billion dollar market cap
o    Mobile wallet – software on phone that enables online bill pay
o    Blessing of Visa Europe & options of 20% of company
o    “Central to Visa Europe’s philosophy”

•    Idea #3: Sandridge Energy (SD)
o    “Bit of a turnaround”
o    Omega believes NAV is $10 per share

•    Idea #4: Sprint  (S)
o    Biggest position in history of firm at $2.
o    Still cheap now 
o    EV to sales and EV to paid sub is paid sub
For an in-depth look, we previously posted Omega's thesis on Sprint Nextel from their Q2 letter this year

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Steve Eisman on Ocwen Financial & Altisource Portfolio Solutions: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Steve Eisman of Emrys Partners.  He pitched two ideas: Ocwen Financial (OCN) and Altisource Portfolio Solutions (ASPS).

Steve Eisman's Presentation at Invest For Kids Chicago 2013

•    His big trade is detailed in Michael Lewis' book, The Big Short
•    “Time to up meds” after Gundlach’s presentation
•    Been analyzing financial companies for over 20 years
•    This cycle is different
•    Discussion of regional banks
•    Past cycles when you come out of recession, the loan book gets better, then loan books expand
•    Credit quality has gotten better and there is no loan growth and the Fed is not going to raise rates anytime soon
•    Assumes US growth to be 2%
•    Looking for secular growth stories bc he doesn’t want to trust US growth
•    Looking specifically at mortgage sector

•    Idea #1: Ocwen Financial (OCN): Best story in financial services
o    Servicing of current mortgages and everything else
o    Servicing of everything else requires a human
o    Banks lose money servicing mortgages and so the shift is going away from banks and towards mortgage servicing companies such as Ocwen
o    Key is that it enjoys a 70% cost advantage over anyone else due to moving servicing to India
o    Earnings have gone up 7x since 2010 and still in middle innings
o    Another trillion of mortgage servicing rights to be transferred in the next few years (Ocwen has $400 billion pip by themselves)
o    Cash generation is huge: 16% 2014E Free Cash Flow Yield (not to mention 50% growth)
o    50% upside in the next year or two assuming no multiple expansion
o    And multiple expansion is definitely possible

Eisman pitched Ocwen at the Sohn Conference in New York as well earlier this year.

•    Idea #2: Altisource Portfolio Solutions (ASPS) 
o    Stock price of $144.8
o    Spun out of Ocwen and now have three businesses
o    Key to story is massive diversification
o    Growth is 42% year over year for Q3 2013
o    Hubzu is a part of mortgage solutions biz – until recently
o    Can buy a house online and is 15% of earnings of company
o    Zillow doesn’t own MLS system
o    70% ROE and PEG ratio of 0.34x
o    Covered by one sell side analyst
o    3 questions were asked on recent call and one sell side guy asked 2 questions
o    Hubzu has revenue of 35% of Zillow and Zillow is a $3 billion company 

We've posted an in-depth analysis of Altisource Portfolio Solutions for those interested

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Nelson Peltz's Presentation on Mondelez at Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Nelson Peltz of Trian Fund Management.  He talked about his position in Mondelez (MDLZ).

Nelson Peltz's Presentation at Invest For Kids Chicago

•    Will talk about a Chicago company – Mondelez
•    Highlight why they own it and what the ability to drive value is
•    Like companies that cannot get disrupted and there is nothing more basic than packaged food
•    Cash growing
•    Like low private label exposure and global growth
•    Confectionary and snack
•    Private level and revenue growth are the two largest problems packaged food companies
•    Profit could rise more than 50% and EPS could double
•    Benefit of the split was creating a structure that would allow them to win
•    “Complexity lowers margins while simplicity raises margins”
•    New Kraft has 300 to 400 bps of better margin by removing layers of inefficient management
•    Mondelez is starting from lower base and can do even better
•    Exceptional emerging markets exposure – perhaps impossible to replicate
•    Most CPGs can’t figure out how to orient their products to local tastes & preferences
•    40% revenue from emerging markets
•    It has the brands, distribution, and consumers
•    Think margins could go from 12% to 18% based on peer comps by percentage of sales (lot of confectionary)
•    Working capital is a problem for Trian
•    Every target management has presented has been missed and missed large
•    EBIT margins are down over the last 6 months
•    2015 margins are 300 basis points too low
•    Margins and sales can both rise as proven by Gillette from 2001 to 2004, Hershey from 2008 to 2012 and many others…
•    Base case upside of 67%
•    Low case upside of 44%
•    Upside case upside of 93%
•    Trian has been in communication with Mondelez since July 2013 but communications not very constructive
•    Constantly evaluating all options

If you missed it in the past, we've posted up Trian's white paper on Pepsi & Mondelez.

