Notes From Value Investing Congress Las Vegas 2013: Day 2

Yesterday we posted up some quick notes from day 1 of the 2013 Value Investing Congress in Las Vegas and today we'll highlight key takeaways from day 2 below:


Whitney Tilson, Kase Capital: AIG, Hertz (HTZ)

He talked about how American International Group (AIG) is still a position he likes as it's still cheap and the company has been streamlined to something much easier to understand and there's been a lot of advancement since the financial crisis and even since last year.  It's around 14% of his portfolio and was his largest position as of last month.  Tilson also likes his long of Berkshire Hathaway (BRK.A / BRK.B) and recently adjusted his intrinsic value figure to just north of $193,000.  Additionally, he mentioned he's started a new position in Hertz (HTZ) and you can read the pitch on Hertz in this newsletter that convinced him.


Guy Gottfried, Rational Investment Group: WPX Energy (WPX)

His pitch was on WPX Energy, a spin-off from Williams Companies last year.  He says it trades at 8x free cashflow and .66x book value.  Gottfried feels it's a very cheap stock for a play on natural gas that doesn't require gas prices to head higher.


Mark Boyar, Boyar Value Group: Weight Watchers (WTW), Dole Foods (DOLE), Western Union (WU)

He thinks we might be in the midst of multiple expansion.  Boyar likes Weight Watchers (WTW) as a play on the weight management industry and notes it's down 50% over the past 12 months.  He also pitched Dole Foods (DOLE) as the company reduced its debt load by selling the packaged foods business.  His third and final pick was Western Union (WU).


Vitaliy Katsenelson, Investment Management Associates: Whistler Blackcomb (WB.TO)

He said that profit growth is slowing down and that the market is actually getting expensive on a P/E basis.  Katsenelson argued that there's no secular bull market, at least not yet.  In the mean time, he likes stocks with solid dividends and says that the vast majority of returns in sideways markets are derived from dividends.  He's the author of The Little Book of Sideways Markets, by the way.  His pick was a high dividend payer (over 7%) in Whistler Blackcomb, the owner of the popular ski resort.  He likes their lower costs due to no property development etc.


Zeke Ashton, Centaur Capital Partners: Fidelity National (FNF), First American (FAF)

He emphasized the importance of learning from mistakes.  While you will encounter your own mistakes as an investor, it's also easy to learn from others' mistakes too.  Ashton argued that emotional mistakes are much more prevalent than analytical ones and so obviously behavioral finance is an important part of investing.  As far as current opportunities in the market go, he's having a hard time finding good ones as so many shares have been bid up.  He's not a big fan of homebuilders but if you want a play on housing, he said to look at the title insurers as a proxy with lower risk.  His picks were Fidelity National (FNF) and First American (FAF).


Joe Altman & Chris Kyriopoulos, COMPOUND Capital: TARP Warrants, Nathan's (NATH)

They launched their fund at a hell of a time: during the financial crisis when Lehman Brothers failed.  These two mentioned that they like TARP warrants, which we'd note has been a hedge fund favorite (especially AIG and BAC warrants, though Compound prefers AIG and COF ones).  They note these are liquid plays that are often underfollowed.  However, their pitch today was Nathan's (NATH), the popular hot dog proprietor.


David Hurwitz, SC Fundamental: Long KISCO, Short Salesforce.com (CRM)

He pitched one long: KISCO in Korea (001940.KRX) and one short: Salesforce.com (CRM).  He says KISCO is much cheaper than CRM.


Chris Mittleman, Mittleman Brothers:  Revlon (REV)

He pitched this as a turnaround story, praising management for a good effort.  Ron Perelman owns a ton of the company and that's partially the reason it's so cheap.  Mittleman likes that it's essentially a recession resistant business.  A solid portion of their revenues come from Walmart.  He also mentioned Carmike Cinemas (CKEC).


Ori Eyal, Emerging Value Capital: Hilan Tech

Eyal talked about the opportunities to invest in Israel, somewhere he specializes in (launching the Emerging Value Israel Fund).  He says the country is stable and pro-business and has a growing economy.  He pitched Hilan Tech, which he dubbed the 'ADP of Israel.'  He says Israeli stocks on the whole are cheap as they've largely traded sideways the past few years.


Harris Kupperman, Mongolia Growth Group: Real Estate

He touched on how there's too many investors out there all doing the exact same thing (i.e. herding).  One place that there certainly aren't many investors involved is Mongolia.  He says the country's GDP will explode 10x over the next decade or so, creating a big opportunity and he recommended real estate there.


For more from this event, head to notes from day 1 of the Value Investing Congress.

