Friday, March 10, 2017

Jim Chanos Interview With Capitalize For Kids

Noted short seller Jim Chanos of Kynikos Associates recently sat down with Capitalize For Kids for an interview.  They touched on a myriad of topics, from how his firm has evolved over the years to areas he's focusing on now for short selling. 

Here's some key takeaways from the interview:

On how the rise of quants, machine learning, and A.I. can affect hedge funds:

"In our universe companies are actively trying to give you false inputs. They’re trying obscure the numbers. They’re trying to basically make it look better than it really is and so, if you are analysing reams of reams of stocks based on a P/E ratio, momentum, whatever factors are en vogue, you’d better be sure that you don’t have a Valeant that is puffing up their earnings in a bunch of one time ways because that algorithm will kill you. So4, I think it’s one area, where because you’re questioning the actual inputs and not how they interact with the market price, that you might still have an edge. Might. I’m always willing to consider the opposite. You have to."

On today's market environment: 

"Since ‘08, ‘09 I think we’re going to look back and say that it was the advent of central banking, ‘the central bank saves the world and makes you all rich’. So, QE and zero interest rates, I suspect we’re going to look back and say well 8 years of that policy kind of got us to where we are now, so how is that going to change if it does, and how does that change manifest itself? Are we going to see companies that just can’t possibly do well if interest rates go up by 400 bases points or 300 bases points? That’s certainly one thought. On a macro basis, I mean, I’m not positioning the portfolio because that’s what I think but on the other hand I’m keeping an eye out for companies who might get into additional trouble should that regime be ending. And whether it’s in the auto cycle or companies with really, really low returns on capital that have been using financial engineering to bolster their results, those are sort of the things that we’re interested in right now."

On the auto industry:

"Cars are usually the first thing out of the cycle and so now we’ve been at this sort of 17 million SAAR now for a while and what we’re seeing is what you would classical see. You see more incentives. You’re seeing car manufacturers beginning to cut plant production on the margin. We see more aggressive use of credit, lengthening lease terms, lowering residuals. All the sort of stuff that you typically see to keep moving the iron off the lots. I think this will be one area in particular that a run up in rates would probably hit hard, because everybody buying cars is doing so on monthly payments. These applied loan rates really affect the current industry quickly, faster than I think housing.  Well, I’m not going to disclose (the specific security). However, at the peak of the cycle the company was earning about 6% on their capital. It’s a giant company in the industry. It’s not one of the OEM’s and has a finance arm. It earned below its cost of capital when things were good.  What's going to happen when things are bad?  Today, it is trading at its highs right now."

There's much more from Chanos in the full talk and you can read the rest of the interview here.

Eminence Capital Ups Rexnord Stake

Ricky Sandler's hedge fund firm Eminence Capital has filed a 13G with the SEC regarding shares of Rexnord (RXN).  Per the filing, Eminence now owns 6.8% of the company with over 7 million shares.

This is up from the 808,426 shares they owned at the end of 2016, so a significant increase.  The filing was made due to activity on February 27th.

You can view other recent portfolio activity from Eminence Capital here.

Per Google Finance, Rexnord is "a multi-platform industrial company. The Company operates through two segments: Process & Motion Control platform, and Water Management platform. The Process & Motion Control platform designs, manufactures, markets and services a range of engineered mechanical components used within systems. The Process & Motion Control portfolio includes motion control products, shaft management products, aerospace components and related value-added services. Its Process & Motion Control brands include Rexnord, Rex, Euroflex, Falk, FlatTop, Link-Belt, Thomas and Tollok. The Water Management platform designs, procures and markets products that provide and enhance water quality, safety, flow control and conservation. The Water Management product portfolio includes professional grade water control and safety, water distribution and drainage, finish plumbing and site works products. Its products are marketed and sold under various brand names, including Zurn, Wilkins and VAG."

Senator Investment Group Adds To Whiting Petroleum

Alex Klabin and Doug Silverman's hedge fund firm Senator Investment Group has filed a 13G with the SEC regarding its position in Whiting Petroleum (WLL).  Per the filing, Senator now owns 5.93% of the company with 21.5 million shares (broken down into 10 million shares and 11.5 million shares underlying call options).

This is up from the previous 7 million shares they owned at the end of 2016, so a 14.5 million increase in net exposure.  The filing was made due to activity on February 22nd.

For more on this hedge fund, we also posted up how Senator disclosed a Forest City Realty Trust position.

