Thursday, May 23, 2019

New Graham & Doddsville Issue: John Hempton, Yen Liow, Bill Stewart

Columbia Business School is out with the Spring 2019 issue of its Graham & Doddsville newsletter.  It features interviews with Bronte Capital's John Hempton, Aravt Global's Yen Liow, and Stewart Asset Management's Bill Stewart.

It also includes student investment pitches such as long Dollarama, long Align Technology, long, and long Dean Foods 6.50% senior unsecured.

Embedded below is the Spring 2019 issue of Graham & Doddsville:

You can download a .pdf link here.

Wednesday, May 22, 2019

What We're Reading ~ 5/22/19

The Culture Cycle: How to Shape the Unseen Force that Transforms Performance [James Heskett]

Xi Jinping calls for new 'Long March' in sign China preparing for protracted trade war [SCMP]

What stocks Baillie Gifford likes now [Barrons]

What can long-term investors learn from traders? [Fundoo Professor]

The greatest investor you've never heard of: an optometrist [Forbes]

A capacity to suffer and setting the right expectations [Scuttlebutt Investor]

The start-ups building dark kitchens for Uber Eats and Deliveroo [FT]

How a cheap, brutally efficient grocery chain is upending American supermarkets [CNN]

Media companies are eyeing cash from sports betting [Axios]

US whiskey stocks have soared; beware the bourbon bubble [Barrons]

Sears's seven decades of self-destruction [Fortune]

Real estate's latest bid: Zillow wants to buy your house [NYTimes]

The world's greatest delivery empire made it cheaper to order in than eat out [Bloomberg]

Profile of e-commerce company Wish [Forbes]

Mr. Market got inside your head; don't let him mess with you [WSJ]

The ultimate productivity hack is saying no [James Clear]

Mapping the world's busiest air routes [Visual Capitalist]

Tuesday, May 21, 2019

Latest Hedge Fund Portfolios Revealed In Our Quarterly Newsletter

The brand new Q1 2019 issue of our quarterly newsletter is now available.  It reveals the latest portfolios of top hedge funds and summarizes their new 13F filings.

Subscribers please login at to download it.

Inside the Brand New Issue

- Updated 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 2 stocks that have seen hedge fund activity. Quickly catch up on the current situation and bull/bear thesis on each stock

33% Discount Ends Soon

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Friday, May 10, 2019

Broyhill's Best Books of the Year

Broyhill Asset Management is back again with its yearly free Book Club featuring the best books of the year.  Perfect timing with summer vacation right around the corner.  You can check out their list of top recommendations here

We featured their picks last year too and this time around their list spans a myriad of topics apart from just investing.  After all, numerous successful investors have talked about how it's important to read across various subjects. 

While we occasionally highlight a book in our "What We're Reading" posts, this is a large compilation of recommendations from another trusted source.  Broyhill also provides a quick blurb on why a specific book was worth reading or what insights were gleaned from it.

Click here to check out Broyhill's favorite books

Wednesday, May 8, 2019

Warren Buffett, Charlie Munger & Bill Gates Interview

Berkshire Hathaway's annual meeting was this past weekend and was filled with wit and wisdom from investing legends.  In a separate interview, CNBC's Becky Quick sat down and talked with Warren Buffett, Charlie Munger, and Bill Gates.

Here's some takeaways followed by the full 2-hour video below.  The first hour was just Buffett by himself and then Munger joined in, and finally Gates joins at around 1hr 20.

Buffett, Munger & Gates Interview 2019

- Buffett says continued trade war would be bad for the whole world

- On Kraft Heinz (KHC): "The company has my confidence."  If he just owned Heinz, he says he'd be doing better but they paid too much for Kraft.  On overpaying: "Time usually works it out, but capital could have been better deployed."

- On the Occidental Petroleum (OXY) deal he's backing:  They've committed the $10 billion 100% and they don't have control over what OXY does with the money or the terms of the deal, etc.  While the 8% preferred is a sweet deal for him, he noted that, "It's a bet on oil prices over the long-term more than anything else.  It's also a bet on the fact that the Permian Basin is what it's cracked up to be."  He and Munger feel good about doing the financing of the deal and they could have done $20bn instead of the $10bn if needed.

