Chuck Akre's Talk at Google: Three-Legged Stool Investment Construct

Chuck Akre of Akre Capital Management recently had a talk at Google about investing entitled "The Peregrinations of an English Major Trying to Solve the Investment Puzzle."

If you're unfamiliar with Akre, he focuses on finding long-term compounders and runs a somewhat concentrated portfolio.  Here's notes from his talk:


Chuck Akre's Talk at Google

- Reads voraciously to this day.  Cited one of the very first books he liked: The Money Masters.  Also noted that 100:1 in the Stock Market is the book he took the idea of compounding from.  Said he read The Intelligent Investor as well as business biographies.

- What makes a great investment?  "Rate of return is the bottom line of all investing."

- Looks at free cashflow return and focuses on valuation as the key to compounding; buy it right.

- How do they identify investments that will generate above average returns?  "We like to fish in the pond of high return businesses."  Asks: what kind of returns on capital?  What are the net margins?  Thinks an 'average' business returns high single digits.  Cites Mastercard (MA) and Visa (V) with 30% margins.  "What is it about the essence of that business that allows them to earn returns that cause them to have a big bullseye on their back?"

- Three-legged stool:  Their investment construct that lets them think in simple terms.  First leg is the quality of a business: a high return business.  Second leg is operations: want management to have skill and integrity (a demonstrated record) and treat investors as partners.  Third leg is reinvestment: would love the company to put cash back into the business if there's great opportunity.  Cited the book Dear Chairman (which we've reviewed here).

- "I have never been able to learn from other people's mistakes.  I have to make my own."

- Wants to be an investor in a business rather than a speculator in shares.

- His goal is to compound capital at an above average rate while incurring a below average level of risk.  Volatility is only a risk in the short run.

- Akre's separately managed accounts over 27 years have compounded at 12.7% versus S&P at 9.4%.  Also has a partnership that's done 15.25% versus S&P 9.2% and mutual funds that have done 13.2% annual.

- Mastercard: originally purchased in 2010 at around $22 with regulatory worries around Durbin amendment.  Business has fantastic returns, had a low valuation (13-14x at the time).  "Their returns are so high they can't possibly find a place to reinvest their money, so our compounding is diminished modestly because of that."

- Moody's (MCO): Bought in January 2012 at $39.  Any company that wants debt has to get a rating on it and it's basically an oligopoly: MCO, S&P (SPGI), and Fitch.

- Enstar (ESGR): Been involved for 10 years.  They buy insurance that's in run-off.  Paid 3 times book when he bought shares. 

- Quotes Einstein: "You should make everything simple as possible but no simpler."  "We cannot solve our problems with the same thinking we use to create them."  "The only source of knowledge is experience."  "Imagination is more important than knowledge."  That last quote is what's on the front of Akre's book:

- Two of his best investments (100 baggers): Berkshire Hathaway (BRK.A) and American Tower (AMT).  "Most of the time you can buy these businesses at reasonable valuations... sometimes you can buy them at a steal."

- On selling: "The most difficult thing to do in our business is not sell, if you're a long-term investor."

- Bought Visa (V) because they have concentration limits in their funds and were bumping into that with their stake in MA.  Did the same with SBA Communications (SBAC) as it relates to their AMT position.  Gaining more exposure to the themes via competitors since individual position limits kicked in.

Embedded below is video of Chuck Akre's talk at Google:



We've covered many other investor talks at Google, including:

- Howard Marks' talk at Google

- Michael Mauboussin's talk at Google

- Jim Grant's talk at Google

What We're Reading ~ 11/16/16

Thinking strategically: the competitive edge in business, politics, and everyday life [Dixit]

Is value investing broken? [Gannon on Investing]

Understanding the art of doing nothing [Pragmatic Capitalism]

India's demonetization - what's next? [Marginal Revolution]

How to find the most persistently profitable companies [Gannon on Investing]

How investors develop bad habits [A Wealth of Common Sense]

On overconfidence and the scout mindset [Abnormal Returns] 

A pitch on American Tower (AMT) [Broad Run]

Inside Intel's race to build a new reality [Techcrunch]

In-depth interview with Liberty's John Malone [CNBC]

