Dr. Michael Burry Long Gamestop: Sends Letter to Board

Dr. Michael Burry of Scion Asset Management and of The Big Short fame has recently re-surfaced in shares of Gamestop (GME).  He previously owned shares earlier this year but sold out in the second quarter per his latest 13F filing as of June 30th.    However, he has re-established a stake in the company as shares plunged, now owning around 3.05% of the company with approximately 3 million shares.

Burry argues the company should buyback a ton of stock given the limited float.  This has been a popular short among hedge funds which view it as 'Blockbuster 2.0' and recently, as much as 60% of GME's shares have been sold short.

Tae Kim over at Barron's scored a rare interview with Burry on his GME long, which you can check out here.  Burry noted that the new gaming console cycle "is going to extend GameStop's life significantly. The streaming narrative dovetailing with the cycle is creating a perfect storm where things look terrible.  [But] it looks worse than it really is."


Scion's Letter to Gamestop Board

Below is the full text of the letter Dr. Burry sent Gamestop:

"August 16, 2019

Dear Members of the Board,Scion Asset Management, LLC and its affiliates (“Scion”) own approximately 2,750,000 shares, or about 3.05%, of GameStop, Inc. (“GameStop”) common stock.

As mentioned in our previous letter to the board, we have concerns regarding capital management at GameStop. Given recent GameStop common stock prices under $4 per share, we must re-state that GameStop complete the remaining $237,600,000 share repurchase at once and with urgency.

Given the market capitalization of GameStop at $290 million at the close on August 15th, completing the authorization would retire over 80% of GameStop’s outstanding shares. Depending on the timing and quality of execution, such a repurchase would increase earnings per share dramatically - far more than any other possible action on a per share basis.

The numbers are striking and demand action. We estimate that GameStop now has in excess of $480 million of cash, more than enough to complete the share repurchase authorization and still invest in the business and pay down debt.

Through August 15th, a total of 11 trading days, 50,399,534 shares have traded. At this rate, for the month of August and for the third month in a row, the number of shares traded will exceed the total number of shares outstanding. Because of such high volume, we maintain that GameStop could pull off perhaps the most consequential and shareholder-friendly buyback in stock market history with elegance and stealth.

Shareholders staring at all-time lows in GameStop stock see little evidence that GameStop has effectively leveraged its elite position in the gaming universe as the new paradigm came into clear view over the last five years.

The unfortunate reality is that Amazon, not GameStop, bought Twitch in 2014. Instead, in 2014, GameStop started buying wireless store assets. And in 2017, Amazon, not GameStop, bought GameSparks - while less than a year ago GameStop reversed course and sold its wireless store assets. Shareholders are right to worry.

We expect GameStop’s business will perk up a bit during 2020 and 2021 as the new console cycle, with associated software updates and introductions, finally gets underway. But what is happening now in the stock is about more than late cycle doldrums or even the streaming paradigm – shareholders do not have faith in current management, and have not been inspired by new leadership policies.

Notably, as of July 31st, 2019, Bloomberg reports short interest in GameStop stock at 57,226,706 shares – this is about 63% of the 90,268,940 outstanding GameStop shares at last report.

We submit that when share prices are at or near all-time lows and more than 60% of the shares are shorted despite cash levels much higher than the current market capitalization, lack of faith in management’s capital allocation is the default conclusion.

All of this creates the opportunity to enter 2020 with a dramatically reduced share count along with multi-fold greater impact per share for every single other achievement of management. Consider as just one example that if the turnaround is successful, and if GameStop were able to shrink its shares outstanding to 30 million through the share repurchase, the $157 million dividend that was just eliminated would pay out around $5.25 per share.

The Board deemed up to $6.00 per share a good price for a buyback less than two months ago, and the price of the stock today is nearly half that amount.

We again advise the Board to represent shareholders well, and to ensure the execution of the remaining repurchase authorization in full.

Sincerely,

Dr. Michael J. Burry"

Michael Gentile Long Gamestop, Short WD-40: Capitalize For Kids Conference

We're posting up notes from the Capitalize For Kids conference 2016.  Next up is Michael Gentile of Formula Growth who pitched long Gamestop (GME) and short WD-40 (WDFC).


Michael Gentile's Presentation at Capitalize For Kids 2016

•    Long Idea is Gamestop (GME), largest video game seller in North America and globally.

