Notes From the Boston Investment Conference 2012

The first Boston Investment Conference took place earlier this month and today we're posting up some notes from it.  The event benefited the Boston Children's Hospital and featured an impressive list of speakers, moderators, and host committee chairs.

Out of respect for the event organizers, these notes are a little bit different than what we typically post in that the pitches won't be linked to a particular investor.  So unfortunately, you'll have to play a bit of a guessing game here, but we figured something is better than nothing given the quality of the speakers.

List of Speakers/Moderators

Seth Klarman, Baupost Group
Jon Jacobson, Highfields Capital
Richard Perry, Perry Corporation
Will Danoff, Fidelity Contrafund
David Abrams, Abrams Capital Management
Jeffrey Vinik, Vinik Asset Management
Max Stone, D.E. Shaw & Co
Edward Shapiro, PAR Capital Management
Jane Mendillo, Harvard Management Company
Nancy Zimmerman, Bracebridge Capital
Michael Trotsky, MA Pension Reserves Investment Management
David Zervos, Jefferies
Andrew Perold, HighVista Strategies
Lawrence Summers, Harvard University
Eric Doppstadt, The Ford Foundation
Jay Light, Harvard Business School
Andrew Bary, Barron's


Ideas Pitched (Listed in Random Order)

Yahoo! (YHOO)
JAL Japan Airlines (TYO:9201)
Google (GOOG)
Global Eagle Acquisition Corp (EAGL)
Fannie and Freddie preferreds
News Corp (NWSA)
Canadian Natural Resources (CNQ)
JZ Capital Partners (LON:JZCP)


Notes From the Boston Investment Conference

Some of the above stocks were discussed only with one or two comments, but we've posted up notes from some of the detailed pitches below.  Again, unfortunately we can't attribute the ideas to a particular speaker:


Japan Airlines (JAL)

- $8.5b IPO out of bankruptcy, Japanese government sold entire stake (IPO'd around 3,800 Yen and is now around 3,750 Yen)

- Revenues for JAL are about 1/2 of Delta (1/2 of JAL's revenues are from domestic market)

- Changes during bankruptcy: reduced headcount by 35%, decreased salaries by 50%, canceled all debt, eliminated some service on underperforming routes, reduced capacity by 40%, reduced non-fuel expenses by 1/3rd

- Valuation: lowest multiple of any global airline.  JAL around 3.1 EV/EBITDAR, P/E around 6.5

- Headwinds: Orders for 45 Dreamliners.  JAL has already started its non-stop Boston to Japan flight.  Overall market liberalization - competitors can now coordinate on prices and schedules (get the benefits of a merger without having to deal with the operational headaches or merging 2 airlines).  High barriers to entry in the Japanese market: JAL is 37% of market and ANA is 47%, little room for new players

- Largest risk: entry of a low cost carrier into Japanese market: currently low penetration of LCC in Japan.  Not seen as a huge threat because LCCs are typically used for short flights and Japanese tend to take trains for short trips.  Also, there are limited slots for new airlines at the airport closest to the city.  If a LCC flew into the airport farther outside the city, the cost of a taxi or train into the city would negate taking a low cost flight to Japan.


Yahoo! (YHOO)

- Cheap when looking at balance sheet.  Market value of 35% of Yahoo Japan = $7.7, market value of stake in Alibaba = $8.1, preferred shares = $0.8 (these three tax-adjusted equal $11.6b), cash = $9.4, shares out = 1.2 for a value of $17.5 (you are paying close to nothing for $4.3b in revenue or $700m in free cashflow).

- Investor thought Marissa Meyer will be a very good CEO   

- MarketFolly note: Our newly released issue of Hedge Fund Wisdom last week highlighted that David Einhorn's Greenlight Capital and Chase Coleman's Tiger Global both started new positions in YHOO during the third quarter.  Also, recall that Dan Loeb's Third Point has been an activist investor in the name.    


Google (GOOG)

- Cheap stock - trading around where it was in 2007 and EPS has increased from $15 then to $40 now 

- MarketFolly addendum: We previously posted Eminence Capital's thesis on GOOG as well. 


