Jim Chanos Bearish on Quick Service Industry, Pharmacy Benefit Management, Tesla

Short seller Jim Chanos of Kynikos Associates recently sat down with CNBC for an interview.  Here's a summary along with video and the transcript.

On healthcare:  He thinks the new tax bill will cause the healthcare industry to see deflation.  "We've been looking at the rent-seeking companies, companies that we think have existed on the periphery of the healthcare economy that basically have went after these pricing sort of gamesmanship models.  And we think that's over. We think as the pie shrinks, it's going to be tougher and tougher to justify the ability of companies to hike drug prices 1,000% or charge commercial insurers five times what you charge medicare and medicaid in the case of dialysis ... We're still very negative on the PBM (pharmacy benefit management) space, Express Scripts (ESRX) came out and reaffirmed guidance, raise it this morning.  There's not reason for independent PBMs to exist, for example."


On Tesla (TSLA):  He's still short.  He thinks the company's equity is worth zero and other competitors are ahead of them in terms of autonomy for self-driving cars (citing Waymo, Audi, and others).  Says the problem is that the company can just keep raising capital and if that train keeps going then it's an issue.  But he's still very bearish on the company and sees the CEO Elon Musk as a bit of a showman constantly using hype, press releases and product launches. 


On fast food:  "I'd be short pretty much anybody in the quick service industry besides McDonalds.  MCD still calls the tune.  They're the 6 billion pound gorilla, so to speak.  They just went to a new value menu a few weeks ago, which always impacts the industry.  It's a dog fight."

He points to the companies' transition to the asset light model in the space.  He singled out Restaurant Brands (QSR), the owner of Burger King and Tim Hortons, which has been a hedge fund favorite.  He says while these companies are getting higher multiples for running an asset light model, look at how the franchisee is doing because the restaurants themselves still have to perform.  These restaurants are being hit with higher royalty rates and rising costs, so they're starting to struggle. 


On retail:  Chanos said they had a lot of exposure to the "well known shorts" in the retail industry but has covered them so they only have small exposure in that sector right now.  They think it will be a decent Christmas holiday shopping season so he'll probably re-examine them as they bounce into 2018.

Embedded below is Jim Chanos' interview with CNBC:

Video 1:


Video 2:


Video 3:


You can also read the full transcript here.

Glenn Greenberg's Brave Warrior: Long Financials (CNBC Interview)

Glenn Greenberg of Brave Warrior Advisors sat down with CNBC for a rare interview.  Here's some key takeaways:

- He looks to buy stocks that will have around a 10% free cashflow yield 1-2 years from now

- Focused on 2-3 years ahead, less concerned about short-term swings or quarterly volatility. Likes to focus on companies that build wealth.

- Long financial stocks JPMorgan (JPM), Primerica (PRI), and Charles Schwab (SCHW).  "We made a big bet that normal interest rates would not stay at zero.  It was that simple and we didn't know when they would change, but the payoff we felt would be substantial so we have had a lot of financial stocks in our portfolio the last few years."

- On JPM: "They should be earning $8-9 in a couple of years if rates track at the moderate increases that are in the dot plot (of the Federal Reserve)."

- On SCHW: "Amazing franchise" and sees it largely as a bet on interest rates normalizing ... 175 bps now versus 350 bps back in 2007 on client cash positions.

- On Freddie Mac: "Best business model I have ever seen."

- "(Interest) rates could go a lot higher, Inflation could go a lot higher."

- Also owns Airbus (AIR.PA), Express Scripts (ESRX)

- Says Valeant Pharmaceuticals (VRX) was "biggest investment mistake over last 30 years" for him.  But still broke even on it.


If you missed the interview on TV today, it looks like the video replay is behind CNBC's paywall.

What We're Reading ~ Analytical Links 10/23/13

Margin debt hits new high [WSJ]

A dozen things learned from Bill Ruane about investing [25iq]

Look to helicopter Ben for clues to Yellen's Fed [FT]

The biggest emerging market in the world: the US [FT]

Do investment consultants pick future winners? [CBS News]

Sales are colossal, shares are soaring. All Amazon is missing is a profit [NYTimes]

Painful prescription: looking at Express Scripts [CNN Money]

In 5 years, Microsoft will be the most valuable company [BusinessInsider] 

Not already invested in Twitter? Might want to stay on the sidelines [AnObjectiveView]

Why Warren Buffett passed on the Washington Post [Fortune]

Interview with now-Nobel laureate Robert Shiller [WashingtonPost]

Emerging market investors sour on Mexico stocks [WSJ]

On hot chocolate demand and cocoa prices rising [FT]

Death of the American mall and rebirth of public space [The International]

Investing as a hobby [AbnormalReturns]

Buying shares in star athletes [NYTimes]

What We're Reading ~ Analytical Links 10/2/13

Why most investors/traders fail [Reformed Broker]

Red flags flying over Boulder Brands [Herb Greenberg]

The outlook for healthcare stocks [Morningstar]

Blackstone: we're in an epic credit bubble' [CNBC]

Satellite TV providers plan for survival as growth fades [BusinessWeek]

10 stealth economic trends that rule the world today [The Atlantic]

Grounded: Brazil has stalled [Economist]

Interview with Amazon's Jeff Bezos [CNBC]

Aubrey McClendon launches new gas company [CNBC]

How Mohnish Pabrai uses checklist investing [Forbes]

Why Wall Street loves houses again [The Atlantic]

Google unveils major overhaul of its search engine [USA Today]

As J.C. Penney flounders, lack of control evident [Dealbook]

Younger generations' approach to investing [NYTimes]

Delivering Alpha Best Ideas Panel: Mark Kingdon, Chris Hohn, Jim Chanos, Lee Cooperman

The Delivering Alpha Conference today featured a 'best ideas' panel that featured some hedge fund titans including Jim Chanos (Kynikos Associates), Chris Hohn (Children's Investment Fund), Mark Kingdon (Kingdon Capital), and Lee Cooperman (Omega Advisors).  Here's a brief summary of their picks:

Mark Kingdon, Kingdon Capital

Long Japanese automakers: Long Toyota (TM), Long Fuji Heavy (7270.TO) Long Mazda (7261.JP)

He says these companies obviously benefit from Abenomics in Japan.  Toyota he likes as an innovative leader with focus on hybrid technology.  Fuji Heavy (Subaru) is moving from low margin to high margin products.   He says Mazda might have the most upside of the names. 

Chris Cooper-Hohn, Children's Investment Fund

Long Porsche (PAH3.DE) - It's basically a holding company owning 150 million shares of Volkswagen.  If the two merge eventually, the stock doubles.  We've highlighted Hohn's thesis on Porsche before.

Long EADS (EAD.FR) - A liquid large cap with a new focus on making money.  Could double over 2 years. 

Long Aurizon Holdings (AZJ.AU)- Australian railroad, a total turnaround story as the company has transitioned from government-owned to a company more aimed at profit.  He thinks it could double over next 3 years


Lee Cooperman, Omega Advisors

Long Qualcomm (QCOM) - points to a large amount of cash on the balance sheet and a lot of pessimism on the name.

Long Sandridge (SD) - could be a double.

Long Express Scripts (ESRX) - company is growing and buying back stock.  We've also posted up another Cooperman interview recently where he talked about other stocks he likes.


Jim Chanos, Kynikos Associates

Short Caterpillar (CAT) - a bet on China's property development slowdown and he says the company is just exposed to the wrong products at the wrong part of the cycle.  Here's Chanos' pitch on CAT here.

