Thursday, April 24, 2014

Marcato Capital's Presentation on Sotheby's & Dillard's

Mick McGuire of hedge fund Marcato Capital Management recently made a presentation on both Sotheby's (BID) and Dillard's (DDS) at the Active Passive Investor Summit.

They are activist investors in Sotheby's and their thesis is summed up by: significant levels of unproductive capital, inappropriate mix of debt & equity, and desire for more shareholder friendly capital allocation.  Daniel Loeb's Third Point is also a BID activist here.

Marcato also presented a passive investment example in Dillard's where activists got involved in the stock a few years ago, the stock continued to drop and the activists eventually bailed on their position. 

Dillard's went on to turn itself around and Marcato thinks it's an attractive passive investment opportunity today as it trades at a 12% free cash flow yield and is using FCF to buy back shares.  The hedge fund thinks DDS could head as high as $155 per share (currently trades around $95).

Embedded below is Marcato's slideshow presentation:

You can view other activity from Marcato here.

East Coast's Q1 Letter on Business Adaptation & the Gas Evolution

Christopher Begg is out with East Coast Asset Management's Q1 letter entitled "The Economy of Evolution."  This time he touches on how businesses are constantly thwarted by change and can be forced to adapt.  Three specific forces they're focused on are: the Amazon effect hurting brick and mortar retail, climate change, and a shift to natural gas.

Since most businesses fail to adapt over time, East Coast looks at whether or not the business' terminal value will be better five or ten years from now.

In particular, the letter goes into depth on the 'gas evolution' and how one can play an impending shift in energy demand.  Instead of looking at the producers or consumers, they prefer to look in the middle, or the 'toll bridges' as the global gas supply chain gets built out.

East Coast then dives into a representative idea, a global terminal storage operator.  They started building a stake in Q4 2013 and have continued to add.  They see it as a transformation play as the company had average operating economics but an inflection point should change that with secular tailwinds.

While the letter does not specifically identify the company, the descriptions sound like it could be Koninklijke Vopak (AMS:VPK).

Embedded below is East Coast's Q1 letter:

We'll end with one last quote from the letter: "Proper temperament is one of the most important attributes of the investor - breathing in reason before instinct."

For more from this firm, head to East Coast's previous letter on understanding mispricings.

Kyle Bass on Global Outlook Pitfalls and Opportunities

Hayman Capital's Kyle Bass recently gave a talk at the Dallas Fort Worth CFA Society for the Texas Investor Summit entitled "Global Outlook Pitfalls and Opportunities For 2014."  In it, he walks through monetary policy and the various scenarios that could unfold and their effects.

In the presentation, he touches on three main topics: the US and tapering, Japan and quantitative easing, as well as emerging markets and slowing growth.

Embedded below is Hayman Capital's .pdf presentation:

You can watch the video of his presentation by clicking here.  You can view recent portfolio activity from Hayman here.

H/T to ValueWalk for finding the video.

Wednesday, April 23, 2014

What We're Reading ~ Analytical Links 4/23/14

A look at the Aereo Supreme Court case [SCOTUSblog]

What's Alibaba really worth? [Value Venture]

Macro and micro inefficiencies in equity markets [Ada Investments]

Takeaways from a slew of recent earnings calls [Avondale]

Americans still don't trust the stock market [CNN Money]

The stock picker's market fallacy [Pension Partners]

Can Facebook innovate? A conversation with Zuckerberg  [NYTimes]

Brazil's 50 year snooze [Economist]

Sell in May and go away? [Barrons]

Putting lipstick on Ulta [Herb Greenberg]

WWE Network profitable or on the ropes? [SNL]

5 questions on the state of mortgage lending [WSJ]

Why Apple is like a movie studio [Recode]

Big Japan investors tell firms to make better use of cash [WSJ]

Greenlight Capital's Q1 Letter: Sees Tech Bubble Forming

David Einhorn's hedge fund firm Greenlight Capital is out with is first quarter letter.  In it, they talk about how a potential bubble in tech is forming.  As such, they've shorted a basket of momentum names in small size in order to manage risk.

Other main takeaways from the letter include various new longs for Greenlight: Resona Holdings (Japan: 8308), SunEdison (SUNE), Altice (Netherlands:ATC), and Conn's (CONN).  The last long might be a surprise to some, as many hedge funds have been short the retailer that also deals in subprime lending. 

