Monday, December 7, 2015

Sohn London Conference Notes 2015 - Burbank, Singh, Block & More

We're posting up notes from the Sohn London 2015 Investment Conference that recently took place.  It featured prominent investment managers sharing their latest ideas to benefit cancer research.  Click the links below to go to the presentations.

Notes From 2015 Sohn London Conference

- John Burbank (Passport Capital): Long CF Industries

- Michael Karsch (Hunter Peak Investments): Long Houghton Harcourt 

- Carson Block (Muddy Waters): Short Proofpoint

- Selvan Masil (Westray Capital): Long Rolls Royce, Short Ericsson

- Bran Cornelisse (Farringdon Capital): Pair trade

- Dinakar Singh (TPG-Axon Capital): Long Yutong Bus Company

- Vikram Kumar (TT International): Long TomTom

- Robert Harteveldt (Trishield Capital): Long New Media Investment Group

- Franck Falezan (Primestone Capital): Long Dorma Kaba

- Guillaume Rambourg (Verrazzano Capital): Long Unipol Group

- Per Johansson (Bodenholm Capital): Long eBay, Short ACS 

- Bo Bortemark (Carve Capital): 3 long ideas

- Beltram Lastra (Bestinver): Long Indra

- Elif Aktug (Pictet Asset Mgmt): Long Mead Johnson Nutrition

- Mike Wilkins (Kingsford Capital): On short selling

John Burbank's Sohn London Presentation: Long CF Industries

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Passport Capital's John Burbank who pitched a long of CF Industries (CF).

John Burbank's Sohn London Presentation 2015

Long CF Industries (CF) 

Burbank said that he is generally very bearish on commodities but he likes CF industries for the following reasons.

- They know CF well and have been researching them for at least two year’s.

- CF is the leader in nitrogen fertilizers. The nitrogen fertilizer business is better than the potash business because farmers have to apply it to the soil.

- CF made two good deals in 2015. CF is buying OCI which is listed in the Netherlands. It will give CF a 50% share of the US nitrogen fertilizer business.  Owning a large share of the market will allow CF to charge higher prices. Buying Netherlands based OCI enables a tax inversion which will reduce CF’s tax rate from 35% to between 20-25%. The CF OCI deal should close in mid-2016. The other good deal that CF has done in 2015 is to allow its largest customer, CHS Co-Op, to buy 9% of it shares at $107/ share or $2.8bn. That’s more than double the current stock price. Burbank thinks that CF will use the money to buy back stock. He also believes that analysts have been slow to recognise that the deals will lead to 25% extra product capacity.

- CF is a shareholder friendly company with a long history of share buybacks. Capital returns in dividends and buybacks have been running at 10% per year since 2011. They have reduced the shares by 35% since 2012. Executives are net buyers rather than net sellers of the stock.  Burbank said that CF stock may not do anything for the next four to five months. Then the deals will close, the big buyback will happen and the stock price will go up.

What can go wrong? Burbank thinks that China will devalue. “If China devalues everything in the World will go down in value.” CF’s earnings will get hit too by about 7%. Passport has bought CF against a basket of commodity shorts. They are hedging the downside risk in non-miner, CF, by being short potash miners like Potash Corp (POT), Mosaic (MOS) and Agrium (AGU).

Be sure to check out the rest of the Sohn London Conference presentations.

Carson Block Short Proofpoint: Sohn London Presentation

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Carson Block of Muddy Waters who pitched a short of Proofpoint (PFPT).

Carson Block's Sohn London Presentation 2015

Short Proofpoint (NAS: PFPT) 

Proofpoint is priced for perfection. They went public in 2012. Block said that the more Proofpoint sells the more it loses. There is something wrong with the business model as they have had plenty of time to turn sales into profit.

Management mischaracterise their company as a cyber security company but it only focuses on email. Email security is a tiny market compared to cyber. Email security is a mature market. The number of business emails might actually be shrinking according to one analyst.

Management fudges the organic growth numbers. The real figure is much less than the market thinks.

Proofpoint is facing increasing competitive pressures. Microsoft, Google and Cisco are putting more effort into email security and are catching up. Proofpoint are losing some of their big accounts. Billing and revenue rates are flat lining. The growth rate is at risk. Proofpoint will not be able to maintain its premium pricing and there are already signs they are selling software at greater discounts. Many companies do not see email security as vitally important and are happy to use a free product that is good enough.

Be sure to check out the rest of the Sohn London Conference presentations.

Michael Karsch's Sohn London Presentation: Long Houghton Harcourt

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Michael Karsch of Hunter Peak Investments.  He pitched a long of Houghton Harcourt.

Michael Karsch's Sohn London Presentation 2015

Long Houghton Harcourt (NAS: HMHC) 

Houghton Harcourt is primarily a school text book publisher. It dominates in books for reading, maths and science. Houghton is the largest developer of text book content from Kindergarten to 12th grade in the US. It has 40% market share of the overall spend in the US. The school publishing market is an oligopoly. HMHC is a well-established company that has been trading for over 100 years. HMHC stock currently trades with a beta < 1.

HMHC went through bankruptcy in 2007 after an LBO and a second private equity owner encouraged it to take on too much leverage.  Houghton re-emerged from bankruptcy about a year ago and has been significantly de-levered.

Text books are a good business as revenues are fairly stable. There is a never ending stream of children entering the education system that need to be educated. It costs about $10,000 to educate a student in the US - approximately $100 per year comes from text books.

Houghton is not vulnerable to digital disruption – 40% of their orders are already for digital products. The text book market should not be compared with newspapers in this respect. Houghton has not lost margins from the move to digital. News Corp tried to break into the school digital market by giving away tablets but failed and had to write off the costs. There may actually be benefits from the digital revolution.  For example, print cost savings.

Houghton has complex accounting partly because revenues from textbooks are spread over 7 years even though the fee for the books is received up front. It’s a lumpy business that is hard to predict quarter by quarter. In the last two quarters Houghton has missed earnings expectations. Only 4 analysts following the stock. The earnings disappointments’ have provided a good entry point. Expect the company to buyback 20% of the shares in the next 12 months.

Be sure to check out the rest of the Sohn London Conference presentations.

Selvan Masil's Sohn London Presentation: Long Rolls Royce, Short Ericsson

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Selvan Masil of Westray Capital who pitched a long of Rolls Royce (RR.L) and a short of Ericsson (STO:ERIC-A, ERIC-B).

Selvan Masil's Sohn London Presentation 2015

Selvan Masil founded long/ short equity fund Westray Capital Management in April 2014. Before that he worked at Theorema Advisors, Pelham Capital, and Lansdowne Partners.

Long Rolls Royce (LON: RR) Rolls Royce primarily makes and services jet engines for aircraft. Aero engines are a good business:

- Air passengers double every 15 years

- The order backlog for wide bodied planes is at historic highs

- Fuel is the largest cost for airlines – around 60%. New engines that provide fuel savings are crucial to the future of airlines.

- The barriers to entry are high due to safety concerns and because engine development for wide bodied planes takes time to pay off. New engines lose money for the first 10-15 years before breaking even.

- There are few competitors : GE, Safran, Pratt and Whitney.  Masil sees no sign of a new entrant for the next 10 to 15 years.

- Rolls Royce has issued 5 profit warnings in a row in the last two years. The previous management did not communicate well with investors. Masil thinks that Rolls Royce is at an inflection point.

- Rolls Royce is at the start of capturing new market share. The order book suggests that it will double its market share in wide bodied engines in the next 15 years.

- Profitability will trough in 2016 and then pick up. Masil thinks that margins will pick up sharply by 2019. Consensus estimates for 2019 only show margins making a small improvement from today. 

- RR’s profit margins are not as good as Safran or GE’s which are around the 20% mark. RR can potentially close this gap over time.

- The new CEO, Warren East, is addressing some of the problems with a package of self-help measures – cost cutting, management redundancies and better communication with investors.

Short Ericsson (STO: ERIC-A; ERIC-B) Ericsson is a network equipment company. The industry dynamics are poor. There is pricing pressure in an increasingly commoditised industry due to competition from Asian manufacturers. The recent merger of Alcatel and Lucent has also created a stronger competitor. EBIT margin will be under pressure for a number of years. Ericsson has not done well in taking market share of the 4G market.  Ericsson’s P+L statement overstates profitability – the restructuring charges are not one off/ exceptional but rather ongoing.

Be sure to check out the rest of the Sohn London Conference presentations.

Bran Cornelisse's Sohn London Presentation: Long First Group, Short Student Transportation

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Bran Cornelisse of Farringdon Capital who pitched a pair trade involving two bus companies.