Per Google Finance, Whiting Petroleum is "an independent oil and gas company. The Company is engaged in development, production, acquisition and exploration activities primarily in the Rocky Mountains and Permian Basin regions of the United States. The Company operates in the segment of exploration and production of crude oil, natural gas liquid (NGLs) and natural gas. The Company's estimated proved reserves totaled approximately 820.6 Million Barrels of Oil Equivalent (MMBOE). The Company has interests in approximately 5,889 gross (3,177 net) productive wells on approximately 948,600 gross (593,900 net) developed acres across all its geographical areas. The Company's Rocky Mountains operations include assets in the states of Colorado, Montana and North Dakota. The Company's Permian Basin operations include its North Ward Estes field in the Ward and Winkler counties of Texas. Its other operations primarily relate to non-core assets in Colorado, Mississippi, North Dakota, Texas and Wyoming."

Thursday, March 9, 2017

TCI Fund's Presentation on Safran / Zodiac

Sir Christopher Hohn's hedge fund firm TCI Fund Management has put together a campaign trying to block Safran's takeover of Zodiac.

TCI has owned Safran for 5 years and as of the date of the letter owned 3.87% of the company.  They also own a much smaller position in Zodiac.  Basically, they're looking for a shareholder vote on the merger in an attempt to stop it.

Hohn writes, "In our opinion the fair value of Zodiac is around €20, which is way below the offer of €29.5 and so Safran’s  shareholders will suffer massive value destruction. The deal represents a  terrible return on investment (ROI) for Safran. Even in a best - case scenario, with  Zodiac’s margins recov ering  from  5%  to  14%,  the  after - tax  ROI  would  be  only  6%,  a  long  way  below  Safran’s cost of capital. At Zodiac’s current level of profitability the ROI of the deal would be just 2%."

Embedded below is TCI Fund's presentation on Safran / Zodiac:

Also embedded below is Chris Hohn's letter to Safran:

You can view the rest of TCI's materials at the website they've established for their campaign: A Stronger Safran.

For more on this hedge fund, we've posted up Chris Hohn's presentation on Charter Communications from the Sohn London conference.

Connor Leonard of Investors Management Corp on Portfolio Construction

Today we're presenting commentary from Connor Leonard of Investors Management Corporation (IMC).  IMC is a holding company located in Raleigh, NC and modeled after Berkshire Hathaway, with the goal of being good long-term owners of excellent businesses.

Connor is the Public Securities Manager for IMC where he runs a concentrated public market portfolio utilizing a value investing philosophy.  While IMC is a privately-held company, they have allowed Connor to share his annual thoughts with Market Folly readers.

Some of his past guest posts over at Base Hit Investing have been featured in our "What We're Reading" links and many readers enjoyed those. 

This letter dives into investment process and portfolio construction and is an excellent read discussing concepts of intrinsic value, variant perception, portfolio concentration, and defining businesses by type of moat.  It's an excellent letter which we'd recommend reading in its entirety.

Embedded below is Connor's annual letter for IMC:

Senator Investment Group Discloses Forest City Realty Trust Stake

Doug Silverman and Alex Klabin's hedge fund firm Senator Investment Group has filed a 13G with the SEC regarding shares of Forest City Realty Trust (FCE/A).  Per the filing, Senator now owns 5.69% of the company with 13.75 million shares.

This is a newly disclosed equity stake for Senator and the filing was made due to activity on February 27th, 2017.

You can view additional recent portfolio activity from Senator here.

Per Google Finance, Forest City Realty Trust is "engaged in the ownership, development, management and acquisition of commercial, and residential real estate and land throughout the United States. The Company's segments include the Commercial Group, Residential Group, Land Development Group and Corporate Activities. The Commercial Group segment owns, develops, acquires and operates regional malls, specialty/urban retail centers, office and life science buildings, and mixed-use projects. The Residential Group segment owns, develops, acquires and operates residential rental properties, including upscale and middle-market apartments, re-use developments, for-sale condominium projects and subsidized senior housing. The Land Development Group segment acquires and sells both land and developed lots to residential, commercial and industrial customers at its Stapleton project in Denver, Colorado. It conducts all of its business, through the Operating Partnership, Forest City Enterprises, L.P."

Wednesday, March 8, 2017

David Tepper: Market Multiple Kind of Full, Short Bonds, Long European Equities

David Tepper, founder of hedge fund Appaloosa Management, was interviewed on CNBC this morning.  Here's the highlights. 

Regarding the markets in general, Tepper said "Listen, I don't think the market is cheap by any stretch of a multiple, you can't say that.  On the other hand, with that backdrop of growth around the world, with the potential we'll do other things here, with the sugar that's still being put on by the ECB, BOJ and let's face it, the Fed is way low ...  You can't be short in that kind of setup.  I'm not suggesting the market is really cheap, but listen, it's hard to go short when you still have the 'drugs' being given.  The punch bowl is still full."  He went on to add, "On a multiple basis it's kind of full... I don't think the market's cheap." 

Regarding bonds, Tepper continues to be bearish and is short them: "If we're short US bonds, we're betting on a stronger economy here.  That's the bet.  Listen... bonds are really hard to own, the yields are really low."

