Wednesday, March 20, 2019

What We're Reading ~ 3/20/19


T. Rowe Price: The Man, The Company & The Investment Philosophy [Cornelius Bond]

How to take the outside view [McKinsey]

Pitch on short Tesla [Dropbox]

What is Amazon [Zack Kanter]

Allen Zhang on the key product principles of WeChat [WeChat]

KKR is too cheap [Yet Another Value Blog]

Buying is easy, selling is hard [Bloomberg]

In 12 minutes, everything went wrong: LionAir crash [NYTimes]

The SaaS busines model & metrics [Matrix Partners]

How an app for gamers went mainstream [The Atlantic]

The risk of low growth stocks: Prestige Brands [Intrinsic Investing]

Franchise value: video game IP vs movie IP [Medium]

The 20 craziest investment facts ever [Irrelevant Investor]

Netflix is the most intoxicating portal [NYTimes]

Farmbelt bankruptcies are soaring [WSJ]

ESPN's ex-President wants to build the Netflix of sports [Bloomberg]

Inside HBO's plan to win the streaming wars [Vanity Fair]

Interview with Twitter CEO Jack Dorsey [Rolling Stone]


Wednesday, March 13, 2019

What We're Reading ~ 3/13/19


The Misbehavior of Markets: A Fractal View of Financial Turbulence [Benoit Mandelbrot]

Transcript of interview with Federal Reserve Chairman Jay Powell [60 Minutes]

Status as a service [Eugene Wei]

The four fundamental skills of all investing [Collaborative Fund]

The perils of investing idol worship: The Kraft Heinz lessons [Aswath Damodaran]

A pitch on Nintendo [HardcoreValue]

A pitch on Molson Coors [Elevation Capital]

A look at the timeshares businesses [Yet Another Value Blog]

A look at HSBC [UK Value Investor]

How internet marketplaces unlock economic wealth [Bill Gurley]

DoorDash tops GrubHub & UberEats in food delivery [Fortune]

Google quietly releases hotel booking with potentially huge implications [Skift]

Pricing algorithms can learn to collude with each other to raise prices [MIT Tech Review]

Not caring: a unique and powerful skill [Collaborative Fund]

On Manchester United: the paradox of profits without trophies [FT]

Investors get burned after betting on electric car metals [WSJ]


Wednesday, February 27, 2019

Last Chance: 33% Discount Ends Tomorrow

The 33% discount on our quarterly newsletter expires tomorrow.  A brand new issue was just released and reveals the latest portfolios of 25 top hedge funds. 

Find out what stocks they had on their watchlists and finally bought during the market sell-off.  It also includes investment thesis summaries on 3 stocks that value managers have been accumulating.  To see a sample of the newsletter, check out a full past issue here.


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Tuesday, February 26, 2019

Warren Buffett Interview: Summary, Video & Transcript

Yesterday on CNBC Warren Buffett sat down for a 2-hour interview with Becky Quick and shared his thoughts on a number of financial topics.  Here's a summary and select quotes, with videos and transcript below.


Warren Buffett Interview Summary

- On the economic signals he sees from all his businesses:  "The rate of improvement has tapered but certainly hasn't flattened ... Home construction has been disappointing, but our retail figures in January were not strong, but January is a peculiar month.  Right now things look fine."  He also noted he sees some signs of inflation in raw material costs.

- On the Federal Reserve & interest rates: "I don't second guess (Jay Powell) at all.  He's a terrific choice."  He said what the Fed does doesn't affect what Berkshire does.

- He's amazed that ten years after the crisis that rates are where they are worldwide (especially negative rates) with the world doing 'really well' now.  "The real question for investors: are these rates the new normal?"

-  On Apple (AAPL): "The lower it goes, the better I like it obviously ...  If it were cheaper, we'd be buying it.  We aren't buying it here"  This quote is interesting considering that AAPL was recently down as much as 30+% in the fourth quarter, but Berkshire was a net seller of shares as one of the portfolio managers (not Buffett) was selling.  His average cost basis is around $141 per share.

- Likes financials as "very good investments at sensible prices.  They're cheaper than other businesses that are also good businesses by some margin."  Says Moynihan at Bank of America (BAC) was underestimated and has done excellent.  Says JPMorgan Chase (JPM) is a very well managed bank.

-  Wanted to be buying stocks in Q4 as they were cheaper, but it sounds like Berkshire was keeping cash on hand for a potential acquisition that didn't materialize.  He said they haven't been buying equities yet in 2019 as the market as 'basically gone straight up.'

- Notes that portfolio managers Ted Weschler and Todd Combs since joining Berkshire: "Overall, they are a tiny bit behind the S&P, each, by almost the same margin."  The now manage around $13 billion each.  Buffett says they've also done better than he has over that time period.

-  On the trade war: The tariffs have had some impact on some of his businesses.  "It pushes prices up, there's no question about that."  It hasn't had a big impact at 10% but 25% you'll have to make changes (pricing, sourcing, etc).

- On KraftHeinz (KHC): Brands in general aren't what they used to be, and in many cases consumer packaged goods companies are being threatened by a ton of new brands, increasingly strong private label, and more.  "The ability to price has been changed, and that's huge."  On his investments he noted: "We didn't overpay for Heinz ... but we overpaid for Kraft."  Says the co still has real debt to be reduced.

- Sold Oracle (ORCL) quickly after concluding he didn't understand the business well enough.  His past dalliance with IBM also entered his mind.  "I don't think I understand exactly where the cloud is going."

- "You do not want to have a political view in investing."

