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

Lauren Taylor Wolfe (Impactive Capital): Long Wyndham Hotels & Resorts

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

Angela Aldrich (Bayberry Capital): Short Treasury Wine Estates


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.


Lauren Taylor Wolfe Long Wyndham Hotels & Resorts: Sohn New York Conference

We're posting up notes from the Sohn New York Investment Conference.  Next up is Lauren Taylor Wolfe of Impactive Capital who presented long Wyndham Hotels & Resorts (WH).


Lauren Taylor Wolfe's Sohn New York Presentation

•    Activist. Not quick fix solutions like buybacks/firing people/sell yourself
•    Focus on ESG
•    Long: Wyndham Hotels & Resorts - Acquired LaQuinta.

o    Largest hotel franchiser.
o    Mid scale operator which tends to do well in downturns and upturns. Asset lite. 3 turn discount to hotel peers. Currently in a penalty box, time arbitrage
o    $110 a night average room. 60% of US hotel rooms in this value segment with Wyndham 40% market share.
o    Least supply growth of any segment in past 15 years. Expect to continue based on construction pipeline.
o    Least exposed to online disruptors. Lower price than AirBnB. Lots of same day bookings. Lowest price branded room you can get. Benefit from trade downs in tough times. 2% organic room growth during 2008 downturn.
o    Only 4% of EBITDA linked to franchisee profit. Lots of international growth coming online.
o    LaQuinta has a lot of growth. Cost synergies with LaQuinta of $~75 million.
o    Trades 3 turns cheaper than Choice, its closest competitor. Wyndham will generate $3 billion in FCF in next 3 years and can use it to buy other companies.
o    ESG suggestion is more efficient HVAC. Give reward points for reusing towels and not changing sheets.
o     Can triple growth. Base case 62% return 3 year return. Bull case 100% return


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.


Angela Aldrich Short Treasury Wine Estates: Sohn New York Conference

We're posting up notes from the Sohn New York Investment Conference.  Next up is Angela Aldrich of Bayberry Capital Partners who presented short Treasury Wine Estates in Australia.


Angela Aldrich's Sohn New York Presentation

•    Treasury Wine Estates (Australia) Short idea - $9 billion market cap. Brands like Bollinger, Penfolds. Stock has gone up 350% past few years

o    Cheap wines have been declining for years
o    TWE is in the middle category which was growing but is now declining. Only high end is growing (which is small)
o    Millennials not drinking wine (drink spirits and smoke pot)
o    Penfolds big in China. E-commerce in China. Lots of counterfeiting. Large inventory in their less desirable brands.
o    TWE channel stuffing in the entire world. Seeing higher sell in and lower sell through in the US
o    They are now selling their popular 19 Crimes wine in 7 Eleven and Costco. Used to be $18. Now selling for $8.99.
o    In house distribution not going well
o    Looking for 50% downside at a generous 19 times forward earnings
o    Business is not growing. No reason for 30 times forward earnings. Compelling short


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