Bran Cornelisse's Sohn London Presentation 2015

Short Student Transportation Inc (TSE: STB): Student Transport is a Canadian school bus company. It owns about 12,000 buses. STB appears to have good growth and pays a very large 10.7% dividend.

The company is not strong financially:

- Net income has been negative since 2007. The company has burnt nearly $200m of cash since 2007.

- The company is increasingly relying on operating leases.

- Cornelisse said that STB cannot afford to pay the dividend. It is being funded by shareholders via the issue of new equity. The company is being poorly run and management have the wrong priorities.

Long First Group (LON: FGP): First Group is a UK based company that runs buses in the UK and operates the famous Greyhound service in the US. It is 4x larger than STB. The two companies do compete in the school bus market.

First Group has consistently generated much higher margins and it is consistently profitable. Unlike Student Transport, First Group does not pay a dividend and does not grow. First Group cut the dividend in 2013 and did a large rights issue. The share price was cut in half and has not recovered since.

First Group has outstanding debt. Interest charges from loans are higher than net income but the first bond will mature in 2018. First Group are paying 6-7% on financing. By 2024 all the bonds will have matured and any new financing should be able to be done at better rates. Once the debt has been paid off expect a profit increase of £60m/ year. Even though First group has expensive debt the balance sheet is strong.

                 Student Transport       First Group  
PE                      62.7                         8.5
EV/CE               2x                            1.8x

Be sure to check out the rest of the Sohn London Conference presentations.

Vikram Kumar's Sohn London Presentation: Long TomTom

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Vikram Kumar of TT International who pitched a long of TomTom (AMS:TOM2).

Vikram Kumar's Sohn London Presentation 2015

Long TomTom (AMS: TOM2) 

TT International  have owned TomTom stock for two and half years.

The Satellite Navigation industry has been shrinking by 25% per annum since 2007. TomTom is misunderstood. It is primarily a mapping software company not a seller of devices/ hardware. Its main business is intellectual property. There are only three global mapping databases: Nokia, TomTom and Google. The barriers to entry are extremely high as it would take at least 10 years to build up a global mapping database.

Google’s map data is not good enough according to interviews that TT International has done with car companies. Accurate maps will be crucial to self-driving cars. It is the key underpinning for the next stage in the development of the automobile. Mapping is going to become more important. Kumar sees Nokia and TomTom as a duopoly. They will have great pricing power in the future.

All Apple mapping data is underpinned by TomTom data. TomTom have recently signed an agreement with Uber to provide all their mapping data. Kumar believes that location based advertising through mobile devices is going to be very important for businesses like Facebook. Push and pull advertising will be targeted by map based technology depending on your location.

In the spring of 2015 Nokia announced that it had been approached by multiple parties and eventually was bought by a consortium led by VW, Audi, Daimler and BMW. Kumar said that this deal proves that mapping is growing in importance to car makers. TomTom is the last remaining independent owner of mapping software in the world. It will be the target of other car companies.

Given that Nokia sold for $3.1bn Kumar thinks that TomTom is worth between $3-5bn.

Be sure to check out the rest of the Sohn London Conference presentations.

Robert Harteveldt Long New Media Investment Group (Sohn London Conference)

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Robert Harteveldt of Trishield Capital Management who pitched a long of New Media Investment Group (NEWM).

Robert Harteveldt's Sohn London Presentation 2015

Long New Media Investment Group (NYSE: NEWM) 

New Media is a newspaper publisher that utilizes a roll-up strategy buying small and medium sized local newspaper businesses.

NEWM owns 575 publications in total, 125 daily publication and 490 related websites EV multiple 2015 6.3x; FCF 17.9%; Dividend 7.3%. NEWM will pay no income tax for the foreseeable future. Revenue and FCF has been growing over the last 3 years. New Media is managed by the private equity arm of Fortress Investment Group.

No one wants to touch newspaper businesses because of the challenge from digital media. Total newspaper circulation in the US has fallen from 51m in 2007 to 44m in 2010. However, Harteveldt argued that if you know where to look you can find thriving newspaper businesses. Newspaper circulation sales trends have stabilised. Small, local papers are here to stay and are sustainable. People need local news and local papers are the main way to get it – school news, obituaries, police blogs etc. There are few alternatives.

Trishield specialises in looking for businesses that are going through a hard time but are misunderstood by the market. New Media’s digital revenues are growing. They receive strong revenues from local advertising.

NEWM have made ten acquisitions since 2013. They will need to acquire $200m more small and medium sized newspapers in the future to hit their targets. This can be achieved via internally generated funds without the need for a rights issue. They make cost savings at newly acquired businesses by centralising administration and raise revenue by raising prices strategically.

Be sure to check out the rest of the Sohn London Conference presentations.

Franck Falézan's Sohn London Presentation: Long Dorma Kaba

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Franck Falézan of Primestone Capital who pitched a long of Dorma Kaba (SWZ:DOKA).

Franck Falézan's Sohn London Presentation 2015

Long Dorma Kaba Holdings (SWZ: DOKA) 

Primestone is a constructivist Activist that brings private equity experience to bear. It focuses on good businesses that can be improved.

Dorma Kaba Holding is a Switzerland-based company engaged in the provision of security systems  - locks, cylinders, hotel security, door closers. It is the No. 2 provider of security solutions after Assa Abloy.

Reasons to like DOKA:

- The security industry is an attractive sector with high margins that are often above 20%. It’s recession resilient. It is characterized by growing markets driven by urbanisation and the need to produce ever more effective security systems. There has been a shift from mechanical to electronic locks – lots of mechanical locks still need to be replaced. Local players have an advantage as government safety standards vary from country to country requiring different products.

- DOKA has a strong position within the industry. Good brands. Architects and security advisers tend to be brand conscious.

- There are multiple ways management can create value. The pieces are beginning to fall into place and he price is still appealing.  DOKA is a good business but it could be improved in several areas.

- Operations: margins should be increased from 16% to come in line with their main competitors that achieve 21%

-Strategy: more growth through acquisitions is required

- Balance sheet efficiency: there is cash on the balance sheet and no debt. DOKA needs to re-lever.

- Management need incentivising: they do not own enough equity and should be paid a larger percentage in shares.

- There is room for consolidation in the market. The market leader Assa Abloy only has 17% of the global market.

Be sure to check out the rest of the Sohn London Conference presentations.

Guillaume Rambourg's Sohn London Presentation: Long Unipol Group

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Guillaume Rambourg of Verrazzano Capital who pitched long Unipol Group.

Guillaume Rambourg's Sohn London Conference Presentation 2015

Long Unipol Group (BIT: UNI) 

Unipol has been a top five position for Verrazzano Capital for the past year and has performed well for the fund.

Unipol is an Italian insurance company. In 2011 it was in chapter 11.It was created by the merger of three insurance businesses that had been poorly managed. They were merged into one entity and a Euro 2bn rights issue was done to take care of the debt. Whilst the rights issue was dilutive, it gave the company a great platform on which to build. They were lucky in 2012 as the money that they raised was invested in Italian high yield bonds with yields of 5-7%. Now that the bonds appear less risky they provide the company with a strong buffer.

Unipol has transformed itself into the No. 1 in telematics. They fit devices to cars of the drivers that they insure that track speed and geography – a kind of in-car spy. With knowledge that they are being watched, drivers drive more carefully and have fewer accidents. Auto insurance is their key market at the moment.

Rambourg said that he likes self-help stories as there is less likelihood of being taken hostage by macro narratives such as the Euro or Chinese GDP.  At Unipol there is a strong CEO that is turning a previously struggling company around. It is taking its destiny into its own hands.

Unipol has a three year plan. Disposals are likely to follow. It pays a 6.4% dividend – the highest in Italy. There is M&A potential.

Be sure to check out the rest of the Sohn London Conference presentations.

Per Johansson's Sohn London Presentation: Long eBay, Short ACS

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Per Johansson of Bodenholm Capital who pitched a long of EBAY and a short of ACS.

Per Johansson's Sohn London Conference Presentation 2015

Long Ebay (NAS: EBAY): Per Johansson is particularly interested in the investment opportunities created by spinoffs. The spinoff of Paypal from Ebay is creating an opportunity to invest in a smaller Ebay. The Paypal spinoff is the first step to unlocking Ebay’s value.

Ebay has a strong balance sheet. It is a high margin business but growth has temporarily slowed for three main reasons.  - May 2014, Google changed the search algorithm - A security breach led to customers having to change their passwords - The strength of the Dollar has been a headwind.

