Notes From Capitalize For Kids Conference 2017: Einhorn, Dreyfus & More ~ market folly

Friday, October 27, 2017

Notes From Capitalize For Kids Conference 2017: Einhorn, Dreyfus & More

The 2017 Capitalize For Kids Conference recently took place and featured hedge fund managers sharing investment ideas to benefit charity to help solve challenges in children's brain and mental health.  Below are notes from some of the speakers' presentations:

Capitalize For Kids Conference Notes 2017

David Einhorn, Greenlight Capital: Presentation

-  Approaches the market from a bottoms-up perspective and is still finding cheap stocks to buy, both on a relative and absolute basis. Greenlight is always net long and is currently operating within its average exposure.

-  Despite 8+ years of underperformance by “value” investors, believes over time value investing outperforms momentum and growth investing. Believes these trends are cyclical/seasonal but does not know when this will end.

-  Has kept the same “playbook” his whole career, does not believe he has the capability to change this. Will go through market periods where people view him a smarter than he is and then also have periods where is looked at dumber than he is.

-  Look for a margin of safety within individual investments, if the thesis is wrong, would like to “break-even or the stock is dead money”, but if a little bit right or mostly right, should be rewarded.

-  If he thinks he is wrong on a position, he will exit right away, however if he is still holding on (to a mark to market loss), he will keep on fighting. If large losses are realized, he fundamentally misunderstood what was going on in the business.

-  Two big losses: SunEdison (most recently) and New Century (in 2009-10) – almost lost 100% on each

-  One of the big advantages available in the market is time arbitrage (since institutional investors only care about 6-12 months) and there is a good amount of opportunities available where the main advantage is greater patience

-  On the short side, generally doesn’t short on valuation, usually needs deteriorating business model with large headwinds. He created the bubble basket in 2013 (to short ~40 stocks on valuation basis).

-  He approached this very simply. Looked at I/S and B/S and valued the business (without looking at the business model/etc. to remove the “story”). If the value estimate was 10% or less of current market value, he would short it). Has made money on most of the shorts (15-20 still remain active).

-  He is still short Tesla (TSLA), Amazon (AMZN), Netflix (NFLX), Athenahealth (ATHN). Still likes these shorts

-  Does not view himself as an activist. He might recommend things to management over time if they want advice or if they had a really good idea.

-  For General Motors (GM), he thought the dual class shares pitch was a really good idea, however, they were outplayed by General Motors management with their force of consultants, proxy advisors,lawyers, public relations etc. – wants to remain quiet now but still believes the idea makes sense.  General Motors is largest long position.

-  Active vs. Passive: In a momentum market, passive will work better as most indices are market cap weighted and index buys more of what’s doing well. Overtime, there is value to be had with active investors. From the GM proxy battle, he had to work with many index proxy managers and was very difficult (poor alignment of interests, index doesn’t care if stock goes up/down)

-  Doesn’t like cryptocurrency, too volatile to be store of value.  Doesn’t do much macro but likes natural gas and gold and is also short Germany/France sovereign debt (negative yields!).

If you missed it, you can also view David Einhorn's Greenlight Capital Q3 letter here, as well as Einhorn's presentation at GIBI Dallas Conference as well.

Dan Dreyfus, 3G Capital: Long Wheaton Precious Metals (WPM)

-  Long Wheaton Precious Metals:  Shares are down 61% since peak in 2011; Believes without movement in commodity price

-  Three steps to get back to mid-$40 or so versus $20 current stock price:  Resolve near-term creating overhang $25, Realize value of hidden assets $35, Upside from normalizing of gold/silver ratio,  $45

-  Business model is very simple: help finance mines for E&Ps. Typically, E&Ps can finance a mine two ways: Equity (very expensive) or Debt (add covenants; and difficulties/risk of losing asset).  Streaming allows them to sell stake upfront and Wheaton can buy committee straight from the company at a reduced price. Upside for the streaming is that the upside is free (from production and commodity price)

-  Streaming companies have massively outperformed gold miners since 2010. Streaming companies do not face any of the risks miners face (geopolitical, regulatory, delays, cost inflation, etc.)