- If Bloomberg announced he were running for President, he would be for him.  If Howard Schulz runs as an independent, he thinks he'd take votes away from Democrats, so it'd be a mistake for him to run.  Generally, third party candidates are going to hurt one side.


Warren Buffett Interview Video

Embedded below is the video of the full interview




Warren Buffett Interview Full Transcript

You can also read a full transcript here.

For more from Berkshire, be sure to also read Warren Buffett's annual letter 2018.


Monday, February 25, 2019

Warren Buffett's 2018 Annual Letter: Berkshire Hathaway

Warren Buffett has released his 2018 annual letter in Berkshire Hathaway's annual report.  In it, he notes they bought $43 billion of marketable equities last year and sold $19 billion.  Berkshire now has a cash-equivalents hoard of $112 billion and another $20 billion in fixed income.

Here's some select quotes from the letter with the full text below:

On share buybacks:  "All of our major holdings enjoy excellent economics, and most use a portion of their retained earnings to repurchase their shares. We very much like that: If Charlie and I think an investee’s stock is underpriced, we rejoice when management employs some of its earnings to increase Berkshire’s ownership percentage."

On Berkshire buying back its own shares:  "it is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value. The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality."

On holding cash:  "Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash."

On finding private acquisitions: "Prices are sky-high for businesses possessing decent long-term prospects.That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities.  My expectation of more stock purchases is not a market call. Charlie and I have no idea as to how stocks will behave next week or next year."


Embedded below is Warren Buffett's annual letter:



You can download a .pdf copy here.

For more from the Oracle of Omaha, be sure to check out Warren Buffett's recommended reading list.


We've also posted up other recent investor letters:

- Excerpts from Baupost Group's letter

- Third Point's Q4 letter 

- Sequoia Fund's letter


Third Point's Q4 Letter: Updates on Baxter, Campbells Soup, United Technologies & Nestle

Dan Loeb and Third Point are out with their fourth quarter letter to investors.  Third Point finished 2018 down 11.3%, only the 4th time in 24 years they've lost more than 1% in a year. 

Their Q4 letter includes a large section on the state of the credit markets, as well as portfolio updates on some of their equity holdings like Baxter (BAX), Nestle (NSRGY), Campbells Soup (CPB), and United Technologies (UTX).


Third Point's Q4 Letter: Updates on Equity Positions

On CPB: They settled their proxy fight that gave them a mix of board representation as well as regular access to the board and executives.   They helped CPB recruit Mark Clouse as new CEO.  They're looking for the company to "repair the balance sheet, execute an operational turnaround of the business, and explore all options to create long-term value for  shareholders."


On UTX:  "Despite the separation announcement, UTC’s sum-of-the-parts  discount  has  continued  to widen  and  the  valuation  gap  versus  UTC’s  closest  multi-industry   peer,   Honeywell International, has reached a new 10-year high.The coming separation will shine a greater spotlight on the large valuation gap to UTC’s pure-play peers.During the separation process, we  expect  the  management  team  to  highlight  UTC’s  asset  quality  and  to  increase transparency  around  Pratt & Whitney’s very significant multi-year  inflection  in  free  cash flow generation."


On BAX: Operating margins of 17.4% have been achieved and they think there's further upside to 23%.  Since 2016 the company has returned $4 billion to shareholders and used another $1 billion for business development.  "Over the next 12-24 months, Baxter  expects  to  start  reaping  the  fruits  of  its  labor  with  several  new  product  launches including Spectrum IQ and Evo IQ pumps, and new generic injectable drugs. The innovation cycle  should  serve  to  drive  revenue  growth  acceleration  and  contribute  positively  to underlying operating margins."


Embedded below is Third Point's Q4 letter:



For more recent investor letters, we also posted up Warren Buffett's annual letter, as well as excerpts from Baupost Group's letter and Sequoia Fund's letter too.


Graham & Doddsville New Issue: Polen Capital, Glenn Hubbard & Joseph Stiglitz, DG Capital

The winter issue of the Graham & Doddsville newsletter is out.  Columbia Business School's publication this time around interviews Glenn Hubbard and Joseph Stiglitz, as well as Damon Ficklin and Jeff Mueller of Polen Capital, and finishes up with DG Capital Management's Dov Gertzulin.

The newsletter also features student investment pitches from the 2018 Women in Investing conference: long Nordstrom (JWN) and a pitch from the 2018 CSIMA stock pitch challenge: long Lions Gate Entertainment (LGF.A).

Polen Capital talks about their positions in Alibaba (BABA), Adobe (ADBE), Align Technology (ALGN), and Starbucks (SBUX).

Embedded below is the Winter 2018 issue of Graham & Doddsville from Columbia Business School:



You can download a .pdf copy here.


Wednesday, February 20, 2019

33% Discount On Our Newsletter: New Issue Now Available

We're having a one week sale on our quarterly newsletter that summarizes the latest 13F filings.  A brand new issue was just released today.  Find out what stocks top hedge funds had on their watchlists that they bought during the market selloff.

Subscribers please login at www.hedgefundwisdom.com to download the new issue.


Inside the New Issue Released Today

Our limited time sale ends in 7 days.  You'll save 33% off normal prices, so take advantage below before it expires. To see a sample of the newsletter, check out a full past issue here.

