Wednesday, September 27, 2017

What We're Reading ~ 9/27/17

Your tolerance for investment risk is probably not what you think [WSJ]

Is value investing dead? Depends on how you measure it [WSJ]

What do the best investors do that the rest don't? [Behavioral Value]

We're going to need more Lithium [Bloomberg]

Mastering three strategies of organic growth [McKinsey]

DaVita: Warren and Charlie's excellent insurance gambit [SIRF]

Old interview with Chuck Akre - never sell the gems [Value Research]

The history of Sears predicts nearly everything Amazon is doing [The Atlantic]

Don't believe the headlines, traditional retailers are thriving online [VentureBeat]

How Kirkland Signature became one of Costco's biggest successes [WSJ]

Altaba's endgame could reward investors nicely [Barrons]

Netflix's Sarandos aims to build the next great Hollywood studio [Bloomberg]

Our entire credit bureau system is broken [The Verge]

Snapchat's influencers are fleeing to Instagram for money [Bloomberg]

How successful people make decisions differently [Fast Company]

Tuesday, September 26, 2017

Senator Investment Group Takes D.R. Horton Stake

Alex Klabin and Doug Silverman's hedge fund firm Senator Investment Group has filed a 13G with the SEC regarding shares of D.R. Horton (DHI).  Per the filing, Senator now owns 5.34% of the company with 20 million shares (inclusive of 5 million shares underlying call options).

This is a newly disclosed stake for the investment firm.  The filing was made due to portfolio activity on September 15th.

For more on this hedge fund, we highlighted another stock Senator has been buying.

Per Google Finance, DR Horton is "a homebuilding company. The Company constructed and sold homes in 27 states and 79 markets, as of September 30, 2015. The Company's segments include its 39 homebuilding divisions, its financial services operations and its other business activities. In the homebuilding segment, the Company builds and sells single-family detached homes and attached homes, such as town homes, duplexes, triplexes and condominiums. The Company's 39 homebuilding divisions are aggregated into six segments: East Region, South Central Region, Midwest Region, West Region, Southwest Region and Southeast Region. In the financial services segment, the Company sells mortgages and collects fees for title insurance agency and closing services. The Company has subsidiaries that conduct insurance-related operations; construct and own income-producing rental properties; own non-residential real estate, including ranch land and improvements, and own and operate oil and gas-related assets."

12 West Capital Shows Laureate Education Stake

Joel Ramin's hedge fund firm 12 West Capital has filed a 13G with the SEC regarding shares of Laureate Education (LAUR).  Per the filing, 12 West now owns 6.5% of the company with over 2.3 million shares.

This is a newly disclosed equity position for the firm.  The filing was made due to activity on September 15th.

Per Google Finance, Laureate Education "provides higher education programs and services to students through an international network of licensed universities and higher education institutions (institutions). The Company’s programs are provided through institutions that are campus-based and Internet-based, or through electronically distributed educational programs (online). It offers its educational services through six segments: Brazil; Mexico; Andean and Iberian; Central America and United States (U.S.) Campuses; Online and Partnerships; and Europe, Middle East, Africa and Asia Pacific (EMEAA). Its institutions also offer an education that emphasizes professional-oriented fields of study with undergraduate and graduate degrees in a wide range of disciplines. As of June 30, 2017, the Company’s global network of 69 institutions comprised 57 institutions it owned or controlled, and an additional 12 institutions that it managed or with which it had other relationships. "

Darsana Capital Shows Stake in Social Capital Hedosophia Holdings (IPOA.U)

Anand Desai's hedge fund firm Darsana Capital has revealed a stake in Social Capital Hedosophia Holdings (IPOA.U).  Per a 13G filed with the SEC, Darsana now owns 5.07% of the company with 3.5 million shares.

This is a new position for the firm as shares of IPOA.U were just floated recently.  Hedosophia is a vehicle used by Chamath Palihapitiya's Social Capital to invest in 'unicorn' private tech companies.  They're trying to create a new model for taking private companies public via this 'blank check' structure.

Prior to founding Darsana, Desai worked at Eton Park Capital.

Per Google Finance, Social Capital Hedosophia Holdings is "a blank check company. The Company is formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. The Company seeks to focus on search for a target business operating in the technology industries. The Company had not identified any business combination target."

Monday, September 25, 2017

Eminence Capital Increases Arris Group Stake

Ricky Sandler's hedge fund firm Eminence Capital has filed a 13G with the SEC regarding its stake in Arris Group (ARRS).  Per the filing, Eminence now owns 5.3% of the company with just over 10 million shares.

This is an increase of 858,147 shares as they previously owned 9.15 million shares at the end of the second quarter.  This most recent filing was made due to portfolio activity on September 12th.

For more on this hedge fund, you can view other portfolio activity from Eminence Capital here.

Per Google Finance, Arris Group is "a media entertainment and data communications solutions provider. The Company operates in two segments: Customer Premises Equipment (CPE), and Network & Cloud (N&C). The Company enables service providers, including cable, telephone, and digital broadcast satellite operators, and media programmers to deliver media, voice and Internet Protocol (IP) data services to their subscribers. It is engaged in offering set-tops, digital video and IP television (IPTV) distribution systems, broadband access infrastructure platforms, and associated data and voice CPE, which it also sells directly to consumers through retail channels. Its solutions are complemented by an array of services, including technical support, repair and refurbishment, and system design and integration. The CPE segment consists of CPE Products-Video and CPE Products-Broadband. The N&C segment consists of Infrastructure Products, Cloud Software and Global Services."

Fairholme Capital Adds To St. Joe Position

Bruce Berkowitz's investment firm Fairholme Capital has filed an amended 13D with the SEC regarding its stake in St. Joe (JOE).  Per the filing, Fairholme now owns 40.5% of the company with just over 27 million shares.

The filing notes that Berkowitz was out buying across August and into early September, at prices ranging from $18.3016 to $19.2174.  In total, he purchased just over 1.55 million shares.

For more on this manager, we've also highlighted other recent portfolio activity from Fairholme Capital here.

Per Google Finance, St. Joe is "a real estate development, asset management and operating company. The Company operates through five segments: residential real estate; commercial real estate; resorts and leisure; leasing operations, and forestry. Its residential real estate segment plans and develops primary residential and resort residential communities of various sizes on its existing land. Its commercial real estate segment plans, develops, manages and sells real estate. Resorts and leisure segment features a portfolio of vacation rentals and hotel operations, as well as golf courses, a beach club, marinas and other related resort amenities. Its leasing operations business includes its retail and commercial leasing. Its forestry segment focuses on the management of its timber holdings in Northwest Florida."

ValueAct Capital Trims Willis Towers Watson Stake Again

Jeff Ubben's activist investment firm ValueAct Capital has filed yet another Form 4 with the SEC regarding its stake in Willis Towers Watson (WLTW).

Per the filing, ValueAct now owns 3.28 million shares. They sold 41,348 shares on September 18th at $152.38 per share. As we've highlighted previously, they've been reducing their WLTW position size.

For more on this fund, we've also posted about another stock ValueAct has been selling as well as one stock ValueAct has been buying.