-  Step 1 - Two outstanding issues; $5 per share of value:  CRA Audit – thinks it’ll settle for a low amount sometime in the next 6-9 months. The company is being looked into as it setup a foreign subsidiary to accept foreign profits.  San Dimas Stream: Owner of the mine is about to go bankrupt, asset will survive (stream is at asset level, doesn’t matter who the owner is); despite current owner having difficulties

-  Step 2: Exceptional Growth (hidden assets) - $10 per share of value.  Wheaton has a lot of production currently and has hidden productions assets on their balance sheet (on the verge of being developed). No capex required to increase production (one of the pros of streaming companies).  Demand of precious metals is still important; copper for city development, electric vehicles; Rosemont/Salobo II mines development to Wheaton has the silver stream for Pascua-Lama, very important project for Barrick Gold.

-  Step 3: re-rate of Silver - $10 per share of value.  Gold:silver ratio at all-time high for gold, however thinks due to cyclical reasons silver demand should rebound driven by solar, industrial demand, etc.  All of these steps can happen very soon.

Jimmy Levin, Oz Management: Long Altaba (AABA)

-  The market is at all-time highs on a relative and absolute basis.  Oz Management looks for investments where they can make money on.

-  Long pitch: Altaba (AABA):  This is a holding company whose main asset is Alibaba (BABA) stock, along with some other assets (like Yahoo Japan).  It trades at a 33% discount to NAV.  Management is incentivized to close the discount between market value and NAV. How quick the discount is closed, as well as how much it closes by is important for compensation targets.  Management is also buying stock (cash source from selling assets) in order to help close the discount

-  Believes the best outcome is the vehicle trades at 1x NAV, which makes sense for an asset of this nature. On the other hand, hard to lose money especially if you are short Alibaba to hedge out systematic risk.

-  Risks include: Mark to Market losses, Both Altaba and its largest holdings are publicly traded, and hence the discount may fluctuate

-  Upside could be: Tax policy; lower corporate tax will help (excess money comes to shareholders), market rumors are that Alibaba will buy back units from Altaba (could help realize value very quickly.)

Brandon Osten, Venator Capital: Long EnerCom

-  Venator is about $200 million in assets; with two strategies (L/S and income)

-  Long Entercom (leader of old school radio, radio is #1 in terms of ROI for advertisers)

-  Earlier in 2017, Entercom agreed to reserve take-over CBS Radio (second largest radio operator in the U.S.), but it was underutilized/under-managed operation. Also, there is FTC deregulation which they could benefit from.o Once transaction closes, float should also increase notably.

-  Radio is #1 in terms of ROI for advertisers (cheap production and local content); listenership is stable and listening hours are also stable.

-  Strong management team with ability to increase margins and a track record of FCF generation and balance sheet deleveraging.

-  CBS assets are solid – strong stations in top markets, sports based; size and scale

-  This vehicle will be family controlled (Field Family) and they have purchased shares via open market since May 2017

-  Estimates 2% revenue growth through 2019, 1% thereafter, 34% EBITDA margin; 25% Tax rate with some buybacks. Believes the stock is worth $16.00 (compared to $11 stock price today).

Jeffrey Olin, Vision Capital: Long General Growth Properties (GGP)

-  Vision Capital, focused on real estate that are publicly traded (both long and short). Have achieved a return of 14% CAGR over the past 10 years (notably beating all relevant indices).  They try to buy real estate that is cheaper/(short more expensive) in the market vs. in private market.

-  GGP owns 100 of the top 500 regional malls in the U.S., Dividend yield of 4.13%

-  Largest shareholder is Brookfield Asset Management (BAM), which owns 34% of shares and has recently bought more.

-  Three reasons to buy the stock: Great Real Estate, Discount to NAV (30%), Various catalysts to close the gap

-  GGP owns a large amount of high quality real estate

-  From a valuation perspective, there is good precedent transactions which support the claim of 30%discount to NAV

-  Regarding catalysts, things such as: good financial performance, improvement of real estate, potential M&A or asset sales to support valuation comps.

-  Brookfield Asset Management could also buy them out given already high ownership.

Check back soon as we'll also be posting the actual slide decks .pdf's of other speakers from the Capitalize For Kids Conference as well.

For even more recent investment conference coverage, we've also posted up the following:

- Notes from Sohn San Francisco Conference (Okada, McGuire & more)

- Notes from GIBI Dallas Conference (Ackman, Einhorn, Russo)

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