Thursday, October 17, 2019

Sohn San Francisco Notes 2019: Kacher, Yusko, Kawaja & More

The Sohn San Francisco Investment Conference just concluded and featured hedge fund managers sharing their latest investment ideas to benefit charity.  The event benefits the Excellence in Investing for Children's Causes Foundation and a portion of the proceeds also go to The Sohn Conference Foundation.

We've already posted up notes from Next Wave Sohn San Francisco which featured emerging managers.  Now below are notes from the main event.

Sohn San Francisco 2019 Notes

Kevin Oram, Praesidium Investment Management Company, LLC

Idea: Instructure (INST)

•    Hidden value that can be unlocked
•    2 key products:
o    Canvas is a leader in education learning software which is ~90% of revenue
o    Bridge is corporate learning software
•    Canvas is student and educator collaboration software
•    Biggest competitor is Blackboard – which has a legacy on premise software and has had trouble transitioning to a cloud model
• Software is a great business but vertical software is even better as it serves a very specific market
•    Believe there is a significant margin expansion opportunity from 24% in 2019 to 40%+ by 2022
•    Has an opportunity to roll up software in other adjacencies given a lot of fragmentation of players in education software
•    Believe it is worth $2.5bn versus current valuation of $1.5bn
•    Undervalued due to large losses in Bridge – corporate learning
•    Bridge software is good but significant competition in the corporate market with entrenched players
•    Bridge has very little synergy with Canvas given different source code and dedicated sales team
•    Opportunity to unlock value by divesting from Bridge via sale, shutdown and focus on Canvas
•    Engaging actively with management over last several months to present case on value destruction of Bridge
•    Dec 3rd – Will have an analyst day to describe company’s new strategy and operating model – could be the catalyst market has been looking for

Gil Simon, SoMa Equity Partners

Idea: Sailpoint (SAIL)

•    Believe that there is 100% upside to $35-40 per share
•    Best of breed software trading at a reasonable valuation (<3x 2022e="" p="" sales="">•    Identity is central to enterprise security but this is difficult because the modern large enterprise is running hundreds of applications
•    Identity and access management is the #1 priority within security
•    Identity Governance and Administration (IGA): Ensure employees access only what they need to access
•    2 key products: Identity IQ and IdentityNow
•    ~1,300 customers
•    Extending the lead over legacy competition like IBM and Oracle
•    8,500 customers market opportunity from legacy competitors
•    CA and Oracle not likely to focus on this space
•    Buying opportunity on missed execution; have recently strengthened the management team
•    Expect revenue growth to re-accelerate which should drive a snap back in the share price

Adam Fisher, Commonwealth Asset Management

Idea: China Interest Rate Convergence

•    Japanese working population peaked in 1995
•    China is a good analog for Japan – working age population peaked in 2015 – projected to fall by 125 million through 2040
•    China’s 4 megacities are already as rich as the rest of East Asia
•    Ne net: Believes that interest rates in China are coming down and going to zero

Glen Kacher, Light Street Capital

Idea: Talend (TLND)

•    $6.5bn data integration market growing >10%
•    Most robust platform across on-premise and cloud environments
•    $218mm of ARR, growing 29% yoy with mix shift towards cloud
•    87% recurring revenue
•    Founded in 2005 and went public in 2016
•    Focused on ETL products: Extract, Transform, Load
•    Talend is the growth leader in the data integration market
•    Hadoop hit a wall but Talend benefits from the cloud database wave
•    Revenue model is based on seat based subscription software revenue, seat and consumption based saas revenue, 3) project based revenue
•    Cloud mix shift should increase over time
•    Believes value could be +86% in the base case

Debbie McCoy, Blackrock

Pitch on theme of sustainable investing and ESG (environmental, social, government)

•    Increasing sustainable investing adoption across large money managers
•    Built an internal model to evaluate companies rather than using third party ESG scores
o    Look at employee happiness as a factor in the model
o    Incorporate other unique factors that third party scores don’t take into account

Myron Scholes, Janus Henderson Investors

The Advantages of Time Diversification: Risks from Option Prices that Inform Investment Decisions.  Tails are important to investors – if you remove the extreme tail gains, realized return falls to almost zero and take out extreme tail losses, realized return nearly doubles over the very long term