•    Stock hasn’t done much over the past few years despite general increase in market indices.

•    Currently, 29% of float is short, 5.9x earnings, 3.5x EV/EBITDA, 19% FCF yield and 5.9% div yield.

•    Market belief: believes digital sales (currently 25% of all sales) will replace physical sales in the next few years. Also, GME has had poor Aug and Sept months.

•    Believes GameStop is the only retailer that does used business as well as it does. Furthermore, physical sales have an advantage over digital sales due to credits received for selling old games. This is a very important competitive advantage. Also, have a strong loyalty program, with 46 million members.

•    Believes virtual reality is a game changing technology and is all free option at this price.

•    Believes market is too focused on new hardware and video game sales, which will account for ~19% of gross profit in 2019.

•    The rest of their business is used sales, technology (they operate 1600 AT&T stores – very high profitability and non-video game related) and collectables business.

•    Since 2009, they have shrunk shares by 38%.

•    Target is: $50/share not accounting for virtual reality opportunity.



•    Short Idea is WD-40 (WDFC).

•    Currently, 29x P/E, 18.7 EV/EBITDA, 2.4% FCF yield. Believes stock price is priced to perfection.

•    From 2006 to 2012, NTM P/E has averaged 19x but over the last three years has jumped to 29x earnings.

•    Believes low interest rate environment has caused valuations to become extreme. The company has also benefited from lower oil (key input cost) and therefore has achieved higher margins.

•    Believes gross margins are primed to fall and multiple contraction given lower growth expectations.

•    Target is: $75/share and would cover short position.


Be sure to check out the rest of the presentations from Capitalize For Kids/Sohn Canada Conference. 

Is Gamestop (GME) a Value Play or Value Trap? Quick Pitch

Market Folly has been adding a bunch of new features as of late. We started off with our stock of the week series and now we're going to begin a monthly 'quick pitch' on certain equities that hedge funds have been long or short.

Today's quick pitch focuses on Gamestop (GME): Value Play or Value Trap? The following is from Chris Lau, a SeekingAlpha contributor:

A major shake-up in the way games are distributed is unfolding. Activision (ATVI) and EA’s (EA) entrance in digital gaming is proving to be a winning strategy. EA’s online site, Origin, bypasses traditional sales channels. In the social networking space, Zynga’s (ZNGA) IPO showed investor willingness to take risks. Investors are putting money in the yet-to-be proven model of social networking games.

This leaves one major question: What does this mean for retailers like GameStop?


Hedge Fund Ownership (Or Lack Thereof)

The top holders of GME stock are largely vanilla mutual fund players like Vanguard and Fidelity. While Cliff Assness' quant firm AQR Capital owned a decently sized position as of 2011 year-end, there is practically no major hedge fund ownership in this stock (at least in the top 100 holders).


GameStop Backstory

GameStop has grown throughout the years, and especially after its acquisition of Electronic Boutique in 2005 for $1.44B. In the last few years as the digital downloading of games has proliferated, GameStop touted its knowledge of gaming and its consumers as a competitive advantage.

In recent months, investor pessimism has grown. Shares are 22.91% off from 52-week highs, closing recently at $21.70. The main concern lies in the rising shift to digital gaming from the traditional physical console games.

GameStop has tried to attack this shift head-on and saw over $450 million in digital sales last year. They've mainly offered access codes in stores that allow gamers to download content at home. GME was originally spun-off from Barnes in Noble (BKS) in 2002, yet another company battling digital distribution of content.

GME's management team has set aside money for further acquisitions in digital as they have cash and no debt.


Valuation

At $21.95 per share, GME trades at a P/E of 7.63 (using 2011 EPS of $2.87 that excludes write-downs). By comparison, Best Buy (BBY) traded recently at $22.95 with a P/E of 6.30 (using 2011 EPS of $3.64).


Why the Bulls Own the Stock

Bulls point to fears over digital distribution as being overblown and argue that the digital transition will take longer to play out and won't cripple GME. They feel as though GME has a dominant market position in the industry.

Joel Greenblatt of Gotham Capital runs a Compustat screen to create a 'Value 1000' index for value investors. GME is one of the main companies on that list due to its cheap valuation. Other bulls might point to a cap structure strategy and its cashflow story as compelling reasons to own it. The massive repurchases could potentially place a floor on the stock that can keep shares buoyant even if things take a turn for the worse. And given the high short interest, there's also potential for various short squeezes as these buybacks reduce the float size.