Tepper also noted he bought Snap Inc (SNAP) shares in the IPO but sold on the spike higher.  "I'm not jumpin' through the hoop to buy it at $21.80.  But if it trades back down to the original offer price, I'd love to buy the stock there.  I'm a believer in the company, it's a valuation question to me.  Up near $30 it's too high for right now ... My youngest daughter loves the thing.  Anybody between 12 and 25 loves it, it's kind of anti-Facebook in that generation."

On Apple (AAPL): Trimmed the position due to concerns over China policy, but that shoe never dropped.  "I wouldn't be adding at $139."

He also likes Europe:  "I am long European equities, I could lose my behind.  There's upside people aren't recognizing.  It's a probability game to me.  (Valuations) are much much lower (than the US). 

On the Federal Reserve, he thinks they will raise interest rates more quickly.

Appaloosa now manages around $17 billion.  You can see the rest of their portfolio in the new issue of Hedge Fund Wisdom.

Embedded below are videos from David Tepper's interview with CNBC:

Video on the market:

Video on shorting bonds:

Video on the Federal Reserve:

Video on Snap Inc (SNAP):

Video on Europe & ECB:

Video on Apple (AAPL):

Video on regulation / tax cuts:

Bridgewater's Ray Dalio on Radical Transparency & Building a Culture

Ray Dalio of Bridgewater Associates sat down with Charles Duhigg at The New York Times New Work Summit to talk about building culture and how it relates to his hedge fund where he encourages radical transparency.
Dalio says: "I want an idea meritocracy.  I want independent thinkers who are gonna disagree.  The most important thing I want is meaningful work and meaningful relationships and the way to get that is through radical transparency."

Dalio also notes he gave everyone at Bridgewater a copy of Duhigg's book, The Power of Habit

The Bridgewater founder feels this transparency (once you get over the emotional reaction of the 'naked truth') develops much deeper, more meaningful conversations.

On markets, he went on to add: "The markets teach you humility and they teach you what works.  You have to be an independent thinker in markets to be successful because the consensus is built into the price.  You have to have a view that's different from the consensus.  When you have a view that's different from the consensus, you're gonna be wrong a certain number of times.  It teaches you humility.  The most important thing is to have humility and to think about 'how do I get the best decision?' It doesn't have to come from me, I just want to be right."

Dalio concluded:  "Decision making should be two steps: the first step is taking in information, particularly if there's disagreement, and then to make a decision ... it's so stupid not to take the time to take in and explore disagreement that might help you prevent yourself from being wrong."

Embedded below is video of Ray Dalio's interview:

Mark Cuban Interview On Business, Investing, Entrepreneurship: Young Investors Society

Entrepreneur and investor Mark Cuban recently sat down for an interview with the Young Investors Society.  In it, they talked about a wide range of topics focused on business: entrepreneurship, investing, risk, and more.  Here's some highlights:

- "I avoid risk by trying to know more about what I'm trying to do than anybody."

- Talked about advocating the Peter Lynch method of investing by focusing on what you know.  He was always using tech hardware and knew which companies' products worked and which didn't.  Parlayed that into a hedge fund based on his research/picks and then sold that.  Noted there's less companies going public these days so "there's more money chasing fewer choices."

- On what he thinks is going to be different in 5-10 years: "Artificial intelligence is gonna eat the world."

- Owns a lot of (AMZN) stock.  Mainly because they're involved in a lot of the areas he was discussing (A.I. etc)

- Also a previous article said he owns a lot of Netflix (NFLX).  In the interview, Cuban talked about how their content aggregation and focus on data allowed them to be able to recommend content to users.  (And then they obviously took that a step further by seeing what was being watched the most and then created their own content based on those metrics.)

- Big time screw ups in investing: he liked the Uber idea but didn't like how they were pricing it.  "Sometimes you make it and sometimes you miss 'em."

- "There's a hundred apps that let you sell your time."  Thinks there's never been a better time to be an entrepreneur.

- On being an analyst:  "Everyone has the same information so it's hard to package it uniquely.  Find the companies where you may have an edge.  Using your unique perspective is what I did when I started investing in stocks."  He talked about how a high school kid's viewpoint on companies like Snapchat or Twitter would be vastly different than someone who's in their 40's or 50's.

- On advice for young investors:  "Understand the hierarchy of return on investment.  Investing in stocks is not the first place you should invest.  Number one is pay off your debt.  Two: save some money.  Life doesn't match up to your returns.  You might have the best investment in the world but find yourself having to sell it to pay for school or to fix your car.  Always have some savings first."

Embedded below is the video of Mark Cuban's interview with Young Investors Society:

h/t A Wealth of Common Sense for the find