Connor Browne, Thornburg Investment Management

Idea: Alkermes plc

•    Biopharma company focused on patient inspired solutions
•    A unique focus on hard to treat patients  - 2 key drugs for opioids addiction and schizophrenia
•    Vivitrol – treatment for opioid misuse disorder; blocks the opioid receptor in the brain
o    Competes with methadone and suboxone and aimed on getting you off the drug
•    Aristada
o    Long acting injectable for schizophrenia
o    Strong revenue growth
o    Expect market share to grow from 5.8% to 9.9%
•    Some optionality in other drugs under development
o    Vumerity – novel oral fumerate for the treatment of multiple sclerosis
o    ALKS 3831- efficacy of olanzapine (Zyprexa) without the associate weight gain
o    ALKS 4230 – novel selective IL-2 fusion protein; more early stage
•    Valuation
o     4 different scenarios of value: currently approved drugs, +Vumerity, +3831, +Vumerity and 3831

Mike Wilkins, Kingsford Capital Management (short-only firm)

Idea: Shorts and frauds

•    Focused on shorting pump and dump schemes
•    Large flows into passive investing creates opportunity
•    Russell 2000 inclusion is very rules based and rebalances in May– if you can get to $150million market cap, index will include you with no regard to if it is a legitimate company
•    Russell 2000 stock promotions – get into index in May and then get ETFs to buy in June and then dump the stock after
•    Several fraudsters have taken advantage of the Russell 2000 fraud including Jason Galanis, Benjamin Wey, Howard Appel
•    Class of 2019 potential frauds – gained admission to Russell 2000 in June but have not gone to zero yet
o    YCBD – merged with Level Branding to get listed on NYSE
o    Pareteum: telecom
o    Wrap Technologies: next gen solution for non lethal law enforcement

Mark Yusko, Morgan Creek Capital Management

Macro Idea: Don’t Cry, It’s Me Argentina

•    Argentina – very low % of their GDP is equitized versus the US which is very high; bullish on long term prospects for Argentina
•    Investors fled Argentina when they should have been buying
•    Argentina Stock Picks
o    Pampa Energy is top stock pick to play this thesis
o    Argentinian banks
o    YPF is a double play on Argentinian shale

Carl Kawaja, Capital World Investors

Idea: D. R. Horton (DHI)

•    Largest homebuilder by volume in the US with over 55k homes sold in 2018
•    Housing market has room for growth
•    Best in class operator
•    Changing their business model that will make it more valuable
•    Limits on credit have driven slower but steady growth in housing
•    Home ownership will continue to become more attractive as mortgage rates fall alongside interest rate
•    Much better deal to buy versus rent in many of DR Horton’s markets
•    Industry leading ROE
•    DR Horton wants to be more like NVR
•    DHI made a strategic shift to focus on lower priced homes with Express Homes and tilts more to the lower end of the market versus competition
•    Trying to transition to a business model that is less capital intensive by using land options
•    Asset light model yields much higher NPV and IRR
•    Should trade closer to other asset light home builders like NVR

Be sure to also check out notes from Next Wave Sohn San Francisco featuring emerging managers and their ideas.

Next Wave Sohn San Francisco Notes 2019: Perkins, Sinantha, Venkatesan, Weldon

We're posting up notes from the Sohn San Francisco Investment Conference which featured hedge fund managers sharing their latest investment ideas to benefit charity.  The Next Wave segment featured emerging managers Stephen Perkins (Toronado Capital), Touk Sinantha (AltraVue Capital), Raj Venkatesan (Trinity Alps Capital), and Christopher Weldon (Stamina Capital).

We've also posted up notes from the main event of Sohn San Francisco so be sure to check that out as well.

Notes from Next Wave Sohn San Francisco 2019

Stephen Perkins, Toronado Capital Management

Idea: Blackline (BL)

•    Software business models are great but software is not undiscovered anymore
•    Blackline (BL) – software company modernizing finance and accounting processes for mid-size enterprises
•    Replaces excel with a vast process improvement
•    Strong user growth – 19% CAGR in users from 2015- Q2 2019
•    SAP relationship will help drive future growth
•    Market is large and underpenetrated and little competition
•    Strong renewal rates at 97-98% dollar retention over last 5 years
•    Founder led with the founder owning ~10% of the company
•    Competition is really thin
•    Focus on this one part of the enterprise is a competitive advantage