Johansson believes growth is picking up again. Auctions are only 15% of the business. Ebay owns some good brands that some market participants are not aware of. For example, it owns which he referred to as the” Autotrader of Germany.” In time the market will recognise the importance of Ebay’s brands.

Short ACS Actividades de Construccion y Servicios (BME: ACS): ACS is a Spain based global construction company. Johansson said that ACS has accounting irregularities and overstates its earnings. The company has not created any cash flow in the last five years. There are hidden liabilities on the balance sheet. ACS’s end markets are deteriorating. There are cost over-runs on big projects in California.

Be sure to check out the rest of the Sohn London Conference presentations.

Bo Bortemark's Sohn London Presentation: Short Lafargeholcim, Long Sprouts & Yahoo

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Bo Börtemark of Carve Capital who pitched a short of Larfargeholcim and two long ideas: Sprouts Farmers Market and Yahoo.

Bo Börtemark's Sohn London Presentation 2015

Carve Capital is a long/ short equity and credit hedge fund manager that approaches equity from a bottom-up perspective.

Short Lafargeholcim.  China used more cement in the last three years than the US did in the whole Twentieth Century.  Now there is over capacity in China and the rest of the world. China is trying to export its excess capacity. China will increasingly seek to export cement to the countries where the price of cement is highest. These are the same markets that Lafargeholcim is in.

Long Sprout Farmers Market (NAS: SFM). The natural and organic food market is expected to grow in the US.

Long Yahoo (NAS: YHOO).  The core operation is valued at zero by the market. Investors have stopped believing and have given up.

Be sure to check out the rest of the Sohn London Conference presentations.

Beltram Lastra's Sohn London Presentation: Long Indra

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Beltram Lastra of Bestinver who pitched a long of Indra (BME:IDR).

Beltram Lastra's Sohn London Conference Presentation 2015

Long Indra (BME: IDR) 

Indra is a Spanish IT company. One of its main areas of business is the provision of air traffic management systems. The company has been through a difficult patch. It has recently taken write-downs of Euro 900m. It has cut labour costs and made redundancies. The share price has suffered and has been cut in half since 2007.

Central to Beltram Lastra’s investment case is the new CEO who was appointed in Jan 2015. Lastra believes the new CEO will turn the company around in the medium-term. In the short-term there are potential risks from further write downs in the Brazilian part of the business and possible balance sheet issues due to the company’s high level of debt.

Be sure to check out the rest of the Sohn London Conference presentations.

Elif Aktug Long Mead Johnson Nutrition: Sohn London Presentation 2015

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Elif Aktug of Pictet Asset Management who pitched a long of Mead Johnson Nutrition (MJN).

Elif Aktug's Sohn London Conference Presentation 2015

Long Mead Johnson (NYSE: MJN) 

Mead Johnson is the global leader in baby milk formula. Baby food is a high growth product driven by population growth especially in emerging markets and the US.

Mead is beefing up its e-commerce presence in China. It is also going to launch a super-premium product in China next year. The termination of China’s one child policy will generate more business.

The industry is consolidating and Mead Johnson could be a takeover target. A cost cutting programme has been recently implemented and the company is buying back 10% of the shares.

Be sure to check out the rest of the Sohn London Conference presentations.

Dinakar Singh: Long Yutong Bus Company at Sohn London Conference

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is TPG-Axon Capital's Dinakar Singh.  He pitched a long of Yutong Bus Company (SHA:600066).

Dinakar Singh's Sohn London 2015 Presentation

Long Yutong Bus Company (SHA: 600066)

Yutong Bus Company’s main products are school coaches, enterprise shuttle buses, caravans, motor homes. Margins are improving. Expect revenues to grow 10-15% in coming years.

Dinakar Singh said that he would much rather invest in Chinese capital goods companies than in their European counterparts that have very high valuations.

Be sure to check out the rest of the Sohn London Conference presentations.

Mike Wilkins on Short Selling at Sohn London Conference 2015

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Mike Wilkins of Kingsford Capital who talked about short selling.

Mike Wilkins' Sohn London Presentation

Kingsford Capital is a short only hedge fund.

Mike Wilkins did not pitch a specific name but talked generally about how his firm finds short ideas by searching for business people who get involved in fraud and law breaking. They look for senior managers that behave badly as they tend to keep going.

Once they have identified a rule breaker, Kingsford Capital follow their progress and build-up histories of their companies. They also track the business networks of people that infringe the law. Fraudsters often interact with one another. For example, they sometimes share the same auditors.

Be sure to check out the rest of the Sohn London Conference presentations.

Wednesday, November 25, 2015

53 Reasons to Attend the December Family Office Super Summit

The Family Office Super Summit is just a few days away on Tuesday next week in Miami and with 471 registered participants it is almost sold out. (Reserve your seat: I’m sure you don’t need any more reason than the chilly weather to head south to sunny Miami this December, but for everyone else who might need further convincing, here are 53 additional reasons to attend this family office conference in Miami in just a few days: 

53+ Family Office Super Summit Speakers 

1.    Sergio Pedro - Jones Family Office (Single Family Office)
2.    Karl Schade – Presidio Group (Top 50 Family Office)
3.    Frank Häusler - Marcuard Family Office (Top 50 Family Office)
4.    Gary Monroe – Gilder Office for Growth (Single Family Office)
5.    John Jennings – St. Louis Trust Company ($1B+ Family Office)
6.    Leah Zveglich – Aster Family Advisors (Family Office)
7.    Angie Sabel – Abbot Downing (Top 50 Family Office)
8.    James B. Bertles – Tiedemann Wealth Management (Top 50 Family Office)
9.    Michael Studer - Oil & Gas Syndicate
10.    Harris S. Fried – Fried Family Office (Single Family Office)
11.    Candice Beaumont – L Investments (Single Family Office)
12.    Michael Sury – Indorus Holding (Single Family Office)
13.    Thaddeus R. Shelly, III – Tiedemann Wealth Management (Top 50 Family Office)
14.    Sheila Barry Driscoll – President & Co-Founder– Billionaire Foundation (Foundation)
15.    Dan Smith – Neuberger Berman ($250B Asset Manager)
16.    James Cassel – Cassel Salpeter & Co.
17.    Aldo Palles – U.S. Trust (Top 50 Family Office)
18.    Davide Accomazzo – Thalassa Capital (RIA)
19.    Richard C. Wilson – Billionaire Family Office
20.    Russell Deakin – Providence Private Markets 
21.    Lorraine George-Harik – Founding Partner – HPM Partners ($1B+ Family Office)
22.    Trevor Neilson - Global Philanthropy Group & G2 Investment Group (Private Investment Firm)
23.    Eric Munson – NY Based Family Office (Single Family Office)
24.    Anthony Ritossa – Ritossa Olive Oil Family Office (Single Family Office)
25.    Gautam Mahtani – Customer Feedback Systems (Private Business Owner)
26.    Henley Smith – Vanderbilt Avenue Asset Management
27.    Basil Trikatzopoulos – Noah Capital (Single Family Office)
28.    Theodore O’Brien – Billionaire Family Office
29.    Richard Stone – Stone Family Office (Family Office)
30.    Howard Cooper – Cooper Family Office (Single Family Office)
31.    Michael Felman – MSF Capital Advisors (Family Office)
32.    Elliot Dornbusch – CV Advisors (Top-50 Family Office)
33.    Cliff Oberlin – Oberlin Wealth Partners ($1B+ Family Office)
34.    Charles Bennett Sachs – Private Wealth Counsel
35.    Peter Pell – CSM Capital Corp ($1B+ Family Office)
36.    Ira Perlmuter – T5 Equity Partners (Single Family Office)
37.    Paul Smith – NAPLIA
38.    Carol Pepper – Pepper International (Family Office)
39.    Mukang Cho – Morning Calm Management
40.    David Lindahl – The Lindahl Group
41.    Paul de Sousa – Bullion Management Group
42.    Dan Farrell – Privos Capital (Family Office)
43.    Cliff Oberlin – Oberlin Wealth Partners ($1B+ Family Office)
44.    Yvette Connor – Alvarez & Marsal
45.    Julio Gonzalez – Gonzalez Family Office (Family Office)
46.    Patrick Fisher – Promus Capital (Family Office)
47.    E. David Smith – Smith & Associates
48.    David Ratcliffe - U.S. Trust (Top 50 Family Office)
49.    Mark Banieweiz – Socius Family Office (Family Office)
50.    Sebastian Jano – Paradee Resources Company (Family Office)
51.    Jim Fried – Aztec Group
52.    Michael D’Onofrio – Engineered Tax Services
53.    Elie Rieder – Castle Lanterra Properties (Family Office)

See the full brochure for a list of everyone who is speaking, panels, and themes for each day of the Family Office Super Summit here: 

Looking forward to seeing you in Miami, 

Douglas Scott
Family Office Club
77 Harbor Drive #76 
Key Biscayne FL 33149

What We're Reading ~ 11/25/16

The problem of rational capital allocation [RationalWalk]

Buyside versus sellside [A Wealth of Common Sense]

The long road of proving yourself as an investor [Morgan Housel]

Health equals wealth [Joe Terranova]

How demographics rule the global economy [WSJ]

Tokenization and the collapse of the credit card [Forbes]

Here comes Masayoshi Son [Economist]

On regret minimization [A Wealth of Common Sense]

Why TripAdvisor excels at product [Tnooz]

Marcato Capital Exercises Calls on LPL Financial; Owns 6.4% of the Company

Mick McGuire's activist firm Marcato Capital Management filed an amended 13D with the SEC recently regarding its position in LPL Financial (LPLA).  Per the filing, Marcato now owns 6.4% of the company with over 6 million shares.