- During the last quarter, GME grew market share to record levels.
- Its expertise allowed the company to create new business models to fill profitability gap
- PowerUp Rewards program (launched October 2010) now has over 17 million members
- Pre-owned digital and mobile business will add $800 million in revenue in 2012
- The company is debt-free
- $500 million stock buyback
- Cheap valuation
- Continued partnerships with publishers to sell DLC


Why the Bears Are Short

Bears will argue that a secular shift to digital distribution of games and the rise of social gaming will lead to the demise of GME ala Blockbuster.

Hedge fund manager Jim Chanos of Kynikos Associates is a notable bear on GME shares as he argues that game publishers like EA are increasingly becoming direct competitors with GME. You can view his bearish presentation on GME here.

He argues that GME looks cheap and will appear cheap all the way down. Just like movies and music, Chanos says that the value of their brick and mortar presence will collapse. GME's counterpart in the UK, Game Group, recently filed for protection from creditors.

And while GME currently thrives on used game sales, that revenue stream could be in jeopardy in the future. It's been rumored that future iterations of Microsoft's Xbox and Sony's Playstation will likely have some sort of "anti-used games measures" built in to the consoles.

One risk that short sellers are cognizant of is that GME could potentially take themselves private or be taken over by private equity. Additionally, the cost to borrow is quite expensive due to the crowded short.

- Fewer packaged game titles are being released
- Short interest has climbed to 41%
- In its recent quarter, GME said physical console category declined faster than projected
- Comparable store sales dropped 3.6% in the last quarter
- 20% decline in hardware sales


Further Talking Points

During the company's recent quarterly conference call, management said that digital receipts are ahead of schedule. They have a goal of $1.5b receipts by 2014.

GameStop's recommerce (buy-sell-trade) for mobile devices, electronics, and tablets started in 2011. The company believes it can resell items like Apple iPads, assuming 5% trade-ins annually and a 12-18 month upgrade cycle. Sales would account for $200m by 2012 and $600m by 2014 which you can read about here.

GME forecasts growth that is reliant on physical games, hardware, and software. The short-term problem for the company is that a lack of new consoles in 2012 will pressure margins. GME's loyalty program must attract a higher proportion of digital sales.

Hot titles like Grand Theft Auto, FIFA Soccer, Call of Duty, and Max Payne 3 may be a catalyst for higher growth. These catalysts aren't necessarily reflected in the current share price and management kept only a conservative forecast for these releases.


Conclusion

GameStop (GME) is a company that dominates in its traditional space of selling physical video games, but it needs to grow-up in the digital world and faces challenges in adaptation. The negative price action in its stock as well as competitors (BBY), suggests that there is further downside. If console makers implement anti-used game measures, GME would have a tough uphill battle. Weak retail sales in electronics and heavy competition make this a stock to avoid at this time.


Thanks to Chris Lau for his contribution to Market Folly in our new 'Quick Pitch' series. If you have an investment write-up you'd like to submit, please click here to email us

Jim Chanos: Beware the Global Value-Trap (Presentation From Value Investing Congress)

At the Value Investing Congress today, Jim Chanos of hedge fund Kynikos Associates talked about various companies to short in a presentation entitled "Beware the Global Value-Trap!"

Be sure to check out all of our notes from the Value Investing Congress.


Jim Chanos (Kynikos Associates): Short Exxon Mobil (XOM), GameStop (GME) & ITT Educational (ESI)

Embedded below is his full slideshow presentation:



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Chanos' entire presentation focused on “how value investors can avoid value traps.” He went from basics things to watch for, to his current specific short themes.


Value Stock Traits: Predictable, consistent cash flows, defensible business, don’t need superior management, low/reasonable valuation, margin of safety, reliable transparent financial statements, “analyzable.”


Classic Short Selling Themes

1. Booms that go bust, debt-driven asset inflation; real estate in US, telecom overbuild, far east real estate now. Cyclical: Sometimes cycles become secular. Autos, airlines. Overly dependent on one product. Coleco, renewable energy. Illegal does not equal value. Be careful- they often look deceptively cheap. Online Poker.

