John Burbank's Sohn London Presentation: Long CF Industries

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Passport Capital's John Burbank who pitched a long of CF Industries (CF).


John Burbank's Sohn London Presentation 2015

Long CF Industries (CF) 

Burbank said that he is generally very bearish on commodities but he likes CF industries for the following reasons.

- They know CF well and have been researching them for at least two year’s.

- CF is the leader in nitrogen fertilizers. The nitrogen fertilizer business is better than the potash business because farmers have to apply it to the soil.

- CF made two good deals in 2015. CF is buying OCI which is listed in the Netherlands. It will give CF a 50% share of the US nitrogen fertilizer business.  Owning a large share of the market will allow CF to charge higher prices. Buying Netherlands based OCI enables a tax inversion which will reduce CF’s tax rate from 35% to between 20-25%. The CF OCI deal should close in mid-2016. The other good deal that CF has done in 2015 is to allow its largest customer, CHS Co-Op, to buy 9% of it shares at $107/ share or $2.8bn. That’s more than double the current stock price. Burbank thinks that CF will use the money to buy back stock. He also believes that analysts have been slow to recognise that the deals will lead to 25% extra product capacity.

- CF is a shareholder friendly company with a long history of share buybacks. Capital returns in dividends and buybacks have been running at 10% per year since 2011. They have reduced the shares by 35% since 2012. Executives are net buyers rather than net sellers of the stock.  Burbank said that CF stock may not do anything for the next four to five months. Then the deals will close, the big buyback will happen and the stock price will go up.

What can go wrong? Burbank thinks that China will devalue. “If China devalues everything in the World will go down in value.” CF’s earnings will get hit too by about 7%. Passport has bought CF against a basket of commodity shorts. They are hedging the downside risk in non-miner, CF, by being short potash miners like Potash Corp (POT), Mosaic (MOS) and Agrium (AGU).

Be sure to check out the rest of the Sohn London Conference presentations.

John Burbank Long CF Industries: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is John Burbank of Passport Capital.  He pitched a long of CF Industries (CF).


John Burbank's Invest For Kids Chicago Presentation

•    Pitching CF Industries (CF).
•    Biggest position for two years.
•    One of the few commodity equities he wanted to be long.
•    Remains bearish on commodities.
•    Located for 30 minutes from Chicago for just for another quarter, did a merger.
•    Stock traded down 30% off the deals.
•    First was a purchase of OCI. 60% of nitrogen fertilizer capacity in USA/5% global market share.
•    USA is the Saudi Arabia of Natural Gas.
•    $2 gas margins over 50%.
•    Went to $70 in early July, ended at $45 by September.
•    CF to exchange $7.4B of stock and assumed debt and cash for OCI NA and European nitrogen/methanol facilities. 2016 close data. Enables a tax inversion.
•    Over-levered copper companies which are going to zero rising 50%, yet stuff like CF dropping doesn’t make sense.
•    HSR approved yesterday and the stock dropped, not understood by the market.
•    By February should be closed.
•    CHS Co-Op – sold a minority stake at a premium. CHS canceled a 3.1BB nitrogen plant. Instead will invest 2.8B in CF for 9% of CF’s pre OCI deal production.
•    Deal values CF equity at ~$107.
•    Combined market cap of $17B. 3-5B of EBITDA post deal.
•    Cash flow from ops after mcapex of $1.8 to 3.2B.
•    Product capacity of 25.1MM short tons.
•    Will use FCF to return to shareholders.
•    Take five years to build capacity so nothing to do with money.
•    CF is not a mining company.
•    Short Mosaic (MOS), Potash (POT), Agrium (AGU), K&S as a hedge. Negative on markets and commodities.
•    Also is long USD.
•    CF is 8th best performing stock over the past ten years behind apple.
•    EPS 5.5-6 dependent upon corn yields.
•    Street doesn’t understand this industry or the OCI deal.
•    Passport has an analyst with a Dow/GE background tracking this. Good edge.
•    CF has returned 11% of its market cap annually to shareholders, bouht back 35% of company since FY12. 2.3% div yield. Will probably buy abck more stock.
•    Sold phosphate biz (not great) to Mosaic.
•    Executives are buyers.
•    Will return $12Bn to shareholders over next four years. Mcap is 17B.
•    Can’t buyback stock now until deal closes.
•    Buybacks based upon flat prices.
•    Thinks commodity prices going down, USA might go into something that feels like a recession. Shouldn’t own most stocks. Want something confident in liquidity and management.
•    Trade long CF / short 2/3 MOS and 1/3 POT as a pair.