Greenlight also covered many unsuccessful shorts, including Chipotle (CMG), Fortescue Metals, Loblaw Companies, and Michael Kors (KORS).

At the end of Q1, their largest long positions were Alpha Bank, Apple, gold, Marvell Technology, Micron, and Oil States International.

Embedded below is Greenlight Capital's Q1 letter:

You can view other recent portfolio activity from Greenlight here.

Pershing Square's Presentation on Allergan/Valeant: The Outsider

Bill Ackman's hedge fund firm Pershing Square Capital has released a presentation called "The Outsider" that details perspectives from Allergan's largest shareholder and talks about a potential combination with Valeant Pharmaceuticals (background on Pershing's involvement via that link).

One of the main concepts detailed in the presentation is platform value.  Pershing notes that, "Considerations in valuating this asset include management's ability to (1) identify new acquisitions, (2) execute those acquisitions on reasonable terms, and (3) integrate them effectively."

Though Ackman is newer to the VRX story, other hedge funds are not.  ValueAct Capital has been invested in the name for many years and has seen Valeant do all three of the above time and time again.

This is due in large part to a fantastic management team with CEO Michael Pearson at the helm.  There's a great book on the best capital allocators of our time called The Outsiders, which made Warren Buffett's recommended reading list.  Ackman argues Pearson should be included in that group.

Embedded below is Pershing Square's slide deck on Allergan and Valeant, entitled "The Outsider":

You can download a copy here.

Tuesday, April 22, 2014

JANA's Barry Rosenstein on Activist Investing: Interview

JANA Partners' Barry Rosenstein talked with CNBC today about activist investing and touched on his stake in Walgreen's (WAG).  Rosenstein says that the company has a "lot of levers to pull, including tax inversion."  Shares of WAG jumped during the interview and WAG is apparently JANA's largest position.

Regarding shareholder activism, he says that, "We don't get involved unless we have concrete ideas that make sense on a long-term and short-term basis and we know we have shareholder support and they're the right solutions for the company."

Embedded below is video of a segment of Rosenstein's interview with David Faber:

You can view additional recent portfolio activity from JANA here and for more on their investment process, you can check out an in-depth interview with JANA Partners here.

Jeff Ubben on Valeant Pharmaceuticals and Microsoft: Interview

ValueAct Capital's Jeff Ubben appeared on CNBC today to talk about some of his positions.  The activist investor talked about his stakes in Microsoft (MSFT) as well as his long-term holding in Valeant Pharmaceuticals (VRX), which is in the news today in a big way.

Late yesterday, we flagged that Pershing Square had acquired an Allergan stake and was working with Valeant to propose a merger.

Ubben highlights how ValueAct's Mason Morfit joined VRX's board in 2007 and so this has been a long-term play for them as they have huge confidence in CEO Mike Pearson.  Ubben says, "Allergan and Valeant are a perfect match."

He then talked about Microsoft (MSFT) and Ubben thinks new CEO Satya Nadella's interests are aligned with theirs.

Embedded below are the videos of Jeff Ubben's interview with David Faber:

Video 1 on VRX

Video 2 on MSFT

You can view some of ValueAct's recent portfolio activity here.

Monday, April 21, 2014

Lone Pine Capital Almost Doubles Michael Kors Stake

Steve Mandel's hedge fund firm Lone Pine Capital has filed a 13G with the SEC regarding their position in Michael Kors (KORS).  Per the filing, Lone Pine now owns 5.5% of the company with over 11.2 million shares.

They've almost doubled their stake recently as this marks an increase in their position of over 5.1 million shares since the end of 2013.  The filing was made due to activity on April 10th.

With this move, KORS has obviously become a bigger part of their portfolio.  KORS was the sixth largest holding in their Lone Cypress fund as of the end of the first quarter, at around 3.1% of assets.

You can view other recent portfolio activity from Lone Pine here.

Per Google Finance, Michael Kors "is a global lifestyle brand . The Company designs, materials and craftsmanship with a jet-set aesthetic that combines stylish elegance and a sporty attitude. The Company is an American sportswear house to a global accessories, footwear and apparel company with a presence in over 85 countries. Its segments include retail, wholesale and licensing. It is focused on retail stores, department stores, specialty stores and select licensing partners."