2. Consumer fads

3. Technological obsolescence: Probably killed more value investors in last 20 years than any other. Examples: Minicomputers, Eastman Kodak, Video Rental. The cash flows drop off faster than you think they do. At some point, cash flows hit a tipping point, and drop precipitously.

4. Structurally flawed accounting: Free cash flow/Run by accountants. Tyco example. Be “Triply careful” whenever management pulls out some metric that they define- such as cash flow. Be careful when they keep pointing to a metric they like. Accounting issues. Confusing disclosure. BFT. Nonsensical GAAP. Sub prime lenders example.

5. Selling $1.00 for $2.00

6. Rapid Prior Growth: “Law of large numbers” Telecom build out example. When tech shift occurs, old metrics that value investors use are totally irrelevant.

7. Value Traps



Other Traits of Value Traps

Marquis management. New CEO as a savior- it is often the business that exits with its reputation intact. Conseco example. Keep doing your work. Look at their incentive- often they win no matter what.

Famous investors: In every great stock market disaster or fraud, there is always one or two great investors invested in the thing all the way down. Enron, dot-com, banks, always "smart guys" involved all the way down. Don’t let your work stop because a smart guy is in the stock. It always happens, even the best make mistakes.

Appears cheap only using management’s metric. EBITDA example. Almost every major business needs depreciation, capital deprecation, if you don’t consider this, you are cheating yourself. Cable TV example. Stocks have done nothing for years because they always quote EBITDA only, in a capital-intensive business.

Ignore restructuring charges at your own peril. Eastman Kodak. Those charges were actual charges, and they never fixed the revenue line. Yet investors used management metrics and ignored the real situation.

Growth by acquisition. Tyco, roll-ups. Be very careful. Earlier today David Einhorn said to short Green Mountain Coffee Roasters (GMCR) and pointed out that the company has largely grown through acquisition.

Buying low growth low P/E businesses with expensive high P/E stock should be a huge red flag. Be careful when you see big write-downs because management is claiming to be conservative, they are banking some earnings. Rely on a “supranational put”- government will bail me out.



Current Value Traps

Liquidating Trusts: Integrated oil companies. Cost structure grown dramatically; finding and development up from $5/bbl to $22/bbl. Production $5/bbl to $15/bbl. Cost of marginal barrel of oil is up and rising, $37 all-in now, where oil bottomed out in 2008/9. Gas has opposite problem. Monster acquisition in gas area. Exxon Mobil (XOM): FCF dropping off, not even enough to cover its cash needs. Also applies to other national oil companies, look even worse.

Digital Distribution Destruction: video games. Will follow music and movies, to digital distribution. Gamestop (GME): Looks cheap, has lots of stores, in a terrible business. Will appear cheap all the way down. As bandwidth and wireless speed increases, the value of their brick and mortar will collapse, just as it has with movies and music. Also other video rental. (Coinstar (CSTR) perhaps? Didn’t say the name.)

"Mis-education" For-Profit Colleges: Now they look cheap as value investors pile into them, says gainful employment didn’t have teeth. “Can’t think of a more predatory business in the US right now.” Congressional support is waning. 90% of the loans are federal loans, and default rates are skyrocketing, was 20% in 2009, now heading toward 30%. Serious line item in the federal budget now. ITT Educational (ESI): Have an off-balance sheet entity. Cohort default rate 22.4% and rising, one of the most expensive tuition of the colleges. Bulls say Republicans will give them cover, but now Republicans have started to walk away- General Petraues' daughter has been investigating the abuse of soldiers.

Nationalistic Commodity: Be careful- they are down a lot and appear cheap, especially Iron Ore, down from $200 to $150-160. Problem is it was $30 forever. Commodities look cheap, but not if you look at longer-term charts. Leveraged to Chinese growth. Vale (VALE): Looks cheap, but in Brazil, which isn’t your friend as a shareholder. VALE is building its own Navy, which they don’t expect to have a positive rate of return.