The brand new issue features:

- New consensus buy/sell lists of the most popular hedge fund trades

- Reveals the latest portfolios of 25 top hedge funds: Appaloosa, Baupost, Lone Pine, Duquesne, Tiger Global & 20 others (full list here)

- Investment thesis summaries on 3 stocks that have fallen sharply over the past several months and were bought by value managers. Quickly catch up on the current situation and bull/bear thesis on each stock


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Wednesday, February 6, 2019

What We're Reading ~ 2/6/19


Billion Dollar Whale: The man who fooled Wall Street, Hollywood & the world [Tom Wright & Bradley Hope]

A bunch of pitches: the top stocks for 2019 [SumZero]

Can more information lead to worse investment decisions? [Behavioural Investment]

White gold: the unstoppable rise of alternative milks [The Guardian]

Can baijiu, China's sorghum firewater, go global? [Economist]

Profile of Slack's founder [Wired]

Good Tesla, bad Tesla: duality vexes hot-selling brand [Detroit News]

Why paid memberships are the new loyalty [Business of Fashion]

Tech trends for 2019 [Deloitte]

Profile of 'Canada's Warren Buffett' [Bloomberg]

Mohnish Pabrai's free lunch portfolio [Chai With Pabrai]

The great NFL heist: how Fox paid for and changed football forever [The Ringer]

David Stern built the modern NBA, now he wants to change how we consume sports [Washington Post]

How Shopify built an $800 million partner ecosystem [Digiday]

How much of the internet is fake? [NYMag]


Thursday, January 31, 2019

Howard Marks' Latest Memo: Political Reality Meets Economic Reality

Oaktree Capital Chairman Howard Marks is out with his latest memo entitled Political Reality Meets Economic Reality.  In it, he spends the first part of the letter with interesting first and second order effects of the impact of tariffs, examining what's perceived as a benefit versus a risk. 

Marks then goes on to touch on something else that's worrying him even more: increasing anti-capitalist sentiment.

Rising populism is something he's watching, and he's not alone, as Ray Dalio of Bridgewater Associates has been cautioning about this as well.

Marks writes,

"A great deal of America's economic progress has resulted from people’s aspiration to make more and live better.  Take that away and what do we have?  The people at the bottom won’t have as many at the top to resent.  But without the contributions of those who aim for the top, everyone will have less to enjoy.  This is why I worry about the rise of negative sentiment toward capitalism and antipathy toward those who succeed under it."

Embedded below is Oaktree Capital's latest memo from Howard Marks:



You can download a .pdf copy here.

Don't forget that Marks also has a brand new book out: Mastering the Market Cycle that's definitely worth checking out.


Sequoia Fund Q4 Letter: New Positions in a2Milk, Electronic Arts & Melrose

Ruane, Cunniff & Goldfarb is out with its Q4 letter for 2018.  Their Sequoia Fund finished the year -2.62% compared to -4.38% for the S&P 500.

New Positions in a2Milk, Electronic Arts & Melrose

During the quarter, the fund started 3 new positions.  Here's their thesis on a2Milk, a premium milk and baby formula producer in New Zealand:

"A good analogy here is Greek yogurt, which is believed in some quarters to confer health benefits you can’t get from regular yogurt. While Greek yogurt, like A2 milk, is a commodity product, companies like Fage and Chobani have built big businesses by wrapping compelling brands around it. a2Milk is attempting to do the same thing, to great effect thus far. Riding powerful consumer trends favoring products perceived to be healthy and natural, a2 has become the leading premium milk brand in Australia while making rapid inroads into the massive and quality-obsessed infant formula market in China. An effort to penetrate the U.S. milk market is also showing early promise."

Their new stake in Electronic Arts is a bet on gaming.  Games are taking more of people's time and are becoming more expensive to produce, favoring deep-pocketed companies like EA who have scale.  Sequoia feels the trends of digital game delivery and in-game purchases will benefit them.

Sequoia's bet on Melrose, on the other hand, is a bet on the jockey.  They write,

"Melrose is essentially a publicly-traded private equity firm, but with some very unusual twists. It mostly avoids borrowed money, focuses on only a small handful of investments at any given time and eschews dedicated funds that create a compulsion to invest without regard for the quality of the opportunities on offer. As with Berkshire and Constellation Software, the combination of a differentiated approach and a talented team has enabled Melrose to compile a hugely impressive long-term record of value creation. The company has never lost money on any of its realized investments, and in aggregate, it has produced an IRR of 24% per annum. At present, the company owns a collection of manufacturing businesses in the U.S. and Europe that span the aerospace, automotive and HVAC industries. In aggregate, they’re unlikely to grow any faster than the overall economy, but we think Melrose can make them substantially more profitable, and we ultimately expect management to sell them at attractive prices, freeing up time and capital for new opportunities."


Sold Almost All Of Their TJX Stake

During the fourth quarter they also sold almost all of their TJ Maxx (TJX) position.  This is notable as they first bought shares almost 20 years ago.  While the company is still operating well, they feel the future of the stock and business is less exciting as the PE ratio roughly double what they originally paid.

The letter also touches on 3 stocks that performed poorly for them last year that they still own: Mohawk (MHK), Naspers, and Charles Schwab (SCHW).

Embedded below is Sequoia Fund's Q4 letter:



You can download a .pdf copy here.

For more fund letters, be sure to check out excerpts from Baupost Group's Q4 letter as well as Oaktree Capital's Howard Marks latest letter.