-  He likes when Apple (AAPL) goes down, "Because they're repurchasing shares and when they repurchase shares our interest goes up and we don't lay out a dime; I love it."  He's "wildly" in favor of the company's $75 billion buyback.

- "I will always react well to declining prices."

- He thinks China and the US will be the two big superpowers over the next 100 years and that the two won't always get along and there will be disagreements over various things.

- On Wells Fargo (WFC):  Munger said: "I think it's a fine company; so they made one bad decision about an incentive plan.  I regard it as an honest mistake not as some deep moral failure ... they just had a blind spot."

-  Buffett said: "Charlie beats this into me all the time:  As soon as you find a mistake, do something about it.  And sometimes that's unpleasant.  But I've gotta do it."

-  Bill Gates on China/US: "It's the most important relationship in the world."

-  Gates is also concerned about intellectual cooperation being slowed down between the two countries and things like artificial intelligence

- "Anger drives out reason." ~ Munger

"  I think people should have modest expectations" about stock returns going forward, Gates says.  He thinks valuations have gotten high and he's amazed at that, but he hasn't made many changes to his Foundation's equity portfolio.

-  "I think stocks are ridiculously cheap... if you believe that 30 year bonds at 3% makes sense." ~ Buffett

- Buffett on what he's been reading lately:  Melinda Gates' book The Moment of Lift

Video of Interview

Embedded below is the 2-hour interview with Warren Buffett, Charlie Munger, and Bill Gates:

Tuesday, May 7, 2019

Notes From Sohn New York Investment Conference 2019: Einhorn, Robbins, Sundheim & More

The 2019 Sohn New York Investment Conference concluded and as usual it featured an excellent array of speakers sharing investment ideas all to benefit pediatric cancer research.  Click the links below to go to notes from each talk.

Sohn New York Conference Notes 2019

David Einhorn (Greenlight Capital): Long Aercap, Short GATX

Larry Robbins (Glenview Capital): Buy HMOs and hospitals, short pharma index, short 3M and Chemours

Daniel Sundheim (D1 Capital): Long Netflix & Disney, bearish Canadian pot stocks

Ryan Heslop (Firefly Value Partners): Short Community Health Systems

Gabe Plotkin (Melvin Capital Management): A few ideas

Christopher R. Hansen (Valiant Capital Management): Long Zillow

Jeffrey Gundlach (DoubleLine Capital): Buy interest rate volatility on long bond

Scott Goodwin (Diameter Capital Partners): Short PlastiPak unsecured bonds, long Constellium equity

Bihua Chen (Cormorant Asset Management): Long Reata Pharmaceuticals

Sohn Idea Contest Winner: Short Lamb Weston

Next Wave Sohn New York Notes 2019

Todd Westhus (Olympus Peak Asset Management): WDC long bank debt/short bonds

Matthew J. Smith (Deep Basin Capital): Long Cabot Oil & Gas 

Parvinder Thiara (Athanor Capital): Long Brazilian bonds

David Einhorn Long Aercap, Short GATX: Sohn New York Conference

We're posting up notes from the Sohn New York Investment Conference.  Next up is David Einhorn of Greenlight Capital who presented long Aercap (AER), short GATX (GATX).

David Einhorn's Sohn New York Presentation

•    Companies that lease airplanes have better businesses than companies that lease railcars (long Aercap, short GATX)

o    Airline leases are usually at least 10 years with a 25 year life
o    Railcar leases are 5 years when it’s new or less when it is used. Useful life is around 45 years
o    Airlines in cyclical growth
o    Railroads are more cyclical
o    Airplane utilization much higher than railcar
o    Can move airplanes around easier
o    Credit has cost airline leasing companies 0.1%. Cost railcar leasing companies nothing
o    Railroads becoming more efficient and using less railcars
o    Aercap- airline leasing in growing industry. Average age 6 years. Sells 15 year old planes. Longer leases
o    GATX-Railcar leasing. 14% market share. Cyclical and secular headwinds. Provides maintenance to customers. Average 20 year age. More dependent on releasing rates. Recent leases are shorter term
o    Aercap trades at a 50% discount to GATX even though it’s a better business both on P/E and P/B
o    Aercap is buying back stock. Reduced shares outstanding by 36%. Will continue to buyback stock

Be sure to check out the rest of the Sohn New York conference presentations.