Per Google Finance, Willis Towers Watson "operates as a global advisory, broking and solutions company. It is engaged in offering risk management, insurance broking, consulting, technology and solutions, and private exchanges. The Company operates through eight segments: Willis International; Willis North America; Willis Capital, Wholesale & Reinsurance (CWR); Willis GB; Towers Watson Benefits; Towers Watson Exchange Solutions; Towers Watson Risk and Financial Services; and Towers Watson Talent and Rewards. The Willis GB segment comprises four business units: Property and Casualty, Transport, Financial Lines and Retail Networks. The Willis Capital Wholesale and Reinsurance segment includes Willis Re; Willis Capital Markets & Advisory; Willis' wholesale business, and Willis Portfolio Underwriting Services. The Willis North America segment provides risk management, insurance brokerage and related risk services."

Friday, September 22, 2017

Hedge Fund Links ~ 9/22/17

Klarman's Baupost Group plans to return some investor money [Bloomberg]

Hugh Hendry closes hedge fund after 15 years [Bloomberg]

Conatus Capital to shut down [Bloomberg]

Bridgewater to launch fund in China [WSJ]

Hedge funds bet on bright future for metals [Reuters]

The man running California's lean, mean endowment machine [Bloomberg]

In private equity, illiquidity is a feature not a bug [Abnormal Returns]

Private assets are the new hedge funds [Bloomberg]

The next quant meltdown [ii alpha]

Wealthy families are cooling on hedge funds except in one area [Quartz]

How hedge funds are handling a possible disaster [Bloomberg]

False peace for markets? Trader is betting millions on it [NYTimes]

Thursday, September 21, 2017

8th Annual Sohn San Francisco Investment Conference

The 8th annual Sohn San Francisco Investment Conference is just around the corner on October 4th.  The event will feature top investment managers sharing their latest ideas to benefit charities.  The event is presented by the Excellence in Investing for Children's Causes Foundation, which has raised more than $1.2 million to support education and pediatric cancer care. 

This is the premier Bay Area investor event, so if you're in the area or nearby, don't miss it.  You can register for the conference by clicking here.

Conference Details

When: October 4th, 2017

Where: Hyatt Regency San Francisco

Sohn San Francisco Speakers List

- Mark Okada, Highland Capital Management

- Mick McGuire, Marcato Capital Management

- Carl Kawaja, Capital Group

- Christopher Lord, Criterion Capital

- Oleg Nodelman, EcoR1 Capital Fund

- Jeff Shen, BlackRock

- Nancy Davis, Quadratic Capital

- Glen Kacher, Light Street Capital

- Dan Morehead, Pantera Capital

- David Crane, Govern for California

Next Wave Sohn Speakers

Additionally, a group of emerging managers will share their ideas as a prelude to the main event.  Here's the list:

- Vineer Bhanshali, LongTail Alpha

- Marcelo Desio, Lucha Capital

- Gil Simon, SoMa Equity

- Seth Wunder, black-And-white Capital

The event's proceeds benefit Bay Area organizations that are focused on improving educational opportunities and life outcomes for underserved youth.  Additionally, a portion benefits the Sohn Conference Foundation with its efforts to treat and cure pediatric cancer.

For more information on the event and to register, please visit

Wednesday, September 20, 2017

What We're Reading ~ 9/20/17

You need to do what others don't [Ian Cassel]

The case for stock buybacks [Harvard Business Review]

5 common mental errors that sway your decision making [James Clear]

Why is value investing so difficult? [Behavioural Investment]

Best Buy's secrets for thriving in the Amazon age [NYTimes]

Why augmented reality is about to take over your world [Buzzfeed]

What's the true total addressable market of search? [Value Venture]

Google Travel is worth $100 billion - even more than Priceline [Skift]

Profile of's founder [FT]

'Netflix for theaters' sending industry into a frenzy [NYPost]

When will self-driving cars make conventional cars worthless? [Quartz]

Why listen to earnings calls when artificial intelligence can do it better? [Institutional Investor]

The big data breach at Equifax has alarming implications [The Economist]

How Casper wants to sell you sleep [Wired]

ValueAct Trims CBRE Group Position

Jeff Ubben's activist firm ValueAct Capital has been busy lately.  In an amended 13D filed with the SEC, ValueAct has disclosed that they now own 8.5% of CBRE Group (CBG) with 28.87 million shares.

This is down from the 34.37 million shares they owned at the end of the second quarter.  In their most recent activity, the filing notes they sold 5.5 million shares at $35.90 in a block trade on September 15th.

For more on this firm, yesterday we highlighted how ValueAct added to its KKR stake again.

Per Google Finance, CBRE Group "operates as a commercial real estate services and investment company. The Company operates through the segments: The Americas; Europe, Middle East and Africa (EMEA); Asia Pacific; Global Investment Management, and Development Services. The Company provides commercial real estate services under the CBRE brand name, investment management services under the CBRE Global Investors brand name and development services under the Trammell Crow Company brand name. The Company's business is focused on commercial property, corporate facilities, project and transaction management, tenant/occupier and property/agency leasing, capital markets solutions (property sales, commercial mortgage brokerage, loan origination and servicing) real estate investment management, valuation, development services and proprietary research."

Tuesday, September 19, 2017

Ray Dalio's Reading List

Ray Dalio, the founder of hedge fund Bridgewater Associates, has penned a book called Principles.  He's been doing various interviews about it and recently joined Tim Ferriss' podcast.  During the interview, Dalio outlined some of the books he's read and enjoyed, as well as others he has stacked up in a pile that he's going to read.  He said curiosity is the driving force behind him reading so much.

Ray Dalio's Reading List

  Einstein's Mistakes: The Human Failings of Genius by Hans Ohanian: A book Dalio's already read and enjoyed.

  Sapiens: A Brief History of Humankind by Yuval Noah Harari: #1 international bestseller by a renowned historian.

  The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis: A look at Daniel Kahneman and Amos Tversky's studies on the decision-making process.

  The Upside of Inequality: How Good Intentions Undermine the Middle Class by Edward Conard: The scourge of America's economy isn't the success of the 1%.

  The Serengeti Rules: The Quest to Discover How Life Works and Why It Matters by Sean Carroll: Award winning biologist examines questions about how the natural world is regulated.

  From Bacteria to Bach and Back: The Evolution of Minds by Daniel Dennett: A look at how the human mind has developed its ability to crate, imagine, and explain.

Dalio was also asked to list books he would give to anyone graduating high school or college.  Here were his 3 picks:

  The Lessons of History by Will and Ariel Durant: A concise survey of the culture and civilization of mankind from Pulitzer Prize winning historians.

  River Out of Eden: A Darwinian View of Life by Richard Dawkins: How did life begin and where is it heading?

  The Hero With a Thousand Faces by Joseph Campbell: Combining the insights of modern psychology with comparative mythology.

Be sure to also check out Dalio's own new book, Principles, about all he's learned over the years.

And if you're looking for recommendations from more smart investors, check out Charlie Munger's recommended reading list, as well as many others linked in the right sidebar of Market Folly.