Hedge Fund Links ~ 1/31/19


Elliott Management looks beyond activism to full blown takeovers [WSJ]

Co-CEO of Bridgewater hails radical transparency [Barrons]

Top performing hedge fund is shorting Canada's banks on housing [Bloomberg]

How John Paulson is positioning his Celgene/Bristol trade [Bloomberg]

Diminishing returns: hedge funds look to keep it in the family [FT]

It was a tough year to be a hedge fund manager not named Ray Dalio [Barrons]

JANA liquidates two hedge funds, to focus only on activism [StreetInsider]

Fahmi Quadir was up 24% last year, but it came at a price [Institutional Investor]

How Bill Ackman convinced Hunter Harrison to ride the rails again [Financial Post]

The inside story how Carson Block made a killing last year [Business Insider]


Wednesday, January 30, 2019

What We're Reading ~ 1/30/19


Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant [W. Chan Kim & Renee Mauborgne]]

Latest thoughts from Ray Dalio [LinkedIn]

Morgan Housel on what other industries teach us about investing [MicroCapClub]

Dominance of tech stocks: an evolve-or-die moment for world's great investors [Fortune]

A global tipping point: half the world is now middle class or higher [Brookings]

A look at Air Lease (AL) [Woodlock House]

Pitch on InterActive Corp (IAC) [LG's Musings]

AT&T wants to be big in entertainment but it has a $49 billion problem [WSJ]

Boeing's decision of the decade: does it build the 797? ]Bloomberg]

How Juul made vaping viral [Techcrunch]

Sports betting in the US: the rise of a billion dollar business [NYTimes]

Mukesh Ambani wants to be India's first internet tycoon [Economist]

How a former Canadian spy helps Wall Street mavens think better [NYTimes]

The best investments of 2018? Art, wine, and cars [WSJ]

A look back at the life of Jack Bogle [Vanguard]

The legacy of Herb Kelleher, co-founder of Southwest Airlines [Harvard Biz Review]


Thursday, January 24, 2019

Seth Klarman's Baupost Group Year-End Letter Excerpts 2018

Seth Klarman has released Baupost Group's 2018 year-end letter and it's already received some media coverage which we linked to yesterday regarding his thoughts on rising global uncertainty, rising division in America, and growing global debt.  As always, he seems to have a cautious stance.  Below are further excerpts from the letter that are more investment-focused.  For 2018, Baupost's funds finished between flat and down less than 1% for the year. 

"Today’s markets feel strange and enigmatic. We will not complain about this; indeed, we see it as an opportunity. While the indices remain historically expensive, many stocks – of growing, not cyclical or declining firms – recently hit 52-week lows and trade at single-digit P/Es. These are levels that traditionally occur closer to market bottoms than tops. The recent selloff likely presented a buying opportunity – you can go years without seeing such valuations – but not across the board and not one for the faint of heart."

Klarman also postulated that private equity might have been the most over-extended asset class last year and wondered if the trend could continue as their tailwinds of low interest rates starts and a growing economy start fading away.

The Baupost founder also expressed another area of concern:

"Moreover, we have been increasingly worried that the U.S. financial markets are very highly leveraged not only with copious direct borrowings but also in less obvious ways – psychologically, algorithmically, and structurally – with investors vulnerable to exactly the same sort of urgent pressures that actual portfolio leverage can give rise to. As with a margin call, those pressures can include an intensely short- term orientation, extreme loss resistance, and an inability to stand apart from a panicky crowd."

As it pertains to psychological leverage, he notes that complacency has risen with the reduction of volatility.  And this complacency can then violently swing the other direction once volatility picks up (as the market showed in its recent sell-off).

Regarding algorithmic trading, his point is that with as much as 85% of all trading being done by machines, it's really hard to predict how these algorithms might react to new and/or unexpected conditions.

Lastly, index funds hold the lion's share of stocks these days and liquidity and ownership have become more concentrated, he notes.  This could cause a sharp impact on small cap companies.

Klarman then finishes up by touching on balancing risk-taking with risk aversion.  Baupost's strategy is to "forgo some upside in order to truncate the downside."  

"We believe another key element in portfolio management is curtailing the duration (the weighted average life) of one’s portfolio through exposure to investments with catalysts for the realization of underlying value. Catalytic events shift the outcome of investments from a reliance on future market multiples and macroeconomic developments (which are not at all under your control) to a dependence on your assessment of the outcomes, probabilities, and implications of announced or anticipated corporate events, including mergers and acquisitions, bond maturities, debt restructurings, bankruptcies, major corporate asset sales, spinoffs, and tender offers. No strategy can avoid all risk of loss. But we believe our approach should increase the likelihood of achieving sustainable gains with limited downside risk over the long- run. To put it differently, a portfolio of near infinite duration (such as an all equity portfolio without catalysts) can trade just about anywhere. With such exposures, if stock prices plummet, the odds go up that an investor will feel pressure to do the wrong thing and sell into market weakness. A limited duration portfolio, both because of the hopefully truncated downside in a bad market as well as the beneficial cash inflows (buying power) that catalysts usually generate, is hugely advantageous in navigating through turmoil."

Baupost saw the recent sell-off as an opportunity in some equities, establishing new stakes, while also increasing and decreasing other stakes. 

That said, he is certainly concerned about growing global uncertainty, rising division in America, as well as rising global debt.