Check out the rest of the presentations from Invest For Kids Chicago 2015.

Third Point Reveals CF Industries Position: Q2 Letter

Dan Loeb's hedge fund firm Third Point is out with their Q2 letter to investors.  In it, they reveal a brand new position in CF Industries (CF):


Third Point's CF Industries Thesis

Third Point writes,

"CF Industries is North America’s largest nitrogen fertilizer manufacturer and one of the  lowest-cost producers globally. CF currently trades at an unwarranted discount to  fertilizer and commodity chemical peers. We believe its structural cash flow generation  strength is misunderstood and that management should deliver a much larger dividend to  its shareholders. Such a dividend would highlight the sustainability of its cash flow  generation and lead to a substantial re-rating."

They see CF's ability to tap lower-cost natural gas in North America as an advantage and the spread between CF's production cost and higher cost producers is a nice benefit:

"On today’s  equity value, that would mean CF is currently trading at an 11% free cash flow yield using  these onerous assumptions. Given the low-risk profile of this portion of CF’s cash flow, it  should receive a bond-like multiple (e.g. 7 - 8% yield), which alone implies significant  upside to the current share price."


Sells Gold Position

It's also worth highlighting that Third Point exited its gold position at the beginning of the 2nd quarter at around $1450.  They see it as an asset that will be hurt as real yields rise.

The letter also touches on Third Point's activist stakes in Sony (SNE) and Yahoo (YHOO).  The hedge fund recently sold a chunk of its YHOO stock to the company.

Embedded below is Third Point's Q2 letter to investors




For more recent hedge fund letters, we also posted up excerpts from Viking Global's Q2 letter.

Latest Thoughts From John Burbank & Passport Capital: 3Q Investor Letter

John Burbank's hedge fund firm Passport Capital provides a glimpse as to their overall portfolio positioning in its third quarter letter. Passport's Global Fund has returned 23.1% annualized since inception in August of 2000. At the end of the third quarter, the fund was up 7.9% year to date and the firm manages over $5 billion. Passport's largest net long exposures were in basic materials and consumer. Overall, they ended the third quarter 95% long, 39% short, leaving them with net exposure of 56%.

Top Holdings

At the end of the third quarter, Passport's top ten equity positions represented 33% of their assets under management (AUM). The top 10 holdings are sorted by percentage of net asset value (NAV):

1. Riversdale Mining (RIV): 10% of NAV
2. Microsoft (MSFT): 4%
3. Exxon Mobil (XOM): 4%
4. Las Vegas Sands (LVS): 3%
5. Financial Technologies (FTECH): 2%
6. Tarpon Investimentos (TRPN3): 2%
7. CF Industries (CF): 2%
8. Wendy's Arby's Group (WEN): 2%
9. Labrador Iron Mines (LIM): 2%
10. Jordan Phosphate Mines (JOPH): 2%

Keep in mind that we've also detailed the rest of Passport's portfolio.


Equity Update: Riversdale Mining (RIV.AU)

Given that Riversdale is Passport's largest holding, it makes sense that they singled out a portion of their letter to provide commentary. On Monday, Riversdale said it was in talks with Rio Tinto (RTP), which is offering AUD $15 per share for the company and RIV shares traded north of AUD $16 on the news (around 15% higher than where it was trading prior to the news). So, Passport has already made some nice money on this play and it will be interesting to follow the developments. Overall though, Burbank definitely advocates hard assets.