Senator Investment Group Boosts MGM Resorts Stake

Alex Klabin and Doug Silverman's hedge fund firm Senator Investment Group has filed a 13G with the SEC regarding its stake in MGM Resorts International (MGM).  Per the filing, Senator now owns 5.57% of the company with 31.5 million shares, which includes 22 million shares of stock issuable upon exercise of call options.

This is an increase of over 24 million shares since the end of the second quarter when they only owned 7.5 million shares.  The filing was made due to activity on September 12th.

For more on this hedge fund, we posted up another stock Senator had been buying.

Per Google Finance, MGM Resorts International "owns and operates casino resorts. The Company operates in two segments: domestic resorts and MGM China. Its domestic resorts segment consists of non-gaming operations, including hotel, food and beverage, entertainment and other non-gaming amenities. Its casino operations feature a range of slots, table games, and race and sports book wagering. Its MGM China’s operations consist of the MGM Macau resort and casino, and the development of an integrated casino, hotel and entertainment resort on the Cotai Strip in Macau. Under its resort operation, the Company's casino resorts offer gaming, hotel, convention, dining, entertainment, retail and other resort amenities. It owns Primm Valley Golf Club at the California/Nevada state line and Fallen Oak golf course in Saucier, Mississippi, among others. It owns and manages CityCenter Holdings, LLC, located between Bellagio and Monte Carlo."

ValueAct Capital Adds To KKR Position Again

Jeff Ubben's activist firm ValueAct Capital has filed an amended 13D with the SEC regarding its stake in KKR (KKR).  Per the filing, ValueAct now owns 8.9% of the company with over 41.9 million shares.

This is the second time this month they've disclosed purchases in KKR.  Their latest round of buying came on September 6th through 8th, as well as September 11th through 15th, and on September 18th too.

In total, they acquired 6.75 million shares at prices ranging from $18.19 to $19.02. 

The filing also notes they also have exposure via cash-settled swaps with respect to 3.65 million shares.

Per Google Finance, KKR is "a global investment firm that manages investments across multiple asset classes, including private equity, energy, infrastructure, real estate, credit and hedge funds. The Company's business offers a range of investment management services to its fund investors, and provides capital markets services to its firm, its portfolio companies and third parties. The Company conducts its business with offices across the world, providing it with a global platform for sourcing transactions, raising capital and carrying out capital markets activities. The Company operates through four segments: Private Markets, Public Markets, Capital Markets and Principal Activities. It operates and reports its combined credit and hedge funds businesses through the Public Markets segment. The Capital Markets segment consists primarily of its global capital markets business. Through its Principal Activities segment, the Company manages the firm's assets and deploys capital."

Monday, September 18, 2017

Soros Fund Buys Shares in Exa & Sigma Designs

George Soros' family office Soros Fund Management has filed two separate Form 4's with the SEC recently.

Soros Adds To Exa Stake

First, Soros' Form 4 regarding Exa (EXA) indicates that the firm was buying EXA shares on September 11th through 13th.  In total, they acquired 159,500 shares at weighted average price of $14.1881.  After these purchases, Soros now owns over 1.66 million shares of EXA, or 11.07% of the company.

Per Google Finance, Exa is "develops, sells and supports simulation software and services that manufacturers use in design and engineering processes. The Company focuses primarily on the ground transportation market, including manufacturers in the passenger vehicle, highway truck, off-highway vehicle and train markets, as well as their suppliers. Its product, PowerFLOW, is a software solution for simulating fluid flow problems, including aerodynamics, thermal management and aeroacoustics, or wind noise. PowerFLOW uses its Digital Physics technology that enables it to predict fluid flows. PowerFLOW directly simulates unpredictable turbulent scales. The PowerFLOW software suite includes the simulation engine and grid generation engine, along with pre- and post-processing software products. The software is delivered in client/server architecture, or through its cloud-based offering, ExaCLOUD. With the ExaCLOUD solution, various client features and functions are accessed through a Web browser."

Soros Boosts Sigma Designs Stake

Per a Form 4, Soros has also disclosed it acquired 65,625 shares of Sigma Designs (SIGM) on September 12th and 14th at a weighted average price of $5.8562.  After the buys, Soros now owns over 5.08 million shares of SIGM.

Per Google Finance, Sigma Designs is "a provider of global integrated semiconductor solutions. The Company offers media platforms for use in the home entertainment and home control markets. The Company sells its products into markets, including smart television, media connectivity, set-top box and Internet of Things (IoT) devices. The Company's media processor product line consists of a range of functionally similar platforms that are based on integrated chips, embedded software and hardware reference designs. The Company's media connectivity product line consists of wired home networking controller chipsets that are designed to provide connectivity solutions between various home entertainment products and incoming video streams. The Company's IoT devices product line consists of its wireless Z-Wave chips and modules. The Company is engaged in the license of its internally developed intellectual property. It also offers legacy products that are sold into prosumer and other industrial applications."

Trian Fund Sells Some Sysco

Nelson Peltz's activist firm Trian Fund Management has filed a Form 4 with the SEC regarding its stake in Sysco (SYY).  Per the filing, Trian sold 372,314 shares on September 12th and 13th at weighted average price of $53.0893.

After these transactions, Trian still owns over 43.59 million shares.  The filing notes this sale was made in conjunction with the liquidation of an investment fund managed by Trian.

For more from this firm, we recently posted up Trian's presentation on Procter & Gamble (PG).

Per Google Finance, Sysco is "a distributor of food and related products primarily to the foodservice or food-away-from-home industry. The Company's segments include Broadline, SYGMA and Other. The Broadline segment includes its Broadline operations located in the Bahamas, Canada, Costa Rica, Ireland, Mexico and the United States. Broadline operating companies distribute a full line of food products and a range of non-food products to both traditional and chain restaurant customers, hospitals, schools, hotels, industrial caterers and other venues where foodservice products are served. SYGMA operating companies distribute a full line of food products and a range of non-food products to certain chain restaurant customer locations. The Other segment includes the Company's specialty produce; custom-cut meat operations; lodging industry segments; a company that distributes specialty imported products; a company that distributes to international customers, and Sysco Ventures platform."

Thursday, September 14, 2017

Boyar's Latest Issue Profiling 3 Stocks That Have Declined ~23% On Avg

We wanted to bring your attention to a limited-time offer from our friends at Boyar Research. Normally their equity research reports, which many of the world’s most successful institutional investors have been subscribing to for over 40 years, are sold exclusively on a subscription basis. These subscriptions cost tens of thousands of dollars. However, for a very limited amount of time, Boyar is making its most recent issue available for purchase for just $945. This issue features three companies including AMC Entertainment Holdings, The TJX Companies, and Harley-Davidson that they believe to be selling at significant discounts to their estimate of intrinsic value.

Act quickly as this offer expires on September 18th at Noon EST.

To take advantage of this limited time offer, please click here.

Investment highlights of companies featured in Boyar's latest issue:

1)  AMC Entertainment Holdings, Inc.  (current price $15.20, Boyar’s 2019 estimate of intrinsic value is $26 per share)

AMC has declined ~60% from its 52-week high due to both weak attendance trends as well as fears that controlling shareholder Wanda could be forced to sell its stake. However, the upcoming film slate looks promising, which could cause a quick rebound in industry sentiment. Even assuming revenue growth slows from 8% (2014-2016 average) to 4% by 2020 and attendance fails to recover to 2016 levels, Boyar estimates AMC’s intrinsic value could exceed $26/share by YE2019 using conservative multiples.