This concludes notes from the Boston Investment Conference.  We've covered a ton of events recently, so be sure to also check out:

- Notes from Sohn London Investment Conference (Hohn, Chanos & more)

- Notes from Invest For Kids Chicago (Mandel, Peltz & more) 

- Notes from Great Investors' Best Ideas (Einhorn, Bass & more)
 

Mark Foley & Tina Larsson's Pendo LLC: International Value Investing

Today we're taking a look at the latest commentary from Tina Larsson and Mark Foley's investment firm, Pendo LLC. Pendo seeks absolute returns (or as they put it, "We don't hug an index") through in-house bottom-up fundamental analysis in order to find undervalued companies outside the United States while remaining agnostic regarding market cap, industry, sector, geography, traditional weightings, etc. As of the end of August, Pendo's International Strategy Fund was -5.34%. Their trailing twelve month return is 8.83%.

In the letter, Larsson and Foley note that despite tumultuous and volatile world markets, they remain quite optimistic about the future of their international investments, and not just for the long term, as they believe their investments will out perform their benchmark indices over the next 6-12 months. While not satisfied with their recent performance, they believe their strategy is now ready to outperform as the global economy improves and they continue to hold businesses that are insulated from the ails of the US market and dollar.

Their portfolio is currently trading at 13.5x trailing earnings, down from an ~18x multiple at the beginning of the year. A PE expansion back to previous multiple would provide a 33% return on its own. They believe this is reasonable considering that the MSCI EAFE benchmark currently only trades at ~20x but has traded at an average PE ratio of ~25.5x real earnings since 1982. Larsson reiterates that they are not market timers, but they remain committed to actively managing their long-term value approach by reducing positions as they become over-valued while increasing positions that become undervalued.

As of August 31st, Pendo International Strategy's top ten holdings are as follows:

1. Sichuan Expressway (China)
2. Tsingtao Brewery (TSGTY)
3. Canadian Natural Resources (CNQ)
4. Hong Kong Exchanges & Clearing (Hong Kong)
5. Philip Morris International (PM)
6. JSE Ltd (South Africa)
7. CEMIG (Brazil)
8. CNOOC (CEO)
9. Anglo American (UK)
10. Silver Wheaton (SLW)


Pendo's Global Value Strategy holds different names and here is their top ten:

1. BM&F Bovespa (Brazil)
2. Deluxe Corp (DLX)
3. McDonald's (MCD)
4. Sanofi-Aventis (France)
5. Vodafone (VOD)
6. Walt Disney (DIS)
7. Canadian Natural Resources (CNQ)
8. Newmont Mining (NEM)
9. Philip Morris International (PM)
10. Leucadia (LUK)

There are some names worth highlighting above because Warren Buffett's Berkshire Hathaway has been fond of Sanofi-Aventis. Additionally, David Einhorn's hedge fund Greenlight Capital has a large position in Vodafone (VOD) and you can see their investment thesis here. In terms of overlap between both of Pendo's portfolios, Philip Morris International (PM) and Canadian Natural Resources (CNQ) are found in both strategies.

The second half of Pendo's letter focuses on recent developments in China where the visiting Premier Wen Jiabao addressed the need for political reform, or more specifically, the need to curtail excessive political control. Such sentiment reassured Larsson that China understands they will have to continue to allow more freedom in the marketplace in order for China’s 30+ years of overall growth and development to continue.

Larsson and Foley feel that centralized planning can work very well in steering a nascent economy towards a more developed, functioning entity. Yet, she also acknowledges that, “in order to fully develop and remain an expanding, dynamic, and innovative powerhouse, free markets must be respected and embraced.” Like China, Brazil is another country that has benefited from starting to separate itself from socialism, as GDP growth is expected to be a robust 7.34% in 2010. Brazil is becoming a global leader through providing financial and technological aid to developing countries, and thus building good will and valuable trading partners (Larsson notes that these developing countries are notably commodity-rich).

Pendo cites a quote from July 17th issue of The Economist to drive home their point: “This aid effort—though it is not called that by the government—has wide implications. Lavishing assistance on Africa helps Brazil compete with China and India for soft-power influence in the developing world. It also garners support for the country’s lonely quest for a permanent seat on the UN Security Council. Since rising powers like Brazil will one day run the world, argues Samuel Pinheiro Guimarães Neto, the [minister for strategic affairs], they can save trouble later by reducing poverty in developing countries now.”

Embedded below is Pendo's latest commentary:



You can download a .pdf copy here.

We almost exclusively cover fundamental bottom-up stockpickers and you can follow our coverage of these hedge funds and their investments here. For more commentary and market analysis, head to our compilation of recent hedge fund investor letters as well.