Top 10 Stocks That Matter Most To Hedge Funds Per Goldman Sachs (Q4 2016)

Goldman Sachs' quarterly hedge fund trend monitor outlines what stocks matter most to hedge funds.  Here's the list as the fourth quarter 2016:


Top 10 Stocks That Matter Most To Hedge Funds: Q4 2016

- Alphabet (GOOGL / GOOG)

- Facebook (FB)

- Amazon.com (AMZN)

- Bank of America (BAC)

- Charter Communications (CHTR)

- Apple (AAPL)

- Microsoft (MSFT)

- Yahoo (YHOO)

- Time Warner (TWX)

- NXP Semiconductor (NXPI)


As you can see, it's quite tech-heavy.   The major exception is Bank of America (BAC), which was a consensus buy in Q4 among hedge funds we track in our newsletter.

For more on what stocks hedge funds have been buying & selling, check out the brand new issue of our premium newsletter that reveals the portfolios of 25 top funds.

What We're Reading ~ Hedge Fund Links 10/4/13

Transcript of an old David Tepper speech [Santangel's Review]

Crispin Odey's latest views [eFinancialNews]

Highfields Capital wants to shrink [Reuters]

Pitney Bowes CEO to hedge funds: don't short us [CNBC]

Latest thoughts from hedge fund manager Daniel Khoshaba [Barrons]

Event-driven hedge funds dominate inflows & performance [Marketwatch]

New additions to the hedge fund hall of fame [II Alpha]

Short star Goshen crushed in rising market [HF Intelligence]

Buffett's Berkshire set to get nearly $2.15 billion of Goldman stock [Reuters]

Third Point bidding for Depfa? [FT]

Falcone's funds sell Harbinger Group shares to Leucadia [Bloomberg]

How to spot a hedge fund fraudster [II Alpha]

The key to hedge fund success [Wealth Professional]

Hedge funds' interest in reinsurance roils markets [PI]

Considering a hedge fund? Here's key questions to ask [WSJ]

Consultants control $830 billion of hedge fund AUM [COO Connect]

Ackman should stick with heavy industry [Dealbook]

Whitney Tilson's Kase Capital Q1 Letter: Pitch on Deckers, Sears Hometown & Outlet Stores

The hedge fund duo of Whitney Tilson and Glenn Tongue split up last year and now Tilson is managing his Kase Capital solo.  He just sent out his first quarter letter to investors where he outlines two of his new investments: Deckers (DECK) and Sears Hometown & Outlet Stores (SHOS), which you can read in the letter below.

Kase Capital's Top Holdings

In Kase Capital's letter, Tilson also lists his largest positions:

1. AIG (AIG)
2. Berkshire Hathaway (BRK.A)
3. Howard Hughes (HHC)
4. Deckers (DECK)
5. Citigroup (C)
6. Goldman Sachs (GS)
7. Netflix (NFLX)
8. Canadian Pacific (CP)
9. dELiA*s (DLIA)
10. Iridium (IRDM)
11. Grupo Prisa (B Shares)
12. Sears Hometown & Outlet (SHOS)
13. Spark Networks (LOV)


Tilson's Shorts & Exposure Levels

Tilson also reiterated a few stocks that he's short: InterOil (IOC), K-12 (LRN), and Nokia (NOK).  He's also holding a large cash balance, waiting for better opportunities to deploy capital.  His equity exposure comes in at 66% long and 22% short currently.


Embedded below is Whitney Tilson's Kase Capital first quarter letter to investors for 2013:

Goldman Sachs Recommends Staying Long Equities & Buying the Dips

Goldman Sachs' Investment Strategy Group recently reviewed four areas they're watching in regards to the markets and economy. In a research note, they address:

1. The current US trajectory: While they do not project growth above the natural trend, they do believe the country is on a sustainable, slow & steady trajectory.

2. Equity valuations: Goldman uses numerous metrics to measure valuation such as 10-year cash flow, price to book, and price to trend earnings. Using a combination of those, they believe equities are fairly valued. They outline two key questions: are margins at risk of declining? And do earnings have to follow suit and decline as well? They feel that margins will be sustained.

3. Geopolitical and other risks: They highlight Middle East tension, renewed pressures in the European periphery, as well as a hard landing in China as key risks. On the last issue, we've posted up Dan Arbess versus Jim Chanos on whether China is a bubble or bonanza. Goldman outlines a combination of these risks accounting for a 25% downside probability in US markets.

4. The merits - or lack thereof - of the old adage, "Sell in May, and go away": Goldman's team identified statistically significant weakness in the month of September. But historically, they point to positive returns in May through August. The main takeaway here is that if the market is down in September, it has typically gone down a lot. That said, they found no evidence to support a consistent "sell in May and go away" investment strategy.


Goldman's Investment Conclusion

Their Investment Strategy Group writes,

"While the economic backdrop, neutral valuations, and moderate geopolitical and economic risks favor equities in our opinion, we also recognize that investing in equities entails volatility. As an asset class with 15% annual volatility, it is typical for equities to decline by 5% or more about 3 times a year and 10% or more about once a year, on average. So to capture the upward trend in equities, an investor has to tolerate the frequent downdrafts. The latest non-farm payroll and heightened concerns about peripheral Europe might well result in one of these downdrafts; in fact, our very short-term momentum signals have turned negative. But as investors - rather than traders - we recommend staying long equities. For those who are underinvested, we recommend using downdrafts as opportunities to build equity positions."

For additional market commentary, head to strategist Jeff Saut's latest note on being conservative, not conventional.

Boykin Curry's Value Investing Congress Presentation: Aon & Goldman Sachs

At day two of the Value Investing Congress, Boykin Curry of Eagle Capital gave the case for going long Aon (AON) and Goldman Sachs (GS) in a presentation entitled "Time Horizon & Analytical Tools."

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


Boykin Curry (Eagle Capital)

Aon (AON): Should have a 15% compound return for five years. It's a duopoly with a free call option (their new GRIP system) and another call option (multiple expansion). However, the company won't have any organic growth and GAAP measure makes it look less attractive.

He mentioned that the turn in the insurance cycle should be a tailwind. Compound rates are over 100% and some natural disaster/catastrophe will be a catalyst for insurance premiums to increase. We've analyzed AON in a past issue of our Hedge Fund Wisdom newsletter.