2)  The TJX Companies, Inc. (current price $73.47, Boyar’s 2021 estimate of intrinsic value is $120 per share)

In Boyar’s view, TJX is a classic case of throwing the “baby out with the bathwater” as shares have declined ~10% from their 52-week high in sympathy with the carnage experienced by traditional brick and mortar retailers (as well as margin pressures Boyar believes to be temporary). However TJX has significant growth opportunities and unlike most retailers possesses a “moat” that protects it from online competition.

3) Harley-Davidson, Inc. (current price ~$47.96, Boyar’s 2019 estimate of intrinsic value is $62 per share)

HOG has declined ~25% from its 52-week high due to a multitude of factors, including a reduction in shipping guidance as well as fears associated with the greying of its traditional customer base. However the company possesses an iconic brand, sells at a below market multiple, and sports an ~11% FCF yield. Boyar believes HOG has a significant opportunity for capital appreciation if some of its marketing initiatives are properly executed.

This offer expires on September 18th at Noon EST, click here to purchase.

For additional information on Boyar Research or this offer, please email

Wednesday, September 13, 2017

Delivering Alpha Conference Notes 2017: Robertson, Dalio, Chanos, Cooperman & More

CNBC and Institutional Investor's Delivering Alpha Conference just took place and featured many big name speakers.  Here's notes from the event itself and summaries of television interviews as well:

Delivering Alpha Conference Notes 2017

Julian Robertson (Tiger Management)

Robertson noted that interest rates need to increase because there's a bubble forming in the stock market.  Since rates are low, stocks don't really have much in the way of competition for money.  He also predicts that Trump will ask Janet Yellen to stay on as Federal Reserve Chair.

He recently got back into Alibaba (BABA).  He previously owned it at "a very low price" (seven years ago) but sold it around $100 but now he's back in.  Says it's unbelievable how the company has seen 50% in earnings.  While other investors claim it to have accounting issues, Robertson said, "It would have to be such a giant fraud.  I mean, I can't imagine anything would be that colossal."

Argued that Apple (AAPL), Facebook (FB), and Google (GOOG) are cheaper than they would have been in the 1960's, 70's or 80's.  On Netflix (NFLX), he noted "does anyone not like it?"  He said it "might be a little out of reach" now but it's still tempting him because it's run by good people and he loves it.

He likes the cruise industry, saying that "(It) has come of age.  And older people my age are attracted to the cruise ship industry.  And they are booming right now, and all over the world they are booming.  And I think they're for the golden oldies."

Robertson still also owns Air Canada: "We got into it at around 8 or 9.  And it's now 23, approaching 24, and the multiple is about the same as when we got in, which is all of five times earnings.  So we have too much Air Canada, but I can't make myself sell it."

Also noted he doesn't think he'll ever understand Bitcoin.

He also continued to share his view that part of the hedge fund crisis is exacerbated by the fact that there's so many of them now and they compete against each other.

Robertson also gave advice to the younger generations: be sure that you love the field and let that be what guides you.

Ray Dalio (Bridgewater Associates)

Dalio's biggest concerns were the following: wealth gap, social conflict, and various financial burdens (debts and pensions).

"I think we're probably in a 2.5% type of growth environment.  I mean, the real question is, to some extent, whether you can unleash the productivity by some of the changes that a pro-business environment can produce."

He thinks tax reform etc will be a watered down version and will come later.

He likened the current environment to 1937 in terms of the early stages of a tightening.

Dalio thinks that we're in an environment with a lot of conflict: political, conflict between parties, conflict between countries.  "This is very important.  This is even more important than how the tax changes are going to take place."

The Bridgewater founder then talked about balancing alpha and beta.  He said gold is essential and part of that balance.  He called it "an effective diversifier of assets" as well as "an alternative version of cash."  He feels it should be 5-10% of everybody's portfolio.

He also thinks it'd be terrible if Gary Cohn left the administration and it'd be bad for the market too.

When asked what he's most worried about, Dalio mentioned risks like North Korea, but said his bigger worry is long-term: wealth and social gap and the conflicts that arise from that.  He's worried about the various debt and pension burdens.

We also recently posted Ray Dalio's TED talk which takes you inside a meeting at Bridgewater.  He also has penned a new book, Principles.

Leon Cooperman (Omega Advisors)

He said that "Conditions that normally lead to significant market decline are either not present or not forecastable."

"The market is in a zone of fair and full valuation.  I see very few signs of exuberance."

Stocks mentioned by Cooperman include First Data (FDC), which he's owned for some time now and called very cheap.

Also, United Continental (UAL), which he felt has solid management that's identified a lot of cost opportunities.  He thinks earnings there can see around 15% over the next few years.  Operating profits could rise by 50% over the next few years and the company has bought back 2% of its shares

He also pitched two energy ideas: Hess (HES), as well as WPX Energy (WPX).  "The solution for low oil prices is low oil prices.  These two (stocks) have growing production profiles and a net asset value well above current prices at existing oil prices."  He thinks oil is headed higher to $60.  Says the sector has been overly discounted.  Says Hess in particular will increase production.

He also likes Shire (SHPG), citing its growth, positive pipeline, and the expectation of stock buybacks.

Said bonds look like they're in a bubble but at same time notes the Fed has been 'forcing people into risk' via its monetary policies.  It will change one day he says, but not yet.

Boaz Weinstein (Saba Capital)

He warned investors to avoid junk bonds.  Argued that half or a third of junk bonds today are held by retail investors, who have a ton of exposure, partly due to the rise of ETFs.  He feels the high yield market is overheated and he's short bonds of various retailers and hospitals.  At the same time, he's long equity of some of those same companies.  "Equity is at a much more rational price and credit markets are ignoring those signals."

Noted that portfolio protection is cheap but few are buying it.  "Does everyone think they can get out on the top?"

Jim Chanos (Kynikos Associates)

He says that "what's worked will continue to work" and monetary will stay easy and investors will live with the valuations.

Chanos says it's easier to find short ideas in this environment, but those ideas "don't work" due to the underlying upward trend.  He says the market was far more correlated last year than it has been this year.

He's short Continential Resources (CLR).  "People have been looking at the industry with rose colored glasses.  This is a problem with the North American shale business.  If we don't get a pickup in the company's fortunes in the back half of the year it's going to struggle."

Jeff Smith (Starboard Value)

Pitched Perrigo (PRGO), generic drug maker.  Says a lot of these products are sold on Amazon now and the company can expand sales of its over-the-counter medicines via that channel.  Shares have been undervalued from pricing pressures.

Also mentioned Altaba (AABA) as a top idea.  This is the former Yahoo stub that is left after selling the core Yahoo business.  What's left is a stake in Alibaba (BABA) and Yahoo Japan, etc.  It's basically a holding company.