Short Hewlett Packard (HPQ) - he also reiterated his call against the PC, saying it's dying a slow death.  This has been a longstanding short and we've posted up Chanos' thesis on HPQ as he called it a value trap last year.



For more from the Delivering Alpha Conference, head to:

- John Paulson on gold, real estate & merger arbitrage

- Nelson Peltz on PepsiCo & Mondelez

- Larry Robbins & Jacob Gottlieb on healthcare plays

- Carl Icahn on activism 

Lee Cooperman Says Market Fairly Valued, Talks Stocks He's Been Buying (Interview)

Lee Cooperman of hedge fund firm Omega Advisors made an appearance on CNBC today to talk about what he's been buying and what his portfolio looks like.

Cooperman thinks the market is fairly valued right now and that the "Fed will have to remain friendly." He thinks the rest of the year will be determined by which valuation camp wins out.

He thinks a radical change in Fed policy or a recession would cause a drop in the market, but he's not terribly worried about either of those scenarios.

At the same time, he points out how many investors have de-risked drastically and are underinvested.  He says, "what the wise man does in the beginning, the fool does in the end."


Stocks Cooperman Likes

Cooperman mentioned Thomas H Lee Credit (TCRD), a mezzanine lender that yields over 9% and he thinks the dividend goes higher.

We recently posted up excerpts from Omega's Q1 letter if you missed it where he talks about some of his other stock picks.

He likes to buy MLP's when they're trading below net asset value and especially if he can get a decent yield.  He thinks Linn Energy (LINE) has assets worth "in the area of 40."

Cooperman has also sued Tetragon Financial and he believes management should be barred from the industry due to 6 years of bad governance in his opinion and possibly unlawful acts.  He still thinks the stock is undervalued (he owns 14 million shares of it and he started buying in 2009 back during the financial crisis).  In sum, he feels it's solely a management problem.

The Omega Advisors man also talked about Sprint (S), saying he bought it at $2 and then again at $7 and likes that there were 2 interested parties in the company (Softbank and Dish Network), but it looks like.  He said he'll tender 80% of his position, but if it trades at the right price, he'll get back into that chunk of his position.

Cooperman has owned Dish (DISH) for six years and he said it's a mature business and he thinks it'd be worth more with Sprint than without it.  He likes management there.

The hedge fund manager noted that he's "very bottom-up" and some things Omega has been buying recently include Express Scripts (ESRX), Halliburton (HAL), Transocean (RIG), Qualcomm (QCOM), Motorola Solutions (MSI). Sandridge (SD), and Chimera (CIM).


Embedded below is the video of Cooperman's 18-minute interview:



For more on this manager, check out Lee Cooperman's thesis on Covidien (COV) and Sirius XM Radio (SIRI).

Lee Cooperman at the Skybridge Alternatives Conference (SALT 2013): Stockpicks & Market Thoughts

We wanted to highlight some notes from the Skybridge Alternative Conference, a.k.a. SALT 2013 taking place in Vegas this week.  Lee Cooperman of Omega Advisors gave his thoughts on the market and some of his holdings.


Market Thoughts From Cooperman

Cooperman says the market might be a little ahead of itself, the economy is limping along.  He doesn't see a reason for the market to decline a lot and says the only two ways that would happen is 1. a recession and 2. the market getting too frothy and the Fed removing quantitative easing.

The Omega Advisors man argued that the economic cycle could be longer than usual and also noted that many investors have de-risked since the financial crisis.  That said, he feels the market is ahead of the fundamentals.


Cooperman's Stock Picks

When asked where he would put new money to work today, he said he'd look to add to existing positions in his portfolio and singled out Monitise in the UK.  We highlighted Cooperman's Monitise stake before as it's a mobile wallet platform.

He also revealed he's been buying an engineering and construction firm Technip, involved in LNG platforms and after exiting Apple earlier, he's dipped back in around the low $400's in a "small size" position.

The Omega founder was asked about housing plays and noted he's missed the homebuilder trade, but has exposure via proxies like Ocwen Financial (OCN) and Altisource Portfolio Solutions (ASPS).  This week at the Ira Sohn Conference, Steve Eisman pitched OCN as a long.

Cooperman also touched on some other of his holdings that are trading below book value that he thinks are attractive:  American International Group (AIG), MetLife (MET), and Citigroup (C).

Omega also owns Facebook (FB) and they think people are underestimating the mobility opportunity and can achieve a much higher multiple.

At the SALT Conference, Cooperman was on the best ideas panel as well and said he likes Express Scripts (ESRX), the pharmacy benefit management company and Transocean (RIG), the deepwater driller.

Embedded below is a clip of Cooperman on CNBC from the SALT conference:



Lee Cooperman was named as one of the top 10 highest paid hedge fund managers of 2012.

Lee Cooperman Says Market is Fairly Valued, Talks Some of His Positions

Lee Cooperman, founder of hedge fund Omega Advisors sat down with CNBC this morning to share his thoughts on the market.

Is the Market Fairly Valued?

"Bernanke's told us everyday since 2009 that he wants higher inflation, more economic growth, lower unemployment,  he wants to create high stock prices to create wealth, to create consumption ... you have to ask yourself as a money manager: has he gotten the market to a zone of overvaluation?"

Cooperman thinks the market is now fairly valued and he thinks every bull market ends at overvaluation.  He concluded that, "So the market's still ok, but it's not a bargain anymore."


On Stocks With Yield

He says he has around 90 holdings and touched on  how investors are looking for yield, so he highlighted some of his positions that fit this mold:

- KKR Financial (KFN): 7.4% yield, growing 5% a year
- Chimera (CIM): accounting issues that he thinks will be resolved this year
- Atlas Pipeline (APL): 7% yield, growing
- Linn Energy (LINE): good yield and growing
- Transcoean (RIG): 4.2% yield and notes Carl Icahn's presence in the name as well

He made an interesting comment on yield as well, saying: "Almost half the S&P 500 right now yield more than bonds."


Growth Stocks He Likes

Cooperman also rattled off some of the stocks he likes that fit under the growth category:  Express Scripts (ESRX), Google (GOOG), and Qualcomm (QCOM).


On Short Selling

Cooperman was asked about Herbalife (HLF) and short selling in general.  He does not have a position in the company but made these comments about shorting: "It's not a wise thing to publicize your short position, and I would not publicize being short 20% of a company."

He also went on to say: "I have no problem with short selling, I think short selling adds some discipline to the market.


Embedded below are the videos of Cooperman's interview:

Video 1


Video 2



Video 3


We've published the rest of Omega's portfolio in the new issue of our Hedge Fund Wisdom newsletter.

Delivering Alpha Best Ideas Panel: Cooperman, Chanos, Feldstein & More

CNBC and Institutional Investor's Delivering Alpha Conference is going on today and we wanted to aggregate the highlights.  The "best ideas" panel included Omega Advisors' Leon Cooperman, Kynikos Associates' Jim Chanos, BlueMountain Capital's Andrew Feldstein, Queen Anne's Gate Capital's Kathleen Kelley, and BlackRock's Robert Kapito.

From the conference, we've also posted up the global opportunities panel as well as the chasing yield panel.


Leon Cooperman (Omega Advisors):  He pitched going long US stocks and called them the best house in the financial neighborhood, a tune he has been singing for well over a year.  However, he did make an excellent point that the maximum "pain trade" is going higher as tons of people are sitting on large sums of cash earning nothing. 

As for specific names he likes: Capital One (COF), Express Scripts (ESRX), Halliburton (HAL), Gannett (GCI), Kinder Morgan (KMI), MetLife (MET), Qualcomm (QCOM), Watson Pharma (WPI) and Western Union (WU).  He also likes AIA Group (1299.HK) traded in Hong Kong.