China Bubble: Chinese State Banks. Underground lending is a significant risk. CDSs went from 30 bp to 200 bp in the summer. PRC sovereign fund said they would be buying stock in these banks. They are instruments of state policy; they are not there to maximize shareholder wealth. They are cheap, but there are many lurking time bombs. They were recapitalized twice in last 12 years even during strong economy in PRC. The refrain in China is “yes there is a lot of silly stuff going on, but the government won’t let anything happen.” Agricultural Bank of China (HKEX.1288): Cheap, but half the capital is bogus. Chinese banks are very levered. PRC this year will expand credit outstanding by 35% of GDP; it was 25-30% each year for 4 years, 100% of GDP. “The only westerners in history that ever got a dollar out of China were the Opium dealers, and they had the British Royal Navy behind them.”



Q&A Session:

1. Commodity boom not supported by China, what about India? Chanos says India is self-sufficient in Iron Ore, and China demand is 50-80% of many of the commodities.

2. China: real estate sales volume was down 40-50% in golden month. Prices haven't fallen, but transactions always dry up first. High-speed rail crash was a psychological hit- even if only 5% of GDP, it was a source of pride for China. Corners being cut, this crash highlighted to the public that there was a cost to the “growth at all costs” mentality in China.

3. When asked about Japanese bonds, Chanos added some humor to his talk by saying, "we only want to piss off one Asian country at a time."



About Jim Chanos: He manages the short-selling focused hedge fund Kynikos Associates. We've covered how Chanos thinks China is a bubble and that he is also targeting alternative energy, shorting Vestas and First Solar.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Joel Greenblatt: The Big Secret For Value Investors (Presentation From Value Investing Congress)

At the Value Investing Congress today, Joel Greenblatt of hedge fund Gotham Capital gave a presentation entitled "The Big Secret For Value Investors".

Be sure to check out all of our notes from the Value Investing Congress.


Joel Greenblatt (Gotham Capital): Value Investing

He started out with a review of the concepts in his book, The Little Book That Still Beats the Market. He says you want stocks that are “cheap and good” and used the Compustat database to rank them by the two measures. Cheap: EBIT/EV. Good: EBIT/ (Net WC + Net fixed assets) (return on tangible capital).

Updated results through 2009: Decile 1: +15.2%, bottom decile: -0.2%. For 20 years ending 12/31/10: SPX annualized 9.1%, 11.8% on equal weight, “Value 1000” value-weighted index is 16.1%. Same Beta as SPX, same std dev. 1.01 Beta vs. 0.99 SPX.

Now, the current situation, and the meat of the presentation: A week ago, the Russell 1000 had average FCF of 9.2% (in the 94th percentile toward cheap!) Looking backwards, cheaper than 94% of periods over the last 20 years and that correlates with a 15-20% return over next one year (market up 5% over week since slide finished) "on only 10-15% left, but still pretty nice."

Average FCF of Value 1000 a week ago was 13.7% and was cheaper than 93% of the last 20 years, which correlates with a year forward return of 30-35% for value index. Greenblatt said that "Not only is the market cheap, but the value stocks are even cheaper."

Large cap long/short portfolio is in the 82% percentile- very big spread between long and short opportunity. ROIC long 59.4%, shorts 4.8%. Arguments against stocks being cheap (playing devils advocate): one argument is that we are at peak operating margins, but he showed a graph that indicated it is unclear what the real mean operating margins should be. The second argument is return on tangible capital continues to climb. In addition, outsourcing of factories, moving to a service economy, so tangible capital may not be the right way to look at it, and again it's unclear where the mean level is. He also showed a graph of tangible capital per dollar in sales is declining to 35 cents from 50 cents, 20 years ago.

Some of companies currently in the value 1000: Gamestop (GME), Aeropostale (ARO) ~ (Revolting companies, you’d never want to buy, he joked), Hewlett Packard (HPQ) ~ terrible, but selling at 5x eps, Dell (DELL), Microsoft (MSFT), General Dynamics (GD), Wells Fargo (WFC), and Merck (MRK). For every name, he mentioned why they are terrible, only half-joking. Part of the reason this works is “it’s really hard to buy these companies.”

He says that the current fixation on short-term returns causes managers to avoid buying cheap companies, because they need the ones that are doing well right now. Buying these stocks with very low expectations gives you a chance for asymmetric returns on the upside if they do even a little bit better than expected. He expects this “time arbitrage” will continue to be exploitable. He is very optimistic for the next year.


Q&A Session:

1. Role of dividends? He's indifferent in his strategy.

2. How does he incorporate financials now, he used to exclude them? He now ranks the financials separately, and adds to index if they are cheap, but he didn’t give what metrics he used.