Mick McGuire (Marcato Capital)

The activist investor has taken a new stake in Terex (TEX), the company that makes construction equipment.  They started buying last year and roughly own around 1.1 million shares per a recent SEC filing as they own 6% of the company

McGuire feels the company should see a revenue boost after a strategic re-positioning.  It's in the middle of an operating turnaround and is reducing SG&A, so there's operational profit upside.  The company also switched its sourcing program which could potentially save them around $500 million annually.  Thinks shares could triple, and has already doubled since he invested in 2016.

Chamath Palihapitiya (Social Capital)

The venture capitalist who now also runs public investments, said that he's massively long cryptocurrency bitcoin.  He calls the blockchain technology disruptive.

He argued that tech investors need to look at a company's ability to innvoate: "There's just this massive trade right now between the disruptors and the disrupted."  He says there's a lot of opportunity to be long disruptors and short the disrupted.

Jamie Dimon (JPMorgan Chase)

He called bitcoin worse than Tulip Bulbs and thinks it will eventually blow up.  Said he'd fire any of his traders trading bitcoin for being stupid.  Says it could go up to $100,000 before it blows up, who knows.  His daughter bought it, it went up, now she thinks she's a genius, he said.  Thinks it could be vulnerable to government intervention.

Thinks government policies are stifling growth.  If things changed, we'd see 3% growth rather than sub 2% which we've seen annualized now.  Singled out small businesses as most impacted.

Argued banks in the US are very sound at the moment.  Says the successor to JPMorgan is inside JPMorgan.

Mary Erdoes (JPMorgan Asset Management)

When asked about US stocks or bonds, she said none of the above.  Sees enormous opportunities in Europe, Japan, and emerging markets.  Thinks that some investors are worried about emerging markets due to the US dollar as an 'anchor' currency.

Steve Mnuchin (Treasury Secretary)

He says that tax reform is too important not to be passed and that it can occur this year and might even be retroactive back to the beginning of 2017.  Said the President's number one concern is North Korea and security.  Said hedge funds wouldn't have the carried interest provision under Trumps tax proposal.

Steve Schwarzman (Blackstone Group)

He's optimistic on tax reform, saying the 'worst' we'd do is a tax cut somewhere around 25-28%.

He thinks the biggest risk to markets are geopolitical, in particular North Korea.  He said "i would not be buying office buildings in Seoul" though didn't comment further on how this would affect investment decisions.

Schwarzman also argued that he relationship between China and North Korea is not friendly as it is perceived to be.  "The Chinese do not want a nuclearized Korean peninsula, and they're very serious about that.  They also don't want to have a shooting war occur and have 20 million refugees from North Korea go into China.  So it's complicated for them as to what they do."

Barry Sternlicht (Starwood Capital)

"It feels like the ocean is full of money, but it could evaporate."  Says he's most worried about potential problems from North Korea or Syria.

Tuesday, September 12, 2017

Paulson & Co Reduces Enzymotec Stake

John Paulson's hedge fund firm Paulson & Co has filed an amended 13G with the SEC regarding its stake in Enzymotec (ENZY).  Per the filing, Paulson now owns 9.17% of the company with over 2.10 million shares.

This is a decrease of around 2.1 million shares in their position size.  They previously owned 4.2 million shares at the end of the second quarter.  The new filing was made due to portfolio activity on August 23rd.

For more on this hedge fund, we've posted other recent activity from Paulson & Co here.

Per Google Finance, Enzymotec is "a nutritional ingredients and medical foods company. The Company's technologies, research expertise and clinical validation process enables it to develop solutions across a range of products. The Company operates in two segments: Nutrition segment and VAYA Pharma segment. Both of the Company's segments offer a range of products that leverage its lipid-related offerings. Its product suite addresses the entire human life-cycle, from infancy to old age, and comprises ingredients in products ranging from infant formula to nutritional supplements, as well as branded medical foods, sold only under a doctor's supervision. It markets its product portfolio to established global consumer companies and physicians and target large and growing consumer health and wellness markets. The Company's clinically-validated products include bio-functional lipid-based compounds designed to address dietary needs, medical disorders and common diseases."

Tiger Global Adds To Apollo Position

Chase Coleman's hedge fund firm Tiger Global has filed yet another Form 4 with the SEC regarding its position in Apollo Global Management (APO). 

The latest filing shows they were buying on September 7th and 8th at weighted average prices of $28.465 and $28.503.  In total, they bought 253,672 shares.  After these buys, they now own over 34 million shares of APO.

We've highlighted other recent portfolio activity from Tiger Global here.

Per Google Finance, Apollo Global is "an alternative investment manager in private equity, credit and real estate. The Company raises, invests and manages funds on behalf of pension, endowment and sovereign wealth funds, as well as other institutional and individual investors. The Company's segments include private equity, credit and real estate. The private equity segment invests in control equity and related debt instruments, convertible securities and distressed debt investments. The credit segment invests in non-control corporate and structured debt instruments, including performing, stressed and distressed investments across the capital structure. The real estate segment invests in real estate equity for the acquisition and recapitalization of real estate assets, portfolios, platforms and operating companies, and real estate debt, including first mortgage and mezzanine loans, preferred equity and commercial mortgage backed securities."

Monday, September 11, 2017

Howard Marks' New Memo: "Yet Again?"

Oaktree Capital's Chairman Howard Marks is out with another memo.  This one is entitled "Yet Again?"

He says his previous memo, "There They Go Again... Again" received the most response he's ever received in 28 years of writing memos. 

His newest memo touches on the response and why he feels the way he does on where the market is currently.  He also addresses topics such as FAANG stocks, Bitcoin, and passive investing, among others.

Embedded below is Howard Mark's new memo: Yet Again?

You can download a .pdf copy here.

Be sure to also read Marks' cautionary memo on cycles.

Viking Global Takes aTyr Pharma Stake

Andreas Halvorsen's hedge fund firm Viking Global has filed a 13G with the SEC regarding shares of aTyr Pharma (LIFE). Per the filing, Viking now owns % of the company with over 2.93 million shares.

This is a newly disclosed equity position and the filing was made due to activity on August 31st.  aTyr Pharma recently issued a press release stating that they'd raised $45 million in equity financing, with Viking purchasing a block of non-voting Class X Preferred Stock at $13.25 per share, each which converts into 5 shares of common stock with various conditions.

We've highlighted previous portfolio activity from Viking Global here.

Per Google Finance, aTyr Pharma is "a clinical-stage biotherapeutics company. The Company is engaged in the discovery and clinical development of medicines for patients suffering from severe, rare diseases using its Physiocrine biology, a discovered set of physiological modulators. The Company focuses on the development of Physiocrine-based therapeutics for the treatment of rare diseases, including facioscapulohumeral muscular dystrophy (FSHD) and limb-girdle muscular dystrophy (LGMD) 2B. The Company is developing Resolaris, an intravenous protein therapeutic for the treatment of rare myopathies with an immune component (RMICs). The Company is investigating Resolaris in patients with LGMD2B. The Company is conducting approximately three open label trials in patients with early onset FSHD, in adult patients with FSHD or LGMD2B and a long-term extension study in adult patients with FSHD. The Company has not generated any revenues."