The Omega Advisors founder also continued to bash bonds, saying "buying US bonds right now is like walking in front of a steam roller and picking up dimes.  It's just not a good policy."

As far as the election goes, he thinks that if Romney wins, the market will spike by 150 points, but if Obama wins, it drifts lower. For more from the Omega man, we just posted up Leon Cooperman on 14 attributes that make a good portfolio manager.


Jim Chanos (Kynikos Associates):  The noted short-seller was out again negative on tech companies.  He mainly pitched the bear case on Hewlett Packard (HPQ), calling it a value trap.  We just recently highlighted Chanos' presentation on global value traps where HPQ was highlighted among other names.

He says that "when you lose the paradigm shift, you spend an awful lot of money defending what you have."  He compared HPQ to Eastman Kodak as the company is in declining businesses.

Chanos also touched on how instead of giving cash back to shareholders, companies will make value-destroying acquisitions.  He cited HPQ's buy of Autonomy last year.  The Kynikos man argues that HPQ has overspent on acquisitions and they're hiding research & development expenditures through them.

He's also negative on Dell (DELL) saying that the company finances its subprime customers (financing their revenue growth).  For more on Chanos we just recently posted up his thoughts on the psychology of short selling.


Andrew Feldstein (BlueMountain Capital):  He likes less liquid credit, angling for 8-12% returns over a 3-7 year time horizon.  He says you have to be patient as this opportunity is available due to everyone's obsession with liquidity (i.e. don't put your money here if you don't have an appropriate time horizon).  He mentioned bonds such as Prospect Medical if you can buy and hold.  Feldstein also mentioned he's less excited about legacy distressed assets in Europe.


Kathleen Kelley (Queen Anne's Gate Capital):  Formerly of Tudor and Kingdon, she pitched two ideas: short the British pound (against long US dollar) as well as short platinum, targeting 20-30% moves to the downside.  She wants to be long the USD against the sterling because the USD can be a commodity currency.

She also likes shorting platinum as there's an oversupply due to slowing Euro auto sales.  At the Ira Sohn conference two months ago, Ospraie's Dwight Anderson pitched going short platinum as well (in addition to going long palladium).


Robert Kapito (BlackRock):  He's going for the "income hog" approach by focusing on equity dividend funds, dividend stocks like AT&T (T), Verizon (VZ), Merck (MRK), Johnson & Johnson (JNJ), high yield bond funds (or individual issues from Sprint, Ally) and municipal bonds such as the San Francisco Airport, New Jersey Tolls.  He thinks that default worry surrounding munis is "overrated."


Sources: Notes sent by readers, II's blog, @iimag,  @ldelevingne, @footnoted, @aarontask

For more from Delivering Alpha, head to the global opportunities panel (featuring Richard Perry) as well as the hunt for yield panel (featuring Marc Lasry)

Goldman Sachs VIP List: Most Important Stocks To Hedge Funds: Q1 2012

Goldman Sachs is out with its Q1 2012 Hedge Fund Trend Monitor report.  In it, they reveal the latest VIP list of 50 stocks that are most important to hedge funds.  These are the positions that appear most frequently in the top 10 holdings of fundamental focused hedge funds.

This quarter, they've also released a new list of very important short positions to hedge funds which we've posted up as well.

Goldman's VIP list of the most important holdings is accessible on Bloomberg via < GSTHHVIP >.  It has "outperformed the S&P 500 by 55 bp on a quarterly basis since 2001."

Goldman Sachs VIP List (Q1 2012)

Stock: Number of funds with stock as top 10 holding

1. Apple (AAPL): 106
2. Google (GOOG): 73
3. Express Scripts (ESRX): 56
4. Microsoft (MSFT): 46
5. Qualcomm (QCOM): 38
6. Citigroup (C): 31
7. General Motors (GM): 29
8. Priceline.com (PCLN): 29
9. JPMorgan Chase (JPM): 27
10. Liberty Media (LMCA): 26
11. Delphi Automotive (DLPH): 24
12. BP (BP): 23
13. Pfizer (PFE): 23
14. Tyco (TYC): 22
15. Visa (V): 21
16. Yahoo (YHOO): 21
17. LyondellBasell (LYB): 20
18. Anadarko Petroleum (APC): 19
19. Bank of America (BAC): 17
20. Ford Motor (F): 17
21. WellPoint (WLP): 17
22. American International Group (AIG): 16
23. Charter Communications (CHTR): 16
24. eBay (EBAY): 16
25. Rock-Tenn (RKT): 16


It's no surprise that Apple (AAPL) is the most widely owned top position amongst fundamental hedge funds.  But despite that, Greenlight Capital's David Einhorn argued hedge funds actually have less than 2% of assets in his Ira Sohn conference presentation.  We've also posted Dan Loeb's thesis on AAPL as he was a big buyer of shares.

Both Tyco and Priceline were featured in the equity analysis section of our Q4 2011 Hedge Fund Wisdom newsletter due to heavy ownership by top funds.  TYC is an event-driven play while PCLN is a huge growth and international play.


Here's the rest of Goldman's VIP list:

26. Seagate Technology (STX): 16
27. Berkshire Hathaway (BRK.B): 15
28. Cisco Systems (CSCO): 15
29. Equinix (EQIX): 15
30. Hertz Global (HTZ): 15
31. Liberty Interactive (LINTA): 15
32. Pioneer Natural Resources (PXD): 15
33. Visteon (VC): 15
34. Valeant Pharmaceuticals (VRX): 15
35. Wells Fargo (WFC): 15
36. Baidu (BIDU): 14
37. Dollar Thrifty (DTG): 14
38. Hess (HES): 14
39. Mastercard (MA): 14
40. News Corp (NWSA): 14
41. Williams Companies (WMB): 14
42. Barrick Gold (ABX): 13
43. CIT Group (CIT): 13
44. Capital One (COF): 13
45. Calpine (CPN): 13
46. Devon Energy (DVN): 13
47. EMC (EMC): 13
48. Hewlett Packard (HPQ): 13
49. Illumina (ILMN): 13
50. Salesforce.com (CRM): 12

Of the above, we've previously highlighted why Passport Capital likes LINTA.  And in the brand new issue of our Hedge Fund Wisdom newsletter, we've analyzed Equinix (EQIX), a big new position by Philippe Laffont's Coatue Management and John Thaler's JAT Capital.

Some of the stocks on the list are brand new additions as enough hedge funds boosted their positions in Q1: ABX, AIG, BRK.B, COF, CPN, CRM, DVN, EBAY, EMC, EQIX, F, HES, HTZ, ILMN, RKT, WLP.


Be sure to also check out Goldman's brand new list of hedge fund very important short positions.

Dan Loeb's Investment Thesis on Apple & Portuguese Sovereign Bonds: Q1 Letter

Dan Loeb's hedge fund Third Point is out with its Q1 letter to investors.  In it, they reveal their investment thesis on Apple, Portuguese Sovereign Bonds, Express Scripts, and more.


Loeb's Thesis on Apple

A few months ago, we flagged when Third Point bought Apple (AAPL) and now we see the rationale for why they did so: capital return. While AAPL announced its dividend and buyback ahead of Third Point's expected timetable, they also like the company for two other reasons.

They bought shares at $445.  On valuation, they write: "Currently, Apple is trading at 13.4x CY2012 EPS of $45, and 11.6x CY2013 EPS of $52 ... Adjusting for cash, Apple's valuation drops to 11.1x CY2012 EPS and 9.6x C2013, leaving it inexpensive relative to the S&P 500."