Contrafund's Will Danoff Bullish For 2013: What Stocks He Likes

Will Danoff is manager of Fidelity's Contrafund and he recently sat down with Fidelity Viewpoints to share his outlook for 2013.  He's bullish and so we wanted to highlight what stocks he's looking at.


On Why He's Bullish This Year

"I’m bullish. Stocks are relatively cheap, and U.S. companies have become much leaner. Management teams were worried about the environment, so they were conserving cash and allocating capital prudently. M&A activity was down about 20% in 2012. Boards were saying, 'We’re not going for the long ball. We’re going to focus on maintaining lean inventories, low capital spending, and tight expenses.' As a result, companies are nicely profitable and generating a lot of cash.

So looking forward, I’m hopeful that we’re going to have modest top-line growth that will lead to decent earnings-per-share growth, good free-cash-flow yields, and total returns that may be a lot better than what we will see from cash and bonds."

He also went on to say that,

"My guess is a year from now the economy’s going to improve and stocks are going to be a good place to be. I’m bullish. So, I think if you’re in cash, you have to really think hard about it and say, 'How much cash do I really need?'"

This is a concept that's been talked about by many managers, including Bridgewater's Ray Dalio who said cash will move into 'stuff' in 2013.  David Tepper of Appaloosa Management has also been quite bullish.


What Stocks He Likes

Danoff notes that the key to his strategy has been identifying the best companies in each industry.  There's a few themes/industries he likes this year, and they all seem hinged on an economic recovery: housing, manufacturing, and industrials.

In particular, the Contrafund manager says he's finding most opportunities that should benefit from more competitive US manufacturing (companies are moving plants back from overseas).

He also likes US companies with lots of international exposure, like Colgate-Palmolive (CL), Estee Lauder (EL), and Starbucks (SBUX).

In tech, he likes internet plays such as Google (GOOG), Facebook (FB), and Yahoo (YHOO).  He also is bullish on the software as a service trend, fancying the likes of Workday (WDAY), Salesforce.com (CRM), and Concur (CNQR).


On Tech Giants Google (GOOG) & Apple (AAPL)

These two tech giants are some of his fund's largest holdings.

Danoff's take on Google: "The stock has done basically nothing since 2007, but the earnings have roughly doubled, and the company is generating a huge amount of free cash flow—we estimate the stock is producing roughly a 9% free-cash-flow yield. And net of the cash, the stock has been trading around 13 times earnings while core revenues have been growing almost 20% annually. So I have believed that Google could continue to grow and had the potential for P/E (price-to-earning multiple) expansion."

We've also highlighted how Ricky Sandler's hedge fund Eminence Capital has been bullish on Google as well as it's their largest position at around a 9% position for them.

Danoff also notes that AAPL has been a good holding for his fund as the company's been generating a ton of free cash flow.  The problem is that most of it is overseas (and it's a massive amount of money too) and he also pointed out that competition has intensified in the smartphone and tablet markets.  You can read more of Danoff's outlook here.

Zack Buckley Shorts Splunk: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Zack Buckley of Buckley Capital Partners.  His talk was entitled 'Is it 1999 Again?' alluding to the year when tech company valuations were sky high with bad business models

Buckley made a head-turning statement when he said he was long China frauds and visited 50 Chinese companies.  "When I went to China, I was long, when I came back, I was short."  He argued that shorting all the various Chinese frauds is "played out."


Short Splunk (SPLK)

The company monitors web traffic.  Revenue model: one-time fee for use of the software with a maintenance contract. Annual term fees to license the software, based on indexing capacity. IPO at $17, up 90% first day.  Now $36.72, $4.23B market cap, easy to short, P/TTM sales 27x, Trades at 271x street 2015 EBITDA.

Not just a valuation short, it has a business model problem: switching costs are very low for customers, very little patent protection. Not really a Software-as-a-Service (SaaS) business, since they sell a package.

Only 35% of revenue is recurring, still Salesforce.com (CRM) trades at 8x sales, SPLK at 20x.  Lots of competition: SAP, EMC, ORCL. Squeezed by both huge listed competition, and small new VC-backed firms.

Potential price war, competition charges $34k for what they charge $120k for. 90% gross margin business with negative 10% operating margins. Also insiders are selling aggressively, filing a secondary right after they went public. 65 employees, directors, VC funds, CEO, CFO, CTO.  Lock-up ends in 2 weeks, 31M shares, Oct 15th.

Look at what happened at Groupon (GRPN), Zynga (ZNGA). Trades at 27x TTM, unprofitable.  Buyout unlikely, as comps were around 7-8x price/sales.  68% over-valued, could be a $12 stock.