Thursday, September 7, 2017

What We're Reading ~ 9/7/17

The more comfortable you are buying something, the worse the investment's gonna be [Meb Faber]

36 obvious investment truths [A Wealth of Common Sense]

What do the best investors do that the rest don't? [Behavioral Value Investor]

Linear thinking in a non-linear world [Harvard Business Review]

How to retain more from the books you read [Medium]

Global growth still at record rates for this expansion [FT]

We need to stop pretending the autonomous car is imminent [Recode]

This is why WeWork thinks it's worth $20 billion [Backchannel]

Is $2 billion the new rate for an NBA franchise? Don't count on it [ESPN]

How YouTube perfected the feed [The Verge]

How built an e-commerce powerhouse in the Middle East [HBR]

Career advice from Facebook's Sheryl Sandberg [Inc]

Get 1% better everyday [James Clear]

Trian Partners' Procter & Gamble Presentation: Revitalize P&G Together

Nelson Peltz's activist firm Trian Partners recently put together a slide deck on their Procter & Gamble (PG) position entitled "Revitalize P&G Together."

They note that organic sales growth has underperformed peers such as Unilever, Reckitt Benckiser, Henkel, Arm & Hammer, and others.  Also, volume growth has trailed peers like Clorox, Church & Dwight, etc.

Trian's initiatives for the company include regaining lost market share, ensure management's productivity plan delivers results, develop small mid-size local brands, make M&A a growth strategy, win in digital, and improve corporate governance.

They outline their plan for the company and highlight all the issues the company is facing in their slidedeck.

Embedded below is Trian Partners' presentation on P&G:

You can download a .pdf copy here.

ValueAct Capital Increases KKR Stake

Jeff Ubben's firm ValueAct Capital has increased its stake in KKR (KKR) per an amended 13D just filed with the SEC.  ValueAct now owns 7.5% of the company with over 35.15 million shares.

The filing notes they were out buying on August 22nd through 25th, as well as the 28th through September 1st, and on September 5th as well.  In total, they acquired 6.6 million shares.  They were buying between $18.42 and $18.98.

Ubben's firm also holds cash settled swaps with respect to 10.4 million common shares that aren't included in 35 million shares they own.

ValueAct has made quite a few portfolio adjustments recently and we've highlighted more of them here.

Per Google Finance, KKR is "a global investment firm that manages investments across multiple asset classes, including private equity, energy, infrastructure, real estate, credit and hedge funds. The Company's business offers a range of investment management services to its fund investors, and provides capital markets services to its firm, its portfolio companies and third parties. The Company conducts its business with offices across the world, providing it with a global platform for sourcing transactions, raising capital and carrying out capital markets activities. The Company operates through four segments: Private Markets, Public Markets, Capital Markets and Principal Activities. It operates and reports its combined credit and hedge funds businesses through the Public Markets segment. The Capital Markets segment consists primarily of its global capital markets business. Through its Principal Activities segment, the Company manages the firm's assets and deploys capital."

Wednesday, September 6, 2017

Ray Dalio's TED Talk on Idea Meritocracy

Bridgewater Associates founder Ray Dalio gave a TED talk on what idea meritocracy looks like at his hedge fund.

The talk focuses on how to build a company where the best ideas win.  Dalio talks about algorithmic decision making and his history as an investor and how he began to learn from his mistakes.

He would write down his lessons and it became a set of principles which eventually were developed into algorithmic decision making.  Dalio has also recently published a brand new book, Principles.  

He notes, "In order to be an effective investor, one has to bet against the consensus and be right."

Dalio walks through the biggest mistake he ever made and how it made him ask himself in any future decisions: "How do I know I'm right?"  He gained humility.

The Bridgewater founder also takes us inside a meeting at Bridgewater and shows how they collect data on each person's ideas and believability.  Dalio says they do this because people naively and arrogantly hold opinions in their mind that are wrong.  But if you zoom out and gain perspective, you can see things through everybody's eyes and view things collectively. 

"Collective decision making is so much better than individual decision making if it's done well.  It's been the secret sauce behind our success."

Embedded below is the video of Ray Dalio's TED Talk:

Be sure to also check out Dalio's brand new book, Principles.

Pershing Square To Sell Entire Nomad Foods Stake

Nomad Foods (NOMD) today issued a press release stating that they were commencing an offering of 33.33 million shares from Bill Ackman's Pershing Square.

This means that Pershing is selling its entire stake in the company and will no longer be a shareholder.

For more from this hedge fund, we've also posted up Pershing Square's Q2 letter.

Per the press release, Nomad Foods is "a leading frozen foods company building a global portfolio of best-in-class food companies and brands within the frozen category and across the broader food sector. Nomad Foods produces, markets and distributes brands in 17 countries and has the leading market share in Western Europe. The Company’s portfolio of leading frozen food brands includes Birds Eye, Iglo, and Findus."

Tuesday, September 5, 2017

ValueAct Capital Increases Seagate Stake Again

Jeff Ubben's activist firm ValueAct Capital has filed an amended 13D with the SEC regarding its stake in Seagate Technology (STX).  Per the filing, ValueAct now owns 7.4% of the company with over 21.45 million shares.

Per the filing, ValueAct was buying STX shares on August 23rd through 25th, as well as the 29th and 30th.  In total, they bought 458,600 shares and paid around $31 for the bulk of the buys.

Also, the 13D notes that ValueAct and Morgan Stanley entered into a stock purchase agreement (10b5-1 plan) where MS will buy for the account of VA up to 6 million shares of STX stock.  Purchases can begin as soon as September 1st and will terminate no later than October 31st.

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

Per Google Finance, Seagate Technology is "a provider of electronic data storage technology and solutions. The Company's principal products are hard disk drives (HDDs). In addition to HDDs, it produces a range of electronic data storage products, including solid state hybrid drives, solid state drives, peripheral component interconnect express (PCIe) cards and serial advanced technology architecture (SATA) controllers. Its storage technology portfolio also includes storage subsystems and high performance computing solutions. Its products are designed for applications in enterprise servers and storage systems, client compute applications and client non-compute applications. It designs, fabricates and assembles various components found in its disk drives, including read/write heads and recording media. Its design and manufacturing operations are based on technology platforms that are used to produce various disk drive products that serve multiple data storage applications and markets."

Friday, September 1, 2017

Moody's Self-Reinforcing Ratings Moat: Analysis From Scuttleblurb

Scuttleblurb has agreed to let us post their recent analysis of Moody's (MCO) for free.  If you're not familiar, provides subscribers with balanced and insightful analysis and commentary on the moats, business models, and corporate strategies of companies across a variety of industries, as well as time-saving summaries of management commentary on earnings calls.