Loeb's hedge fund also points to growth in China and the "halo 2.0" effect as key drivers of future success:  "In order to sustain its success, Apple will need to drive its ecosystem experience outside of the US, with multiple devices, content libraries and cloud services.  China's enthusiasm for Apple's products and brand is exciting, but investors will need to see whether Apple can establish the ecosystem the way it has in the U.S."
 

Third Point's Rationale on Portuguese Sovereign Bonds

We previously highlighted Third Point's new position in Portuguese sovereign bonds a month ago and now the hedge fund provides some color on their position.  They classify it as a classic "forced selling" situation which they like to take advantage of.

They write, "While we have studied Portugal since last year, it was not until the country's February downgrade to junk by all three rating agencies that we found a truly asymmetric investment opportunity.  Many investors liquidated their holdings after the downgrade, causing bonds to decline from the high 50s to the low 40s.  Following the playbook that has generated numerous successful investments for Third Point we provided liquidity to sellers when others would not."


On Express Scripts (ESRX) Post Medco Merger

Third Point played the risk arbitrage in the merger between Express Scripts (ESRX) and Medco Health.  Post merger, they find the combined entity attractive, writing: "Based on our analysis of the combined MHS/ESRX entity, we believe that Express Scripts remains an attractive investment candidate, combining 15+% EPS growth, the opportunity for accelerated synergy realization, and a reasonable forward PE multiple (13 x 2013 EPS)."


On Their Mortgage Portfolio

The hedge fund writes, "Third Point's mortgage portfolio has remained fairly consistent for the past 6-12 months.  We continue to own Alt-A Re-Remic mezzanine bonds, "seasoned" subprime bonds, and CMBS mezzanine bonds.  We have recently repurchased some Alt-A floating rate bonds which we previously owned in 2009."


Embedded below is Third Point's Q1 letter to investors:




For more on this fund, we just recently posted up Third Point's latest exposures as well as Loeb's comments at a distressed investing panel.

David Einhorn's Extensive Q&A Session from the CIMA Conference

Continuing the series of notes from the CIMA conference (Columbia Investment Management Association), we move on to the portion with Greenlight Capital's David Einhorn. He did his entire session in question and answer format.

David Einhorn's Q&A Session (CIMA Conference)

1. How do you look for ideas on a day-to-day basis? No method for doing it. We are looking for situations where we think something is mispriced. We start with a story, a thesis of why it’s misvalued. There is no systematic way to do this; it’s like going to a bookstore to browse for books. We don’t start with “is it cheap?” That’s easy to find on the computer, but we view cheap as secondary situation. Our goal is weed out as many things as fast as we can.

Example? Process is lack of a process. Sometimes an analyst generates the idea, sometimes other fund managers, a conference, or an idea dinner. Market Folly note: you can also get a good look at Einhorn in action in his book: Fooling Some of the People All of the Time. Be sure to also check out Einhorn's recommended reading list.


2. Once you have an idea, what is your edge? We want to find out what the misunderstanding is. Sometimes it’s a conspiracy to misinform people. Wall Street has this agenda. We like to identify something in which the public has been misinformed. How do you know you’re right? That’s what the work is. We find out what everyone thinks, and then what we think, and then we test it. What we need to know to convince ourselves that we understand it. Fairly informal process, not a firm checklist.


3. Where do you see the most promise today- an example? Long first: large position in AAPL. What could we possibly figure out that not every other person on the planet could figure out? Come to the view that large cap stocks have the same efficiencies as small cap stocks if you take a step back. Compare to KO a decade ago, selling bottlers to make earnings, and it was a high multiple stock. We didn’t short it because, we thought, “What could we possibly know about coke?” KO then declined like crazy- we realized we were making a big mistake by ignoring large companies with large inefficiencies.

What is the inefficiency at AAPL? It trades at a low multiple because people have seen the history of hardware companies, such as the Motorola RAZR, which has been learned. Issue with AAPL is it started with the iPod, got all your music. Now you have the music on your iPhone. TV, iPad, photos. Once you have an Apple device, you buy a second. You become an “Apple customer.” You’re not going to choose your next phone by it being 5% better than the iPhone5. Most people will just go buy the new iPhone5. It’s not a one-time hardware sale; you need a new one every 2 years. They simply wear out, it’s not just to get better phone. Market thinks it’s a hardware company that could lose its edge. Instead, it’s a growth, recurring revenue business that the market has refused to award it. The majority of market practitioners misunderstand it. Bought at 60, sold at 80. Watched, watched, and bought back at 240.


4. More on AAPL: TVs with low margins. Answer: (Note that AAPL shares have jumped 25% since he made these comments) At this valuation, you are not paying for TV at all. You’re not even paying for the current business. $390 per share for business ex cash, earn $45, getting it at 8x p/e. Grew rev at 70% last year, still penetrating the world on early stage iPads, geographically still penetrating for iPhone, especially in China. Even on a bad day, that multiple should be more than a premium of the market. Best company on the market, and trading for half the market premium. Room for value destruction at this price. Never done big acquisitions, R&D expenditure is tight, CAPEX is smart. On TVs: they’ll have to revolutionize the TV like they have the iPhone. Otherwise, they won’t do it. The cable companies might even subsidize the TV. But you don’t have to be right about the TV to make money on the stock.


5. Risk/position sizing? He doesn’t believe in any of the quantitative measures of risk- instead the common sense of risk- how much can you lose? How quickly can you get out of a position? Never bet the whole firm on one position. Large long position is small double digits. Short position smaller, because of upside risk.


6. On poker: skills are somewhat related, you have some information you can see for sure, and some you can deduce, and then you have the future which is a range of possible outcomes. You try to optimize it based on all these factors. In the past, we've highlighted the growing number of hedge fund managers that play poker.


7. Japan- still in trouble, out of the money options are mispriced because people pricing them are using VAR, which is fundamentally flawed.


8. Gold: how do you value it? He is long a lot of gold, has been for a few years, since the financial crisis. Moved all the problems from the private sector to the public sector, which will have an effect on the currency. Gold is money; you don’t value it for its use as a productive commodity. This money only grows at 1-2% per year and the other kind of money changes whenever the central banks decide they need to lend the banks a trillion euros. Policies being pursued now are fraught with risk. Makes sense to have a fraction of your assets that is not exposed to the consequences of their decisions.

Einhorn originally bought physical gold in 2009. Since then, he's also bought gold miners.


9. Emerging Markets? Don’t invest in emerging markets; not comfortable with accounting, risks.


10. Walgreens? Thought about being long WAG, due to fight with ESRX. Idea is they will make up eventually and the stock will pop higher. First, figured out they can’t get any edge on whether they work it out or not. Now they think that since WAG customers can’t use ESRX, it is already a permanent loss for WAG because they may change already. Compromise will still be a lower price per prescription, so everyone else will want the same deal as ESRX gets with WAG. Caremark could demand the same deal since ESRX did. Believe it will be a more sustained, permanent impairment of earnings.


11. Why doesn’t Android win? AAPL has high switching costs. They don’t have a lifetime guaranteed annuity, what they have is a happy, loyal customer. Most of the time these types of franchises have 20-30x multiples, but it’s being priced as a deteriorating business, which it’s not.


12. Fed Balance Sheet: He can’t figure out what the implications of the increased fed balance sheet means, and he doesn’t need to for holding his longs. We’re not going to know what could go wrong, it’s almost certain to be something we don’t think it will be. The fed chairman is a “fanatic” who is living out his academic thesis. We could have a real problem on the way out.


13. New York Mets: of all of his investments, he thought for sure this was the most certain to be negative risk-adjusted return, which made it so irritating that he couldn’t do it.