Assumptions for bull case to work: 40% 5 year growth, 29% FCF margins, and 45x multiple.  FCF margins are 1/6 that level now.

Question & Answer

But revenue is doubling every year?  Yes, but the rate of growth is slowing. shorts have been wrong on CRM for a long time, is it the same?  He says if it does grow like that, maybe, but it has very little recurring revenue, whereas CRM has 90% recurring revenue with high switching costs.


Embedded below is Buckley's slideshow presentation from the Value Investing Congress:





Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

Long/Short Equity Investing Panel: Whitney Tilson (CIMA Conference)

Continuing the series of notes from the CIMA Conference (Columbia Investment Management Association), we turn to the long/short equity investing panel with Whitney Tilson of T2 Partners.

Whitney Tilson On Various Longs/Shorts & Lessons Learned

On His Netflix (NFLX) Trade: over 2 years, they’ve broken even. Shorted at 100, covered at 200, felt smart as it went to 300. Wanted to kill themselves as their short thesis played out, got back long on the day in blew up going from 120 to 77 in a day.

Lessons: what they missed on the short side: very dangerous shorting an open-ended situation with a lot of momentum. Both stock and business had momentum, and they didn’t fully appreciate the quality of the business or the momentum the stock has.

Why was he short? Because P/E was 75x, also NFLX needed to invest heavily in streaming content to grow, which would have compressed margins. It happened, should have been more patient before entering the short. Now, balance sheet has tripled in a year, CEO has given up on core business, has bet entire company on the streaming business, with 3B of deals, which is senior to the debt. Stock could be 1000 in 5 years, or zero in 5 years. Each incremental sub is almost pure profit. Good news is they learned the company VERY well and could act very quickly when the stock collapsed. “We didn’t change, the stock price changed.” Every stock in the universe is a long at one price and a short at another price.


On Berkshire Hathaway (BRK.A / BRK.B): 15% position, held continuously for 13 years. Upside, worth 170k, up from 117k. Based on investments 100k per share, then 10x multiple on operating businesses, add it together. Any method you value it, worth at least 150k. Buffett buys it back at book. 8% downside, 50% upside stock. Railroads, housing sensitive business are doing great, insurance business is getting better. What is the bear case? No catalysts. No activists, can’t break it up, no dividend. Cheapness is the only catalyst, and the valuation gap will close. Single biggest area of cheap stocks, they are cheap on risk-adjusted basis.


Tilson on His Short Positions: Says to size your shorts small. Has there ever been a $10B market cap that traded at 10x REV that didn’t collapse?

Lululemon (LULU), Salesforce.com (CRM): good businesses at ridiculous prices

Green Mountain Coffee Roasters (GMCR): OK business, may be chance of fraud of channel stuffing. See David Einhorn's short thesis on GMCR here.

Interoil (IOC): interoil, claims to have found world’s largest natural oil field in Papua New Guinea, they think the value is zero.

Nokia (NOK), Barnes & Noble (BKS): terminal value zero, thinking of adding Research in Motion (RIMM) to the list, waiting for a bounce. Tricky with a lot of cash, doesn’t expect NOK and RIMM to survive in Android business. Bigger, better player can go under- Borders Books failed, BKS will be next. Any time you’ve seen a stock that has moved a lot, and you say, “I missed it.” Instead, stop and do your work, pretend like it never was at a price before. Only thing that matters is where the stock is today and where it’s likely to be in the future.

Two types of shorts: both very tough. Where is it on the life cycle? Broken momentum shorts. Value traps. Best Buy (BBY): value trap, or say it’s trading at 8x FCF?


Q&A Session:

On Hedge Fund Management Fees & Investor Expectations: If you’re having a ballet in an auditorium, that’s fine, as long as you say that outside. If it’s a rock concert, that’s fine too, as long as you’ve labeled it as such. The problem is when you say it’s a ballet and it’s a rock concert. Make investors aware of exactly what your style is. He’s more volatile than the average hedge fund, so they communicate with their clients frequently. Had only single digit redemptions last year, up 12% so far this year. Manages ~$150 million: if he thought cutting fees would get him to $1B, he would do it. The money chases performance regardless of fees anyway. No clever fee arrangement works anyway.


For the rest of the notes from the CIMA Conference, head to these posts:

- Dan Loeb: Lessons He's Learned as an Investor

- David Einhorn Question & Answer Session

- Bruce Berkowitz's Basic Checklist for Investing & What He's Learned

- Distressed Investing Panel (Dan Loeb & Daniel Krueger)

- Bill Miller on What Stocks He Likes Now

- Michael Karsch on Risk Management

- Bruce Greenwald's Market Comments