Goldman Sachs (GS): Company is facing a lot of short-term headwinds but if you put a 14x multiple on the i-banking division you get $1 billion and you put a 13x multiple on the PE division. He gives a liquidation value of $155 billion and most of their assets are liquid. Curry says GS could buyback 30% of equity over 3 years.


Q&A Session:

1. Goldman's balance sheet? They are borrowing money and sitting in cash to protect against bank run and to take advantage of potential opportunities.

2. Regulatory uncertainty will continue to be a problem for GS but he thinks they should still make a bunch of money.


About Boykin Curry: Eagle Capital has over $10 billion AUM and since inception in 1988 has returned 15.1% annualized.


Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.

Whitney Tilson's Value Investing Congress Presentation on Berkshire Hathaway & J.C. Penney

At day two of the Value Investing Congress, Whitney Tilson & Glenn Tongue of hedge fund T2 Partners gave the case for going long Berkshire Hathaway (BRK.A) and J.C. Penney (JCP) in a presentation entitled "Many Ways to Win."

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


Whitney Tilson & Glenn Tongue (T2 Partners)

Embedded below is their full slideshow presentation:




The hedge fund pitched J.C. Penney (JCP) and they have a $71 price target (stock $31 now). “Decent” business. Followed Ackman, but got a lot more interested with new CEO on board. Story well known, same as Bill Ackman’s JCP thesis a few months ago. Persistent question about how the real estate value can be realized.

Other new stocks they have added in size: Goldman Sachs (GS), Citigroup (C), and Sandisk (SNDK). GS, C: Ackman also has these positions. Says trading at discount to book value. Says everyone ignores a fabulous business at C’s “good bank” and only looks at the bad bank portion.

SNDK: they own disk drive makers, says 90% storage on spin platters, the other 10% will be in Flash memory. Memory capacity constrained, explosive demand via tablets, smartphones. NAND has historically been commodity product, but being spec’d into a smartphone is different, enormous operating leverage, SNDK has IP on MLC.

You must overcome your initial knee-jerk reaction that “this is a terrible business.” The industry has changed- consolidated, and demand is exploding. Every iPad, iPhone needs it, yet analysts all expect pricing to fall as technology falls. They think pricing will improve. SNDK is trading so cheap, at a 6x P/E, and it could grow and trade at 20x P/E. Says a massive portion of the margin in iPhones is the incremental NAND. SNDK in the 4S.

As indicated in our September hedge fund performance numbers post, T2 was -9.5% in September and -29.6% for the year at that time.


Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.

Bruce Berkowitz & Bill Ackman: Summary of Their Harbor Investment Conference Talk

We're continuing our focus on the recent Harbor Investment Conference that took place late last week and wanted to point out a discussion between Fairholme Capital's Bruce Berkowitz and Pershing Square Capital Management's Bill Ackman. The two interviewed each other on their respective investments.

Below courtesy of our friends at Benzinga.com is a guest post summarizing the managers' talk at the Harbor Investment Conference:

"Berkowitz of Fairholme Capital, was interviewed by Bill Ackman, the conference's Co-Chair, and he discussed why he's been long Berkshire Hathaway (NYSE: BRK-A) and Leucadia National Corp. (NYSE: LUK) for a long time. He bought both of them around 1985, for similar reasons. He liked the company's management, and he specifically liked Berkshire because he said that Warren Buffett was a "smart guy" who ran other people's money. He paid about $2,700 per share for each A share he owns.

Ackman of Pershing Square Capital, asked what Berkowitz's biggest investment error was of his career. Berkowitz responded by saying that his biggest mistake was trusting management, and not verifying them. He said that in order to verify management, you have to try to prove them wrong, and kill their thesis.

He also discussed some of his better investments, like Imperial Metals, which Berkowitz said he has no idea why it's doing well, it just is. He discussed his position in Wells Fargo (NYSE: WFC) in the late 1980's and early 1990's, and said that he really likes the banks now. He believes we are rebuilding now, and a lot of banks are trading below book value, with low valuations, and said that the worse the bank was perceived, the better it will probably wind up being. He owns positions in Goldman Sachs (NYSE: GS), Regions Financial (NYSE: RF), AIG (NYSE: AIG), CIT Group (NYSE: CIT), Bank of America (NYSE: BAC), Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) in the financial sector. Berkowitz said there is a black box risk to owning banks, but after three years, you can get an idea of who's going to do well. Berkowitz said he would own more of Goldman Sachs if he could, but as a mutual fund, he's forbidden by law.

Regarding AIG, he said that AIG is more respected in Asia than it is here, and he sees tremendous value in the company's remaining assets, which it has so many of. Berkowitz said that former AIG CEO Hank Greenberg was a serial acquirer of assets, and there is tremendous value still there. He said that the current AIG is trading below book value, and it's trading at a single digit P/E. A major reason why he likes AIG is the company won't have to pay taxes for quite some time, as the company lost over $100 billion in market cap."

To read about the rest of Ackman and Berkowitz's talk, we highly recommend heading to the full summary at Benzinga here.

Todd Combs of Castle Point Capital Joins Berkshire Hathaway as Investment Manager

Warren Buffett just announced that Todd Combs of hedge fund Castle Point Capital will be joining Berkshire Hathaway (BRK.A) as an investment manager at the end of the year. Buffett and Charlie Munger have been tracking Combs for three years and Combs has been running his hedge fund for the past five years.

We'd hypothesize that in the intermediate term, Combs has been brought on as a replacement for Lou Simpson since Combs is said to take control of part of Berkshire's investment portfolio. Simpson, who manages the investments for Berkshire's subsidiary, GEICO, is set to retire at the end of 2010 (the same time when Combs is set to start). On the notion that Combs could manage all of Berkshire's investments, Buffett said, "He’s got the best chance of being the successor, but if we find the right guy or gal, we’d take that person, too."

In the past, many have questioned Berkshire Hathaway's succession plans and this year there has been much talk of Li Lu joining as an investment manager. However, Buffett has just revealed that Lu will be staying with his own fund. Buffett also emphasized that Berkshire's succession will include one person handling the CEO role, and then multiple individuals could still act as investment managers in a multi-pronged approach.