Larry Robbins Long HMOs/Hospitals, Short 3M & Chemours: Sohn New York Conference

We're posting up notes from the Sohn New York Investment Conference.  Next up is Larry Robbins of Glenview Capital who talked about the healthcare industry and shared a myriad of ideas, including long HMOs and hospitals, short pharma index, and short 3M (MMM) and short Chemours (CC).

Larry Robbins's Sohn New York Presentation

Buy HMOs and hospitals. Short pharma index.  Hospitals trading at discount despite superior growth.  Buy Cigna (CI), Humana (HUM), UnitedHealth (UNH), HCA (HCA), Tenet Health (THC), UniversalHealth (UHS). 

•    Medicare For All is dead on arrival. Need President and Congress in order to get Medicare For All. Too high of a hurdle. Only 3 presidential candidates support this and they are not the favorites. Democrats in House and Senate not all on board. Need 60 senate votes to do this because it requires spending money.
•    Multiples are compressed relative to the market in HMO sector and have over 50% upside
•    President can act unilaterally to lower drug costs due to provisions of ACA. Drug revenues at risk
•    Same drug cost 3 times more in the US as in other OECD countries
•    Both sides (Dem and Republican) agree on drug prices
•    People under appreciate coming biosimilars

Short 3M (MMM) on PFAS (chemical that causes cancer that has ended up in drinking water) risk. Lawsuits have gone up 87 fold. Reserves for liabilities have only gone up 8%. They are not reserved. They have at least  $3 to $6 billion liabilities on this.

Short Chemours - is also exposed to these PFAS lawsuits.  Each time DowDuPont (DWDP) loses a lawsuit, he says you should assume this also hits CC.

Be sure to check out the rest of the Sohn New York conference presentations.

Daniel Sundheim Long Netflix & Disney, Bearish on Canadian Pot Stocks: Sohn New York Conference

We're posting up notes from the Sohn New York Investment Conference.  Next up is Daniel Sundheim of D1 Capital Partners.  He talked about being bullish on Netflix (NFLX) and Walt Disney (DIS) and was bearish on Canadian pot stocks. 

Daniel Sundheim's Sohn New York Presentation

- Overall cautious saying valuations are a concern and especially so if inflation picks up and Fed expectations are impacted or China trade talks fall, there's not enough cushion.

- Bullish on Walt Disney (DIS) and Netflix (NFLX).  Both will be the leading direct-to-consumer video companies in the future.  Sees the latter breaching $1,000 in the next 4-5 years.

- Bearish on Canadian pot companies: "Growing marijuana is inherently not a good business." Says Canadian weed industry has enormous downside due to huge supply.  Business models are challenged and the valuations are 'absurd.'  Closest thing to a bubble since bitcoin.

- Unlike other hedge funds, has not shorted Tesla because Elon Musk is 'hard to bet against.'

- Advised not to sell out of positions where you have a ton of conviction.  Cited Mastercard which he bought at IPO and sold once it doubled, only for it to jump 10x its IPO price.  "Great businesses don't come around that often ... Time is your friend when you have a great business."  He emphasized compounding capital over years instead of months.

Be sure to check out the rest of the Sohn New York conference presentations.

Ryan Heslop Short Community Health Systems: Sohn New York Conference

We're posting up notes from the Sohn New York Investment Conference.  Next up is Ryan Heslop of Firefly Value Partners who presented a short of Community Health Systems (CYH).