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Dinakar Singh's Thesis on Hitachi & Daqin Railway: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Dinakar Singh of TPG-Axon Capital.  He presented two long ideas: Hitachi and Daqin Railway.

Dinakar Singh's Presentation at Invest For Kids Chicago

•    Global fund – but pick best few dozen ideas
•    Average multiple of 14 is misrepresentative as some sectors are trading above historical number
•    Asia is discount of world
•    Many cyclical stocks in Asia trade at low multiples
•    Japan is seeing company change in some companies
•    At US with high prices with high margins
•    % of index trading at single digit multiple chart (very low in US and 32% in Europe and 30% in Thailand, and 27% in Hong Kong)
•    Likes to use auto sales for a proxy on where an economy is
•    Big recovery is over
•    Companies have restocked
•    Margin trend in Russell 3000
•    American listed companies has  come from interest and taxes – EBITDA margins are lower
•    Climb becomes harder when rates begin going up
•    Own 30 stocks and 5 happen to be US

•    Idea #1: Hitachi (Japanese) 
•    New CEO in 2008 was a change agent (even though insider)
•    Sold entire consumer business
•    Investing in healthcare equipment like Emerson and Phillips
•    Valuation is different than Emerson and Phillips
•    Hitachi has made tremendous process with margins at 5% yet could they double
•    Far more ways to win in terms of earnings
•    CEO boosted buybacks dividends

•    Idea #2: Daquin Railway (601006 CH) 
•    P/E multiple is half on union pacific at 8.2 versus 16.3x for Union Pacific
•    Good balance sheet
•    Good management and 6% dividend yield
•    Every year they should grow profits
•    Dividend should be growing
•    Could get tariff growth form coal
•    Rail rates could be up significant

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Sam Zell's Real Estate Thoughts at Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Sam Zell of Equity Group Investments and he gave his thoughts about real estate.

Sam Zell's Presentation at Invest For Kids Chicago

•    Business card is a book call “Quotations from the Chairman”
o    “Be a risk taker yet define risk in your own terms”
•    Perspective on US real estate in commercial sector
•    Flavor of the month – obsession of buying single family homes
•    Zell turned down the offers to operate a platform – Zell operates largest
o    Average of 400 units per location
o    Yet lower number of HVAC systems
o    Don’t see how it equates to a public company
•    How would you get credit in the stock market when the market doesn’t get one-time gains – not likely to be a very good public company going forward
•    Yet multifamily is probably the strongest sector in real estate
•    Deferral of marriage – times were different “there was no pill”
•    5 years ago Motorola rented prices in the city bc they couldn’t attract smart people to the suburbs
•    Society becoming more and more urbanized
•    The further out of a city you get the more you are affected by weakness
•    Demand for multi-family housing and optionality is changing supply / demand characteristics going forward
•    Retail is Darwinian scenario – major malls are taking market share 
•    Becoming “downtowns” of the past and Zell is positive on their future
•    Significant obsolescence in many non-core malls
•    Economics of strip centers – anchors cover interest payments and guys in middle make your profit yet these companies are hit the hardest
•    Retain under a huge threat of e-commerce which will continue to grow
•    Office market not as hot as 2007
•    Use of office space is changing
•    Existing tenants are redoing leases with less square footage than before
•    Not seeing construction which leads to oversupply
•    Hospitality (Chinese in the US is driving hospitality)
•    Expect significant number of tourists from Asia pacific (China especially)
•    Supply is in measure “under constraint”
•    Biggest issue is debt creation at historically low rate – low at 4% being refinanced at 7% - what does that mean?
•    One of the rules of the game is getting as long of a term as possible
•    Pubic market cheap but not significantly – “sharp shooter market” 

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Jeff Gundlach's Presentation at Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Jeff Gundlach of DoubleLine Capital.