Why Todd Combs?

This is the question many people are asking as he doesn't seem to be particularly well-known. Here are some potential reasons for the hire:

First, his focus on financials. Given the recent financial crisis, Combs' familiarity with these companies and niche focus on the sector gives him an advantage. In an increasingly complex financial world (derivatives, etc), Combs' expertise will come in handy considering Berkshire owns very large stakes in financials including: Wells Fargo (WFC), American Express (AXP), US Bancorp (USB), Moody's (MCO), and M&T Bank (MTB).

Second, his risk management skills. Buffett apparently described Combs' performance during the crisis as, "pretty good." According to Bloomberg, Castle Point returned +6.2% in 2009, -5.7% in 2008, +19% in 2007, and +13.6% in 2006. In Berkshire's 2007 shareholder letter, Buffett discussed the topic of hiring investment managers. In it, he said that this person needs to be, "genetically programmed to recognize and avoid risk, including those never before encountered." Given this stringent requirement, it's obvious that Buffett and company feel Combs possesses a risk management skill-set that is beyond satisfactory. (And speaking of risk, Buffett recently talked about his worst trade).

Third, his personality blends with Berkshire's culture. According to the New York Times, Buffett said that, "He’s always been enamored with Berkshire. I know he’ll be good, but he’s the right type of guy. We don’t want someone who’s trying to figure out if they can make $100 million with us, or $200 million with the next guy." And, this ties somewhat into the next reason.

Fourth, his age. Given the fact that Berkshire's leading men Warren Buffett, Charlie Munger, and Lou Simpson are getting older, Berkshire wants to bring in younger talent that can add longevity to the company. At the young age of 39, Combs can slide into Berkshire's organization and stay there for many decades, just as Buffett has. And, based on his personality, it appears that Combs is in it for the long haul. Combs received his degree in finance and multinational business operations from Florida State University. He has experience working for Florida's comptroller as well as Progressive Insurance.

Castle Point Capital's Portfolio

Given Berkshire's stamp of approval, it's only appropriate to look under the hood at Todd Combs' hedge fund to see what he's invested in. The following were Castle Point's long equity holdings as of June 30th, 2010 according to their most recent 13F filing with the SEC. The new disclosures reflecting their Q3 portfolio will be released in the middle of November.

Keep in mind that you can see what Berkshire Hathaway and prominent hedge funds are investing in via our newsletter, Hedge Fund Wisdom. But for the time being, here's Castle Point's $279 million in reported assets:

New Positions
CIT Group (CIT)
Broadridge Financial (BR)
Leucadia (LUK)
Hartford Financial (HIG)
PNC Financial (PNC)
Wells Fargo (WFC)
Chatham Lodging (CLDT)

Increased Positions
Blackrock (BLK): Increased by 78.5%
Aercap (AER): Increased by 78%
Mastercard (MA): Increased by 70%
State Street (STT): Increased by 60%
Genworth Financial (GNW): Increased by 53%
Charles Schwab (SCHW): Increased by 43%
Annaly Capital (NLY): Increased by 43%
Western Union (WU): Increased by 36%
US Bancorp (USB): Increased by 27.5%
Chubb (CB): Increased by 27.5%

Reduced Positions
JPMorgan Chase (JPM): Reduced by 39%
MB Financial (MBFI): Reduced by 21.5%
Goldman Sachs (GS): Reduced by 18.4%

Sold Out of Completely
Assurant (AIZ)
Signature Bank (SBNY)
Reinsurance Group America (RGA)
TD Ameritrade (AMTD)
First Citizens Bancshares (FCNCA)
Two Harbors Investment (TWO)

Top 25 Positions

1. US Bancorp (USB): 8.2% of reported assets
2. Mastercard (MA): 7.3%
3. State Street (STT): 6.8%
4. Western Union (WU): 6.5%
5. CME Group (CME): 5.1%
6. Renaissance Re (RNR): 5.1%
7. Pennymac Mortgage (PMAC): 4.6%
8. Chubb (CB): 4.6%
9. Starwood Property Trust (STWD): 4.5%
10. Annaly Capital Management (NLY): 4.4%
11. CIT Group (CIT): 4.3%
12. Progressive (PGR): 4.1%
13. JPMorgan Chase (JPM): 4.0%
14. Goldman Sachs (GS): 3.8%
15. Charles Schwab (SCHW): 3.6%
16. Broadridge Financial (BR): 3.5%
17. Aercap Holdings (AER): 3.4%
18. MB Financial (MBFI): 3.4%
19. Genworth Financial (GNW): 2.9%
20. United America Indemnity: 1.9%
21. Blackrock (BLK): 1.8%
22. Leucadia National (LUK): 1.8%
23. Hartford Financial (HIG): 1.6%
24. PNC Financial (PNC): 0.8%
25. First Financial (FFBC): 0.8%

As you can see, Castle Point's portfolio is very financial-laden. And, they share the same large position in US Bancorp (USB) as Berkshire Hathaway. We'd also point out Combs' preference for payment processors & money transfer services such as Mastercard (MA) and Western Union (WU). These types of companies have been long favored by hedge funds we track. The last takeaway here is that he runs a somewhat concentrated portfolio as well.

So, at least one of Berkshire's future investment managers seems to be in place. Li Lu appears to be out of the running. The question that remains is, will there be more managers added? Only time will tell. You can view Buffett's past comments on succession plans here as well as a video that examines potential Berkshire successors here.

For more on Berkshire's new hire, Carol Loomis at Fortune penned an article here.