Wednesday, January 23, 2019

What We're Reading ~ 1/23/19


Seth Klarman's warning on global division and debt [Dealbook]

Why some platforms thrive and others don't [Harvard Business Review]

Customer loyalty is overrated [Harvard Business Review]

Survival is the ultimate performance measure of a business [Intelligent Fanatics]

On Netflix's pricing flex [Stratechery]

Interview with Peloton's CEO [strategy + business]

A look at Ferrari (RACE) [Intrinsic Investing]

Profile of Masayoshi Son, most powerful person in Silicon Valley [FastCompany]

Starbucks' worst nightmare in China is coming true [Forbes]

Direct to consumer brands are mostly spurning Amazon [Digiday]

Not all marketplaces are created equal [Medium]

US birthrate at 30-year low [WSJ]

Stockpickers don't know how to sell [Bloomberg]

On 5G: if you build it, we will fill it [Benedict Evans]

Meet the new payment champions, same as the old ones [WSJ]

How a deluge of money nearly broke the English Premier League [The Guardian]

To cover China, there's no substitute for WeChat [NYTimes]


Friday, January 11, 2019

Hedge Fund Links ~ 1/11/19


The 20% a year stock picker who wishes his edge would disappear [Bloomberg]

Deal-master Debbane - the secretive fund manager behind Oprah's WeightWatchers windfall [Forbes]

Jeff Vinik plots third comeback [WSJ]

Some 2018 performance figures of prominent hedge funds including RenTec [FT]

Bridgewater ends 2018 up almost 15% [Reuters]

Greenlight down 34% in 2018 [Bloomberg]

The money managers to watch in 2019 [WSJ]

Muddy Waters up 20% in 2018 [Institutional Investor]

Harvard quietly amasses California vineyards [WSJ]

Scott Bessent is preparing for the great divergence [AFR]

Mega family offices strike Transatlantic partnership [Bloomberg]


Thursday, January 10, 2019

Notes From Sohn London Investment Conference

Below are notes from the Sohn London investment conference late last month.  Apologies for the delayed posting.  Click each link to go to that speaker's presentation.


Sohn London Investment Conference Notes 2018

Vikram Kumar (Kuvari Partners): Short Kier Group


Benoit Colas (PrimeStone Capital): Long Spirent Communications


Dureka Carrasquillo (Canada Pension Plan): Long Ferrari


Andrew Dickson (Albert Bridge Capital): Long Micro Focus


Luke Newman (Janus Henderson): Long Rolls Royce


Rachel Reutter (J O Hambro Capital UK Opportunities Fund): Long Smiths Group


Per Lekander (Lansdowne Partners): Long Carbon Credits


Maxime Franzetti (Mubadala Capital): Long Korian


Andy Brough (Schroder Investment Management): 2 Long Ideas


Bernie Ahkong (UBS O'Connor): Long Paddy Power Betfair


Vikram Kumar Short Kier Group: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Vikram Kumar of Kuvari Partners who presented a short of Kier Group.


Vikram Kumar's Presentation at Sohn London Conference

(Note: On the day after the conference Kier Group made an emergency rights issue of £264m and the shares fell 34%.)

Kuvari have held a short position in Kier Group since August 2017. They are currently short 0.71% of the company’s stock. They previously held a disclosed and successful short position in Carillion, the support services company that collapsed in Jan 2018.

Kier Group are in the construction and contracting business, mostly in the UK. The UK government is a big customer – infrastructure services, road maintenance and development and civil work such as schools and hospitals.  They also build residential houses and commercial buildings.

Kuvari do not like these types of businesses because they are low margin, commoditised and competitive. If government contracts cost more than anticipated to fulfill the company is liable.

Kumar called the accounting aggressive. The contract nature of the business means that income does not come in steadily but in lumps.  The contracts can be multi-month and multi-year. There is a temptation to try to smooth revenue by booking work that may have been done but not paid for. With the IFRS 15 regulation coming in Kumar believes the company will be forced to re-state some of its revenue.

With short positions, Kuvari pay great attention to working capital and particularly receivables – how quickly once you’ve invoiced your customer can you collect cash? Kumar believes that Kier’s customers are slow to acknowledge the work that has been done and slower to pay up. He believes that Kier have been booking income before customers have acknowledged work has been done.

There is a lack of cash generation in the business. According to their accounts, Kier generated £95m in cash over the last five years. Kumar believes that they have overstated that cash. Kier had to restate their full year 2017 FCF from over £100m to -£56m after pressure from regulators.

The most worrying aspect of Kier’s business is the high leverage. Kuvari estimate debt could be as high as 6.8 times, taking them well into distressed territory. Kier owns the equivalent of 68% of the equity in JVs. Kumar believes that the JV’s are being used to hide the leverage. The debt is not being consolidated. Kier also calculates leverage at a low point during the financial year and does not average it which would lead to a higher figure.

Be sure to check out the rest of the presentations from the Sohn London investment conference.


Benoit Colas Long Spirent Communications: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Benoit Colas of PrimeStone Capital who presented a long of Spirent Communications (LON:SPT)


Benoit Colas's Presentation at Sohn London Conference

PrimeStone have been invested in Spirent for 3 years. Spirent is a fairly complex business that designs, manufactures and tests solutions for communications equipment across a wide range of technologies.  It operates in three divisions: Network and Security - helps Nokia and Cisco test equipment; Connected Devices - tests mobile devices for Apple and Samsung; Lifecycle Service Assurance – helps Telecom Korea.

Despite being a London listed company, it creates 90% of its sales in the US and Asia Pacific. Sales have been stable for the last 10 years. Gross margin has crept up from 65% to 72% over the same period. PrimeStone was attracted by the high EBIT margin of over 20% which lasted until 2013 when they fell below 10% and then rebounded a bit. PrimeStone invested in Spirent with the belief that they could get the EBIT margin back above 20%.The company enjoys a strong and stable global market share and long-lasting relationships with customers. PrimeStone are pulling levers to bring about change at Spirent.