Physical Gold

Passport also mentions that 8% of the fund's NAV is in physical gold. The hedge fund firm owns 100,000 ounces of the precious metal stored in Zurich. They highlight various purchases by central banks as a bullish indicator. However, they are also partially concerned by the fact that some gold miners have been de-hedging. As a result, Passport delta hedged their entire gold position. For more hedge fund advocates of gold, head to our in-depth post on John Paulson's gold fund as well as David Einhorn's preference of physical gold.


Added Large-Cap Multinational Stocks

During the third quarter, Burbank's firm also bought high quality large cap companies. This is a prevalent theme we've seen in hedge fund portfolios as of late. Regarding this theme, Burbank writes:

"Recently, we have begun adding certain large-cap, multinational stocks to our portfolio. These are the same stocks that we largely avoided for the last ten years. What has changed? For one, many such companies have dividend yields of greater than 3% and "earnings yields" of 6-9%. Compared to "risk-free" 10-year Treasuries (yielding 2.5% at quarter end), these are quite appealing. While these companies' future earnings and dividends are uncertain, we think they are very likely to rise over time given strong franchises (predictable pricing and market share) and meaningful exposures to faster-growing emerging markets. We have sought out companies we believe are characterized by strong management teams, powerful competitive moats, healthy balance sheets, predictable cash flows, and healthy growth prospects."

Companies that they recently added include Exxon Mobil (XOM) and Microsoft (MSFT). Oaktree Capital's Howard Marks has said to buy high quality large-caps as well. And for a specific look at MSFT, T2 Partners' Whitney Tilson has put together his investment thesis on Microsoft.

Embedded below is Passport Capital's third quarter letter to investors:



You can download a .pdf copy here.

For analysis of Passport's US equity longs, head to the new issue of our Hedge Fund Wisdom newsletter. And for more thoughts directly from Passport's founder, head to his presentation from the Value Investing Congress.

John Burbank's Passport Capital Likes Natural Resources (Portfolio & Investor Letter)

John Burbank's hedge fund firm Passport Capital is out with their May performance update and first quarter investor letter. Per the documents, we see that Passport now manages $3 billion and their Global Strategy Fund was up 0.6% for May in a month where the market indices tumbled 8%. Overall, they fared much better than other hedge funds who were down big. Year to date for 2010, Passport is up 5.1%. Since inception, Burbank's fund has returned an impressive 23.6% annualized. Those returns, however, do come with some wild volatility. Passport Global was up 219.7% in 2007 and down 50.9% in 2008. Still though, if you can stomach the ride, the cumulative body of work is hard to argue with. Note that John Burbank will be presenting investment ideas at the upcoming Value Investing Congress and we've secured over a 40% discount for Market Folly readers here.

Turning to Passport's most recent exposure levels, we see they're overall 93% long and -44% short. This gives them 49% net long exposure and it's certainly much higher than what we've seen from other hedge funds. The vast majority of funds have had very low net long exposure. This is even more surprising when you consider that Passport had high exposure yet still managed to generate a positive return in a month where the markets were down severely. Burbank did note that this increase in exposure is not a shift in their market outlook, but rather due to appreciation of their basic materials positions.

Here are John Burbank's top 10 public longs:

1. Riversdale Mining (AU:RIV)
2. Apple Computer (AAPL)
3. Financial Technologies (IS: FTECH)
4. McKesson (MCK)
5. Teva Pharmaceutical (TEVA)
6. Labrador Iron Mines (CN:LIM)
7. CF Industries (CF)
8. Pantaloon (IS:PF)
9. TIG Holding Ltd (BZ:TARP)
10. Jordan Phosphate Mines (JR:JOPH)

As you can see, they have a lot of international exposure and also favor natural resource plays. Of their equity holdings though, two look very familiar: Teva Pharmaceutical and Apple. These two are some of the most widely held stocks amongst hedge funds. Embedded below is the May performance attribution sheet from Passport Capital:



You can download a .pdf copy here.