Market Folly readers can receive a 20% discount off your first year of Scuttleblurb using coupon code: marketfolly

Moody's Self-Reinforcing Ratings Moat

Moody’s is one of the big 3 Nationally Recognized Statistical Rating Organizations (NRSROs), a title bestowed by the SEC on a handful of credit rating agencies, the top 3 of whom act as an oligopoly in the US debt ratings gambit. As you well know, Moody’s (and S&P and Fitch) fell into disrepute during the last financial crisis when ratings on vast swaths of corporate and securitized paper proved worthless, its grossly conflicted issuer-pay model laid plainly bare. But testament to the company’s resilient business model, and toothless fines and regulatory censures notwithstanding, Moody’s Investor Service (“MIS”, the credit rating agency side of the business that constitutes ~2/3 of revenue and ~85% of EBITDA) has thrived since the crisis, compounding revenue and EBITDA by 10% and 15%, respectively, since 2009 and generating more of each vs. the 2007 peak:

Over the last 100+ years since its founding, Moody’s ratings – derived from a consistent framework applied across 11k and 6k corporate and public finance issuers, respectively, in addition to 64k structured finance obligations – have become the veritable benchmark by which market participants, from investors to regulators, peg the credit worthiness of one debt security against another. NRSRO ratings underpin the risk weightings that banks attach to assets to determine capital requirements, dictate which securities a money market fund can own, and, in ostensibly surfacing the credit risk attached to fixed income securities, make it easier for two parties to confidently price and trade, enhancing market liquidity. I was a research nerd in the bond group at Fidelity just prior to and during the crisis. It’s hard to overstate just how tightly Moody’s and S&P (and to a lesser degree, Fitch) ratings were stitched into the fabric of our ratings and compliance infrastructure and the day-to-day workflows of analysts and traders on the floor.

Because of such industry-wide adoption, a debt issuer has little choice but to pay Moody’s for a rating if it hopes to get a fair deal in the market: an issuer of $500mn in 10-year bonds might pay the company 60bps ($3mn) upfront, but will save 30bps in interest expense every year ($15mn over the life of the bond)….and each incremental issuer who pays the toll only further reinforces the Moody’s ratings as the standard upon which to coalesce, fostering still further participation.

This self-feedback loop naturally evolves into a deeply entrenched oligopoly. In terms of total ratings issued, S&P and Moody’s are right at the top of the heap. There are actually 10 NRSROs, but unless you work in credit, you’ve probably never heard of most of them (Egan Jones anyone?)

The government’s determination of NRSRO status is premised on “whether the rating agency is ‘nationally recognized’ in the United States as an issuer of credible and reliable ratings by the predominant users of securities ratings” (per this SEC report), which criteria itself is in part tautologically attributable to the government’s NRSRO designation in the first place. And when things go horribly wrong and these ratings are shown to be the reactive measures that they are, the agencies simply appeal to freedom of speech protection under the First Amendment. This is a really hard business to screw up. Who wants to rock the boat? Certainly not the staid management team at Moody’s, which thrives on 5 year plans, formulaic capital allocation policies, and farcically granular guidance that plays to the myopic expectations of sell-side model tweakers (though I give management props for expensing stock comp in its adjusted profit numbers). You will never see Moody’s carve out an “Other Bets” P&L for new innovations. Day One will always be yesterday.

[If watching Sundar Pichai saunter on stage to fulsome fanboy applause against jubilant theme music from Fitz & The Tantrums provokes reflexive eye-rolling, then do yourself a favor…watch the 2016 Moody’s Investor Day webcast and take refuge in the sterile quietude of a generic albescent conference room where every cough and throat clear is awkwardly amplified against the AV projector’s fan’s sad whir.]

MIS’ 2016 revenue was about 60% transactional (tied to new debt issuance) and 40% “recurring” [per 10K: annual fee arrangements with frequent debt issuers, annual debt monitoring fees and annual fees from commercial paper and medium-term note programs, bank deposit ratings, insurance company financial strength ratings, mutual fund ratings], a mix that has been reasonably stable during the quiescent issuance environment of the last 5-6 years.

Debt issuance in the US, which constitutes nearly 2/3 of MIS revenue, can be choppy from year-to-year….

Source: SIFMA

…but the overall stock of debt has been steadily growing…

Source: SIFMA

…so, as you might expect, MIS’ recurring revenue has served as a reliable anchor during stormy issuance periods.

Still, recurring profits did little to cushion the punishing issuance swoon during the last recession. Revenue from corporate and structured finance bond issuance declined 26% and 53%, respectively, from 2007 to 2008, forcing a ~$575mn revenue decline that translated into a $450mn EBITDA hit.

We don’t know the profit split between transactional and recurring profits (and I don’t even know if such a determination is possible since labor is the biggest component of SG&A and allocating the cost of an analyst’s time between new issuance and maintenance work feels like arbitrary hair splitting). But, I think we can confidently say that non-recurring revenue per dollar of new issuance is way larger than recurring revenue pulled from each par dollar of the rated installed base, and so big swings in transactional revenue have a disproportionate impact on profitability…though, keep in mind that heavy debt issuance in a given period adds to the stock of outstanding debt and thus the monitoring fees earned in future periods.

Given the lofty contribution margins attached to new issuance, the prospect of a reversal has been a source of trepidation for me. Transactional revenue growth has proceeded at a strong, though not torrid, 12% pace over the last 6-7 years as issuers have seized on a stubbornly low rate environment to refinance debt and add leverage to their balance sheets.

Meanwhile, outside a commodity-driven hiccup in 2016, high yield default rates are well below the historic average (which should give you pause if you believe in cycles and mean reversion).

[Aside: the below exhibit, which breaks out the uses of funds from high yield bond and bank loans, is interesting in its own right. In the late 1990s, 20%-25% of companies that raised funds cited internal investment as a reason for doing so vs. just a mid-single/high-single digit percentage today.]

I’m being unhelpfully obvious when I say that credit conditions feel toppy. But even if mean reversion is impending, 2008/2009 seems an inappropriate analog since not only is the catalyst driving systemic financial concerns that loomed so large back then less relevant today, but also a significant chunk of the company’s pre-2008 profits came from its reckless rubber-stamping of toxic asset-backed securities.

Disaggregating MIS’ revenue streams per above, we see that outside of structured finance, the revenue declines were actually not sooo bad during the worst financial crisis in decades, thanks of course to issuance stoked by aggressive rate-deflating monetary policy measures. Structured finance grew from just $384mn in revenue in 2002 to $873mn in 2006 (an 18% CAGR) and was so profitable that even while non-SF revenue grew by 14% in 2009, overall MIS EBITDA still declined as SF revenue contracted by another 25% from 2008’s harrowing 53% decline. I don’t believe MIS has significant revenue streams tied to comparably negligent and profligate underwriting today, and would expect the profit hit from a cyclical correction to be far more muted. Also, due to the surge in 7-10 year paper subsequent to the financial crisis – MIS’ non-structured revenue increased by 17%/yr from 2008 to 2012 – the refinancing needs over the next 4 year period (2017 to 2020) are 30% greater than they were from 2013 to 2016, providing an intermediate tailwind to transactional revenue, though 1h17’s whopping 30% y/y growth in corporate finance revs is clearly testament to some pull-forward of refinancing needs.

Debt issuance cycle aside, companies have been increasingly tapping the capital markets, rather than banks, for their debt funding needs. In Europe, bonds constitute just 23% of non-financial debt [bonds + bank loans] outstanding vs. 52% in the US, with the mix shifting in favor of bonds over at least the last decade.