Ryan Heslop's Sohn New York Presentation

•    Short Community Health Systems (CYH): levered rollup of rural hospitals

o    Company will file for bankruptcy and equity will be worthless
o    CYH grew from 8,000 to 30,000 beds through acquisitions since 2000’s. Paid 600k per bed
o    Net debt grew to $16 billion from less than $2 billion since 2005
o    Management compensated on revenue and EBITDA. Ignores debt
o    Admissions have been declining. Patients are choosing to go to urban hospitals. Trend towards outpatients
o    Rising unit costs
o    Declining profitability per bed
o    Slashed capex by 50% per bed over 10 years. Under-investing in new technologies which fuels patient declines
o    CYH charging more and gauging out of network patients and uninsured. Top in the industry in gauging. Desperate for cash
o    Over 4 years has sold 1/3 of hospitals. Paid top dollar buying them at 600k. On sale has received 250k per bed and might be getting worse
o    Debt per bed has increased to over 700k per bed
o    Company doesn’t generate any cash. Including items the company categorizes as one-time costs they are burning a few hundred million a year.

Be sure to check out the rest of the Sohn New York conference presentations.

Christopher Hansen Long Zillow: Sohn New York Conference

We're posting up notes from the Sohn New York Investment Conference.  Next up is Christopher R. Hansen of Valiant Capital Management who presented long Zillow (ZG).

Chris Hansen's Sohn New York Presentation

Long Zillow
•    $7 billion market cap, $6 billion EV
•    70% market share
•    Currently sells leads. Potential to move to taking part of the commission
•    $1.2 billion in revenue. $350 million in EBITDA
•    Huge potential in flipping homes. Has all the data. Has all the traffic of people looking to buy homes. Some people willing to sell for a little less in order to get cash quick and not deal with selling their house
•    Will get into mortgage origination business. 50% to 75% attach rates
•    Will get fees on this flip. Don’t even need to make money on the actual flip. Will turn over inventory 6 times (30 to 90 day holds) a year which will make it a good margin business

Be sure to check out the rest of the Sohn New York conference presentations.

Jeffrey Gundlach: Buy Interest Rate Volatility on the Long Bond (Sohn New York Conference)

We're posting up notes from the Sohn New York Investment Conference.  Next up is Jeffrey Gundlach of DoubleLine Capital who talked about markets.

Jeff Gundlach's Sohn New York Presentation

•    Public debt about to explode and interest costs will explode. Especially once we hit a recession
•    He thinks there is more of a chance of recession
•    Interest rates will see more volatility
•    Fed Chair Powell has completely changed his tune and is moving towards MMT
•    Buy interest rate volatility on the long bond. Thinks volatility could double

Be sure to check out the rest of the Sohn New York conference presentations.

Gabe Plotkin Bullish Las Vegas Sands & Worldpay: Sohn New York Conference

We're posting up notes from the Sohn New York Investment Conference.  Next up is Gabe Plotkin of Melvin Capital Management who talked markets.

Gabe Plotkin's Sohn New York Presentation

- Sees US growth looking stable, says this is a "good environment for stocks."
- Bullish on Las Vegas Sands (LVS) and Worldpay (WPAY)
- Most of his fund's profits have come from shorting and betting against companies.  He's skeptical about mall REITs and Tesla (TSLA).

Be sure to check out the rest of the Sohn New York conference presentations.

Scott Goodwin Short PlastiPak, Long Constellium: Sohn New York Conference

We're posting up notes from the Sohn New York Investment Conference.  Next up is Scott Goodwin of Diameter Capital Partners who presented a short of PlastiPak unsecured bonds and a long of Constellium equity.

Scott Goodwin's Sohn New York Presentation

•    Credit investor - Secular shift in plastic packaging. 50 year bull run in the use of plastic packaging.
•    Many single use plastics being banned. Creating huge problems in oceans and landfills. Not easy to recycle. Thinks use of plastic will decline and will be a secular decline. Cliff is coming
•    Short PlastiPak unsecured bonds. 4% EBIT margins. Peer group has 10% to 12% margins. Bond trades at 95 cents. Heavily levered. Likely to be worth close to zero in bankruptcy
•    Long Constellium equity (aluminum). Much easier to recycle aluminum and higher recycling rates

Be sure to check out the rest of the Sohn New York conference presentations.

Sohn New York Idea Contest Winner: Short Lamb Weston

We're posting up notes from the Sohn New York Investment Conference.  Next up is the Sohn idea contest winner who presented a short of Lamb Weston (LW).