3. Question about Michael Burry. (Background: In “The Big Short”, writer Michael Lewis made Greenblatt out for a villain for taking money from Burry even as Burry was right.) Greenblatt was a little annoyed by the question: “Michael Lewis has never let the facts get in a way of a good story. What they got wrong in the book is Burry wanted to side pocket both mortgage and corporate CDS... we did not want him to side pocket the liquid corporate CDSs … only reason we took money from him was we were getting redemptions.”

4. Where does he see the market now? He’s not a market timer, but he would argue for raising exposure to stocks now if asked.

5. Can you use the value screen and really juice returns by using further fundamental analysis? Answer: we were small, had 6-8 concentrated names, that’s why we made 40% returns - it’s impossible on large amounts of money or a very diversified portfolio. This solution is good for a very diversified portfolio, same beta as the market and beats the SPX. We’ve tried, but haven’t been able to beat the indexed approach. “We’re pretty good at picking stocks, so it’s hard to do.”

6. Large cap stocks are pretty cheap, this is an interesting time- HPQ at 5 times earnings. Bond bubble, even bigger than the stock bubble- which is crazy. Still plenty of opportunity in special situations for smaller funds.


About Joel Greenblatt: He manages Gotham Capital and saw 40% annualized returns for 20 years. He's the author of the new book The Big Secret for the Small Investor: A New Route to Long-Term Investment Success. And for aspiring investors, numerous prominent hedge fund managers such as Seth Klarman have recommended Greenblatt's other book: You Can Be a Stock Market Genius.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Notes From Leaders In Investing Summit: Leon Cooperman, Larry Robbins, Bill Ackman, Howard Marks & More

The CIO/CEO Leaders in Investing Summit took place on Tuesday at The Metropolitan Club of New York and featured presentations from numerous high-profile hedge fund managers.

The summit is a peer-only event only open to those investing third party capital. We're pleased to present notes from the event concerning specific investment ideas and/or commentary on the economy:


Leon Cooperman (Omega Advisors): The legendary hedge fund manager's talk centered on equities as the best house in the financial asset neighborhood. He argued that you need to believe four issues in order to have a positive view on today's market:

1. The U.S. is not another Japan and will not suffer a lost decade.
2. The European Central Bank (ECB) will act to stabilize Europe.
3. President Obama will move to the center.
4. The Middle East's turmoil leads to democracy and oil stays below $135.

Cooperman continued to voice his concern over employment. He also pointed out that the yield curve is quite steep and that the Federal Reserve is trying to inflate the country out of debt. Cooperman says inflation is not bad for stocks (see the best investments during inflation).

He argues that stocks are cheap trading at 13.6x relative to bonds and history. The Omega Advisors founder also thinks that bonds are 'screaming' to be shorted. Other hedge fund managers have also advocated shorting bonds. Don't forget that you can also hear Cooperman's latest investment ideas at the Value Investing Congress in October (click here for a discount).



Larry Robbins (Glenview Capital): Formerly of Cooperman's Omega Advisors, Robbins founded Glenview Capital. His presentation yet again focused on Life Technologies (LIFE). The company trades at a 11x P/E and is likely to grow EPS 20% over the next few years as they were able to grow EPS throughout the slowdown and 95% of their business grows with research spending.

Robbins highlighted free cashflow is 91% of EPS and that the company will have 80% market share versus competitor Illumina (ILMN). One could postulate that he's short ILMN as a hedge but when asked about it he said that he's "only here to discuss my longs."

And speaking of longs, he said some of his top holdings are Expedia (EXPE), Flextronics (FLEX), Xerox (XRX), and BMC Software (BMC) in technology. We've detailed the in-depth investment thesis on EXPE in the latest issue of our Hedge Fund Wisdom newsletter.

In general, Glenview looks for good businesses, low valuations, excess capital, a business that can succeed regardless of economic environment, and pricing power. Currently, Robbins thinks the economy will grow slowly and with heightened volatility due to excess government intervention.



Tom Russo (Gardner Russo & Gardner): The long-only manager is still bullish on China and pitched Nestle (NSRGY) at the event. His idea is simply to buy prominent international players and hold through the ups and downs. In the past, he's talked about how Nestle can invest large amounts of money in emerging markets and see high rates of return.