Management thinks that disintermediation (+2%-3%) plus debt issuance prompted by global GDP growth (+2%-3%) plus pricing (+3%-4%) should sum up to around ~high-single/low double digit revenue growth through the debt cycle, which sounds reasonable to me and is consistent with the 9% revenue CAGR MIS has realized since 2011.

And on top of that, there’s another 2%-3% contribution from Moody’s Analytics, MCO’s less good business segment that offers a range of risk management, research, and data products and services, and constitutes about 1/3 of revenue and 16% of EBITDA (corporate overhead is already allocated to business segments). Almost all of the ~$1bn that the company has spent on acquisitions (out of cumulative free cash flow of ~$8bn) over the last decade through 1q17 has gone towards bolstering MA, mostly small tuck-ins.

Then on May 15, 2017, management announced the €3bn acquisition of Bureau van Dijk. Moody’s is spending 3x more on this one acquisition than it has on the sum of all previous acquisitions over the last decade. BvD is an Amsterdam-based company that aggregates data on 220mn private companies across a wide range of geographies and industries and makes it available in hygienic, organized form to 6k corporate and government customers. This acquisition will be “tucked into” RD&A [In 2016, about 54% of MA’s revenue came from “Research, Data, and Analytics,” which is really just an extension of MIS insofar as it realizes revenue by selling research and data (analysis on debt issuers, economic commentary, quantitative risk scores, etc.) generated in MIS. The quality of RD&A mirrors that of the ratings segment, with 95% retention rates driving hsd revenue growth (90% organic) from hsd pricing and volume since 2011], boosting its revenue by ~43% (and contributing ~8% to MCO’s total revenue).

BvD does not own the data, but rather licenses it from 160mn obscure data providers in various jurisdictions before “cleansing” and standardizing it for subscribers who use it to, for instance, better assess credit risk, conduct M&A due diligence, set transfer pricing reporting policies and docs for multinationals, and identify potential B2B sales leads. Management claims that this business benefits from network effects, by which I assume they mean that the license fees BvD pays to suppliers are pegged to the number of users of that data and so more users compel more suppliers to make their data available to BvD, which in turn draws more users. Going off the high-level historical financials provided by Moody’s, BvD has performed like a truly kick-ass asset, with revenue expanding at a steady 9% CAGR (all organic) over the last decade, growing every year right through the recession, and EBITDA margins expanding from 39% in 2006 to 51% in 2016.

But great assets go for great prices. MCO is paying a lofty 12x revenue and 23x EBITDA at a time when its own stock traded at “just” ~14x at the time of announcement. €3bn is triple what private equity firm EQT paid for BvD less than 3 years ago. One might argue that if we extrapolate the last decade’s 12% annual EBITDA growth out 5 years (which might actually be reasonable given the seemingly predictable, consistent nature of the business) and apply estimated out-year synergies ($40mn revenue / $40mn costs), we’re looking at €295mn in 2021 EBITDA, which puts the multiple at ~10x, but even management concedes that it is reaching on valuation and falling short of their typical 10% cash yield target on this one.

The revenue synergies seem fairly modest (14% of revenue, 5 years out) and sensible on the surface. For various reasons BvD has found it difficult to break into the US market (unlike regions outside the US, financial data on private companies in the US is sparse…plus, BvD who?) and still derives 3/4 of its revenue from Europe. Moody’s can bundle BvD’s datasets into MA’s analytics products and sell a more robust bundle to its US customer base. [Notably, MA already feeds BvD’s data into the loan origination solution it sells to financial institution clients and some MA customers already use BvD data to drive their credit models] and cross-sell MA products into BvD’s customer base. Finally, BvD’s dataset on smaller, private companies gives MIS the opportunity to provide credit ratings to the underserved SME market, though this seems like a more distant aim.

[Here’s a high-level summary of Moody’s business mix post-BvD; MA gets a nice margin lift and its EBITDA increases from ~17% of consolidated to nearly 1/4.]

Still, most of management’s justifications – the acquisition reduces the volatility of the ratings business, is accretive to per share earnings, accelerates growth forecasts, gets the company access to new revenue opportunities like transfer pricing and tax planning that have little to do with the core ratings business – have jack to do with value creation and reek of generic Wall Street pandering. And while BvD’s business seems good enough on its own merits that I don’t think the acquisition will be grossly value destructive, it’s tough to credibly claim that much incremental value has been added at this lofty purchase multiple.

Outside of RD&A, there are two other business lines: 1) Enterprise Risk Solutions (11% of post-BvD revenue; risk management software and services…basically, financial institutions use Moody’s tools to create credit, market, and operational risk tables and make them available to their regulators; has grown revenue by ~11% organically over the last 8 years) and 2) Professional Services (4% of post-BvD revenue; financial training and certification, mid-single digit organic revenue growth since 2008….seems like a pretty mediocre business, but one which management insists is an important entry point to the customer).

Taken as a whole, Moody’s Analytics is just “meh” compared to other data and analytics peers, in my opinion. Great analytics businesses tend to have self-reinforcing data feedback loops, which are not very relevant to MA.

[Here is what I wrote about Verisk Analytics (VRSK): The company sits at the center of a network that procures data from a wide variety of sources on one side (claims settlements, remote imagery, auto OEMs, name your buzz word – smart cars, smart watches, smart cities) analyzes it, and spits out predictive risk and customer insights to their clients on the other (insurers, advertisers, property managers). The agreements through which a customer licenses VRSK’s data also allows the company to make use of that customer’s data, so essentially the customer pays Verisk for a solution that costs almost nothing for the company to deliver and Verisk gets to use that customer’s data to bolster the appeal of its own products, which improved solutions reduce churn and attract even more customers (and their data) in a subsidized feedback loop.]

Its solutions seem more akin to templated reporting and risk management to sate regulatory requirements than data-fueled machine learning algorithms to drive business outcomes. Management continuously talks about realizing synergies from tuck-ins and driving operating leverage, but the fact of the matter is that MA margins have gone nowhere for years and I think it’s fair to say that this side of the company has disappointed expectations.

So, stepping back…nearly 80% of MCO’s pro-forma EBITDA comes from a ratings business that has long established itself as the de facto credit risk benchmark, relied upon by all significant players in the fixed income ecosystem. But while MIS is a structurally advantaged business that will continue heaping value over time, because 60% of MIS is high-margin transactional revenue tied to new issuance, it is also unavoidably cyclical, and conditions today seem about as good as they will get. Through the cycle, MIS is a steady high-single digit revenue / low-double-digit EBITDA grower generating prodigious free cash flow (30% of revenue converts to free cash flow). Most of it will be mechanically dedicated to buybacks and dividends, which is probably just as well since its tuck-in acquisitions have had little to show, and I suspect the same will be true of BvD. At $134, the stock trades at 18x/23x my estimate of pro-forma LTM EBITDA/cash EPS. The EBITDA multiple is about as high as it has been in decades (matched only in late 2005/early 2006) on what in retrospect will likely turn out to be cyclically peak earnings. Moody’s is a great business and is priced accordingly, though with a long enough time frame, a buyer will probably do just fine even at the current valuation.

For more analysis like this, don't forget: Market Folly readers receive a 20% discount off your first year of Scuttleblurb using coupon code: marketfolly