-    There is scope for cost reduction. In 2015, PrimeStone convinced management that they did not need to spend more on product R&D to keep up with competitors.

-    The balance sheet is strong and offers potential. The company has over $100m of cash and PrimeStone have been pushing for this money to be either distributed to shareholders or spent on share buybacks. If there was a $100m buyback the company would remain debt free.

-    There is potential to refocus the business on the most attractive parts. The weaker businesses like Connected Devices should be sold off.

Spirent trades at a discount to its US peers. Colas’ thinks the main reason for the discount is the depressed EBIT margin. As they work to get the margin back above 20% the stock price will rise.


Be sure to check out the rest of the presentations from the Sohn London investment conference.


Dureka Carrasquillo Long Ferrari: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Dureka Carrasquillo of Canada Pension Plan who presented a long of Ferrari (RACE).


Dureka Carrasquillo's Presentation at Sohn London Conference

In 2017 the luxury car market was valued at $570bn. Estimates suggest it will grow at about 9% for the next 5 years. Ferrari sits in the category of luxury goods that is considered an ‘experience’ and that category is projected to grow at an even higher rate.

One hallmark of a luxury goods company is it is a price maker. Carrasquillo thinks Ferrari can increase the price of their cars by about 4-7% per year. During the Marchione years prices were raised regularly.

Special cars have historically been about 2% of sales but they will become a larger part of the business.  She estimates that by 2022 special cars will represent 20% of revenues. These cars which are limited editions – often 500 cars - sell for more than $1m each and sometimes sell out on the day they go on sale. Gross margins on special cars are about 3x base cars. If the number of special cars is increased in the way that Carrasquillo predicts EBITDA margins for the whole group could increase from 33% to 38%.

Another hallmark of a luxury goods player is careful management of supply. Current product capacity is about 16,000 cars per year yet only 9000 are made. In comparison, Porsche sells 25,000 to 30,00 911s per year. Carrasquillo thinks that Ferrari could increase production to 16,000 cars per year and still sell them. Ferrari intends to launch 15 new models in the next 5 years – that’s a lot more than in the past. It takes about 40 months to produce and launch a new car.

3 potential risks to the Ferrari growth thesis:

1.    Do wealthy millennials want a Ferrari? Do they even want to drive at all? There could be a demographic timebomb for Ferrari? The Ferrari sweet spot is in the 35 to 50-year-old age range. Even though fewer millennials drive during their 20s than previous generations by age 30 they catch up.

2.    Are there enough wealthy buyers? Ferrari buyers tend to be high net worth individuals with investable assets of more than $1m – this is the starting base of an entry level Ferrari customer. Ferrari only manages to sell cars to 0.5% of this group. In the ultra-high net worth bracket they have 3.25% penetration. Carrasquillo concluded that there is a good runway for growth.

3.    Changes in consumer preference. Consumers may become more environmentally conscious? They might prefer to use autonomous cars? The most bullish forecasts suggest that EVs may become 30% of the fleet by 2030. In addition, Ferrari are aiming for 60% of their new cars to be hybrid by 2022. The hybrid cars will have higher price tags and be more profitable.

Luxury goods companies with a similar financial profile to Ferrari have an average P/E 27. If you put Ferrari on that multiple it implies 60% upside. Valuing Ferrari by its cashflows, implies a growth requirement of 3.5% per annum, yet it has been growing its top line at 10% per year for the past 20 years.

There is room for further sales. Ferrari have sold almost no cars in China. Surprisingly the embedded fleet in China is less than 500 cars.

Be sure to check out the rest of the presentations from the Sohn London investment conference.


Andrew Dickson Long Micro Focus: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Andrew Dickson of Albert Bridge Capital who presented a long of Micro Focus (LON:MCRO).


Andrew Dickson's Presentation at Sohn London Conference

Micro Focus is a FTSE 100 company that has an acquisitive business model. It buys mature legacy software businesses, particularly in the enterprise application software area. These are ‘melting ice cube’ businesses but the Micro Focus team have figured out a way to put them in the freezer to make them last longer. Their model is the antithesis of traditional tech investing. They find businesses that have stopped growing. They are not looking for businesses that are taking share or accelerating growth. Once they have bought a software company they try to change the culture away from growth to ‘trying to stay relevant’.

Micro Focus was founded in 1976 and listed in 2005. Until last year the stock was up 25x since 2005. In 2017 they made their biggest acquisition buying Hewlett Packard’s software businesses for $8.8bn. Digesting the HP businesses has been difficult so far. In January and March 2018 there were two profit warnings. Micro focus’s shares sold off from $20 per share to $0.9 in three days and the CEO left. Albert Bridge added to their position at that time. Since then, the company has been getting back on track but the shares are still down 40% year to date.

Dickson believes that Micro Focus’s long experience of turning around businesses will allow them to successfully integrate the HP businesses over time. In the end, they will do what they have done in the past and take businesses with 20% EBITDA margins up to 45%.

Short interest is quite high. Dickson thinks the shorts misunderstand the business. They point to the lack of top line growth when the model is all about slowing the pace of revenue deterioration. Some analysts have suggested that they need more acquisitions. The shorts also point out that the CFO is leaving after less than a year in post. Dickson thinks he is only leaving to work with a previous boss.

Currently, Micro Focus is reasonably priced at PE 9.5x. In July 2018 it announced it would sell one of its highest growth businesses, Suse, for $2.5bn. There will be a special dividend for shareholders early next year. In six months the sale will be completed and the company will still be able to produce $2 of EPS. By then it will be on a PE 7.5x, 15% FCF yield.