14. Research in Motion (RIMM): has problems, but could be an interesting long (Einhorn established a new long position in RIMM in Q4 2011). Critical mass for app developers, and they may have missed it. Has a good B/S, trades at a low multiple, and has some IP that a lot of tech companies would want. Trades on a run-off basis, it’s a reasonable speculation that it won’t melt. Not a fantastic investment, but the price has come down so far, that it makes no sense to short it.


15. Shorting GMCR and being public about it - do you have confidence in the SEC? He has no confidence in the SEC. There are about 20 or 30 ways he can win on the GMCR short, but SEC is not on the top of the list. Accounting practices are rather blatant and obvious that the SEC should do something about it, but they don’t look likely to do anything.

If you haven't seen it yet, you can view Einhorn's short case on Green Mountain Coffee Roasters (GMCR).


16. Time arbitrage: he thinks their time horizons of 1-3 years is longer than most market active participants. Most hedge funds under 6 months, long only 6-12 months. Don’t want to hold things that could be in half before it works. But don’t say “dead money” because it could move when you least expect it.

MF note: Blue Ridge Capital's John Griffin has often classified investments as time arbitrage or catalyst driven. Joel Greenblatt's Gotham Capital also utilizes time arbitrage as part of its investment strategy.


17. Long DELL: AAPL is much better than DELL, but DELL has been a great business innovator. They were lousy capital allocators, bought back stock at 40-50x earnings. Then once the stock collapsed, they bought businesses at high multiples instead. In the middle of 2011, they woke up and started buying back stock cheap. They haven’t made any bad acquisitions lately either. $15 stock, $7 per share, $2 EPS, getting stock at 4x P/E even if they’re not growing fast. If they use part of the $7 to buy back stock, you could win. Misunderstanding is at least half of their business is not PCs or notebooks. If you put 8x p/e on other stuff, you get the PC business for free. You can see further thoughts on DELL in Einhorn's investor letter.


18. Industries he won’t touch? He learned to never say never. Six months before he bought gold, he said never to buy gold. His mind can change at times. Betting on outcome of clinical trials is very challenging, and he has no expertise. But he still won’t rule it out. He never would have a large allocation in technology 11 years ago. Time and place for everything just recognize which areas are harder for you.


19. Economics is not a science, it’s an art. He’s very critical of it, people make some very bad conclusions that have had awful consequences for our society. Winning Nobel prizes, but enacting their views as if their science instead of art, have had huge negative consequences.


20. Online gaming? He has no idea how it will sort out. If it opens up, it will be very competitive.


21. St. Joe (JOE): concept stock runs into a math problem. You know exactly what the values are today, because you have transactions and you know what the value is. They can’t create value through actively managing. All they can do is reduce the amount of value that’s being destroyed every day. Land worth $7, stock worth $14. not levered, but it’s also good that it can’t rocket up either. Only way it works is if they discover oil, and his diligence says they’ve already looked.

If you haven't seen it, check out Einhorn's short thesis on JOE.


22. Commodities business? Very hard- need to figure out the normal price of the company, and see if the business is value added or subtractive, and then see if the business is cheap. So when the prices swing quick, you can get hurt badly. You need to have an insight on which way the commodity price will go.


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

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

- Distressed Investing Panel (Dan Loeb & Daniel Krueger)

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

- Long/Short Equity Investing Panel: Whitney Tilson

- Bill Miller on What Stocks He Likes Now

- Michael Karsch on Risk Management

- Bruce Greenwald's Market Comments

Lone Pine Capital's Current Investment Themes

Today we're covering the current investment themes from Steve Mandel's hedge fund Lone Pine Capital.


*Update: excerpt removed per request by representatives of Lone Pine


In more recent portfolio activity, we've detailed how Lone Pine nearly doubled its SolarWinds (SWI) stake and has been buying the dip in VanceInfo Technologies (VIT).

Free Sample of Our Hedge Fund Wisdom Newsletter

Here's your chance to see a full past issue of MarketFolly's premium newsletter, Hedge Fund Wisdom. Hopefully this gives you an idea as to the high quality research and in-depth nature of the newsletter.

The free sample issue includes quick investment thesis pitches on Sirius XM Radio (SIRI), Express Scripts (ESRX), Alcon (has since been bought out), and Cisco Systems (CSCO).

It also features in-depth analysis of Aon (AON) and CareFusion (CFN). And of course, it highlights the portfolios of 25 top hedge funds.


Click here to download a free .pdf sample of Hedge Fund Wisdom.


The sample is also embedded on the website below:




The above download is a past issue. Our brand new 91-page issue was just released! If you like what you see, make sure to take advantage of our low introductory pricing before prices go up on June 30th. Save 33% instantly by clicking here.

Notes From Invest For Kids Conference: Ackman, Robbins, Whitney, Zell

The Invest For Kids Conference took place last week in Chicago and was a resounding success, raising over $1 million to benefit local children. We wanted to post up a quick summary of the event, including in-depth notes below from the prominent hedge fund managers that presented. Speakers included Bill Ackman (Pershing Square), Larry Robbins (Glenview Capital), Meredith Whitney, and more. Here are some of their latest investment recommendations:

Bill Ackman of Pershing Square Capital Management: Instead of doling out equity specific investment advice, Ackman instead turned to real estate. At the conference, he proclaimed his bullishness on the housing market and said to buy single family homes, citing home affordability at its highest level in many years. The low interest rate environment obviously helps this but he cautions rates won't stay low for long. This is the same recommendation as John Paulson who said to buy housing recently as well. Stay tuned next week as we'll examine Ackman's latest portfolio in our newsletter, Hedge Fund Wisdom. For our recent posts on the manager, head to Ackman's potential thesis on JC Penney (JCP).

Meredith Whitney of Whitney Advisory Group: Whitney harped on the issues found on the state and local government level regarding their fiscal problems. In short, she feels that municipalities are in trouble, especially New Jersey, Illinois, Massachusetts, and Michigan.

William Browder of Hermitage Capital: Browder focused on emerging markets and an inflationary environment. As such, he tossed out Koza Gold as an idea, a miner in Turkey. He cites their cheap valuation and cheap production costs at $320 an ounce. He also recommended Renhe Commercial Holdings, a shopping mall developer in China.

Larry Robbins of Glenview Capital: Robbins has been presenting the case for McKesson (MCK), Express Scripts (ESRX), and Life Technologies (LIFE) as of late. This conference was no different as he again pointed out the attractiveness of each investment. ESRX is well positioned for the generic drug boom in 2012 and Robbins likes their $6 billion in cash. He fancies LIFE due to its valuation and thinks the company should buyback shares. MCK is attractive due to the company's use of cash to accelerate EPS growth. He also cautioned about mortgage put-backs and appears to be short two banks with high exposure there. Head to our Hedge Fund Wisdom newsletter to view the rest of Glenview's portfolio. We also recently detailed how Glenview increased its position in Punch Taverns.

Joshua Friedman of Canyon Partners: Friedman's suggestion was to play the Lehman Brothers bankruptcy but cautions that it's a complex situation, to say the least. More detailed thoughts are found below.

John W. Rogers of Ariel Investments: Rogers offered three ideas: CBS (CBS), Viacom (VIA), and Gannett (GCI), the last of which he likes the best. He believes a natural move for CBS would be to go private later on as Sumner Redston ages. He also believes Redstone could push VIA private as well. Of the two, Rogers says VIA is cheaper and has solid upside. On GCI, Rogers argues that despite the unpopular print media business, he has been buying on the way down. In a sense, this is an economic recovery play as ad sales pick up.