Additionally, in Burbank's first quarter letter to investors, he hones in on Passport's current strategy: betting on natural resources that China is structurally short. He touches on their thesis for Riversdale, their largest position and one they have owned for three years (traded in Australia). Burbank cites rising merger activity in the sector and rising coking coal prices. Passport owns around 14% of the company.

Turning to their position in Teva Pharmaceutical, Burbank cites increased opportunity in the health care sector due to reform. Passport believes the winners due to these changes will be pharmaceutical players, and diagnostics sectors. They also like pharmaceutical benefit managers (PBMs) and pharmaceutical distributors, thus reflected in their McKesson position. We've seen many other hedge funds bullish on the PBM sector as Andreas Halvorsen's Viking Global bets on Express Scripts (ESRX) and Lee Ainslie's Maverick Capital had been bullish on CVS Caremark (CVS).

Turning back to non-equity positions, keep in mind that Burbank's Passport owns physical gold as well. Embedded below is Passport Capital's first quarter letter to investors and we recommend reading it in its entirety for Burbank's in-depth explanation of some of their natural resource related bets:



You can download a .pdf copy here.

That about wraps up this comprehensive update on one of the more successful macro funds over the last decade. Keep in mind you can receive investment ideas directly from John Burbank and many other prominent hedge fund managers at the upcoming Value Investing Congress (receive a discount here).

John Burbank's Passport Capital Hedges With ETFs, Options: 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is John Burbank's hedge fund firm Passport Capital. Burbank founded the San Francisco hedge fund in 2000 and they use sector specific and macroeconomic analysis to select their investments. Once they have identified potential themes, they'll drill down to find specific companies that can benefit.

Burbank has over a decade of experience in markets having previously worked as a consultant and as a director of research at ValueVest Management. His educational background includes an undergraduate degree from Duke University and an MBA from Stanford University. Passport previously had a track record of gaining 27% annually, but like many other funds had a rough 2008.

Previously, we've detailed a lot of investment resources out of Passport including:

- Passport's rationale for owning physical gold
- Passport's recent Agriculture Fund investor letter
- The hedge fund's case for agriculture

The positions listed below were Passport's long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. All holdings are common stock unless otherwise denoted.


Brand New Positions
iShares S&P 500 (SPY) Puts
iShares Emerging Markets (EEM) Puts
CF Industries (CF) Calls
US Steel (X) Calls
Dr Pepper Snapple (DPS) Calls
Barrick Gold (ABX)
CVS Caremark (CVS)
Materials (XLB) Puts
Terex (TEX) Calls
Barrick Gold (ABX) Calls
UnitedHealth (UNH)
Illumina (ILMN)
Ultrashort Crude Oil (SCO)
News Corp (NWSA)
Boston Scientific (BSX)
Small Cap Bear 3x (TZA)

All the rest of their new positions were each less than 0.5% of reported assets: Ensco (ESV), Tesoro (TSO) Puts, Knight Capital (NITE), Rowan (RDC), Nuvasive (NUVA), CF Industries (CF), Medtronic (MDT), Dollar Tree (DLTR), Knight Capital Group (NITE) Calls, Mosaic (MOS) Calls, National Oilwell Varco (NOV), & Omnivision (OVTI)


Increased Positions
Proshares Ultrashort Real Estate (SRS): Increased by 23,451% (was previously a tiny position)
Perfect World (PWRD): Increased by 971%
iShares S&P 100 (OEF) Puts: Increased by 356%
Onyx Pharma (ONXX) Calls: Increased by 100%
Janus Capital (JNS) Puts: Increased by 100%
US Steel (X): Increased by 78.9%
Discover Financial (DFS) Puts: Increased by 20%
Dr Pepper Snapple (DPS): Increased by 17%