This is up from the 550,000 shares Marcato owned at the end of the third quarter and is mainly due to Marcato exercising call options on November 20th at a unit cost of 20 each.

Per Google Finance, LPL Financial is "an independent broker-dealer, a custodian for registered investment advisors (RIAs) and an independent consultant to retirement plans. The Company provides a platform of brokerage and investment advisory services to independent financial advisors, including financial advisors at around 700 financial institutions, enabling them to provide their retail investors with objective financial advice. It also supports approximately 4,400 financial advisors who are affiliated and licensed with insurance companies through customized clearing services, advisory platforms, and technology solutions. It provides its advisors with the front-office, middle-office, and back-office support. The Company provides its technology and service to advisors through a technology platform that is server-based and Web-accessible. Its subsidiaries include LPL Financial LLC, The Private Trust Company, N.A., Independent Advisers Group Corporation and LPL Insurance Associates, Inc."

Tuesday, November 24, 2015

Sohn London Conference 2015: Burbank, Singh, Karsch, Lastra & More

Launched four years ago, the Sohn London Investment Conference is here again.  Hedge fund managers will share their latest investment ideas to benefit the research and treatment of pediatric cancer on December 3.

With the support of the UK investment community, the Sohn Investment Conference has raised more than £53.5 million to date to support pediatric cancer research and treatment. You can learn more about the event and cause here.

Sohn London 2015 Conference Details

When: December 3, 2015 at 12:00 PM - 6:00 PM (GMT)
Where: Marriott Hotel in Grosvenor Square, London

2015 Speakers List

- John Burbank, Passport Capital
- Dinakar Singh, TPG-Axon Capital
- Michael Karsch, Hunter Peak Investments
- Beltran Lastra, Bestinver
- Guillaume Rambourg, Verrazzano Capital
- Carson Block, Muddy Waters
- Mike Wilkins, Kingsford Capital
- Bo Börtemark, Carve Capital AB
- Elif Aktug, Pictet Asset Management
- Bram Cornelisse, Farringdon Capital
- Franck Falézan, PrimeStone Capital
- Robert Harteveldt, Trishield Capital
- Per Johansson, Bodenholm Capital
- Vikram Kumar, TT Long Short Focus Fund
- Selvan Masil, Westray Capital

If you're based in the UK or Europe, this is sure to be a great event benefiting a great cause.

You can register for the conference by clicking here.

Lone Pine Capital Increases Dollar Tree Stake

Steve Mandel's hedge fund firm Lone Pine Capital has filed a 13G with the SEC regarding its position in Dollar Tree (DLTR).  Per the filing, Lone Pine now owns 5.6% of the company with over 13.19 million shares. 

This is up from the 5.13 million shares they owned at the end of the third quarter when they originated the new position.  This latest filing is due to activity on November 13th, 2015.

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

Per Google Finance, Dollar Tree is "an operator of discount variety stores offering merchandise at the fixed price of $ 1.00. The Company offers a selection of everyday basic products and also supplements these basic, everyday items with seasonal, closeout and promotional merchandise."

Bill Ackman Boosts Valeant Pharmaceuticals Stake

Bill Ackman's Pershing Square has filed an amended 13D with the SEC regarding its position in Valeant Pharmaceuticals (VRX).  Per the filing, Pershing now owns 9.9% of the company with exposure to 34.11 million shares.

This is up from his previous exposure of 19.4 million at the end of the third quarter.  Ackman bought VRX common stock on October 1st at $178.38 and again on October 21st at $108.13.

He was also active in the options market and this is where the bulk of the increased exposure comes from.  He bought January 2017 $95 calls, sold January '17 $165 calls and also sold January '17 $60 puts.  He also bought and sold at other strike prices and you can view all the transactions here.  Prior to these purchases, Ackman's cost basis on VRX was somewhere around $190.

Shares of VRX have fallen from a high of $260 in August down to as low as $69 recently, before rebounding to $86 currently. 

The company first came under attack as Hillary Clinton and various Democrats publicly voiced concern over pharmaceutical pricing practices.  Secondly, investigative journalists and short sellers questioned the company's relationship with specialty pharmacies, in particular one called Philidor.

VRX has been the definition of a hedge fund hotel for many quarters now.  Another interesting facet here is just how many of these funds held/hold such highly concentrated positions.  Managers such as Sequoia Fund, ValueAct Capital, Pershing Square, Hound Partners and many others have allocated huge chunks of their portfolio to VRX.  While many of these funds' large positions were due to share price appreciation, Ackman's was mainly built via buying earlier this year.

For more on Pershing Square, head to Bill Ackman's comments at the Berkshire Hathaway 50th Anniversary Symposium.

Carl Icahn Starts Xerox Position, Files 13D

Per a 13D filed with the SEC, activist investor Carl Icahn has disclosed a new stake in Xerox (XRX).  Per the filing, Icahn now owns 7.13% of the company with over 72.21 million shares.

The filing contains the standard activist boilerplate that he intends to have discussions with management.

Icahn purchased shares throughout October and November via a forward contract with expiry of July 20th, 2017 at prices between $9.63 and $10.66. 

Those prices contain a footnote that explains: "Represents a forward price of $8.00 per Share, plus the amount per Share the Reporting Person paid the counterparty to the forward contract or minus the amount per Share the Reporting Person received from the counterparty to the forward contract, as applicable, in each case upon entering into such forward contract.  The forward price is subject to adjustment to account for any dividends or other distributions declared by the Issuer. In addition, the Reporting Person will pay a financing charge to the counterparty to such forward contract."

For more on this investor, head to Carl Icahn's recent interview.

Per Google Finance, Xerox is "engaged in offering business process and document management solutions. The Company operates through the following segments: Services, Document Technology and Other. The Company's customers include small and midsize businesses (SMBs), graphic communications companies, Governmental entities, educational institutions and Fortune 1000 corporate accounts. The Company's Services segment provides two types of service offerings: Business Process Outsourcing (BPO) and Document Outsourcing (DO)."

ValueAct Capital Doubles Rolls Royce Stake

Jeff Ubben's activist firm ValueAct Capital now owns 10% of Rolls Royce (RR.L / RYCEY), according to a regulatory filing with the company.  The investment firm crossed the required threshold on November 18th.

We highlighted when ValueAct initially took a Rolls Royce stake earlier this year.  Back then, they owned 5.44% of the company and since that disclosure shares have fallen around 21% and they've utilized the dip to increase their stake.

The company's new CEO Warren East recently issued another profit warning and is laying out his plans to turnaround the airplane engine maker.

Rolls has been hit in the near-term with its exposure to the oil and gas industry via some of its other business lines.  Additionally, the company has seen some dips in their aerospace segment (especially with its Trent 700 engine) as customers wait for newer, more efficient engines and airplanes to be delivered.

It seems as though ValueAct likes the company's duopoly position in the widebody aircraft engine industry.  However, they're probably looking for the company to improve margins and rationalize their production lines. They've also been pushing for a seat on the board at Rolls, but thus far haven't been granted access.

ValueAct, as a long term investor, probably sees this as an ideal turnaround story and are willing to take the near-term pain as East begins to dig in at the company.  Rolls sells its engines at a loss or break-even but then earns money on service contracts over the lifetime of the engine. 

As RR delivers more and more of their newest engines (on planes such as the Airbus A350) their installed base of service contracts is set to expand dramatically.  The company just has to get through the rough patch until then.

You can view additional portfolio activity from ValueAct here.