Doug Silverman of Senator Investment Group: Possibly the most telling information from Silverman's presentation was the fact that they had previously focused on credit the past few years but are now focused on value equities. In terms of specific recommendations, Senator likes rental car companies at present. He referenced the bidding war for Dollar Thrifty (DTG) and sees consolidation in the space. Senator owns 6% of Avis Budget (CAR) and then a lot of Hertz (HTZ) shares as well. You can read his detailed thoughts below.


Numerous other speakers presented at the Invest For Kids Conference and we highly recommend reading the full set of notes attached. Embedded below are the notes, courtesy of Simoleon Sense:



You can download a .pdf copy here.

Overall the second annual conference was a resounding success, raising over $1 million to benefit local children. And, the various hedge fund managers that spoke presented some interesting investment ideas.

Consensus Versus Variant Perception in the Markets: East Coast's Q2 Letter

We're pleased to present the second quarter 2010 commentary from East Coast Asset Management. The letter, penned by Chief Investment Officer Christopher Begg, touches on a number of intriguing and hotly debated topics, including inflation. Some of you will recall that we featured some past commentary from East Coast where they examined the deflation-reflation continuum.

East Coast is decisively in the inflationist camp. They believe that central banks armed with printing presses can only lead to one outcome. Their portfolio is positioned to mitigate the effects of any tail risk events such as hyperinflation, a bond bubble, a spike in interest rates, paper currency debasement, and a double dip recession. You'll recall that Baupost Group's Seth Klarman has also protected his portfolio from tail risk events as a form of cheap insurance.

Summarizing East Coast's stance, Begg writes, "The greatest opportunities to compound capital come from periods where dislocations are being driven more by 'what ifs' than the 'what is'. Fundamentals trump hypotheticals and facts weigh heavier than emotions."

Maybe the most intriguing aspect of their commentary though is the list of consensus views they've compiled. They've outlined 10 areas where there are currently consensus views in the market; areas where East Coast has strafed away from the crowd and into an opportunity with a perceived edge. They see these variant opportunities as a means to mitigate risk away from the consensus. This is a topic we've very briefly touched on in our piece where we examined the hedge fund herd mentality.

Below is East Coast Asset Management's list of 10 consensus views and their corresponding variant perception:

1. Consensus: Everyone is a macro-economist. Variant Perception: Fundamental/value investing and focusing on micro themes is the key.

2. Consensus: Binary extreme outcomes of inflation/deflation. Variant Perception: Individual investment merits based on expected return.

3. Consensus: Flood to fixed income as individual investors chase yield. Variant Perception: Bond bubble. Attractive equity total return expectations.

4. Consensus: Inflation protection via TIPS. Variant Perception: Owning businesses with pricing power.

5. Consensus: Gold - speculators are weak holders. Variant Perception: Own gold for mid-long term as paper currencies are debased. John Paulson started his gold fund for the exact same reason: as a bet against the US dollar.

6. Consensus: Overly bearish. Variant Perception: Bullish on fundamentals.

7. Consensus: Short-term time horizons. Variant Perception: Mid-to-Long term time horizons.

8. Consensus: Low rates will be the norm. Variant Perception: Interest rates will dramatically rise across the curve. (Legendary hedge fund manager Julian Robertson had previously placed a bet on sharply rising interest rates).

9. Consensus: Inferior companies can thrive. Variant Perception: High quality companies have a competitive advantage. East Coast specifically highlights Nestle (NSRGY), Waste Management (WM), Colgate (CL), Coca Cola (KO), Novartis (NVS), and Express Scripts (ESRX). We've seen numerous hedge funds become bullish on high quality companies as well. In particular, Andreas Halvorsen's hedge fund Viking Global favors ESRX. Additionally, we earlier today highlighted East Coast's bullish stance on Beckton Dickinson (BDX).

10. Consensus: Complexity. Variant Perception: Simplicity.

Begg examines each of the ten above listed views in-depth in his most recent letter and ends his commentary by giving us a view of their most recent portfolio construction. We highly recommend reading the entire East Coast second quarter letter embedded below:



You can download a .pdf copy here.

For more from East Coast Asset Management, be sure to check out their recent bullish presentation on Becton Dickinson (BDX) that we posted earlier today. Additionally, those intrigued by the inflation/deflation debate should head to their past piece on the deflation-reflation continuum. For more great investment commentary we posted up Perry Capital's latest letter yesterday as well.

Ira Sohn Conference Notes: Investment Ideas From Hedge Fund Managers

This year's Ira Sohn Conference was packed with investment presentations from heavy hitting hedge fund managers including Seth Klarman, David Einhorn, Bill Ackman, David Tepper, Larry Robbins and more. Like the Value Investing Congress (in-depth notes from that recent event here), you get a plethora of ideas from top talent. Presentations at Ira Sohn in years past include Greenlight Capital's David Einhorn blasting Lehman Brothers before it failed and Pershing Square's Bill Ackman detailing his bullish stance on shares of General Growth Properties when they were trading below $1 (as they now trade north of $13).

We covered many of last year's Ira Sohn presentations for those interested and the list goes on, but you get the picture. Without further ado, let's dive into some of the investment presentations we've aggregated from various sets of notes that were sent to us, as well as the live-tweeting of NY Times' Michael de la Merced and additional coverage from Barron's Tiernan Ray. We'll post up more in-depth presentations as they become available.


David Tepper of Appaloosa Management: Tepper was nonchalant in the outset of his presentation where he mentioned that his firm had lost $1 billion in AUM over the past month, yet he shrugged his shoulders and joked 'what are ya gonna do?' He then shifted to his current investment ideas such as his bet on AIG 8.175 junior subordinated debt. It trades somewhere around 70 cents on the dollar and he thinks this mispricing is due to a misunderstanding of AIG's capital structure. Additionally, Tepper likes Bank of America (BAC) and thinks it could see $27 in the next year. Sticking with banking, he also likes Spanish giant Banco Santander (STD). Lastly, Tepper also likes commercial mortgage backed securities (CMBS) here. Regarding the economy and a potential turnaround, he is hopeful and thinks we can handle it. His funds are typically invested in 70% debt and 30% equity. Currently, his debt exposure is 50% corporate and 20% asset backed. We recently detailed Appaloosa's portfolio for those interested in the rest of Tepper's investments.


David Einhorn of Greenlight Capital: Einhorn had all kinds of negative things to say about the creditworthiness of the US. His presentation was entitled, "Good News for the Grandchildren" implying that grandchildren won't have to pay off the government's spiraling debt. Einhorn actually thinks that a crisis has unfolded already and our generation will be the ones paying for it. He says it is very necessary to address the situation now rather than spiral into a debt crisis. Einhorn again lambasted the credit ratings agencies and thinks official ratings should be eliminated. He notes that Treasury Secretary Timothy Geithner is 'all-in' because he thinks that the US's credit rating will never be cut. To this though, Einhorn said, "I don't believe a US debt default is inevitable." In his presentation, Einhorn mentioned that he is still short Moody's (MCO) as well as McGraw Hill (MHP), the parent company of ratings agency Standard & Poors. Einhorn originally laid out a short thesis on these names at last year's Ira Sohn Conference in a presentation, The Curse of the Triple-A.

Einhorn then shifted the discussion to real-world costs and inflation. He went on to say that, "if your goal is to never see inflation, you will never see it until it is rampant." Einhorn was critical of the government's zero interest rate policy and warns it can create another bubble. He thinks that higher rates would actually lead to increased lending in the private sector because right now all you're seeing is banks playing the yield curve. Einhorn outlined all the past scenarios where the Federal Reserve didn't see a bubble until it was too late: from Long Term Capital Management to the dot-com bubble to the housing bubble and now to the sovereign debt crisis.