Jeff Gundlach's Presentation at Invest For Kids Chicago 2013

•    QE with its monumental scale and scope tries to
•    FDR is a parallel to Obama.  Government – federal, state, and local – costs too much…  New Deal
•    FDR inauguration in a banking panic
•    FDR blamed bankers immediately
•    FDR sent congress a record numbers of bills
•    FDR “try something” & the new slogan is “whatever it takes”
•    Record corporate profits – will they catch the attention of the tax man?
•    FDR raised the marginal tax rate to 100% (500,000 equivalent in today’s dollars)
•    Dynamite shack – sounds like quantitative easing
o    For now the dynamite keeps getting stuffed into the plastic shack
•    Synonym for early is wrong
•    Interest rates are low but don’t have to rise in the near term
•    FDR confiscated gold and the Fed now explains things are “the policy”
•    Speculation at the expense of savers
•    US margin debt is borrowing at the purpose of speculation – mirrors S&P 500
•    Currently alarmingly high
•    Lunch atop a skyscraper
•    Amazon with no earnings, Netflix, Tesla
•    Advice: do not get sucked in to QE and remember ocean of liquidity and risk manage accordingly 

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Mark Kingdon's Thesis on Boeing & Aegerion Pharma: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Mark Kingdon of Kingdon Asset Management.   He pitched two ideas: Aegerion Pharma (AEGR) and Boeing (BA).

Mark Kingdon's Presentation at Invest For Kids Chicago

•    $1.6 million dollars 30 years ago; 17% CAGR 30 years
•    Generally positive view on global economy and equities
•    Increasing auto and housing outlook

•    Special situations:

•    Idea #1: Aegerion Pharma (AEGR)
•    Drug is Juxtapid
•    Orphan drug for HOHF (ultra high cholesterol)
•    Original thought was 300 patients in US and 900 worldwide
•    Actually though TAM of 15,000 patients or more (no pediatric assumed)
•    $295,000 per year per patient leads to $25 EPS
•    Sell side is now upping patient forecast to 15,000
•    Upcoming testing in children, Japan is growing

•    Idea #2: Boeing (BA): thinks it's undervalued
•    5 years late and well over budget
•    First major plans designed from ground up since 1960’s
•    Terrific customer experience and better for carriers
•    787 is very economical to operate
•    (no rivets rather using special glue)
•    Boeing CEO – payback could be as low as two years.
•    Used to be 5% payback on a plane and now expected return is 30%
•    Airline industry is facing rising demand
•    8 year backlog for planes
•    2015 is mid-cycle
•    12 FCF (low end of 2015) x 14 multiple = 156 stock
•    Boeing has promised to return 80% of FCF to shareholders
•    Multiple should rise, backlog is strong

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Rick Rieder's Presentation at Invest For Kids Chicago 2013

Next up in our notes from Invest For Kids Chicago 2013 is Rick Rieder of BlackRock.

Rick Rieder's Presentation at Invest For Kids Chicago

•    21 years at Lehman; Fixed income analyst hall of fame
•    Upside value of FI is muted to say the least
•    Talk on convert – fundamental value of significant proportion
•    Investment regime is changing
•    2003 to 2007 – leverage built up
•    2008 to 2013 – Fed saving system
•    Rebooting system back to “2003 or 2004”
•    Growth in the next few years has exogenous for moderate growth for next 2 to 3 years
 •    Expect moderate growth framework for next few years
•    Low rate framework
•    Buying a lot of agency mortgages
•    Can re-lever US balance sheets
•    Cost of equity versus BBB yields is very wide
•    Investors are forcing CEOs to return capital
•    Dividend to CapEx has also growth so ST growth for equity price but LT underinvestment
•    Need for interest income in market yet not enough assets so investors are forced out the rick curve to equities
•    Converts provide upside convexity, income, and the ability to leverage volatility(options are priced cheap due to volatility being held on the Fed’s balance sheet)
•    Likes DR Horton, MGM, and Ford converts
•    Also works in Europe & Asia 

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Steve Kuhn's American Capital Presentation at Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Steve Kuhn of Pine River Capital.  He pitched American Capital (ACAS).