Be sure to check out the rest of the presentations from the Sohn London investment conference.


Luke Newman Long Rolls Royce: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Luke Newman of Janus Henderson who presented a long of Rolls Royce (LON:RR).


Luke Newman's Presentation at Sohn London Conference

At its heart Rolls Royce is a razor to razorblade business model – the razors - or the engines in this case - cost billions of dollars to design, deliver and install and come with an obligation to buy razorblades - service contracts - for the next 25 years. The gross margins on the service contracts are  high between 50% to 70% but the engines are sold at a loss.

The secular trends in air travel are supportive driven by increasing wealth and emerging markets. Air passenger kilometres over the last 70 years have grown at 6% CAGR. If passenger growth continues at 4.5% and assuming planes have a 25-year life, 425 new wide body planes are required every year to keep up with demand. That’s 37 new wide-bodied planes every month. The production schedules for Boeing and Airbus for next year are slated at 34 per month creating positive pricing dynamics for all participants.

Rolls Royce has the engine orders, the challenge is to execute: deliver the engines and carry out the maintenance contracts. There is also an organisational challenge. When Warren East took over as CEO he described Rolls Royce as an athlete that needs to lose weight. New management have been brought in to run finance and operations. A Cost reduction plan was announced earlier this year cutting 25% of non-engineering jobs. In addition, cash consumptive and loss making businesses have been sold. Rolls Royce has always traded on its high levels of technology and market share. Now Warren East is holding it financially accountable by setting cash flow targets of £1bn by 2020 and an increase to £1.8bn by 2023.

Over the last 20 years what was a 3-player market has become a duopoly. Pratt and Whitney took the rationale decision to concentrate on narrow body engines and ceded their market share to Rolls Royce. That did not come for free because Rolls Royce had to spend billions of dollars developing new engines to take the market share. The good news is that this year is the first year in which most of the revenue will come from the high margin aftermarket business. The company has reached a critical inflection point.

GE, the other member of the duopoly, has been in harvest mode, maintaining share and enjoying good aftermarket revenues. GE has lots of problems, but the engine business has not been one of them. GE’s engine margins have been consistently high.

There has been a correlation over the years between Rolls Royce’s share price and FCF per share.  The 2023 target of 1.8bn FCF should equate to a share price of just under 1000p per share.

Management are incentivised to grow FCF through bonus plans. To maximise their bonuses RR executives need to generate 158p of FCF in 2018, 2019 and 2020. Analyst consensus now is 117p – leaving 35% upside if the stretch targets are hit. Newman believes that Rolls Royce’s past performance is misleading analysts. He thinks they are behind in understanding just how cash generative the business has become.

Warren East bought £74K of stock in December suggesting he has faith in the way the business is performing. If Rolls Royce could execute as well as Safran and MTU their shares could go far higher.


Be sure to check out the rest of the presentations from the Sohn London investment conference.


Rachel Reutter Long Smiths Group: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Rachel Reutter of J O Hambro Capital UK Opportunities Fund who presented a long of Smiths Group (LON:SMIN).


Rachel Reutter's Presentation at Sohn London Conference

Perceptions of Smiths Group are stuck in the past. The management team that was appointed in 2015 has solved the pension overhang, shored up the balance sheet and now they are diverting cashflows into R&D to become market leaders in several businesses.

More recurring revenue type business is being done – 57% of revenues are from the aftermarket. Smiths has 17% operating margins. It has a diverse set of cashflows that are multi-product, multi geography, varied customers with multiple cycles.

The management are good allocators of capital. The balance sheet is strong.

Since 2015 Smiths has gone from being market leader in 60% of their businesses to 80%. The quality of the company is rising. Areas of market leadership include: airport security and particularly scanners. There are strong barriers to entry in this area because of trust and relationship issues involved in the security sector. Airmiles are set to grow at 5% per annum and the threat of terrorism seems to be ever present and becoming more sophisticated. Borders are understaffed and only 2% of containers are checked. Governments have no choice but to spend on security equipment, the underlying market is growing at 5% per year.

Other leading businesses include: John Crane, the maker of seals for the oil industry; Inclusion Systems, the maker of medical devices - 20% market share, 82% of sales are recurring.

Smiths is sensibly valued, FCF yield 6.5%, dividend 3.5%, cashflow is growing at 5% per year.

Reutter expects the medical division to be sold in the next few months. There is plenty of upside potential.


Be sure to check out the rest of the presentations from the Sohn London investment conference.


Per Lekander Long Carbon Credits: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Per Lekander of Lansdowne Partners who presented a long of Carbon Credits.


Per Lekander's Presentation at Sohn London Conference

Emissions credits were introduced by the EU in 2005. Companies with high emissions either had to cap them or buy credits. The carbon market will begin to go from over supply to under supply.

In 2019, new supply will be cut by 24%. The market will balance in two years. After that there will be a shortage of credits and prices will rocket.

The market is liquid and deep.

Carbon Credits are a highly regulated and synthetic market. Lekander noted the risk of political interference.

Be sure to check out the rest of the presentations from the Sohn London investment conference.


Maxime Franzetti Long Korian: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Maxime Franzetti of Mubadala Capital, an Abu Dhabi Sovereign Wealth Fund with over $ 20 billion of invested capital who presented a long of Korian.


Maxime Franzetti's Presentation at Sohn London Conference

Franzetti runs a concentrated book of long (usually high-quality compounders) and short positions. Korian is their largest position. They made their initial investment over two years ago.