He is also still holding SAB Miller (LON: SAB) despite declining EBITDA margins as the company is now making acquisitions to make up for the lack of growth. Russo did not seem to like the Foster bid.



Howard Marks (Oaktree Capital): His presentation focused on the keys to success in a low return world. Marks focused on three key questions to ask yourself as an investor today:

1. Should we prepare for prosperity? He argued no because the economic recovery is faltering.

2. Should we worry about losing money or missing opportunity? For now, he says to be mindful of losing money.

3. What holds the key? Capital and nerve? Or discernment, discipline, risk control and selectivity? Marks argues the latter right now, saying that stocks are slightly cheap, but not by much.

Marks says that your choices today are as follows: invest for the long-term, go to cash, take more risk (chase yield), or find niches. Take your pick. Marks also brought up a good point that just because stocks are flat over a ten-year period doesn't mean they are a buy because the P/E was 30x ten years ago.

Oaktree recently filed for an initial public offering and Marks' recently released his new book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor which has received praise from legendary investors Warren Buffett and Seth Klarman.



Paul Singer (Elliott Associates): This hedgie's talk focused on the shape of the next crisis. He mentioned that all major banks are quite opaque and no one can truly analyze them, meaning the next crash could be even faster because the leverage is still there. He doesn't seem to be a fan of Bernanke.

Singer points out that the lesson was "sell first, move assets first, ask questions later." Those that took more time to do so got stuck and that is dangerous. He also believes that Dodd-Frank has made the system more brittle and thinks there should be NO financial institution that is too big to fail.

Lastly, he also mentioned that monetary policy has caused commodity inflation (Howard Marks also thinks this is the case).



Bill Ackman (Pershing Square Capital): Speaking on activist investing, Ackman said that you have to work *with* management. He cited his investment in J.C. Penney (JCP) as an example as the company has a new CEO who redesigned Target (TGT) then most recently headed Apple's (AAPL) wildly successful retail operation. He also says that the company has a big advantage by owning its own real estate and not paying rent. We've covered Ackman's JCP thesis here in-depth for more.

Concerning his recent investment in Family Dollar (FDO), Ackman said that Nelson Peltz's Trian Fund is driving the effort. The company has a bid on the table and is a prime leveraged buyout candidate. The vote is in January and management has to fix the company or sell it. We've also posted Ackman's presentation on FDO.

Ackman also talked about lessons he learned from his mistakes. He said that liquidity is very valuable and lack of it is a big opportunity cost. Also, he pointed out that as you get older, you further understand the opportunity cost of time. He likes to measure whether the potential return justifies the time and risk.

Citing his past failed investment in Borders (BGPIQ), Ackman said he underestimated the risk of technological change. He would rather invest in a good business than just good management. He said the limitation of his approach is that although the stocks he invests in are liquid, his concentrated stakes are not (Ackman also mentioned 27% of his fund was redeemed during the crisis).



Ron Gutfleish (Elm Ridge Capital): Gutfleish likes the defense sector and in particular, Lockheed Martin (LMT). He argues the company doesn't make bad acquisitions, pays a good dividend and does smart buybacks. While he admits to being "usually too early," the hedgie thinks that these stocks are very cheap no matter what you think about the defense sector.

The bear case there is very obvious, he notes, pointing to a budget under pressure. However, he argues that these companies generate huge cash flow during down cycles and deploy it in shareholder friendly ways.



Joel Greenblatt (Gotham Capital): Greenblatt's presentation focused on the 'big secret for value investors.' He was, of course, referring to his new value-weighted indexing method which is detailed in his new book, The Big Secret for the Small Investor: A New Route to Long-Term Investment Success.

He argues that indexes have the flaw of market cap weighting. Evenly weighted, the SPX outperforms by 3% per year over the last 20 years. A value weighted index of 800 stocks beats the SPX by 7% a year.

Right now, Greenblatt says his statistics point to stocks being at about average valuations. Some of the stocks on his list right now include: Gamestop (GME), Wellpoint (WLP), and Intel (INTC). He says that these companies are trading at bargain prices either due to uncertainty or because they are troubled.




That sums up notes from the summit. Keep in mind that many of these hedge fund managers will be presenting investment ideas at the upcoming Value Investing Congress in October and Market Folly readers can receive a discount to the event by clicking here.