In terms of investment ideas, he likes African Barrick Gold (LON: ABG) traded in London. He thinks this name is cheap and could eventually be added to various indexes as well which would serve as a catalyst for institutional buying. Einhorn ended by saying, "We own some gold and some gold stocks for our investors and for ourselves. We will worry about our grandchildren later." If you'll remember a long while back, we first detailed when Greenlight Capital started storing physical gold. In recent activity, regulatory filings disclosed Einhorn's new position in NCR and we've also detailed Greenlight's portfolio. To learn more about Einhorn and his investment process, we recommend checking out his book, Fooling Some of the People All of the Time.


Bill Ackman of Pershing Square Capital Management: In typical Ackman fashion, he crammed an 80-slide presentation into 15 minutes. He proposed a "Wait to Rate" system to reform the rating agency business where it would be illegal for an agency to issue a rating within sixty days of the security's issuance. And if the agencies mess up, then they should lose their status. Turning to specific investment ideas, Ackman again focused on General Growth Properties (GGP). Some of you will remember that Ackman presented this same idea last year when shares were ridiculously cheap. Last year's premise with this name was an argument that the company's assets were worth more than their liabilities and that this bankruptcy was different than most.

This year, Ackman's GGP thesis continues on in that he sees very little mall construction over the next three to five years, an area GGP already has a dominant position in. He highlights that GGP is being split up into two entities: GGP & GGO. GGP would be the cash-flow generating side of the business and GGO would represent underperforming but valuable assets. Lastly, Ackman quickly remarked that his firm Pershing Square has been buying Citigroup (C) in recent weeks and has assembled a position of 150 million shares, but ran out of time to elaborate on the stake. For more on Ackman's investing style, he is the subject of Christine Richard's new book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. Additionally, we've previously profiled Pershing Square and detailed Ackman's portfolio.


Seth Klarman of Baupost Group: Klarman continued his stern and gloomy comments from last week. He essentially gave a speech on what he would say if he were called in front of Congress to discuss Wall Street. He likened short sellers to policeman and reiterated the fact that they are not evil. He commented negatively on risk regulators, saying that they will inevitably make mistakes and that they won't be able to head off the next crisis at the pass. He feels the market should work itself out and that there should be no bailouts and that only the strong should survive. Klarman noted that many institutions have been bailed out and that the government's action related to AIG has 'raised moral hazards to new heights.' Klarman also joined in on the berating of the ratings agencies saying something should be done about them. Lastly, Klarman says that anyone in a transaction with a counterparty thinks the other investor is wrong, that's the beauty of a market. Just a few days ago we highlighted Seth Klarman's recommended reading list so definitely check that out. We also posted a summary of Klarman's speech at the CFA conference and have previously detailed Baupost Group's portfolio as well.


Steve Eisman of FrontPoint Financial Services Fund (Morgan Stanley): This name should be familiar to those of you who have read Michael Lewis' The Big Short, as he was one of the investors profiled in the story of the subprime trade. His presentation was entitled, "Subprime Goes to College" and as you can guess, he's negative on for-profit education companies. Those of you who followed the Ira Sohn Conference last year will remember that Jim Chanos gave a similar presentation berating these companies. Eisman sees Washington continuing to clamp down on the industry after these companies hired seemingly every lobbyist out there in previous years. He notes that a key to the problem here is the 'rating' these institutions receive from accreditation boards and he likens these boards to the ratings agencies who blessed subprime mortgages.

Eisman focused specifically on Apollo Group (APOL) and noted that if employment figures started to rise, APOL & others could see EPS declines of 40% annually. His presentation called out numerous other players in the space, including ITT Educational (ESI), Corinthian Colleges (COCO), and Education Management (EDMC). Eisman also painted Washington Post (WPO) in a negative light due to their ownership of the Kaplan test preparation business. That last one is intriguing because we recently saw Roberto Mignone's hedge fund Bridger Management buy shares of Princeton Review (REVU), a fellow test prep service.

The dichotomy of opinion continues as the for-profit education space has been an area ripe for debate. We've seen many prominent hedge fund managers own sizable stakes as Stephen Mandel's Lone Pine Capital has been bullish on education plays. That said, we've also noted that some of these managers have had a recent change of heart. David Stemerman's Conatus Capital had been long and sold out of their education plays. Andreas Halvorsen's Viking Global also exited Apollo Group recently. Additionally, there are also numerous high profile detractors such as Chanos and now Eisman.


Jamie Dinan of York Capital: Dinan's first idea was Coca Cola Enterprises (CCE) as they saw Coca Cola buy their bottling operations in the US earlier this year. He loves CCE's free cash flow. We've actually seen numerous other prominent hedge funds owning CCE shares as well, so they're definitely not alone in this pick. Dinan's second bet is on ING (ING). He values it at 1.2x book resulting in a value of 9.32 euros a share. He also noted that post bankruptcy equities are good places to be. This is a sweet spot for York Capital given their focus and he cited Lyondell (LALLF) as an example as he thinks it's worth $22 (it currently trades around $17). We just yesterday detailed some of York's recent portfolio activity for those interested.


Larry Robbins of Glenview Capital: Robbins highlighted that the market's P/E multiple is 12.3x and as the political presence in Washington grows, the P/E shrinks. He thinks now is a great time for stockpicking and not cash, 10 year treasuries or debt. He says to buy definitive growth and avoid high valuations. In particular, Robbins likes McKesson (MCK), Express Scripts (ESRX), Life Technologies (LIFE) and Fidelity National Information (FIS). Regarding FIS specifically, he agrees with the board's decision to reject Blackstone's bid and is in favor of the leveraged recapitalization plan. Regarding Express Scripts, he sees stable earnings and points out they have cash on hand to buy back stock or make acquisitions. We've pointed out that Andreas Halvorsen's Viking Global is bullish on ESRX as well. On Life Technologies, Robbins highlights organic growth, a defensive business mix, and potential industry consolidation. He also likes McKesson because it has a ton of cash, great free cash flow, and is trading at 11x earnings. For more from Robbins, we've previously outlined his thoughts on the case for global equities in 2010 at a hedge fund panel.


Jon Jacobson of Highfields Capital: Jacobson, formerly of Harvard's endowment and now one of the founders of Highfields, listed Sallie Mae (SLM) as his favorite pick. The main thesis here is that it is moving into a fee-based business with a great management team. He noted that the street has had a hard time valuing shares due to the gross leverage. And while this play is risky, he thinks it's undervalued. In a run-off scenario, Jacobson thinks SLM is worth between $15 and $25. While Sallie Mae is term funded, he argues they are adequately capitalized. He mentioned its legacy "FFELP" business is worth $6-8 a share on its own. SLM trades at 2x earnings and many of their competitors are essentially gone. SLM enjoys economies of scale, the credit quality of their loans is getting much better, and Jacobson also mentioned insider buying. Shares were up in aftermarket trading following his presentation. Shifting to the general commentary, Jacobson also cited his concern for the climate in Washington as he claims there is no leadership and that many US states are the American equivalent of Greece, bankrupt or about to be. Overall, he feels that the government is simply delaying these problems for future generations. We've covered some of Jacobson's previous thoughts at a hedge fund panel where he addressed whether or not there is alpha in asset allocation.