Sohn Idea Contest Winner: Short Lamb Weston

•    Lamb Weston(LW) – (Short idea) Lamb will miss estimates by 30% to 40% in next few years as margins are at peak.

o    Buys potatoes and sells them as french fries to restaurants.
o    Lots of new supply coming online. Was an unexpected boom in demand which sent margins in the business way up but a supply response is coming
o    People don’t realize that their current pricing power is cyclical and not secular. Stock is priced like a consumer staple
o    Would cost $5 billion to recreate Lamb’s assets. Company's EV is well more than double that

Be sure to check out the rest of the Sohn New York conference presentations.

Bihua Chen Long Reata Pharmaceuticals: Sohn New York Conference

We're posting up notes from the Sohn New York Investment Conference.  Next up is Bihua Chen of Cormorant Asset Management who presented a long of Reata Pharmaceuticals (RETA).

Bihua Chen's Sohn New York Presentation

•    Reata pharmaceuticals (RETA) - stock can be a ten bagger if it works. Has an experimental drug targeting kidney disease with good results. Can be a $25 billion company on $5 billion peak sales. Current market cap is $2.3 billion
•    Current data is so good that some people believe the data is fake
•    Some safety concerns on heart safety (now excluding patients with heart disease and slowly moving patients dose up) Since changes there have been no problems. No liver problems or any warning signs. No actual muscle loss. They think the safety profile is good

Be sure to check out the rest of the Sohn New York conference presentations.

Todd Westhus's WDC Trade: Long Bank Debt/Short Bonds (Sohn New York Conference Presentation)

We're posting up notes from the Sohn New York Investment Conference.  Next up is Todd Westhus of Olympus Peak Asset Management who presented a Western Digital (WDC) trade: long bank debt / short bonds.

Todd Westhus's Sohn New York Presentation

•    Western Digital (WDC) - negative cyclical and secular headwinds. Capital structure arbitrage. Long bank debt/short bonds. 2 points downside with 50 points upside.

o    HDD is losing share over time to SSD where WDC is a smaller player. HDD is in secular decline.
o    SSD has cyclical and competitive issues. WDC is losing market share in SSD
o    SSD inventory bloated and prices falling. Cycle is early and WDC has worst balance sheet in industry
o    HDD industry revenue expecting to decrease 15% over 4 years. Melting ice cube
o    WDC SSD has been growing 2% a year while industry grew 24%.
o    WDC has an inventory issue
o    Margins going to get worse. Gross margins likely to go flat or negative in a recession
o    China will be entering SSD market and will create more supply.
o    $11 billion of debt and EBITDA can go negative in a recession from $4 billion today

Be sure to check out the rest of the Sohn New York conference presentations.

Matthew Smith Long Cabot Oil & Gas: Sohn New York Presentation

We're posting up notes from the Sohn New York Investment Conference.  Next up is Matthew J. Smith of Deep Basin Capital who presented long Cabot Oil & Gas (COG).

Matthew Smith's Sohn New York Presentation

•    Energy focused investment firm
•    Cabot Oil & Gas (COG) - Currently $25 a share. Base case $35/Bull case $45/Downside to low 20’s
o    Acquisition candidate. Management incentivized to sell
o    Acreage in Marcellus shale. Marcellus generates 1/3 of natural gas used in the US
o    COG is in the best place in the country for nat gas
o    Productivity of COG wells 75% better than industry average
o    18 years of inventory in prime acreage
o    Atlantic Sunrise pipeline built to take COG gas into premium markets. Realize higher prices on nat gas. Own 10% of Atlantic Sunrise
o    40% higher margins than peers and growing
o    Over next 8 years will generate market cap in FCF
o    Based on current curve COG worth mid-thirties. On 50 cents higher curve worth bull case
o    Doesn’t like AR RRC because they are levered and are competing with free gas from oil production (associated gas)
o    COG will soon be a tax payer. Through an acquisition the profits can be shielded from taxes
o    COG share of Atlantic Sunrise worth $300 million and likely to sell and repurchase stock
o    Average management age at Cabot is in the sixties so think they will look to exit in a sale

Be sure to check out the rest of the Sohn New York conference presentations.