Interview with Michael Mauboussin [Motley Fool]

JD.com's Richard Liu takes on Alibaba in cutthroat contest for Chinese consumers [Forbes]

Guide to stocks potentially impacted by a Trump presidency [StreetInsider]

How your brain decides without you [Nautilus]

What We're Reading ~ 10/22/15

10 poor investment theses [Irrelevant Investor]

The case against short selling [Long Short Trader]

The five "why's" in problem solving [Wallbuilder]

The danger of 1-year performance numbers [A Wealth of Common Sense]

Latest post from the Valeant (VRX) bear camp [Bronte Capital]

How bad will it get for American Express? [Bloomberg]

China is not collapsing [Project Syndicate]

Kingmakers of China's internet: Baidu, Alibaba and Tencent [WSJ]

A look at wireless tower stocks [Barrons]

Tribune Media shares at a 50% discount [Barrons]

Fossil Group (FOSL): a value stock with temporary problems? [Value & Opportunity]

Netflix is creating a cordless nightmare for traditional media [Institutional Investor]

Light beer gets in touch with serious side [WSJ]

Auto parts retailers' immunity to Amazon drives stock surge [Bloomberg]

Why investors don't fund dating [Andrew Chen]

Robots and us [MIT]

Lone Pine Capital Starts SBA Communications Position

Steve Mandel's hedge fund firm Lone Pine Capital has disclosed a brand new position in SBA Communications (SBAC).  They filed a 13G with the SEC indicating they own 6.4% of the company with almost 8.2 million shares. The filing was required due to portfolio activity on January 8th.

While this is a new stake, they've had exposure to the wireless tower stock play via their position in Crown Castle International (CCI). 

Their new SBAC position, however, is much larger and it's a bit curious that they would all of a sudden initiate their position now.  The thesis and valuation has largely been unchanged.  

It's also worth highlighting though that SBAC has been a longstanding top position for hedge fund White Elm Capital.  White Elm was founded by Matthew Iorio and before launching his own fund, he worked at Lone Pine.

While the bull case on tower stocks has been a play on the proliferation of wireless data usage, the bear case seemingly hinges on a potential rising interest rate environment and potential consolidation in the wireless carriers.

Per Google Finance, SBA Communications is "an independent owner and operator of wireless communications towers. The Company’s principal operations are in the United States and its territories."

We recently detailed some of Lone Pine's other portfolio activity here.

What We're Reading ~ Analytical Links 7/17/13

Notes from the Delivering Alpha conference: part 1 and then part 2 [Reformed Broker]

There is no such thing as emotionless investing [Abnormal Returns]

Curse of the macro tourists [Big Picture]

Are you guaranteed to lose 3.5% every year? [Pragmatic Capitalist]

Muddy Waters Research negative on American Tower (AMT) [Barrons]

Finding value outside of the US [Institutional Investor]

Lessons learned from well-behaved investors [NYTimes]

NAAIM survey of manager sentiment [NAAIM.org]

Reminder to all investors: bonds are not safe [The Atlantic]

Razors, lighters & pens: a pitch on Societe Bic [Graham Disciple]

High net worth investors taking more risk [WSJ]

3 rules to make your company exceptional [Harvard Business Review]

Carson Block: adventures abroad could hurt US companies [Dealbook]

Meet the man responsible for steering China's currency reserves [WSJ]

Google has discovered a new revenue driver and it's a threat to Amazon [Yahoo Finance]

Carlos Slim invests in Shazam [WSJ]

Mistral Capital Partners: Latest Investment Themes (Q3 Letter)

McLane Cover's Mistral Capital Partners recently released their third quarter letter and in it we see they were up 9.81% net for September compared to 8.55% for the S&P 500. While Mistral is down 5.9% year to date compared to an S&P gain of 2.3%, they are still up over 121% over the past 10 years. McLane Cover, President and CIO, sees two important themes driving the markets in the fourth quarter:

First, the Republicans taking the House following the November elections as the country demands a more fiscally conservative approach from the US Administration. And second, the Federal Reserve will likely continue to flood the economy with liquidity by pursuing a second round of Quantitative Easing.