Per Google Finance, Rolls Royce is "a United Kingdom-based company that designs, develops, manufactures and services power systems for use in the air, on land and at sea. The Company operates through two divisions: Aerospace and Land & Sea. The Aerospace Division produces aero engines for large civil aircraft and corporate jets and provides defense aero engines and services. The Land & Sea Division comprises power systems, marine and nuclear businesses. The power systems business is involved in the development, manufacture, marketing and sales of diesel engines and power systems. The marine business is engaged in the development, manufacture, marketing and sales of marine power propulsion systems and aftermarket services. The nuclear business is involved in the development, manufacture, marketing and sales of nuclear systems for civil power generation and naval propulsion systems."

Saturday, November 21, 2015

Holiday Sale: 50% Off Hedge Fund Wisdom Newsletter (New Issue Just Released)

The brand new Q3 issue of our Hedge Fund Wisdom newsletter was just released!

As a thank you to our loyal readers, we're offering a huge holiday sale: 50% off our Hedge Fund Wisdom newsletter.   To see what you're missing, check out a full past issue here.

The brand new issue features:

- Consensus buy/sell lists of the most popular hedge fund stocks
- The latest portfolios of 25 top hedge funds (David Tepper, Seth Klarman, Steve Mandel)
- Expert commentary on each fund's moves
- Equity analysis of 2 stocks that have seen a lot of hedge fund activity lately

Save 50% Instantly, Subscribe Below

When you sign up, you'll get immediate access to the new issue and the entire archive of past issues.  Lock-in these low prices before it's too late.

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Thursday, November 12, 2015

Notes From Berkshire Hathaway 50th Anniversary Symposium: Klarman, Ackman & More

The Berkshire Hathaway 50th Anniversary symposium just took place and featured conversations with the likes of Seth Klarman, Bill Ackman, Tom Gayner, Byron Trott, Carol Loomis, Roger Lowenstein, Tom Russo, John Phelan, and Whitney Tilson.  The notes were compiled by Jacques Romano, MD.

Notes From Berkshire Hathaway 50th Anniversary Symposium

Carol Loomis (CL) and Byron Trott's (BT) Conversation

Warren Buffett (WB) was invited but he graciously declined explaining his presence would change the nature of the discussions. BT met WB because the GS partner that had handled his account, Tom Murphy, Jr., had retired.  Hank Paulsen told Warren that BT was the only guy for him.  Initial one hour meeting lasted about three hours.  This was in early 2002.

WB created through GS a negative coupon convertible bond of about $300 million called SQUARZ in April 2002, whereby he was paid to borrow money and the institutional holder of the security was able to purchase Berkshire Hathaway (BRK) stock in the future at a higher price.  Charlie didn’t like the idea.

BT represented Pritzker in the Marmon deal and was involved with MacLeans and Pampered Chef transactions.  BT also involved in Wrigley and Mars deal.

BT describes WB as a perfect ten times two.  He has an incredible mind and able to do math in his head and his discipline is incredible.  On the human side, he is humble and has the best sense of humor.  He is someone you want to be with and is always positive about anyone.

Regarding discipline, he cited some KKR transaction that WB could have done for 10-15% more in price while having a cheaper cost of capital but WB felt he could use that cash more effectively at another time.  He waits for his pitch.  “You should see the stuff he turns down over the years”.

WB looks at cash on cash returns and doesn’t factor in leverage.  He looks for durable long lasting cash flow stream businesses.  He realizes that sometimes to get great businesses you have to reach but he is incredibly disciplined and completely unemotional.

WB told BT that CL started as a reporter but is great in accounting and finance and is a stickler for details.  She’s from Missouri.  CL expanded on a vignette about her dating Ty Cobb.  She had come to NYC in 1950s and was on the quiz show Tic Tac Dough where she did well and was subsequently contacted by Ty’s nephew for an invite by Ty to the 21 Club.  “How could a baseball fan turn that down?”  She was his subsequent “date” to Yankee Stadium during an Old Timer’s Game where she was presented with a Mantle, Maris, Whitey Ford autographed baseball.  That’s about where it went.  She was in her late 20s and he was in his late 60s.

In 2008, Goldman Sachs was experiencing a small but daily run on the bank and wanted to raise capital.  BT said it was about a 20 minute negotiation with WB.  In addition to making his BRK investment, WB wanted to make a big statement about being confident in that investing climate.  He subsequently made his GE investment and wrote his Oct. 2008 NY Times op-ed.  One of his points was that markets go up first and that there is reasonable cause to regain confidence.

WB is an American icon.  The world doesn’t understand how important WB was to the solutions during the financial crisis of 2008.  I would describe him as a “pragmatic optimist grounded in reality”.  

Hank Paulson told BT that during a late night phone call, it was Warren’s idea to make TARP capital attractive to banks and for it not to be stigmatized so all the banks should receive it and none look particularly weak or strong.  But he also wanted to make it more expensive for the banks if they kept this capital for a longer period.  

WB was doing this to help the country.  Some may be cynical about this because he owned Wells but Hank knew and everyone else who knows WB knew that he was creatively playing a constructive role.

Warren is disciplined, opportunistic and long term.   Charlie is not my number two; he is my equal and has kept us on the straight and narrow. Warren doesn’t want to do small deals but will do minority deals as long as it is big.

Warren’s the greatest, nicest and most accessible person.  He’s a great teacher and a great student of investing and business.  He provides a safe home for business owners that want liquidity and still passionately want to run their businesses. Warren is one of a kind and will be the best investor of all time and his record will not be beaten. 

He thinks very long term and Berkshire will still be intact a century from now. “Warren, you can’t control things from below the ground.” “Maybe not, but I can try.” The term “investor” is not quite expansive enough to describe Warren.  He’s also a great acquirer, manager and owner of businesses. Matt Rose of Burlington Northern told me that Warren knows more about the railroad now than I do.  And he can interconnect it to everything else.  He makes the complex seem simple.  When I talk to Warren, I feel like I’m 2 steps behind him.

They discussed how Andrew Carnegie is known more now as a philanthropist than as a businessman and Warren may have similar impact and be known more expansively.

Seth Klarman (SK), Bill Ackman (BA), and Roger Lowenstein's (RL) Conversation

Bill went to Larry Cunningham’s Cardoza symposium in 1996 and fortuitously sat next to Suzzie Buffett who invited him to sit next to Warren at lunch!  When he went to HBS, there were not any classes in investing although there were classes in investment management.  There were no investment clubs at that time either.  He read Graham’s Intelligent Investor and then Warren’s annual reports.

Seth Klarman took a job at Mutual Shares after college and “Warren” was common parlance once I got into the business.  He thought Warren’s Superinvestor article was very logical.  SK feels that there must be some type of gene that makes people have an affinity for value and value investing.  He told a story about a friend of his whom enthusiastically tried value investing full time but three months later ended up quitting:  “It doesn’t work”.  

BA says some of the things he tries to emulate are Buffett’s focus on quality, durability and concentration.  Although given “my” experience in Valeant, perhaps I should change one of his aphorisms to “be fearful when others are fearful”.  

Making good investments is not about performing discounted cash flow analyses or reading footnotes but more about assessing the moat in our dynamic world. Many of Buffett’s investments in the 1970s like encyclopedias and newspapers did not hold their advantages.  You can’t “just buy and hold”.  The world has changed rapidly.

The difficulty is the qualitative assessment and the implementation. Railroads now seem to pass the 100 year test but how many businesses can pass that test? Lowenstein made the point that Wall Street loves those 99:1 bets but not WB.

SK said that the maxim of “don’t lose money” does not mean at every time and in every instance but to the extent that it puts you out of business.  Sometimes you can bet or invest in favorable expected value situations where you lose the bet.  This is similar to an insurance operation.  Some investments in a portfolio will lose but you don’t put the operation at risk.  

SK: In the 1980s you could actually buy quality inexpensively; you didn’t have to pay up.  I remember Nabisco selling for 7 times after tax earnings.   You can’t just kneel at the temple of Graham and Dodd, you and the world will change.  We will evolve and ought to evolve because the world requires us to.  WB teaches us how to make our own map.

I don’t know WB well enough to know how he feels, but I suspect that he feels that him being held as an investing demigod is a bit silly.  WB isn’t about that. WB is not about giving you a formula.  “Business is hard.  Everything is overlaid with judgment”. WB has been fortuitous to invest at a time when you could get quality inexpensively.  He has built on certain advantages.  No one else gets the calls that he gets. Some people are overly focused on him as opposed to understanding how he thinks.