Steve Kuhn's Presentation At Invest For Kids Chicago

•    American Capital (ACAS): a Fabulous Fish out of Water
•    BDC with three business lines
o    Debt & Equity in US companies
o    Debt & Equity in European companies
o    Asset management arm
•    Tax treatment similar to REITs yet pay out all earnings in dividends
•    Sector is slightly at a premium to book value
•    Dividend value of 9.8%
•    ACAS is trading at 0.73x but doesn’t have a dividend
•    In 2008 they had a giant NOL carryforward
•    But using NOL was a better strategy than paying out divided so they converted to a C-Corp and are using the NOLs
•    Repurchased 27% of stock in the last 2 years which added over $1.50 per share to book value since June 2011
•    Average price to book of repurchase is 0.66x
•    Going to buy back 15% of equity now
•    On the “naughty list “ of diluters such as Citi and BofA is 0.7x
•    Book value growth has been at a CAGR of 38%
•    Book value of the asset management business is $3 per share
•    AUM of 14 billion
•    3 CLO deals this year – plan for additional products and business lines
•    Company values business at $1 billion yet it makes $120 million per year (super conservative valuation – could be worth $500 million more)
•    By 2016 Book value could be a s high at $26 per share 
•    ACAS has 3 years of tax shield of three more years then probably reinstates a dividend
•    Think portfolio value could increase as well and could underpin a $28 per share valuation
•    Management has 250 million reasons (options) to make this happen – would increase to a value of $105 million
•    Book value of $19.28 and trading at $14.20 

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Steve White's Avid Technology Pitch at Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Steve White of Castle Union.  He was part of the emerging manager panel and pitched Avid Technology (AVID).

Steve White's Presentation at Invest For Kids Chicago

•    “Real companies not current on their financials”
•    Avid Technology (AVID): audio & video editing software
•    Industry standard with customer stickiness
•    HD shift was super strong
•    Revenue gone down for 5 years
•    No financials filed since Q3 2012
•    February 2013 was fired
•    Restatement process should be doing in Q1
•    Ultra HD aka 4K
•    Competitor of adobe and autodesk with mid 20% margins
•    Second worst margins are 17%
•    Stock is $6.60 with comps at multiples above $20
•    Application software companies are bought as 8x (low of 5x) maintenance
•    Risk is restatement of financials
•    Nearly 20% of market cap is cash
•    Getting compensated properly to take risk 

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Peter Zaldivar's Hotel Shilla Pitch at Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Peter Zaldivar of Kabouter Management.  He was part of the emerging manager panel and presented a long of Hotel Shilla (008770).

Peter Zaldivar's Presentation at Invest For Kids Chicago 

•    International focus; looks for smaller underloved companies
•    Hotel Shilla (008770) 
•    $2.4 billion market cap
•    2 hotels in Korea (10% of sales) and duty free shops (90% of sales)
•    6 locations generate $6 billion of sales
•    Duopoly – 35% versus 50% Lotte (private)
•    Fast growth of 15% and accelerating
•    Barriers to entry are scale and government licenses
•    Chinese are getting richer – number of rich Chinese are growing substantially
•    Korea wants tourism and China is only 90 min away
•    Cosmetic surgery – world center for plastic surgery
•    Most important thing is that they sell luxury brands for less (as in 40% less than in mainland China)
•    South Korea has a tourist police force that verify authenticity
•    Chinese half of customer base and growing at 30% per year
•    More Chinese are getting passports – still less than 10%
•    Yet Hotel Shilla is trading at 17.2x 2014E earnings
•    28% upside in a base case
•    69% upside implied by a slight premium to comps
•    Same P/E as European counterparts would imply a 60% gain

Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Tuesday, October 29, 2013

Valinor Management Starts dELiAs (DLIA) Stake

David Gallo's hedge fund firm Valinor Management just filed a 13G with the SEC regarding shares of dELiAs (DLIA).  Per the filing, the hedge fund has disclosed a 9.56% ownership stake in dELiAs (DLIA) with 6,571,429 shares.

This is a brand new position for Valinor and the filing was due to portfolio activity on October 24th.  Whitney Tilson's Kase Capital has also been involved with DLIA shares.