Reduced Positions
Wendys Arbys (WEN): Reduced by 47.4%
Mckesson (MCK): Reduced by 5.23%
Teva Pharma (TEVA): Reduced by 2.3%


Removed Positions (Sold out completely):
Materials (XLB) Puts
PNC Financial (PNC) Puts
Wells Fargo (WFC) Puts
Covidien (COV)
Cephalon (CEPH)
Pfizer (PFE)
Las Vegas Sands (LVS) Calls
Golar LNG (GLNG)
Onyx Pharma (ONXX)
Myriad Genetics (MYGN)
Gilead Sciences (GILD)
Wright Medical (WMGI)
Amag Pharma (AMAG)

The rest of their sold positions were each less than 0.5% of their reported assets: Stryker (SYK), Starent Networks (STAR), Activision Blizzard (ATVI), Momenta (MNTA), Petrohawk (HK), Beazer Homes (BZH), Aeropostale (ARO), Hovnanian (HOV), Sanderson Farms (SAFM), BRF Brasil Foods (PDA), Pride (PDE), Impax Lab (IPXL), Weatherford International (WFT), EHouse (EJ), CKE Restaurants (CKR), & Ship Finc (SFL)


Top 15 Holdings by percentage of assets reported on 13F filing

1. SPDR S&P 500 (SPY) Puts: 15.79%
   
2. iShares S&P 100 (OEF) Puts: 14.4%
3. iShares Emerging Markets (EEM) Puts: 12.23%
   
4. CF Industries (CF) Calls: 8.21%
   
5. US Steel (X) Calls: 5.77%
   
6. Dr Pepper Snapple (DPS): 4.58%
   
7. Onyx Pharma (ONXX) Calls: 2.64%
   
8. US Steel (X): 2.64%
   
9. Dr Pepper Snapple (DPS) Calls: 2.55%
   
10. Barrick Gold (ABX): 1.85%
    
11. Perfect World (PWRD): 1.62%
    
12. Mckesson (MCK): 1.46%
    
13. AK Steel (AKS): 1.29%
    
14. Wendys Arbys (WEN): 1.16%
    
15. CVS Caremark (CVS): 1.15%
    

It appears that John Burbank's hedge fund Passport Capital utilizes exchange traded funds (ETFs) and options for hedging purposes as their top three holdings are all put positions on indexes. This falls directly in line with Goldman Sachs' recent research where they found hedge funds mainly use ETFs as a hedging tool. Additionally, you'll note that they use options to express a lot of their position views as well. Their largest actual equity position is in Dr. Pepper Snapple (DPS) and they additionally own calls on the name as well.

Assets reported on the 13F filing were $2.2 billion this quarter compared to $1.2 billion last quarter, over a 70% increase in exposure which is nothing to sneeze at. (Remember that these filings are not representative of the hedge fund's entire base of AUM). So, the vast majority of their portfolio activity was via completely selling out of some names and starting brand new positions in equities and options.

Passport is definitely focused on the global growth and natural resources themes with positions in steel companies, agriculture plays, and gold plays. Keep in mind that Passport also has many commodities positions that won't show up on the 13F filing, including a large physical gold position. (They've previously outlined their rationale for owning physical gold). Overall, we track Passport to see which sectors they are flocking to and what kind of exposure they have.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, Warren Buffett's portfolio, John Paulson's hedge fund Paulson & Co, Lee Ainslie's Maverick Capital, Dan Loeb's Third Point, Eddie Lampert's RBS Partners, David Ott's Viking Global, and Chris Shumway's hedge fund Shumway Capital Partners, Chase Coleman's Tiger Global, Philip Falcone's Harbinger Capital Partners, Roberto Mignone's Bridger Management, and Thomas Steyer's Farallon Capital. Check back daily for our new updates.