BA: Buffett has made more people rich than anyone else in history.  And he gives it all away.  He’s one of the great educators. I believe in response to a questioner, BA went into a diatribe about Coca Cola (KO).  It does enormous damage to society and people consume too much sugar contributing to obesity and diabetes.  He wouldn’t be against supermarkets that sell coke.  And he owns Mondelez: all things in moderation.  But Coke doesn’t seem to have had a bad effect on Buffett.  I believe he has said WB hasn’t had water since the 1950s!  He thinks Coke has great distribution and marketing but it is not good for children to get too much sugar water.

There was some discussion that the BRK model with insurance, concentrated positions and possible illiquidity may have problems in future.  You need to be a fortress and inspire confidence and trust with regulators.  Will that survive Buffett? Conglomerates do not have a great history.

Buffett is a fabulous communicator.  He has stayed on the right side of politics and has avoided becoming a target of Washington.  It is not automatic that the next CEO will be able to tell the story of the company as well. SK said he stole the idea of writing meaningful partner letters from WB.  And he feels that the overall quality of fund letters in general has improved because of Buffett’s lead.  Consistency, reassurance, and transparency give shareholders comfort.

BRK can be a Warren centric model.  He is uninvolved in the management of the businesses and there may be an opportunity for “optimization”.  With 3G he is “outsourcing” the less attractive aspects of the business. Catastrophic risks can destroy enormous amounts of value.

SK: excessively raising prices on drugs may not be illegal but there are social costs.  Capitalism may face a more constrained environment as a result of bad behavior. WB has conducted himself generally beyond reproach.  He has not become a target.  The next CEO may not get a pass so easily. Value investing is nuanced but we will always have it.  “Human nature will not yield”.  Greed, fear and lack of intellectual honesty will result in bargains from time to time. There is always going to be a share of the investment business that is following the crowd.  There are those watching over their shoulder and who have misalignment of goals.  They may be forced to do things they may not want to do for human reasons.

Someone asked SK if he wanted to be an investment manager at BRK or if he had any discussions about this with WB.  He said he was never a candidate and loves his job. He said he was surprised on the upside with WB’s decisions about investment managers.  It was hard to do and it has gone incredibly well.  

Berkshire Shareholder Panel: Tom Russo, Paul Lountzis, Whitney Tilson

“Only WB can fill a room without even being in it”.

Whitney Tilson has been adding to his BRK position.  It is safe, cheap and with decent growth.  He puts fair value about $267,000 give or take 10%.  You can find his slide presentation on the Internet (there were no slides at this conference).

Tom Russo said there are no agency costs and an extraordinary alignment of interests.  WB owns 30% of the stock and makes $100,000 for managing. The corporate form allows for tax efficiency with respect to capital allocation.   He has the willingness to do anything if it makes sense and the capacity to do absolutely nothing if conditions warrant.  Great businesses can find a home at BRK where they will be protected.

Paul Lountzis tries to understand BRK broadly and deeply.  There is embedded optionality in BRK.  Regarding Berkshire, he is reminded of the Ralph Waldo Emerson quote: “Every institution is the length and shadow of one man.”  We try to understand it now and in the future. He mentioned that Geico is on the books for $2-3B but is worth 10-15 times that.

WT told WB that he is his role model in Jan. 1999 and he tries to emulate how he runs the business.  Given how WB communicates, BRK is the opposite of a black box.  He has incredible humility and even looks for ways to self-flagellate.

PL:  WB is a wonderful human being and exemplifies consistency and loyalty to a high degree.  He focuses on permanence over the long term and looks out 10-20 years. His example impacts everything you do both personally and professionally.  BRK values permeate seamlessly and consistently throughout its business. Despite the fact that BRK has gone down by 50% several times it has still been extraordinarily rewarding.

Few businesses have great reinvestment opportunities.  If you can defer taxes on unrealized gains, this is a great advantage. The problem with many public companies is their inability to take advantage of some of their potential opportunities, unlike family controlled companies.  Public companies may need to make earnings estimates as opposed to investing in opportunities that may penalize current earnings.  They may worry about activists.

BRK is a unique public marriage between private and public investments.  BRK gets $1.5B month in free cash.  It is effectively a source of permanent capital and a robust re-investment engine. During times of stunning market drops, WB was never forced to sell. Permanent capital is very valuable. The ability to do nothing is valuable in the investment business. Operationally, they can turn down the noise of Wall St. Buffett has the flexibility to do nothing.  He is unique and special and combines analytical strengths with strong people skills to a degree that is very rare. He has unique qualitative insights. You don’t see the 99% of opportunities he says “no” to.  

Buffett plays a very important cheerleading role.  Many company CEOs are rich and old and feel personally loyal to Buffett.  Are they going to be as loyal to the next CEO? There is somewhat limited corporate governance but Buffett holds it all together.  

What is the next BRK? The best BRK is BRK. One interesting point that was made: investors that held the S&P 500 going into the financial crisis more than likely sold when everyone was running for the hills.  But given their understanding of and loyalty toward BRK, shareholders were much more likely to garner the full return of the company and not otherwise sell low and buy high.  This is a point that can be missed when one compares BRK returns to the index.  The index’s returns are more likely illusory and less likely realized. Other companies “wave people in at the peak”. 

Partnership Session With Markel's Tom Gayner and John Phelan

John Phelan.  We don’t take 1% or more positions without visiting the company. Should you locate far from Wall St?  Mindset trumps location.   We think we have semi-permanent capital.  There is always a balance between the short term and long term. Our benchmark is not the S&P 500.  Our benchmark is to make money.  The risk free rate is your benchmark. We have the luxury of not being invested all the time. Simplicity is a virtue and we have fewer problems that way. If you hire someone that is not from a top school, they are less likely to think, “You’re lucky to get me”.  Some of our best hires are from the military.  They know how to get things done. We currently have 18% cash which is on the high side. We are company focused and not market focused.

Tom Gayner: “Good meat priced right is better than poor meat priced cheap”. JP worries about the credit markets.  Now a $250M 10 year Treasury trade moves the market whereas before $1B wouldn’t make it blink. We are defensively positioned but not bearish on the US economy.  We are seeing wage pressure in our companies.   The best hedge is a great attractively priced business. Paying up for a business is counter-intuitive.  It costs more but may be worth a lot more.

Lawrence Cunningham: Buffett’s presence here would steal the stage and by electing not to come, he is letting us have the conversation. LC organized a conference at Cardoza Law School in 1996.  One questioner asked what happens to the shareholders when Buffett dies.  Buffett said, “it won’t be as bad for you as it will for me!” BRK looks a lot different today than it did then but the core values have stayed the same.  He has created an institution that goes beyond him in the quality of the people, businesses and values and that is the best succession plan possible.

BRK gets funds from internal generation and insurance float versus the cost of borrowing to make acquisitions.  The float is currently $85B with no due dates, covenants or banker negotiations.

The Board is not there to monitor management but to partner with it.  They have no options, liability insurance and bought stock with their own cash. Company CEOs have clear and simple mandates.  Called out Bruce Whitman, CEO of Flight Safety who was at the conference. He has never sold a subsidiary and sometimes business sellers accept a discount compared with offers from other business buyers. We would rather bear the visible costs of a few bad decisions than suffer under stifling bureaucracy.

GenRe would have gone bankrupt after 9/11 without BRK! Dexter Shoe was another “mistake”. BRK sometimes is a juicy target for journalists-recently Clayton Homes and National Indemnity.

He spoke about a recent acquisition called Detlev Louis from Germany that sells motorcycle gear.  Similar to See’s being a small deal but defining the future of the company, he sees this company as a possible harbinger of future deals in Europe.  He points out that it only has about $40M in earnings which is less than WB’s minimum size but he made an exception to get a toehold in Germany and Europe.

He made mention that Pampered Chef’s sales have considerably decreased and that there is some turmoil in the capital intensive business of NetJets.

Don’t focus on beating the market but in finding the greatest discrepancy between price and value.

Wednesday, November 11, 2015

What We're Reading ~ 11/11/15

Dream Big: How the Brazilian Trio behind 3G Capital acquired AB Inbev, BK & Heinz [Correa]

10 questions to help define your investment philosophy [A Wealth of Common Sense]

A way to detect bias [Paul Graham]

What the Marines taught me about investing [WSJ]

The peril and opportunity of China [Mauldin]

Burbank's Passport says no place safe in China-led decline [Bloomberg]

Kyle Bass on China's looming banking crisis and the US economy [Fortune]

Platform Specialty Products could rebound [Barrons]

On Warren Buffett's stake in IBM [Medium]

On the focus of short-term profits [NYTimes]

How FICO became outdated [Pymnts]

Why the next sports empire will be built on eSports [Redef]

America's exurbs are booming [New Geography]

Tuesday, November 10, 2015

ValueAct Capital Trims MSCI Stake

Jeff Ubben's activist investment firm ValueAct Capital has filed a Form 4 and 13D with the SEC regarding their stake in MSCI (MSCI).  Per the Form 4, ValueAct sold 255,000 shares on November 5th at $68.83, another 762,000 shares on November 6th at $68.11, and another 815,000 shares on November 9th at $66.45.