Bruce Berkowitz Buys Morgan Stanley (MS): Fairholme Portfolio Update

Bruce Berkowitz's Fairholme Capital has quite the appetite for financial companies and this partially (mainly?) stems from his confidence in a United States recovery. While he acknowledges that a double-dip recession is possible, his bets say otherwise. His Fairholme Fund (FAIRX) recently revealed its latest portfolio and here is the portfolio breakdown as of May 31st, 2010:

1. Sears Holdings (SHLD): 7.7% of the portfolio
2. AIG (AIG): 6.8%
3. Citigroup (C): 5.4%
4. Goldman Sachs (GS): 5.4%
5. Berkshire Hathaway (BRK.A): 4.7%
6. Bank of America (BAC): 4.4%
7. St. Joe (JOE): 4.3%
8. Humana (HUM): 4.0%
9. AmeriCredit (ACF): 3.6%
10. Regions Financial (RF): 3.5%
11. Spirit AeroSystems (SPR): 2.7%
12. Hertz Global (HTZ): 2.6%
13. MBIA (MBIA): 1.0%
14. Morgan Stanley (MS): < 1.0%

Keep in mind that the latest portfolio update above only reflects equity positions. As we've highlighted before, he has a large debt position in General Growth Properties as well as other corporate and convertible bond stakes. And of recent news regarding the positions above, he surely has to be happy that AmeriCredit is set to be purchased by General Motors.

We've previously detailed Berkowitz's new MBIA stake as well as the fact that he has been adding to his AIG position. What's interesting here is that Berkowitz is now one of the largest shareholders in MBIA and yet it is only a 1% position for his mutual fund. Specifically regarding his MBIA stake, Berkowitz believes that the firm will survive as it honors its guarantees and has a confident CEO in the form of Joseph Brown. Berkowitz also is fond of the move that separated the municipal bond insurance arm into a new unit. Circling back to his economic recovery theme, he thinks that policies MBIA writes now and in the near future will be lucrative.

Regarding his position in AIG, Berkowitz feels that at the end of 2011 the company will be free and clear of the government's stake and you can read his full AIG thesis here. Also, we pointed out his new position in Goldman Sachs back when he revealed it at the Value Investing Congress. Back then, it was unclear as to how large of a stake he had purchased but now we can see it's quite a sizable one at 5.4% of his fund's capital. Lastly, it's worth noting that the Fairholme Fund still has just under a 15% cash position. If opportunities arise, we'll assume that Berkowitz won't be shy. As you can see, it's quite clear: Fairholme fancies financials.

Value Investing Congress: Notes From Day One

The Value Investing Congress has been posting updates of the first day of the event on Twitter (make sure to follow us as well) and we wanted to aggregate their brief updates into a comprehensive post here on Market Folly. Yesterday, the Congress heard investment presentations from the likes of Mohnish Pabrai (Pabrai Investment Fund), Bruce Berkowitz (Fairholme Fund), Paul Sonkin (Hummingbird Value), Richard Vogel (Alatus Capital), Lloyd Khaner (Khaner Capital), Amitabh Singhi (Surefin Investments), Carlo Cannell, Guy Spier (Aquamarine Capital), and Patrick Degorce (Theleme). We'll start first with Mohnish Pabrai's presentation:


Mohnish Pabrai of Pabrai Investment Funds: His presentation was entitled "Leveraging Checklists to Dramatically Improve Investing Results." He has developed this list based on mistakes other value investors have made and thus far he has 80 mistakes on the list. Pabrai notes that no companies will pass all of the 80 questions on his checklist but that his list has helped him determine position sizing. He also mentioned that had this checklist been in place before some of his prior investments, some of his decisions would have been different. In terms of investment ideas, Pabrai feels that the property & casualty market is very soft but that there is value to be found there. For those interested, we've also detailed Pabrai's portfolio in the past.


Bruce Berkowitz of Fairholme Fund: The main thing to take away from Berkowitz's talk is that he is now long Goldman Sachs (GS) in size. It's not exactly clear what type of investment he made, but we do know he has a new position now. Turning to his stake in General Growth Properties (GGP), he mentioned that he is not raising his bid. On his new position in AIG (AIG), he noted that GAO has terrific reports on the company (we previously detailed Fairholme's new AIG stake). Lastly, Berkowitz jokingly mentions that the only 'perfect hedge' is a Japanese garden as everything is correlated when things turn sour. You can view the rest of our coverage on Berkowitz here.


Richard Vogel of Alatus Capital: Vogel is focusing on companies with 8-10% free cash flow yields that also have an "inflection point" with some sort of catalyst (a new product launch or tapping into a new market, etc). His presentation focused on Europe as all the countries are 'in a sea of red ink' because they all have budget deficits, except for Switzerland. Vogel focused on a Swiss based company: Valora (SWF: VALN). It has an estimated free cash flow yield of 11% and is the largest kiosk operator in Switzerland and Luxembourg with 1,175 outlets. He mentions that new management is taking positive steps as they improve margins and restructure.


Lloyd Khaner of Khaner Capital: Khaner gave a presentation entitled, "Why Some of the Best Value Investors Own Gold." He mentioned that he had formerly 'shunned gold' until the mid 2000's but obviously has had somewhat of a change of heart. He mentions that the gold to oil ratio has typically been "1 oz of gold to 15 bbl of oil." In terms of rationale for owning gold, Khaner cites that gold supply is decreasing as production is around 2,500 tons per year and consumption bests that at 4,000 tons. Central Banks have also been net buyers of gold for the first time since 1980. Khaner specifically highlights gold as a safe haven because it holds value even if it does not appreciate. It is the last currency standing as you cannot print more.

If you were to use the same inflation trajectory as the last gold bubble and apply it to current times, the price would be near $5,000 an ounce. There is one main reason value investors own gold: currency devaluation. While not a value investor, this is exactly the reason that John Paulson launched his gold fund. He is using gold derivatives and gold mining stakes as a proxy for his wager on the US dollar being devalued.

Khaner did not specifically cite the best way to play gold (whether it be via exchange traded funds, physical gold, or mining companies). John Burbank's hedge fund Passport Capital prefers physical gold and David Einhorn's Greenlight Capital does as well. In fact, at the previous Value Investing Congress in October 2009, Einhorn's presentation centered on gold.

Khaner did say that if you go the mining companies route, you have to focus on good management teams that have skin in the game, a company with a good history, and one with low production costs. Back in the 1930's when deflation was prevalent, gold mining stocks were the place to be. Both John Paulson and George Soros bought a stake in the same gold miner recently as well. In the past we've posted up copious amounts of hedge fund research on gold so definitely check that out if you're looking for more insight on the subject.