Sector & Economic Themes

Recently, Mistral Capital has taken profits in the technology sector given the significant appreciation in their portfolio, but they continue to believe the sector is attractive and well-positioned going forward. Additionally, they believe asset plays will out perform as the Fed (and other central banks) remain focused on reflating the economy.

Consumer

They expect US consumer spending to remain constrained but probably exceed extremely low investor expectations. Mistral expects auto sales to remain strong and thus are sticking with their core position in Ford Motors (F). In the past we've noted that Jim Chanos is short F. Mistral also believes that the emerging market consumer becomes an increasingly dominant force, as they note that more than 80% of the world’ s six billion people currently live in emerging economies with China and India representing one billion each. McLane highlights ChinaCast (CAST) has a player in this space. ChinaCast is a leading player in four year vocational universities and they believe that the Chinese government’ s support of vocational universities will propel future growth.

Energy

Mistral Capital continues to believe that natural gas becomes a key component of US energy policy, though they admit they have been “ long and wrong” on this call for quite some time. Natural gas is politically attractive because it is sourced in America and we have a lot of it (90 years of supply by some estimates). Furthermore, an expansion in the use of natural gas would stimulate job growth. Natural gas is carbon based but its carbon footprint is half of coal and thus more environmentally friendly. Natural gas represents a bridge to more eco-friendly alternatives as wind, solar and geothermal become scalable and more economically viable.

They believe in JA Solar (JASO) as a play off a comeback in solar. JA Solar is a low cost quality leader in the solar space and is the world’ s largest manufacturer of crystalline silicon cells based in China. JA Solar has tailwinds as industry solar demand have continued to rise for 2010 and 2011.

Other Plays

In healthcare, they like Volcano (VOLC) – A leading global provider of intravascular ultrasound (IVUS) and functional flow measurement (FFR) equipment and catheters. In telecom, Mistral favors American Tower (AMT), a dominate wireless tower provider in the US with an emerging market presence in India and Latin America. The company is considered to have the highest quality portfolio among its peer group in terms of location and tower size. AMT was one of the specific equities highlighted in-depth as a hedge fund favorite in our newsletter, Hedge Fund Wisdom.

Embedded below is Mistral Capital Partners Q3 letter:



You can download a .pdf copy here.

We're starting to post up a bevy of fund manager market commentary and outlooks, so be sure to scroll through our set of investor letters as we continue to highlight them.

Equity Risk Premium 'Exceptionally Large' & Investors Shun Stocks: Jeff Saut

It's been a while since we've checked in on what market strategist Jeff Saut has to say so let's examine his latest commentary. In his weekly investment strategy, Saut points out the high correlation in markets these days, as pair trades don't seem to be working. He also highlights somewhat of a contrarian signal in the fact that money flows out of equity mutual flows are quite gargantuan. Everyone favors bonds and 'safety' these days as retail investors haven't been this unwilling to talk about stocks since the fourth quarter of 1974. As evidenced in the chart below, investors have shunned stocks and the equity risk premium (ERP) has been exceptionally large.

(click to enlarge)

Given the increased fear and pessimism in equity markets over the past few weeks/months, Saut believes that many people are ignoring corporate profitability. He feels the S&P 500 will climb to around 1120 (current market levels) and then stall out/ pause before rallying even higher. Needless to say, this is the most bullish we've seen him in quite a while.

So, what stocks to buy? The Chief Investment Strategist at Raymond James feels that technology is the sector to be in. He likes Intel (INTC) here as the company has taken steps to gain exposure to the booming cellular market. Interestingly enough, Saut also likes smartphone plays American Tower (AMT) and Crown Castle (CCI). We actually featured an in-depth analysis of one of these companies in our brand new quarterly newsletter: hedge fund wisdom. Hedgies have definitely favored the wireless tower operators and we examined the investment thesis to take you inside the head of a hedge fund manager. Lastly, Saut also offers CA Technologies (CA) as a play.

In summary, Saut acknowledges that the economy is slowing but he thinks we avoid the dreaded 'double-dip'. Given the recent encouraging market action, Saut thinks we're headed above the early August highs of 1130 after the market pauses to catch its breath first. He would turn negative if the market found a way to break below its 50 day moving average at around 1085.