After these sales, ValueAct still owns over 7.47 million shares of MSCI, or 7.3% of the company.  The firm's 13D filing also noted this about their sale:

"(ValueAct has) sold the securities of the Issuer reported in Item 5 herein as part of their standard ongoing process of portfolio management.  D. Robert Hale, a partner of ValueAct Holdings and ValueAct Holdings GP, will continue to serve on the board of directors of the Issuer and currently intends to stand for reelection at the Issuer's 2016 annual meeting."

We've posted previous portfolio activity from ValueAct Capital here.

Per Google Finance, MSCI is "together with its wholly owned subsidiaries, is a provider of investment decision support tools, including indexes, portfolio risk and performance analytics and multi-asset class market risk analytics products and services. The Company’s products include global equity indexes and environmental, social and governance (ESG) products marketed under the MSCI and MSCI ESG Research brands, its private real estate benchmarks marketed under the IPD brand, its portfolio risk and performance analytics covering global equity markets marketed under the Barra brand, its multi-asset class, market and credit risk analytics marketed under the RiskMetrics and Barra brands and its performance reporting products and services offered to the investment consultant community marketed under the InvestorForce brand."

Baupost Group Exits Alliance One Position

Seth Klarman's investment firm Baupost Group has filed a 13G with the SEC regarding shares of Alliance One International (AOI).  Per the filing, Baupost no longer owns an equity position in the company.

This is down from the 638,364 shares they owned back at the end of the second quarter. The latest filing was made due to activity on October 31st.

For more from this manager, be sure to check out the collected wisdom of Seth Klarman.

Per Google Finance, Alliance One is "a leaf tobacco merchant. The Company is engaged in purchasing, processing, packing, storing and shipping tobacco to manufacturers of cigarettes and other consumer tobacco products globally. The Company deals primarily in flue-cured, burley, and oriental tobaccos that is used in international brand cigarettes. The Company’s revenues are primarily comprised of sales of processed tobacco and fees charged for processing and related services to these manufacturers of tobacco products. The Company does not manufacture cigarettes or other consumer tobacco products. The Company has classified its business into three segments for reporting purposes: South America segment, Value Added Services segment and Other Regions segment. Value Added Services is comprised of the Company's crushed rolled expanded stem (CRES), cut rag, toasted burley and other specialty products and services."

Viking Global Files 13G on Broadcom

Andreas Halvorsen's hedge fund firm Viking Global has filed a 13G with the SEC regarding its position in Broadcom (BRCM).  Per the filing, Viking now owns 5.3% of the company with over 29.71 million shares.

Viking previously disclosed a small stake in BRCM in the first quarter of this year.  However, their most recent 13F filing shows they exited that position in the second quarter.  So now it appears that they've re-entered the name in a big way.  The filing was made due to activity on October 29th.

Broadcom received a bid from Avago Technologies (AVGO) earlier this year and it would be the biggest merger in the chip sector.

Last week we also highlighted other recent portfolio activity from Viking Global.

Per Google Finance, Broadcom is "provides semiconductor solutions for wired and wireless communications. The Company offers a portfolio of system-on-a-chip solutions (SoCs) that deliver voice, video, data and multimedia connectivity in the home, office and mobile environments. The Company's solutions are used globally by manufacturers and are embedded in an array of communications products. The Company operates in two segments: Broadband and Connectivity, and Infrastructure and Networking. Broadcom's solutions in Broadband and Connectivity segment include set-top box solutions, broadband modem solutions, connectivity solutions and a range of other technologies. Its solutions in Infrastructure and Networking segment include Ethernet switches and PHYs, which includes switches and fabrics; copper and optical transceivers; backplane and optical front-end physical layer devices; processors, and other Infrastructure and Networking technologies."

Friday, November 6, 2015

Notes From Invest For Kids Chicago 2015: Burbank, Sandler, Tananbaum & More

The seventh annual Invest For Kids Chicago conference recently took place benefiting underprivileged children in Chicago.  Many prominent investors shared their latest ideas and you can click below to read about each presentation.

Invest For Kids Chicago 2015 Notes

- John Burbank (Passport Capital): Long CF Industries

- Steve Tananbaum (GoldenTree Asset Management): Calpine equity

- Ricky Sandler (Eminence Capital): 2 longs & 1 short idea

- Andy Hall (Astenbeck Capital): Outlook for oil

- James Flynn (Deerfield Management): Horizon Pharma & Valeant Pharmaceuticals

- Soren Aandahl (Glaucus Research): Short EROS

- David Samra (Artisan Partners): Pitch on RBS

- Rupal Bhansali (Ariel Investments): 2 long ideas

- David Heller (Cloud Gate Capital): Long Berry Plastics

- Andy Greenberg (Saker Management): Long NXRT

- Michael Sacks (GCM Grosvenor) & Barry Sternlicht's (Starwood) conversation

- Sam Zell & Andrew Litt on real estate

John Burbank Long CF Industries: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is John Burbank of Passport Capital.  He pitched a long of CF Industries (CF).

John Burbank's Invest For Kids Chicago Presentation

•    Pitching CF Industries (CF).
•    Biggest position for two years.
•    One of the few commodity equities he wanted to be long.
•    Remains bearish on commodities.
•    Located for 30 minutes from Chicago for just for another quarter, did a merger.
•    Stock traded down 30% off the deals.
•    First was a purchase of OCI. 60% of nitrogen fertilizer capacity in USA/5% global market share.
•    USA is the Saudi Arabia of Natural Gas.
•    $2 gas margins over 50%.
•    Went to $70 in early July, ended at $45 by September.
•    CF to exchange $7.4B of stock and assumed debt and cash for OCI NA and European nitrogen/methanol facilities. 2016 close data. Enables a tax inversion.
•    Over-levered copper companies which are going to zero rising 50%, yet stuff like CF dropping doesn’t make sense.
•    HSR approved yesterday and the stock dropped, not understood by the market.
•    By February should be closed.
•    CHS Co-Op – sold a minority stake at a premium. CHS canceled a 3.1BB nitrogen plant. Instead will invest 2.8B in CF for 9% of CF’s pre OCI deal production.
•    Deal values CF equity at ~$107.
•    Combined market cap of $17B. 3-5B of EBITDA post deal.
•    Cash flow from ops after mcapex of $1.8 to 3.2B.
•    Product capacity of 25.1MM short tons.
•    Will use FCF to return to shareholders.
•    Take five years to build capacity so nothing to do with money.
•    CF is not a mining company.
•    Short Mosaic (MOS), Potash (POT), Agrium (AGU), K&S as a hedge. Negative on markets and commodities.
•    Also is long USD.
•    CF is 8th best performing stock over the past ten years behind apple.
•    EPS 5.5-6 dependent upon corn yields.
•    Street doesn’t understand this industry or the OCI deal.
•    Passport has an analyst with a Dow/GE background tracking this. Good edge.
•    CF has returned 11% of its market cap annually to shareholders, bouht back 35% of company since FY12. 2.3% div yield. Will probably buy abck more stock.
•    Sold phosphate biz (not great) to Mosaic.
•    Executives are buyers.
•    Will return $12Bn to shareholders over next four years. Mcap is 17B.
•    Can’t buyback stock now until deal closes.
•    Buybacks based upon flat prices.
•    Thinks commodity prices going down, USA might go into something that feels like a recession. Shouldn’t own most stocks. Want something confident in liquidity and management.
•    Trade long CF / short 2/3 MOS and 1/3 POT as a pair.

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Steve Tananbaum on Calpine Equity: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is GoldenTree Asset Management's Steve Tananbaum who talked about Calpine equity.