Carlo Cannell of Cannell Capital: Focusing on small cap value plays, Cannell founded his firm in 1992. He has 18 years of investing experience and will take on an activist role when needed. During his talk, he mentioned that all of his funds are named after islands. The were not many updates posted about his talk but he did mention that Research in Motion (RIMM) does not particularly interest him as he prefers to buy companies trading at 1x EBITDA. He gave one example of a gem: Core-Mark (CORE).


Patrick Degorce of Theleme Partners: Degorce recently launched Theleme (his new firm) with $200 million and he was previously co-founder of The Children's Investment Fund. Investment timeframe is very important to Theleme as they typically focus on 4-5 year timelines. Degorce echoed Warren Buffett by noting that you should invest in businesses/companies that you understand and not pay attention to short-term gyrations in the market. In particular, Degorce values companies based on discounted cash flows. Turning to his specific investment idea, Degorce recommended Deutsche Boerse (ETR:DB1). He notes that they earn 45% of EBIT from European equity derivatives and fixed income. They recently announced cost cutting measures to the tune of $150 million and have a growing cash horde of 6.5 billion euros. In 2009, they generated 3.40 in free cash flow and it currently trades around 10 times FCF.


Amitabh Singhi of Surefin Investments: Singhi focused on opportunities in India and noted that while many industries are mature, some have exploded like real estate, telecom, and pharma. He thinks there is more opportunity in small cap names as there is little research coverage. In particular, he buys 'cigar butts' as he prefers contrarian plays, special situations, and even some GARP plays (growth at a reasonable price). One such 'cigar butt' play is Cheviot (BOM:526817), a producer of Jute (vegetable fiber) that is trading at cash and below its net current asset value. Additionally, it has a return on equity of 26% over the last 10 years. Overall, when investing in India, Singhi likes to have 'assets on the ground in (the) country.' He typically avoids the metals and oil & gas sectors.


Guy Spier of Aquamarine Capital: Spier focused on Fortescue Metals Group (FMG) and notes it could be trading at 1x EBITDA if the market starts to take a hit. He also noted an idea from Passport Capital's John Burbank: 'go long what China is short.' Spier also mentioned something that Warren Buffett has in his office: 'invest like a champion today.' Guy also recommends to increase productive relationships and reduce toxic ones in order to associate yourself with people who are better than you so that you may become better. In essence, that is one of the main goals here at Market Folly. By tracking successful and talented investment managers, we strive to learn from both their successes and their mistakes.


Paul Sonkin of Hummingbird Value: Sonkin focuses on micro and nano cap value plays and looks for a discount to intrinsic value. He seeks internal and external catalysts and notes that certainty of outcome and timeline are essential as well. Interestingly enough, he sometimes competes with companies buying back their own stock due to the low liquidity. Sonkin's investment idea was Steinway Musical Instruments (LVB) citing three assets: real estate, piano business, and band business. Like many other companies, he anticipates growth in Asia over the next ten years as well as a recovery in the US for their piano business. He estimates their properties in New York might be worth $50-75 million. Additionally, Sonkin feels LVB has pricing power as they've raised prices on pianos 4% each year for quite some time. Lastly, a fun fact from Sonkin: he feels the Proxy statement is the most underrated tool out there and he also won't invest in a company if a CEO wears a lot of jewelry (guess he won't be investing in rapper mogul "Birdman's" new oil company).


That wraps up the summary of the first day of presentations. Thanks again to the Value Investing Congress for posting their Twitter updates and keep in mind you can follow us on Twitter as well. Hopefully readers have found this aggregation useful. Stay tuned as we'll also post up summaries from day two of the event here at Market Folly as well as more in-depth research regarding some of the investment ideas. In the mean time, head to our coverage of the latest hedge fund portfolio movements.

Matthew Grossman's Hedge Fund Plural Investments: Portfolio Glance (13F Filing)

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

This is the first we've covered Matthew Grossman's hedge fund so here's some background. Grossman founded Plural Investments in 2008 with $900 million after previously serving as the Chief Investment Officer of CR Intrinsic (of Steven Cohen's SAC Capital). Prior to that, Grossman was an energy analyst with Julian Robertson's Tiger Management. Needless to say, he has quite the resume when it comes to prominent fund managers.

Fourth quarter 2009 was actually the very first time that Plural filed a 13F with the SEC. So, we don't have any quarter over quarter portfolio changes to update you on. However, this is the first major glimpse at their portfolio and as such we'll provide their top holdings.

Top 20 Holdings by percentage of assets reported on 13F filing

1. Alcon (ACL) Calls: 7.64%
2. Grainger (GWW): 3.07%
3. Goldman Sachs (GS): 2.64%
4. SPDR Gold Trust (GLD): 2.33%
5. Eaton (ETN): 2.05%
6. Bucyrus (BUCY): 2.02%
7. US Oil Fund (USO): 1.95%
8. Goodyear Tire & Rubber (GT): 1.92%
9. Dr Pepper Snapple (DPS): 1.91%
10. Flowserve (FLS): 1.77%
11. Alcon (ACL): 1.75%
12. Humana (HUM): 1.67%
13. Wellpoint (WLP): 1.55%
14. Union Pacific (UNP): 1.37%
15. CSX (CSX): 1.28%
16. Watsco (WSO): 1.19%
17. Bank of New York Mellon (BK): 1.12%
18. Cablevision (CVC): 1.11%
19. Lincoln National (LNC): 1.10%
20. Norfolk Southern (NSC): 1.07%

So, an intriguing first look at Grossman's Plural Investments. Right away you can notice a few sector themes here. While they represent a smaller portion of his overall portfolio, railroads definitely catch the eye here. Grossman's hedge fund owns practically all the remaining majors left after Burlington Northern's acquisition by Warren Buffett's Berkshire Hathaway. Plural owns shares in CSX, UNP, and NSC. Also, we see that Grossman fancies healthcare here as he owns shares in both Wellpoint and Humana. By far and away their largest position though is Alcon as they own both calls and common stock on the name. Lastly, we'll make note of yet another hedge fund with exposure to gold (via GLD). Whether it be for hedging, a macro bet, or some other purpose though, we don't know. Overall, an interesting mix of stocks and we look forward to being able to compare portfolios next quarter.

Data used for this article comes from Alphaclone, our source for backtesting strategies and sorting through all the hedge fund portfolio maneuvers with ease. Assets reported on the 13F filing were $826 million this quarter. Remember that these filings are not representative of the hedge fund's entire base of AUM.