Embedded below is Jeff Saut's latest market commentary:



You can download a .pdf copy here.

For previous commentary from the market strategist, you can head to his piece on how he thinks the March 2009 lows will hold. For more theoretical and application based discussions, Saut outlined his risk management principles as well as the businessman's risk portfolio.

Hedge Fund Viking Global Likes American Tower (AMT), Invesco (IVZ): Q2 Letter

Andreas Halvorsen's hedge fund firm Viking Global is out with its second quarter 2010 investor letter and courtesy of Dealbreaker we wanted to highlight some of their latest portfolio maneuvers. Here are Viking's latest top 10 positions:

1. Invesco (IVZ)
2. Unilever (UN)
3. American Tower (AMT)
4. Oracle (ORCL)
5. Comcast (CMCSA)
6. News Corp (NWSA)
7. Tyco International (TYC)
8. Sherwin-Williams (SHW)
9. Goodrich (GR)
10. Adobe Systems (ADBE)

Right off the bat there are several changes to highlight between Q1 and Q2. Back in the first quarter, Visa (V) was Viking's largest position. This time around, Visa is nowhere to be found in their top 10 positions. One might assume they reduced or exited this position, but there was no commentary on this stake to verify. If you read into their letter, you'll see that they are more focused on building concentrated positions and as a result ramped up stakes in various companies. Visa, apparently, was not one of them.

It's quite possible that the credit card processor is still a holding at Viking and other portfolio positions merely leapfrogged their V stake. The same could be said for their position in Express Scripts (ESRX) as it was their fourth largest holding in the first quarter and is nowhere to be found on their top 10 holdings for Q2. These positions will certainly be something to look for in their Q2 13F filing that we'll cover when it's released in a few weeks.

For the second quarter, Halvorsen's hedge fund maintains its long-held position in Invesco as it moves back up to their top holding. Halvorsen writes,

"Our largest loss in the quarter was Invesco which cost us 1.3% in VGE and 1.4% in VLF. Invesco has been in our top ten list since we initiated the position in the fourth quarter of 2007 and was our second most profitable investment in 2009. During the second quarter, Invesco sold off along with other asset managers despite reporting better than consensus first quarter earnings and higher synergy estimates from the Van Kampen acquisition. Encouraged by the fundamental strength of the company and financial and strategic benefits from the Van Kampen acquisition, our core thesis has not changed and we continue to believe that Invesco will outperform its competitors. Viking is currently net long 2.4% in the Asset Management and Custody Banks sub-industry group, which includes the Invesco long position and short positions in asset managers that we believe will experience deteriorating fundamentals and are more levered towards a declining market."

In terms of other Viking positions, Unilever also remains a high conviction pick for them. Moving down the top 10 positions list, News Corp and Tyco also retain their status as a top holding from Q1 to Q2. In terms of new additions, Viking has moved up the following positions: Adobe, American Tower, Comcast, Goodrich, Oracle, and Sherwin-Williams.

Of those stakes, Viking has increased conviction in their new American Tower (AMT) position. Viking likes the company due to its solid business model with high barriers of entry, pricing power, and strong secular growth. Additionally, the company has compelling operations overseas in numerous growth markets. Of this stake, Halvorsen writes,

"We have owned American Tower in the past and we re-initiated a position this quarter because we believe the market has taken many of these characteristics for granted and is underestimating future growth opportunities both domestically and internationally. Additionally, we believe that American Tower’s shareholder remuneration will accelerate over the next several quarters and that, in light of certain tax incentives, the company may convert to a REIT. We find American Tower to have a superior business model relative to most traditional REITs, yet it trades at a discount to the REIT-average. We believe the combination of predictable growth, accelerating shareholder returns, and pending REIT status will generate greater shareholder interest over the next several quarters causing the stock to trade closer to our price target over time. As of June 30, American Tower was our third largest long position at 4.3% of VGE capital and 4.9% of VLF capital."

We've touched on this industry as a compelling investment numerous times as hedge funds favor wireless tower stocks. Numerous high profile managers have moved in and around AMT. Additionally, we've highlighted how hedge funds are bullish on rival company Crown Castle International (CCI) as well. SBA Communications (SBAC) is the other player in the sector and some funds have moved in and out of stakes there as well.