Pershing Square Acquires Allergan Stake, Working With Valeant Pharmaceutical To Propose Merger

Bill Ackman's hedge fund firm Pershing Square Capital Management has just filed a new 13D with the SEC regarding shares of Allergan (AGN).  Per the filing, Pershing Square now owns 9.7% of the company with over 28.8 million shares.  This is a brand new position for Ackman and the filing was made due to activity on April 11th.

The stake is actually broken down into 24.8 million shares underlying call options at strikes ranging from $1.20 to $1.33 and exercise dates from March 2015 to April 2015.  They also have exposure to 3.45 million shares of common stock via forward purchase contracts with an expiration of April 22, 2015 and based on a forward price of $140.37.

Working With Valeant Pharmaceutical To Propose Merger

Pershing has filed the 13D jointly with Valeant Pharmaceutical (VRX).  Pershing and Valeant entered into their agreement on February 25th, 2014 and they're working together via a joint vehicle called 'PS Fund 1, LLC' that VRX will contribute $75.9 million to.

There's a lot of details and it's worth viewing the entire SEC filing here (including all exhibits)  But basically, what you need to know is that Valeant intends to propose a merger with AGN.

VRX has been a serial acquirer in the pharmaceutical space under the guidance of CEO Michael Pearson.  The stock is also a hedge fund favorite.

ValueAct Capital has held a large VRX stake for quite some time, as has Ruane Cunniff.  Additionally, VRX was one of Lone Pine Capital's top five holdings in their Lone Cypress fund as of the end of the first quarter.  With Ackman joining the party and now working with VRX, there are a lot of prominent investors involved here.

Per the 13D, Pershing Square intends to "engage in discussions with the Issuer and Issuer’s management and board of directors, other stockholders of the Issuer and other persons that may relate to governance and board composition, management, operations, business, assets, capitalization, financial condition, strategic plans and the future of the Issuer."

The filing also notes that, "Valeant currently intends to propose a merger in which the Issuer’s shareholders will receive a combination of cash and Valeant common shares. Valeant has not yet determined the amount of cash and number of Valeant common shares it will offer, but it currently expects the cash component will total around $15 billion. Barclays and Royal Bank of Canada have indicated that they are prepared to deliver financing commitments covering the cash portion of the transaction at the time Valeant makes an offer.  Although Valeant currently expects to make an offer, it is under no obligation and provides no assurance it will do so.  If Valeant fails to make an offer before May 2, 2014, the Reporting Persons will have the right to terminate the letter agreement."

*** Update: Valeant has proposed a merger of $48.30 in cash and 0.83 shares of VRX for each share of Allergan, with shareholders allowed to elect a mix of cash and shares.  Based on today's trading, that's a deal of about $157 per AGN share, a significant premium over the $116 they were trading at just yesterday. 

If the merger goes through, AGN shareholders would own 43% of the combined company. As Allergan's largest shareholder, Pershing Square would elect to take only stock in the deal and plans on being a holder of the combined entity. ***

Now we know what Ackman was buying with the proceeds from his sale of General Growth Properties shares and Beam shares.

What We're Reading ~ Hedge Fund Links 4/21/14

Lone Pine admits lousy quarter but reaffirms strategy [II Alpha]

Hedge funds suffer worst start to year since crisis began [FT]

Viking Global hits a few bumps and ponders a new vehicle [II Alpha]

Largest hedge funds vulnerable to 2008 repeat [Risk]

What a hedge fund failure looks like [All About Alpha]

The big unwind: how hedge funds drove the brutal NASDAQ selloff [Business Insider]

European hedge fund assets hit record high in Q1 [HedgeWorld]

JANA, Och-Ziff pressuring Walgreen's to relocate to Europe [HedgeWorld]

Profile of T. Boone Pickens [Forbes]

The basic strategy that made Cliff Asness successful [Financial Post]

Tiger Global raises $1.5b in 8th global VC fund [VC Circle]

Marc Lasry, Wesley Edens buy NBA team [HedgeWorld]

Parallels Between Great Investors and a Renowned Sushi Chef: Jiro Dreams of Sushi

At first glance, it may seem odd to compare a sushi chef to an investor.  But as you'll see by the end of this post, they both share a common goal: to become masters of their craft.

Jiro Dreams of Sushi is a documentary about renowned sushi chef Jiro Ono in Tokyo, Japan.  His restaurant, Sukiyabashi Jiro, is a Michelin three-star restaurant, requires reservations a month in advance, and prices start at ¥30,000 (around $300 US).