In our portfolio series we've already covered a ton of long/short equity hedge funds, including:
Value, Event-Driven or Activist focused funds such as: Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Warren Buffett's portfolio, David Tepper's Appaloosa Management, Dan Loeb's Third Point, Eddie Lampert's RBS Partners, Bill Ackman's Pershing Square Capital Management, Ricky Sandler's Eminence Capital.

'Tiger Cub' and 'Tiger Seeded' funds (hedgies somehow tied to Julian Robertson): Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, Lee Ainslie's Maverick Capital, David Ott's Viking Global, and Chris Shumway's hedge fund Shumway Capital Partners, Chase Coleman's Tiger Global, Roberto Mignone's Bridger Management, Philippe Laffont's Coatue Management Charles Anderson's Fox Point Capital, Jonathan Auerbach's Hound Partners, Lee Hobson's Highside Capital, David Stemerman's Conatus Capital, Matt Iorio's White Elm Capital, David Gallo's Valinor Management, Tom Brown's Second Curve Capital, and Robert Citrone's Discovery Capital.

As well as hedge funds employing various strategies ranging from long/short to merger arbitrage to global macro: John Paulson's hedge fund Paulson & Co, Philip Falcone's Harbinger Capital Partners, Thomas Steyer's Farallon Capital, John Burbank's Passport Capital, Brett Barakett's Tremblant Capital, George Soros' hedge fund Soros Fund Management, Phil Hempleman's Ardsley Partners.

Be sure to check back daily for our new updates.

David Gallo's Valinor Management Adds Heavily to Goldman Sachs, Iconix Positions: 13F Filing

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

Next up is David Gallo's Valinor Management. Gallo founded Valinor after previously working at Roberto Mignone's Bridger Management. He received his MBA from Harvard Business School and the hedge fund is named after lands often inhabited by immortal souls from the books of J.R.R. Tolkien. We just started covering Valinor's portfolio, and in the past have detailed their recent position adjustments.

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


Brand New Positions
Check Point Software (CHKP)
Education Management (EDMC)
Cardinal Health (CAH)
Amedisys (AMED) Puts
PHH (PHH)
Bank of America preferreds (BAC-S)
Schweitzer mauduit (SWM)
Graphic Packaging (GPK)
Lear (LEA)
Boston Scientific (BSX)


Increased Positions
Goldman Sachs (GS): Increased by 457.4%
Gymboree (GYMB): Increased by 304.3%
Iconix (ICON): Increased by 132.7%
Popular (BPOP): Increased by 82.4%
Qualcomm (QCOM): Increased by 78.6%
Regions Financial (RF): Increased by 72.3%
Bank of America (BAC): Increased by 68.2%
Assurant (AIZ)): Increased by 44.8%
Dr. Pepper Snapple Group (DPS): Increased by 42.3%
Morgan Stanley (MS): Increased by 38.2%
Yahoo (YHOO): Increased by 33.8%
LM Ericsson (ERIC): Increased by 28.7%
Jarden (JAH): Increased by 19.4%
Covanta (CVA): Increased by 19.1%


Reduced Positions
DSW (DSW): Reduced position by 33.6%
Monsanto (MON): Reduced position by 21.5%


Removed Positions (Sold out completely):
People United Financial (PBCT)
Allegheny Energy (AYE)
International Speedway (ISCA)
Ecolab (ECL)
Hertz Global (HTZ)
Exterran (EXH)
Royal Caribbean (RCL)
Allergan (AGN)
United Community Banks (UCBI)
Eclipsys (ECLP)
MSC Software (MSCS)
YRC Worldwide (YRCW)


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

1. Wyndham Worldwide (WYN): 4.29%
2. American Water Works (AWK): 3.18%
3. LM Ericsson Telephone (ERIC): 3.15%
4. Popular (BPOP): 3.10%
5. Goldman Sachs (GS): 3.06%
6. Covanta (CVA): 3.06%
7. Assurant (AIZ): 3.04%
8. Transdigm Group (TDG): 2.97%
9. Jarden (JAH): 2.96%
10. Iconix (ICON): 2.92%
11. Qualcomm (QCOM): 2.92%
12. Dr. Pepper Snapple (DPS): 2.92%
13. Yahoo (YHOO): 2.91%
14. Regions Financial (RF): 2.78%
15. Monsanto (MON): 2.49%
    

Wyndham Worldwide is their largest holding and this is certainly the first time we've seen a hotel at the very top of a hedgie's portfolio. In fact, Valinor's portfolio as a whole doesn't resemble many of the other hedge funds we've looked at as it seems they take the road less traveled. Some examples of this would be positions in Yahoo, Regions Financial, and American Water Works. However, Valinor does join the plethora of other hedge funds betting on Transdigm Group (TDG).

Of the positions they added the most to, Goldman Sachs takes the cake as they boosted their position by over 450%. Other large additions include Popular (BPOP) and Iconix Brand (ICON). There weren't many reductions in their portfolio at all, especially when you consider their reported assets rose 28% on a quarter over quarter basis. Overall, Valinor increased their long US equity portfolio via consumer goods and financials exposure and they reduced services exposure.

Data used for this article comes from Alphaclone, our source for backtesting strategies and sorting through all the hedge fund portfolio maneuvers with ease. Assets reported on the 13F filing were $1.2 billion this quarter compared to $956 million last quarter, almost a 28% increase. Remember that these filings are not representative of the hedge fund's entire base of AUM.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, Warren Buffett's portfolio, John Paulson's hedge fund Paulson & Co, Lee Ainslie's Maverick Capital, Dan Loeb's Third Point, Eddie Lampert's RBS Partners, David Ott's Viking Global, and Chris Shumway's hedge fund Shumway Capital Partners, Chase Coleman's Tiger Global, Philip Falcone's Harbinger Capital Partners, Roberto Mignone's Bridger Management, Thomas Steyer's Farallon Capital, John Burbank's Passport Capital, Brett Barakett's Tremblant Capital, George Soros' hedge fund Soros Fund Management, and Philippe Laffont's Coatue Management Charles Anderson's Fox Point Capital, Bill Ackman's Pershing Square Capital Management, Jonathan Auerbach's Hound Partners, Lee Hobson's Highside Capital, David Stemerman's Conatus Capital, and Matt Iorio's White Elm Capital. Check back daily for our new updates.