Per Google Finance, dELiAs is "a retail company comprised of two lifestyle brands primarily targeting teenage girls and young women. The Company generates revenue by selling predominantly to teenage consumers through direct mail catalogs, Websites and retail stores. It operates in dELiA*s brand. Through its e-commerce Webpages, catalogs and retail stores, dELiA*s (the brand) offers a variety of product categories to teenage girls to cater to an entire lifestyle. Through its catalogs and the e-commerce Webpages, it sells many name brand products along with its own brand products in key teenage spending categories. These products include apparel and accessories. Its mall-based dELiA*s specialty retail stores derive revenue primarily from the sale of apparel and accessories and, to a lesser extent, branded apparel to teenage girls. It operates in two segments: direct marketing and retail stores."

Tiger Veda Starts EADS, Osram Licht Stakes: Q3 Letter

Manish Chopra's hedge fund Tiger Veda initiated a few new positions in the third quarter according to their Q3 letter.  Tiger Veda bought Osram Licht, EADS, and KAR Auctions Services.

Readers might already be familiar with Osram Licht because David Einhorn's hedge fund purchased it as well and mentioned it in Greenlight Capital's Q3 letter which we previously posted.  This lighting manufacturer was spun-off from Siemens and is a restructuring play.

Of their new EADS stake, Tiger Veda writes,

"EADS in France, the manufacturer of Airbus aircraft and various defense businesses, that we expect will grow earnings materially over the next 5 years, due to losses from old products going away, well executed high incremental margin product introductions hitting the tarmac, and a restructuring of the defense businesses post ridding the company (Board) of government supervisors (Directors), as they sold down their equity stakes to undergo an attempt at a transformation towards the profit margins of Boeing."

Chopra also purchased shares of KAR Auctions Services (KAR), a used car auctioneer.  

During the third quarter, Tiger Veda had average gross exposure of 114% and average net exposure of 68%.  Their top five holdings at the end of Q3 were Tribune, Macquarie Infrastructure, Royal Caribbean, Gencorp, and Air Lease.

For more Q3 hedge fund letters, head to:

- Dan Loeb & Third Point's Q3 letter

- David Einhorn & Greenlight Capital's Q3 letter

- Bill Ackman's  (Pershing Square) Q3 letter

- Cobalt Capital thesis on EOG Resources

- Hoplite Capital's Q3 letter

- Corsair Capital's thesis on News Corp

- Ruffer's Q3 letter

Lone Pine Capital Adds to The Gap Position

Steve Mandel's hedge fund firm Lone Pine Capital filed a 13G with the SEC indicating they've increased their position in The Gap (GPS).

Per the filing, the hedge fund now owns 5.4% of the company, or 25,085,025 shares of GPS.  This marks a 31% increase in their position size since the end of the second quarter. 

The filing was required due to activity on October 18th.  Gap shares have traded down from $46 in August to $37.50 currently, and it looks like Lone Pine took advantage of the decline.

Per Google Finance, The Gap is "a global specialty apparel company. Gap Inc. offers apparel, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. It operates in two segments: Stores, which includes the operations of the retail stores for Gap, Old Navy, and Banana Republic, and Direct, which includes the operations for its online brands, both domestic and international. It has Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, China, and Italy. It also has franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores throughout Asia, Australia, Eastern Europe, Latin America, the Middle East, and Africa."

This hedge fund has been quite active lately, and you can view some more of Lone Pine's portfolio activity here.

Soros Fund Starts Palace Capital Stake

George Soros’s family office Soros Fund Management has disclosed a new stake in London listed property company, Palace Capital (LON: PCA).

Palace Capital recently raised £23.5m at a placing to buy a portfolio of commercial property assets in England and Wales from Quintain Estates. Quintain are refocusing on London and sold their outside of London assets to Palace.  

Soros’s Quantum Fund took part in the placement taking a 14.87% stake in Palace Capital. 

Per Google Finance – “Palace Capital plc, is a United Kingdom-based investment company. Its   principal activity of the Company is to invest in entities operating within the property sector. The   Company has made an investment in the property arena through its acquisition of Hockenhull   Estates Limited. The Company’s subsidiaries include Equalgold Limited and Hockenhull Estates   Limited. The Company owns the freehold interest in nine commercial properties located in Crewe   and Nantwich, Cheshire which are let under fourteen individual leases. The Company focuses on   the United Kingdom secondary property market outside of London. In October 2013, the Company  acquired Sequel Portfolio from Quintain Estates & Development PLC.”

For more on this legendary investor, check out George Soros' best investment advice.