Korian is the largest European operator of nursing homes. It has over 76,000 beds spread over 4 countries. They are No. 1 in France and Belgium and No. 2 in Italy.

The business is growing organically and margins are increasing. It’s a secular growth story with the business being able to perform well regardless of geo-political events or cyclical trends. The aging population over 80 years in Europe is set to double in the next two decades. They are well positioned to gain from the shift from public sector to private sector provision. Governments are closing public sector homes and issuing licenses to private sector providers. Korian has occupancy rates of 95%. There are barriers to entry in the form of licenses and regulatory requirements. The business is resilient and grew organically during in the financial crisis.

The business is at an inflection point. Management were replaced two years ago. The new CEO has been restructuring the business. Korian can grow the top line by 6% per year via volume, increasing prices and M&A. However, pricing is not exclusively in the hands of the business as rises are capped by law in France. The market is still fragmented with the top five players owning a small amount of the total market. There is a long runway for growth. There are economies of scale.

Korian itself has attracted interest from private equity. KKR made an offer earlier this year. Franzetti suggested that further offers could follow in the future.

Leverage is 3.2x but it is backed by real estate which is worth about half of the market cap.


Be sure to check out the rest of the presentations from the Sohn London investment conference.


Andy Brough Long Sports Direct: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Andy Brough of Schroder Investment Management who presented 2 longs: Sports Direct (LON:SPD) and Restaurant Group (LON:RTN).


Andy Brough's Presentation at Sohn London Conference

Long: Sports Direct

Mike Ashley is the best retailer he has come across in his 30 years of fund management. Brough likes sports retailing because there are only two quoted companies in the sector – there isn’t the high level of competition you get in general retailing. It’s profitable with gross margins between 40-48%.

Mike Ashley’s record of selling his own shares and buying back shares over the years proves he is a good capital allocator. Ashley has been a net buyer of shares recently and currently holds 65%.

Why buy Sports Direct now? It’s below the floatation price. It’s buying up other retailers on the cheap: House of Fraser (paid £90m), Evens Cycles (paid £8m - bought from Private Equity that paid £83m three years ago), Debenhams.

Brough believes that Sports Direct’s accounting is the most prudent in the FTSE 350. There are no exceptional items in the accounts. If they have a cost they take it on the chin through the P&L. As soon as stock comes into the business it’s automatically written down by 20% - it’s a way of smoothing profits.

Innovation is the key to retailing. Sports Direct’s click and collect regime has been applied to House of Fraser and has lifted the average spend per shop to £40.


Long: Restaurant Group (LON:RTN)

Restaurant Group is the largest concession operator in airports and stations in the UK.

CEO, Andy McCue, has an almost forensic-like attention to detail.  He makes good use of data to steer the business.

Restaurant Group’s shares have gone from 230p to 140p since the acquisition of Wagamama. Brough believes that Wagamama will become an excellent addition. Some Frankie’s and Benny’s restaurants will be converted into Wagamama’s. Also, underused kitchens at Frankie’s and Benny’s are being put to better use by the Gourmet Burger brand to allow home delivery by Deliveroo.

Be sure to check out the rest of the presentations from the Sohn London investment conference.


Bernie Ahkong Long Paddy Power Betfair: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Bernie Ahkong of UBS O'Connor who presented a long of Paddy Power Betfair (LON: PPB).


Bernie Ahkong's Presentation at Sohn London Conference

Paddy Power Betfair is an international sports betting company. It has 4 divisions: Online; Australia; Retail; US.

Ahkong’s buy case was largely based around Paddy’s ability to expand in the US. Today the US only accounts for 3% of profit. Spending on betting is far lower in the US than in the UK or Australia - largely because it has been banned. The Professional and Amateur Sports Protection Act was struck down by the Supreme Court earlier this year. It could represent a huge opportunity to expand sports betting in the US.

Paddy acquired Fanduel earlier this year. Fanduel runs fantasy league betting in the US with 7m registered customers. Only a fraction of these are active customers, though. Ahkong predicted that Paddy could take 10% market share in the US.

On the business outside the US: retail betting shops only account for 12% of Paddy’s profit – there is not as much Brexit risk as some analysts think. Regulatory headwinds in the UK are well known and priced in. The Betfair part of the business faces increased competition. It had a bad H1 but concerns that they are losing share are over stated.


Be sure to check out the rest of the presentations from the Sohn London investment conference.


Wednesday, January 9, 2019

What We're Reading ~ 1/9/19


Atomic Habits: An easy & proven way to build good habits [James Clear]

On hard choices [Seth Klarman]

Putting recent economic & market moves in perspective [Ray Dalio]

A final decision investment checklist [Value Investing World]

16 ways to measure network effects [Andreessen Horowitz]

The 2019 stock buy list [Crossing Wall Street]

Stock market investors: it's time to hear the ugly truth [MarketWatch]

The world's top 750 family businesses ranking [FamCap]

Disney's Bob Iger interview [Barrons]

On the Kentucky Bourbon resurgence [NYTimes]

Pitch on Radisson Hospitality (RADH) [Yet Another Value Blog]

A look at Cognex (CGNX) and Roku (ROKU) [RGA]

GE powered the American Century - then it burned out [WSJ]

Interview with BNSF's Matt Rose [Railway Age]

The thin line between bold and reckless [Collaborative Fund]

How China's reform transformed poor families into middle class shoppers [SCMP]

Dirty dealing in the $175 billion Amazon marketplace [The Verge]