Quick Goldman Sachs Conviction Lists Update

Yesterday, we saw that Goldman Sachs made a few changes to their Conviction Lists. Notably, they added Wyeth (WYE) to the buy list, giving the stock a breakup value of $50 a share. They currently have a price target of $46 on the shares. Additionally, Autoliv (ALV) was removed from the conviction buy list. But, they still retain a normal 'buy' rating on the name. You can check out the rest of the recent updates to the GS conviction buy and sells lists here and here.

Taken from Google Finance, Wyeth (WYE) is "engaged in the discovery, development, manufacture, distribution and sale of a line of products in three primary businesses: Wyeth Pharmaceuticals (Pharmaceuticals), Wyeth Consumer Healthcare (Consumer Healthcare), and Fort Dodge Animal Health (Animal Health)."

Autoliv (ALV) is "a supplier of automotive safety systems with a range of product offerings, including modules and components for passenger and driver-side airbags, side-impact airbag protection systems, seatbelts, steering wheels, safety electronics, whiplash protection systems and child seats, as well as night vision systems and other active safety systems."

Goldman Sachs Conviction Lists Update

A few more changes were made to the Goldman Sachs Conviction Buy list early this week. Firstly, Arcelor Mittal (MT) was added to the Conviction Buy List. Schlumberger (SLB) was also added to the buy list with a new price target of $59. Schlumberger, as we've detailed here on Market Folly, has a heavy concentration of hedge fund ownership, including the likes of Boone Pickens' BP Capital, Stephen Mandel's Lone Pine Capital, and many more funds.

Additionally, Humana (HUM) was removed from the buy list, but the firm still maintains a regular 'buy' rating on the stock. Transocean (RIG) was also removed from the Conviction Buy list, having been added to the list just recently back in September.

Boeing (BA) was added to the Conviction Sell List. Lastly, HealthNet (HNT) was removed from the Conviction Sell list.

If you've missed them, we've detailed previous changes that were made to Goldman's coveted lists on October 27th here, as well as the changes from October 20th here.

Goldman Sachs Conviction Buy & Sell Updates

Late last week, Goldman Sachs made some changes to their coveted Conviction Buy and Sell lists. They were very active in the steel sector, adding Steel Dynamics (STLD) to the conviction buy list and then putting US Steel (X) on their conviction sell list. Lastly, Goldman also removed Alcatel Lucent (ALU) from the conviction buy list, but still rates the company as a normal 'buy.'

Goldman has been very busy the last few weeks adding and subtracting names from their lists as the volatility picks up and the market landscape changes. We have detailed more of Goldman's moves here and more additions to their conviction buy list here.

Warren Buffett is Buying American

If you haven't heard about it yet, Warren Buffett recently addressed the public with an editorial piece in the NY Times. Here is an excerpt,

"THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: 'I skate to where the puck is going to be, not to where it has been.' "

It should also be noted that each time he has addressed the public like this in the past, it has seemingly marked a market top or bottom. But, with the caveat that he is usually a few months early. As I wrote about recently, Buffett has been selling puts on Burlington Northern (BNI). Also, Buffett recently sat down to talk with Charlie Rose in an interview about the economy and market. All this, combined with Berkshire's Goldman Sachs (GS) and General Electric (GE) buys have made him quite a busy man. You can read the rest of his NY Times editorial here.

Technical Analysis: Charts With Solid Risk/Reward

Just wanted to breeze through some charts really quick, since it's been a while. Time for some good old technical analysis. Ok, right to it. BJ's Restaurants. Simply put, this place is a clusterf*ck. They're facing rising input costs and slower dining traffic. As I've written about here and here, the consumer environment just isn't that hot right now. In fact, its accelerating to the downside. So, this place will only get squeezed harder. Their solution? Raise prices faster. Oh, great, that will really get struggling consumers in the door. BJRI is hurting so much for any type of positive news that it was up 9% yesterday on an analyst upgrade. Yes, one upgrade. Well, the good news is that this fluke of a 9% move gives us a low risk opportunity here. Check out the chart below.

(click to enlarge)

As you can see, BJRI used to bounce right off of support at $13.5 way back in April and May. Then, the stock ripped lower. It has already tried to test $13.5 once in August and it failed. Well, it's right back up at those levels again. $13.5 was past support and thus is now future resistance. The analyst upgrade today moved the stock up to a high of $13.62. So, a low risk play here would be to short BJRI at these levels and then place your stop just above the resistance (and the 200 day moving average) at around $14 or so. You can be the judge as to how tight of a stop you want to use here. One thing to note if you want to play this from the short-side: be cautious because the recent move upwards has had some volume behind it. Because, as you've seen yesterday, the slightest bit of positive news can send these consumer related names flying. Conversely, if you do get stopped out, you could just flip your trade to the long side. Because, if BJRI breaks out above its 200 day moving average, as well as above the strong resistance at $13.50, it has the potential to go much higher. Another option would be to just stand on the sidelines to see which way it is going to move and then pile on. The point here is that BJRI has very clear risk/reward in both directions. Watch it and play it however you're comfortable.

Next up, I want to point out the large channel Goldman Sachs (GS) has been trading in for a long while. I meant to post this up a few weeks ago, but I've been so busy that I forgot. Here's the original chart I meant to post up showing the clear support for GS at around $155 and then the resistance at around $200 (you could also make a point for resistance around $190).

(click to enlarge)

Now, take a look at GS currently.

(click to enlarge)

As expected, it bounced right off $155 and traded higher up to $170. The simple play here has been buy GS around $155 and stop out around $145 or so (depending on how tight you want your stop). Then, you turn around and sell GS as it rallies higher into various levels of resistance around $170, $190 or wherever you want to lock in some profits. As you can see, this name has been trading sideways for a while. So, while there might not be a big play here right this moment, keep your eye on it. Eventually, some very favorable risk/reward setups will take place just as they have in the past in this name.