Touk Sinantha, AltraVue Capital – value investing firm

Idea: SIGA Technologies (SIGA)– Specialty Pharma

•    Post bankruptcy microcap
•    Focused on biodefense and only company with vaccine for Small Pox
•    US and Russia continue to keep stock of the virus and possible to recreate the virus synthetically
•    Siga was a good business that went bankrupt because of legal fight over acquisition by another company
•    Continue to provide Small Pox vaccine to national stockpile
•    Stock became orphaned for a number of reasons
•    $600mm BARDA contract
•    Core value estimated at $7 per share or ~30% upside
•    Optionality:
o    International sales: ~$4 per share
o    TPOXX Label expansion: $2 value
o    New products: $0 value
•    Sum of the core value and potential upside value = $7+$4+$2= $13 per share
•    Risks: BARDA funding risk, Capital allocation risk, new competition, liability risk

Raj Venkatesan, Trinity Alps Capital Partners (long only, global and sector agnostic)

Idea: Afya (Brazil – but trades as an ADR)

•    Focused on medical education
•    Good reform happening in Brazil that are tailwinds to the business
•    Population in Brazil is aging and healthcare spend is growing at low double digits
•    Low number of doctors on a per capital basis and applicants/openings for med schools have declined
•    70% of medical education in Brazil is private
•    Path to become a doctor and specialist is long (like the US)
•    Earnings power of a specialist doctor is very high
•    Payback for general physician education is 5 years
•    Pure play way to play medicine in Brazil
•    Multiple growth levers:
o    TAM doubles in 5 years to R$32B
o    Roll up strategy
o    Regulated brownfield and greenfield growth opps
o    Asset light monetization of content  - vertical and horizontal
•    Value: Think Afya is a double
•    Risks: Macro/currency, regulatory framework, Recent IPO/limited history

Christopher Weldon, Stamina Capital ($200mm AUM, 3 years in)

Idea: Adyen long (3 year double)

•    Payment processor/merchant acquirer based out of the Netherlands
•    Visa is a good case study for Adyen – great operating leverage as revenue and costs are completely unrelated
•    Lowest cost operator
•    Value: believe it can double in 3 years driven by ~35% revenue, >50% FCF CAGR
•    Displacing legacy merchant acquirers given cost advantage: First Data and WorldPays of the world
•    Growth levers:
o    Customers growing quickly
o    Wallet share gains
o    New customers
o    New services
•    Digital payments are a secular share gainer in global transactions
•    Very large TAM of $25 trillion card based payments
•    Base case: +80% upside; Reward Case: +250%; Risk case: -25%

Click here to also read notes from the main event of Sohn San Francisco.

Wednesday, October 16, 2019

What We're Reading ~ 10/16/19

The Ride of a Lifetime: Lessons Learned from 15 Years as CEO of Walt Disney [Bob Iger]

The active manager paradox: high-conviction overweight positions [CFA Institute]

In-depth piece on Amazon: Jeff Bezos's master plan [The Atlantic]

How cloud gaming will and won't disrupt [Matthew Ball]

A look at TradeDesk [Greytab Investments]

A pitch on Interactive Brokers [Barrons]

On unsustainable consumer subsidies in the new app world [The Atlantic]

Recent commentary from Bill Nygren [Oakmark]

Top 20 business transformations of the last decade [HBR]

TJMaxx prices, experience make it immune to Amazon [Business Insider]

T. Boone Pickens on what made him successful [Twitter]

How baseball cards got weird [The Atlantic]

Tuesday, October 15, 2019

New Graham & Doddsville Issue: Pabrai, Moroz, Carr, Peterson & More

Columbia Business School is out with the Fall 2019 issue of its Graham & Doddsville newsletter.  It features interviews with Mohnish Pabrai (Pabrai Investment Funds), Paul Moroz (Mawer Investment Management), Ellen Carr (Weaver C. Barksdale), and Matthew Peterson (Peterson Capital).

These managers talk about names such as Wolters Kluwer, Alphabet (GOOG), Constellation Software (CSU.TO), GrafTech (EAF), DailyJournal (DJCO), and more.

The issue also features student investment pitches from the Pershing Square Challenge, including long Aramark (ARMK), long ServiceMaster (SERV), long US Foods (USFD).

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

You can download a .pdf copy here.