After watching this insightful documentary, it became glaringly evident that investors and sushi chefs have a lot more in common than one would think.

Parallels Between Great Investors and a Renowned Sushi Chef

1.  Develop a constant, repeatable process.  Jiro does the same thing almost everyday.  He sculpts the pieces of sushi the same way over and over.  He constructs the day's menu and seating chart.  He even boards the daily train from the same exact spot each time.  His attention to detail might seem maniacal to some, but to him, it's a necessity to achieve greatness.

Applied to investing, great capital allocators seek to identify their own 'style' of investing.  Many of the greatest investors develop a repeatable process of finding ideas that meet various criteria.  Instead of being a deep value investor one day and then becoming a momentum trader the next, talented investors seek to find their niche and stick to it over and over and over again.

2.  Never stop learning, pursue perfection.  Jiro talks about how he is always trying to improve despite the fact that he was 85 years old when this documentary was filmed (in 2011).  He wants to be at the top of his game, even though he doesn't know how high up that is.

Jiro's fish vendor says that, "even at my age (50), I'm discovering techniques.  Just when you think you've figured it all out, you realize that you're just fooling yourself."  His shrimp vendor adds, "When you work at a place like Jiro's, you are committing to a trade for life."

The documentary also references 'shokunin' frequently, which literally translated seems to mean 'artisan,' but it sounds like the meaning goes much deeper than that in Japanese culture.  Jiro says that, "Shokunin try to get the highest quality fish and apply their technique to it.  All I want to do is make better sushi.  I do the same thing over and over, improving bit by bit.  There is always a yearning to achieve more."

Likewise, investing is a continual education.  Great investors are always improving and refining their process.

3.  Be passionate about your craft.  Instead of retiring, Jiro is doing what he loves on a daily basis: making sushi and perfecting his art.  He gives his all every single day.  Jiro says, "You have to love your job.  You have to fall in love with your work."

Some investors, like Warren Buffett and Charlie Munger, are getting up there in age but they don't stop.  They love what they do and they come into work each day excited to try to find their next investment and to perfect their art.

4.  Develop a discerning palate.   Jiro says, "The quality of ingredients is important but you need to develop a palate capable of discerning good and bad."  In investing, 'ingredients' can be the various inputs that determine the success of a business, such as the management team.  While that 'ingredient' is important, at the end of the day, you still have to develop a palate that's capable of discerning between a good and a bad business.

As Warren Buffett put it, "When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

5. Be highly selective.  Jiro's vendors are very specific: 1 focused on tuna, 1 for shrimp, 1 for rice; each is the best of their trade.  This is somewhat akin to an investment fund that has analyst teams broken down by sector.  The analysts and sector heads become so immersed in those businesses that they become micro experts.  Jiro trusts these vendors to bring him the best ingredients, and fund managers trust their teams to bring them the best ideas.

There's also a fantastic scene at the Tsukiji fish market where Jiro's tuna vendor comments that, "I either buy my first choice or I buy nothing.  If ten tuna are for sale, only one can be the best.  I buy that one."

This is comparable to focusing on a strict set of criterion each investment must pass before it's added to the portfolio.  An example of this is Mohnish Pabrai, who frequently talks about the importance of an investment checklist.  Extrapolated further, many successful investors have allocated capital only to their best ideas.  As Fairholme Capital's Bruce Berkowitz says, "Why put money in your tenth best idea?" 

6.  Determine the important metrics.  Jiro's eldest son, Yoshikazu, helps run the restaurant and will succeed his father one day.  In the film, he goes to the market to buy some octopus and the vendor points out the color difference between two octopuses.  Yoshikazu doesn't care; he says he's only focused on one thing: the flavor.

In investing, investors need to identify the few key metrics that define and drive a given business.  Once those metrics are identified, it helps the investor really focus on the business' performance.

7.  Learn from a mentor.  A fish vendor says, "When you work for Jiro, he teaches you for free.  But you have to endure ten years of training."  There's a natural progression for employees at Jiro's restaurant from preparation cook to apprentice to a chef who opens their own restaurant.  Jiro is the master and his son, Yoshikazu, is the protégé being groomed to takeover.