Steve Tananbaum's Invest For Kids Chicago Presentation

•    $24B AUM – credit manager formed in 2000.
•    Credit market discussion – HY defaults increasing, many leading indicators.
•    High transaction multiples and leverage increasing – debt to ebitda around 5.2x. Increase in default rates, just about to begin over the next 12-24 months.
•    Would get 1000 bps, think were halfway there at 500 bps spread.
•    Is HY cheap now? Now its ok, closer to fair value.
•    2/3 bonds trading below par. 90% of loans trading below PAR
•    Now a bond/loan picker market.
•    June 14 – 90% of bonds above par
•    In bonds – 2/3 of what is trading below 95 isn’t energy. Loans its 80%.
•    Looking at triple C credits, many funds who owned them did great in FY09-13, and then 14/15 something went wrong. What occurred is the lowest part of the market had a significant reversal (i.e. CCC) underperforming by almost a 1000 bps. Expect it to continue.
•     Triple C headwind.
•    Oil futures $52 for dec 15, hy market/stock market pricing in a $65 price. Performance in energy/commodity function where oil is.
•    Problematic sector? Technology. Leverage is around 7x currently for Tech LBOs. What enters LBO tech market is slow to no growth tech companies (i.e. Compuware although no mentioned by name). Went from 4x to 8x. Technology is 8% of CCC issuance.
•    Illiquidity in HY market? More where it is in the 90s, 05 was an anomaly.
•    Finding some value in structured products. Greater issuance versus corp bonds a decade ago. 2x1 structure vs corporate. Now it is 20% of issuance. Less eyes on structured products.
•    Adjustable rate feature in structured rate products aren’t being priced in.

•    Idea is Calpine equity (CPN) –an independent power producer trading at low multiple, trough earnings and strong cash flow.
•    Half of cash flow is locked in for 3 years. Stable earnings outlook even in a low commodity price environment.
•    Young reliable efficient gas and geothermal fleet.
•    Texas – currently at trough earnings/depressed margin (25% of cash flow)
•    Buying back stock aggressively – 20% over last two years.
•    Significant NOL to shield free cash.
•    Will buy back another 15% of stock.
•    $22.3 by FY17 or a 20% FCF yield today.
•    Create gas assets at $477kw less than half of replacement costs.
•    Risk is increasing renewable supply such as wind/solar, potential new gas supply if prices recover and high leverage at 5.4x or 6.4x including major maintenance.
•    Bonds trade above par at spread basis, credit markets benign view.
•    FCF conversion currently 33%. 
•    Trades for ~8.25x EBITDA.
•    Price target includes 298 shares, $3.16 per share of FCF and implies a 12% fcf yield.
•    Down 32% YTD – market thinks price will be priced off $2 gas. Half of cash flows already locked in.

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Ricky Sandler Long GMCR & ZNGA, Short WAB (Invest For Kids Chicago Presentation)

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Eminence Capital's Ricky Sandler who pitched a long of Keurig Green Mountain Coffee (GMCR).

Ricky Sandler's Invest For Kids Chicago Presentation

•    At 25 launched his own business Fusion Partners. In '98 started Eminence
•    Long idea: GMCR/Keurig Green Mountain.
•    Controversial there is a credible short story. Thinks it’s already priced in and an incredible long opportunity.
•    Two businesses, hot biz (kcups) and Kold with sodas, brand new.
•    Hot platform sell 9MM to 10mm brewers/year and sell 10B to 11B kcups per year.
•    Razor/razorblade model.
•    Significant room for increased household penetration. Current penetration at 21M to 22M households compared to 70MM homes. With a coffeemaker.
•    Think market goes single serve.
•    Industry kcup should grow in the LDD range.
•    $4 of EPS from the hot business in FY15 estimated.
•    Think hot EPS can reach $5 over the next couple years driven by volume growth, $300MM restructuring, normalizing brewer losses form the last holiday season, normalized coffee costs, share buybacks and offsetting some headwinds.
•    Kold launched in September with Coca-Cola. Addressable market thinks its 5x – 10x hot.
•    Reviews are high on quality but negative on price/value.
•    $375 asp per machine and pods more expensive than a can of coke.
•    Not so much price of pod, but thinks the range of pods/products.
•    Think its convenience/choice. Negatives looking at just price.
•    Kold loss 50 cents per share.
•    Trades at 15.5x FY15E sept EPS and 13.5x EPS ex kold.
•    EPS estimates under pressure – poor 2.0 brewer launch execution and K-cup profitability impacted by mix shift. Finally negative reaction to kold.
•    Hot value = 17x -20x hot EPS ($5) or 85-100 plus option value for kold.
•    KO owns 17% at $92. Insiders bought at $90.

•    Loves Baidu (BIDU), and a top five position.

•    Zynga (ZNGA) – mobile gaming. Franchises include Farmville, words with friends.
•    Some think games are obsolete, ZNGA has 75MM active users.
•    Zynga was late to the consumer shift from desktop to mobile making the last two years rough. •    Mobile games for the last year =70% of bookings vs 30% a year ago.
•    Expect new titles over the next 12 months.
•    Trading at 1x sales when backing out SF real estate ($500MM value). $687MM EV.
•    Launch 6 new games, $300MM incremental bookings bringing total bookings to $900MM.
•    KING sold for 2.6x sales, using that valuation = $5.
•    At a 35% margin, ZNGA generate $315MM EBITDA or trading for 2x.
•    Has big infrastructure to support bigger biz. Downside protection by cash and real estate.
•    Top hit potential = $1B rev potential.
•    Mobile gaming is $20B biz. New categories such as esports and real money gaming growing.

•    Wabtec (WAB) – Short.
•    Leading supplier of brakes, electronics and other railroad components to the global rail industry.
•    55% - 60% of EBIT comes from NA freight segment.
•    LT rail is GDPish industry and cyclical.
•    Track record is fantastic – only US listed co whose stock price increased every year for 14 straight years, 19% EPS CAGR form 06 to 15E and hadn’t missed earnings since 09 and 3Q15.
•    Bull thesis – not cyclical, high ROIC/ high market share high after market mix/quality biz.
•    Product mix is opaque due to acquisition strategy.
•    Bulls think EPS will grow double digits for ever.
•    WAB is cyclical and currently at the peak of rail equipment super cycle driven by NA O&G activity.
•    Demand driven by trail traffic, production of new locomotives and freight cars.
•    Rail traffic is weak – CNI talking about laying off employees.
•    Locomotives – NSC storing locomotives, expect it to be up to 200. GE orders dropped significantly, only sold compared 3 the last quarter.
•    Freightcar peak – industry backlog driven by tank cars oil and covered hoppers i.e. frack sand. 40% downside to deliveries.
•    Trading at 20x EPS, 13x EBITDA. Could be peak earnings in FY15. Mid cycle earnings $3.5 - $4. At 16x = $60 or 30% downside.
•    Low short interest, favorable sell side ratings.
•    Consensus calls for positive organic growth.

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Andy Hall's Outlook For Oil: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Andy Hall of Astenbeck Capital who talked about his outlook for oil.

Andy Hall's Invest For Kids Chicago Presentation

•    Presentation is the outlook for oil.
•    Rarely consensus view for oil has been this pessimistic.
•    Saudi Arabia/Worries over China – murky long term outlook for oil and fossil fuels. Running out of storage perhaps. Cash costs production avg $20 per barrel.
•    Perception is worse than reality. Q3 stock build at 500K BPD vs estimate of 1.6MM BPD.
•    Q2 estimated surplus revised lower by 900 KBPD.
•    No super contango means no distressed surplus of oil in contrast to 09 and 86.
•    Global oil demand growing at 2MM BPD so far in FY15, double the rate predicted at beginning of the year.
 •    Chinese demand growing at 7% YoY, led by gasoline and jet fuel.
•    Demand response to lower prices has already reduced surplus. Current oversupply is not just crude oil but also NGLs.
•    Overall surplus will continue to shrink and become a growing deficit in h2 2016.
•    In 1986 OPEC spare capacity was almost 20% of global product, today OPEC spare capacity is less than 2%.
•    Cuts in industry capex will prove excessive – industry cut capex by 25% in FY15. Further cuts expected in fy16, only second time in 30 years capex cut in consecutive years. Believes capex reductions will prove excessive – not 1986.
•    Significant lag between laying down rigs and production rolling over. Production peaked in June and has since dropped by 500 kbpd. USA shale/tight oil production overs over first.
•    Us production to continue to fall – EIA has reduced USA oil production forecast for FY16 from growth of 200 kbpd to a decline of 400 kbpd.
•    Rig productivity has plateaued.
•    Iran will add 300k to 400k barrels per day. Iraq will decline due to budgetary constraints.
•    Nigeria, Venezuela and Algeria at risk.
•    High geopolitical risks throughout oil producing regions.
•    Stop growth – supply declines by 8.6% per annum at existing production. 1.3MM bpd per annum has been the average or 1.4% growth in demand.
•    Thinks $70 per barrel is where it needs to be. Shale co’s said $40 break even yet they haven’t been able to generate FCF since FY10. Their supplier costs will likely rise as well particularly after consolidation.
•    2/3 E&P have negative cash flow and may be heading to bankruptcy. PXD says they need $70, EOG needs $80.

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