Daniel Arbess of Perella Weinberg Partners/Xerion Capital: Arbess' presentation focused on China. He specifically likes Yum Brands (YUM), as the fast food chain has great exposure to that country. Additionally, he likes Ivanhoe (IVN) in the metallurgical coal space as he's bullish on gold and commodities as well. On gold specifically, he says "I doubt we're at a top" but at the same time he does not like it as a safe haven against inflation. In currency trades, he likes a trade of short the Japanese yen and long the Canadian dollar. Arbess also listed Celanese (CE) as one of his picks. Lastly, he sees more distressed credit opportunities coming up as maturities start to roll in. And like many other presenters, he had an unpleasant view of the current political administration and their actions. Turning lastly to the debt crisis, Arbess thinks there are no quick fixes and the outcome is unpredictable. In the past, we've previously covered some brief portfolio activity out of Perella Weinberg.


Jeremy Grantham of GMO: His favorite picks were commodities and in particular, timber. He highlights this because it's the only asset class that did not lose value in the 1970's or during the Great Depression. His second pick centered on emerging market equities and thirdly, Grantham also favors high quality US stocks. Armed with a chart displaying equity valuation of mega caps since 1955, he points out that mega cap valuation has declined since 1955 and they currently represent great value. Shifting to macro thoughts, he thinks the UK housing bubble has yet to burst and that prices could fall as much as 33% more and also warned of a possible bubble in Australia.


Niall Ferguson: He mentioned that now is not the time to short Treasuries. However, he also cautioned to avoid holding 10 year bonds to maturity. Scarily enough, Ferguson thinks the US will be like Greece by 2013 and that we won't be able to 'print' our way out of this mess.


That wraps up our aggregation of notes from the Ira Sohn Investment Conference. If you enjoyed our coverage, please consider receiving our free hedge fund updates via email or our free updates via RSS reader. Thank you to those that sent us notes and stay tuned as we'll post up in-depth presentations as we receive them.

David Stemerman's Hedge Fund Conatus Capital Favors Tech: 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 filings.)

Next up is David Stemerman's hedge fund Conatus Capital. Stemerman founded his firm last year with $2.3 billion after he left Stephen Mandel's Lone Pine Capital. Conatus places an emphasis on bottom-up individual stockpicking via a long/short equity strategy. Stemerman's firm focuses on the quality of the business and the quality of the associated management team. They seek short positions by identifying companies that are seeing increased competition from low-cost alternatives and those that are being displaced by new technology. We've previously taken a more in-depth look at Conatus' investment process for those interested. For 2009, Stemerman's firm finished up 19.16% as detailed in our hedge fund performances post.

The positions listed below were their long equity, note, and options holdings as of March 31st, 2010 as filed with the SEC. All holdings are common stock unless otherwise denoted:


Brand New Positions
JPMorgan Chase (JPM)
Union Pacific (UNP)
American Tower (AMT)
US Bancorp (USB)
FMC Technologies (FTI)
City National (CYN)
Mead Johnson Nutrition (MJN)
Sotheby's Holdings (BID)
Charles Schwab (SCHW)
Webmd Health (WBMD)


Increased Positions
BHP Billiton (BHP): Increased position size by 103%
Ctrip.com (CTRP): Increased by 94.4%
Wells Fargo (WFC): Increased by 91.8%
Amazon.com (AMZN): Increased by 84%
Schlumberger (SLB): Increased by 73%
Bed Bath & Beyond (BBBY): Increased by 58.5%
Visa (V): Increased by 54.9%
Goldman Sachs (GS): Increased by 52.5%
NetApp (NTAP): Increased by 48.5%
Urban Outfitters (URBN): Increased by 38.4%
Google (GOOG): Increased by 35%
Polo Ralph Lauren (RL): Increased by 35%
Walter Energy (WLT): Increased by 29.4%
Salesforce.com (CRM): Increased by 25.9%
Citrix Systems (CTXS): Increased by 23.6%
Crown Castle (CCI): Increased by 20.8%


Reduced Positions
Priceline.com (PCLN): Reduced position size by 34.4%


Positions They Sold Out of Completely
Abercrombie & Fitch (ANF)
Credicorp (BAP)


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

1. Apple (AAPL): 5.6%
2. Express Scripts (ESRX): 4.4%
3. Google (GOOG): 3.9%
4. Estee Lauder (EL): 3.9%
5. Cognizant Technologies (CTSH): 3.9%
6. Amazon.com (AMZN): 3.9%
7. Walter Energy (WLT): 3.9%
8. Cisco Systems (CSCO): 3.8%
9. Medco Health (MHS): 3.8%
10. Schlumberger (SLB): 3.4%
11. Wells Fargo (WFC): 3.3%
12. Visa (V): 3.3%
13. Covidien (COV): 3.2%
14. JPMorgan Chase (JPM): 2.8%
15. Bed Bath & Beyond (BBBY): 2.8%


As you can see, Conatus Capital did little in the way of selling in the first quarter of 2o10. In fact, they were quite active on the buying side, adding to numerous existing stakes like BHP Billiton, Ctrip.com, Wells Fargo, and Amazon.com. They also started brand new stakes in JPMorgan Chase, Union Pacific, and American Tower among others. Given the recent market decline, it will be intriguing to see next time around whether Conatus was reducing long exposure or if they continued to add.

Since Stemerman previously plied his trade at Stephen Mandel's Lone Pine Capital, it should come as no surprise that this portfolio has obvious similarities to Lone Pine's. While the typical 'hedge fund favorite stocks' like Apple and Amazon are present, both Conatus and Lone Pine are bullish on shares of Estee Lauder and Cognizant Technologies, names we don't see as frequently in hedge fund portfolios.

Lastly, we want to point out the three sectors Conatus seems to like the most: technology, health, and energy. They own the typical tech bellwethers in Apple, Google, Cisco, and Amazon. But at the same time, they're focusing on niche segments like cloud computing. Shifting to pharmacy benefit management companies (PBMs), Conatus has a large position in Express Scripts, a company we saw fellow hedge fund Viking Global heavily favors. Additionally, Conatus is long Medco Health as their ninth largest US equity long. In energy, Conatus likes Schlumberger and Walter Energy. In the end though, technology is by far and away the overwhelming theme as five of their top ten positions are in tech.

As we've previously detailed, Conatus is bullish on cloud computing and this is evident from their positions in VMWare, Citrix Systems, and NetApp. And as we've also highlighted, hedge funds favor wireless tower stocks and Conatus is no different: they own all three majors in American Tower, Crown Castle, and SBA Communications.

Assets reported on the 13F filing were $2.6 billion this quarter. Data from the SEC is aggregated and sorted automatically by Alphaclone, our source for hedge fund tracking, replicating, and performance backtesting (Market Folly readers can receive a special free 30 day trial). Remember that these filings are not representative of the hedge fund's entire base of AUM.

This post is part of our daily hedge fund portfolio tracking series. We've already detailed activity from numerous managers so click the links below to be taken to the respective portfolio updates: Seth Klarman's Baupost Group, Warren Buffett's Berkshire Hathaway, Stephen Mandel's Lone Pine Capital, and Bill Ackman's Pershing Square, David Einhorn's Greenlight Capital, Eddie Lampert's RBS Partners, David Tepper's Appaloosa Management, Mohnish Pabrai's Investment Fund, John Griffin's Blue Ridge Capital, Lee Ainslie's Maverick Capital, Bruce Berkowitz's Fairholme Capital Management, Andreas Halvorsen's Viking Global, Dan Loeb's Third Point, John Paulson's hedge fund Paulson & Co, Chase Coleman's Tiger Global, Roberto Mignone's Bridger Management, and Phil Falcone's Harbinger Capital Partners. Be sure to check back daily for new hedge fund updates.