On Wall Street, there are many examples of successful mentor/protégé relationships.  In value investing, you have Benjamin Graham and Warren Buffett.  In global macro, you have George Soros and Stanley Druckenmiller.  In long/short equity, you have Julian Robertson and all of his Tiger Cubs (John Griffin, Andreas Halvorsen, Lee Ainslie, among many others).

This just goes to show that some of the greatest investors (and sushi chefs) have spent time to learn under the best.  It also reinforces the junior analyst > analyst > sector head > portfolio manager hierarchy that many larger firms employ.  You have to gain valuable experience and learn the necessary skills to succeed in the craft of investing. 

8.  Identify your competitive advantage.  Jiro recognizes his strengths and weaknesses.  Investors should do the same.  Warren Buffett famously says to, "focus on your circle of competence."

There's one particular scene in the documentary where everyone says Jiro's rice is the best.  A hotel wanted to buy the same rice from Jiro's vendor, but the vendor said no because, "what's the use if they don't know how to cook it properly?"

Jiro purchases very specific rice from this vendor and uses a distinct preparation method that involves very high pressure to cook it and requires it to be served at a specific temperature.  He doesn't know anyone else who does this.

Other examples include the fact that his chefs massage the octopus for an hour to make it less tough texturally.  Jiro also plans the progression of the courses in a certain order, something it took him years to refine.  His specific vendors, focus on high quality ingredients, and preparation techniques are some of the things that differentiate him from the competition.

Fund managers these days are often asked by potential investors what their competitive advantage is over other active managers.  Good investors will have identified this and can quickly point it out, whether it be experience, style/strategy, sector focus, time horizon, their limited partners, or a myriad of other factors.

9.  Attention to detail is key.  Jiro is laser focused on every detail of the dining experience at his restaurant.  Before customers arrive, Jiro sets a seating chart in order to enhance the flow of the meal while accommodating groups so they can sit together.  If he notices a customer is left-handed, he immediately adjusts where he is placing the sushi in front of them.  He also alters portion sizes based on whether the diner is male or female.  The presentation of each piece of fish is timed ideally for taste, texture and temperature.  Jiro is very methodical in everything he does.

Attention to detail in investing is key as well.  Just ask hedge fund manager Jim Chanos, who famously identified fraud at Enron by obsessively examining their books.  This is also why so many hedge funds dig so deep on potential investments.

Analysts perform channel checks by visiting countless retail stores, talking with competitors & industry experts, surveying customer preferences, etc.  And don't forget the basics: listening to company conference calls and reading SEC filings (including the fine print) etc.  It's the little things that can make a big difference.

10.  Take advantage when opportunities arise.  Jiro doesn't necessarily have the same menu everyday.  His son sees what the best ingredients are at the market for that day and Jiro molds the menu around it.  In this manner, the fish market is a lot like the stock market.  Advantageous investors scoop up shares of specific companies when they find the prices they're looking for. 

There are other similarities, too.  Jiro and his chefs are familiar with all the ingredients they work with, so they know what is good at any given day at the market and when to strike (this ties back in to developing a discerning palate).

The same can be said for many investors who build a 'universe' of investments they've become familiar with over time from past research.  When a business they like finally trades at a price they're comfortable with, they can buy.

As you can see, there are some interesting parallels between great sushi chefs and great investors.   If you haven't seen it already, Jiro Dreams of Sushi is a well-done documentary worth viewing, especially if you like sushi (just don't watch it hungry).

Embedded below is a trailer for Jiro Dreams of Sushi:

You can purchase a DVD copy here or you can watch via instant video here.

"Always try to improve on yourself.  Always strive to elevate your craft.  That's what he taught me."  ~ Yoshikazu on his father, Jiro

Ackman Cuts Beam Stake Yet Again

In what has seemingly become routine selling, Bill Ackman's hedge fund firm Pershing Square has filed another amended 13D with the SEC regarding their Beam Inc (BEAM) stake.

Per the filing, they've basically cut their stake in half since their last sales only a few weeks ago.  As we've mentioned before, BEAM shares are effectively a risk arbitrage play since Suntory made an $83.50 per share offer for the company.  With the spread so thin, it looks as though Ackman has been cashing in his chips to deploy the capital to other potential ideas.

The latest 13D shows that Pershing Square now owns only 5.6 million shares, or 3.4% of the company.  The hedge fund was out selling on April 16th and 17th at a price of $83.27.