Parvinder Thiara Long Brazilian Bonds: Sohn New York Conference

We're posting up notes from the Sohn New York Investment Conference.  Next up is Parvinder Thiara of Athanor Capital who presented long Brazilian bonds.

Parvinder Thiara's Sohn New York Presentation

•    Worked at DE Shaw for 8 years before setting up fund; Chemist
•    Uses macro for relative value trades
•    Brazil- Long Brazilian bonds (currency hedged) as too much policy tightening is being priced in.

o    Went through a painful economic cycle and too much policy tightening is being priced in.
o    Real output still 5% below previous peak. Inflationary pressure should remain low as there is slack in the economy. There is currently low inflation. Easing is more likely than tightening being priced in.
o    Balance of payments is good and has money to defend currency. Not vulnerable to current account shocks. This isn’t Turkey or Argentina
o    Bolsonaro wants lower rates and tweets about it like Trump

Be sure to check out the rest of the Sohn New York conference presentations.

Monday, April 29, 2019

24th Annual Sohn Investment Conference New York

The 24th annual Sohn Investment Conference in New York is fast approaching.  Supporting the Sohn Conference Foundation's mission to treat and cure pediatric cancer, this is always a great event and supports a great cause.  In partnership with CNBC, the conference features top investors and industry thought leaders sharing investment ideas and more.

You can learn more about the event and register by clicking here.

2019 Sohn New York Speakers List

·         Bihua Chen, Founder and Portfolio Manager, Cormorant Asset Management, LP
·         Patrick Collison, Chief Executive Officer, Stripe
·         Laura Deming, Managing Director, Longevity Fund
·         David Einhorn, President, Greenlight Capital, Inc.
·         Tim Ferriss, Investor, Best Selling Author, and Top-Ranked Podcaster
·         Spencer Glendon, Concerned empiricist and Founder, Probable Futures
·         Jeffrey Gundlach, Chief Executive Officer, DoubleLine Capital LP
·         Christopher R. Hansen, President and Founding Partner, Valiant Capital Management, L.P.
·         Ryan Heslop, Co-Founder & Portfolio Manager, Firefly Value Partners, LP
·         Sir Michael Moritz, Partner, Sequoia Capital
·         Gabe Plotkin, Chief Investment Officer and Founder, Melvin Capital Management LP
·         Larry Robbins, Founder, Chief Executive Officer, Portfolio Manager, Glenview Capital Management, LLC
·         Daniel Sundheim, Founder and Chief Investment Officer, D1 Capital Partners
·         Josh Waitzkin, Extreme Athlete, Peak Performance Specialist
·         Ariel Warszawski, Co-Founder & Portfolio Manager, Firefly Value Partners, LP
·         Dr. Joon Yun, President, Managing Member, Palo Alto Investors LP

Click here to register for the conference.

Event Details

When: May 6th, 2019

Where:  Lincoln Center in New York City

Next Wave Sohn 2019

In addition to the main event, the conference will again feature the 6th annual Next Wave Sohn segment earlier in the day, which showcases emerging managers presenting their latest investment ideas.  Here's the speaker's list:

·         Angela Aldrich, Managing Partner & Portfolio Manager, Bayberry Capital Partners LP
·         Matthew J. Smith, Chief Executive Officer & Chief Investment Officer, Deep Basin Capital LP
·         Parvinder Thiara, Chief Investment Officer, Athanor Capital, LP
·         Todd Westhus, Founding Partner, Chief Investment Officer, Olympus Peak Asset Management LP
·         Lauren Taylor Wolfe, Managing Partner, Impactive Capital LP

As usual, this figures to be a full day of interesting market ideas and thought provoking discussion, all benefiting pediatric cancer research.  If you're interested in attending, we'd recommend signing up quickly before the rest of the seats disappear. 

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.

33% Discount Expires Tomorrow

The discount expires on February 28th.  After signing up, you'll get immediate access to the new issue & the archive of past issues.

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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 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

33% Discount Expires in 7 Days

The discount expires on February 28th.  After signing up, you'll get immediate access to the new issue & the archive of past issues.

1-year Subscription (4 issues): Normal Price $299.99 Discount Price $199.99 per year

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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.