In addition to these portfolio changes, it's obviously worth noting that Viking has struggled performance-wise this year as their Viking Global Equities portfolio was down 5% in the second quarter. As such, Halvorsen penned quite an explanation as to how Viking will strive to atone for these errors and the solution apparently circles around the idea of increased concentration in their highest conviction picks. As such, Viking has added to numerous positions, many of which we've detailed recently. It will be interesting to see if Viking's increased concentration (and possibly increased volatility) is a recipe for correcting their recent struggles.

We highly recommend reading Viking Global's entire letter on Dealbreaker here.

Goldman Sachs & Hedge Funds Bullish On Tower Stocks

While we don't typically highlight shifts in analyst sentiment, we found some moves out of Goldman Sachs late last week intriguing as they were out positive on tower stocks. They raised price targets on American Tower (AMT) from $52 to $53, on SBA Communications (SBAC) from $40 to $43, and on Crown Castle (CCI) from $42 to $46. While AMT is rated a 'buy,' SBAC in particular is on Goldman's Conviction Buy List.

With their updated coverage, Goldman also added Crown Castle to their Conviction Buy List. They believe that CCI trades at a discount to peers and note that shares have recently underperformed. Goldman also feels that of the tower companies, CCI is the most likely to increase guidance. So, now why did this recent adjustment catch our eye? Well, because plenty of hedge funds own these names, of course!

In our hedge fund portfolio tracking series we've noted that a sizable concentration of long/short equity hedge funds have built up large positions in these various tower companies. Now, before we begin, keep in mind that these funds are set to update their portfolio disclosures with the SEC in the next few weeks so their portfolios could have changed drastically. But for now, we want to focus on the data we have, as this has been a building trend for a few quarters now. Here's what we've found:

John Griffin's Blue Ridge Capital has held shares of Crown Castle for over 3 quarters now. It had previously been their 17th largest US equity holding but most recently CCI was their 6th largest position as they added to their stake in the third quarter of 2009.

David Stemerman's Conatus Capital has previously owned both American Tower and Crown Castle. Their most recent portfolio disclosures show they currently prefer SBAC and CCI (their 17th & 18th largest positions), as they sold out of AMT in favor of those names.

Lee Hobson's Highside Capital Management has owned American Tower (AMT) for at least three quarters now, although it has slipped from their 8th largest holding 3 quarters ago to now their 12th largest holding most recently (SBAC was their 14th largest).

Chase Coleman's Tiger Global has owned American Tower for the past few quarters and it has hovered around their 7th and 10th largest US equity holding. They had last sold some shares when we covered Tiger's portfolio.

Matt Iorio's White Elm Capital had CCI as their third largest US equity holding when we looked at their portfolio via 13F filing and we noted they had also started a new position in SBAC.

Chris Shumway's hedge fund Shumway Capital Partners has been involved with all three in some fashion as they were recently selling out of CCI, reducing their SBAC holdings and starting a new position in AMT which we noticed when looking at their portfolio.


So, quite a few prominent names involved in tower stocks as you can see (and that's not even all of them). Again, keep in mind that this data is set to be refreshed in a few weeks and we could see a completely different story then. However, the fact that many of the above funds have held various tower companies over the past three quarters should say something. We track fundamentally research driven hedge funds with longer-term investment timeframes in hope of finding their next big plays.

We've previously touched on how many of the 'Tiger Cub' funds often hold similar positions in their portfolios and this is no different. (A Tiger Cub is a fund started by someone who was previously involved with legendary hedge fund manager Julian Robertson's Tiger Management). In fact, hedge fund replicator Alphaclone even has a Tiger Cub portfolio that takes the most popular stocks amongst Tiger Cub hedge funds and combines them into a portfolio that outperforms the market by a wide margin. These tower stocks are by far some of their more common holdings.

So, given the recent bullishness out of Goldman Sachs on tower companies, we thought it would be prudent to examine the large hedge fund presence as well. We'll have to see if this theme continues when the new sets of portfolio disclosures come out in a few weeks. As always, we'll cover those in our hedge fund portfolio tracking series.