Next, I want to turn to a little series that I like to call: There's no such thing as a triple bottom. First up, we have Companhia de Saneamento (SBS). Now, I actually like this name as a longer term play on Brazil. But, for the time being, you absolutely have to respect the technicals, which point to lower prices. Obviously this presents us with a risk/reward setup. You can either try to catch a falling knife (which I don't really recommend). Or, you can wait until it slices through that past support line and short it down along with the rest of the momentum players. It's up to you. The point is that around $37 or so has served as past support for SBS as it double bottomed back in April of 07 and February of this year. You could get a reflex bounce off that support level. But, since we all know there is no such thing as a triple bottom, it looks like it's heading lower.

(click to enlarge)

The second chart in the "no such thing as a triple bottom" series is Freeport McMoran (FCX). Again, this company is actually a great name to own for the longer term, as valuations have just gotten ridiculously cheap. But, in the mean time, you've got to respect the technicals. Some hedge funds have been forced to sell their shares, while others are merely front-running each other. It's a mess out there and it doesn't look like it will end anytime soon. On the chart, you see that FCX double-bottomed in September of last year and February of this year. Yet again, we're down along those levels of $65. Triple bottoms don't exist so I expect this name to trade even lower to the secondary support level I've drawn in around $60. This is simply another risk/reward setup for you to keep your eye on. These charts are painting an ominous picture right now.

(click to enlarge)

So, what does everyone think about these setups? Are there some you like, some you don't? Would love to see what other people think about these setups. Because, after all, technical analysis is in the eye of the beholder. And, what I see could be completely different than what you see.

Wow...

So, fresh off my post about owning MA and V as your play on financials, I receive this chart... what timing! Barry Ritholtz over at Big Picture has a nice graph (seen above) of banks that have accessed the fed's discount window. As you can see, this year has been record setting to say the least in terms of banks needing help. So, what's next? Implosion? Just another reminder as to why I want to avoid the financials in general and stick to best of breed in the space if you really feel the need to be in there. Some of these companies' balance sheets are giant mysteries, and Lehman (LEH) scares the crap out of me right now with all their level 3 assets or whatever. Click on the graph to enlarge it and get an up close and personal view of how "well-run" our banks are at the moment.

Why the only "financials" you need to own are Mastercard (MA) and Visa (V)

I love it when the media (especially those yaks on cnbc) always ask "Is now the time to buy the financials?!?!" Personally, I steer clear from most of them, except for a revered few. And, they don't even really count as true 'financials.' I'm talking about Mastercard (MA) and Visa (V). I want to preface this by saying that by no means do I recommend jumping into these names right now at these levels. They've had massive runs and undoubtedly are due for pullbacks. But, I just want to put it on your radar for when they eventually do pull back. I've been selling into the strength and only have a little bit of each left and am dying for a pullback to load up on these names. I'm starting to feel empty inside because I can't have full positions in these dominant companies haha.

(Side Note: Now, don't get me wrong, there are 2 ACTUAL financials that I like, US Bank (USB) and Goldman Sachs (GS). USB because of the strong 5% dividend and solid dividend growth, as well as a pretty cautious management team. They seem to have weathered the majority of the storm in terms of the credit crisis/housing woes, and the stock mainly trades sideways. So, I just pocket the dividend and write some covered calls on that badboy to create some nice cashflow. Treat this name almost like a CD or a high yield savings account (but higher yielding). GS, on the other hand, is by far the best of breed investment bank and they get dragged through the mud with the other banks due to guilt by association. In the long run, look for them to distance themselves from the pack and truly outperform. Look to really load up on shares around $160 or even $150 if it trades that low. GS and USB are the only "true" financials I touch with a ten foot pole.)

The main thing that prompted me to post about MA and V has been SunTrust's analyst coverage of the names. Normally, I don't pay much attention to analyst estimates because half the time the analysts are wrong. But, I pay attention to these calls solely because time and time again, SunTrust has been ahead of the pack (and rightly so) in terms of realizing the true revenue that MA and V can grow. Notable Calls has been right on the money by flagging this for their readers. SunTrust now has a street high estimate for MA 2008 and 2009 EPS. Last week, SunTrust raised fical 2008, 2009, and 2010 EPS estimates for V. For V, they raise 2008 estimates from $2.04 to $2.11, 2009 estimates from $2.69 to $2.96, and 2010 estimates from $3.55 to $3.82. As you can see, these are pretty substantial boosts. Then they come right back this week and raise MA's estimates even higher. They boosted MA's 2008 estimates from $8.68 to $8.94 and 2009 estimates from $11.08 to $12.17. Once again, a pretty notable increase. SunTrust suggests that MA could see sustainable EPS growth of at least 20%, which is huge. The overall belief is that MA and V are seeing pricing power in their industry niche of payment processing with no credit risk. They have operating leverage (and are continuing to reduce operating costs) and are seeing massive volume growth. Voila - my investment thesis all along. Suntrust has an argument for those who say MA and V are rich in valuation now: They believe that this is due to the fact that analyst estimates are simply too low and flat out unrealistic.

This reminds me of the exact situation that has been occurring in the fertilizer segment of the agriculture trade. Analysts simply have too low of estimates and these companies are actually trading at much cheaper multiples than we think. 6 months later in the fertilizer game and analysts are STILL playing catch-up. Now, I don't think MA and V are seeing the kind of secular growth explosion that MOS or POT are obviously; but, at the same time, I definitely agree that analyst estimates are too low on MA and V and there is a secular trend building. SunTrust is the only analyst I'll follow on this group simply because they are leading the pack of analysts right now and until the others play catch-up, SunTrust is the only bank out there who "gets it." Through my time in the markets, I've found that certain analysts in each sector are just flat out better than others (surprise, surprise), and you've got to find those analysts and only listen to them. Listening to the others is just a truckload of garbage and noise. So, SunTrust is way ahead of the game here and look for others to follow suit once they crunch the numbers and take a look at what is really happening in the world of global payment processing and realize that their estimates are way too low.

The phrase "global payment processing" is all you really need to know about these companies. They are global stories and most of the growth is occurring away from American shores. Despite an economic slowdown/recession in America, MA and V continue to see huge revenue growth due to international consumers' willingness to use plastic rather than cash. The slowdown in spending from American consumers is not even a chink in the armor of these guys. Think of the rest of the globe as Americans 10 years ago. Eventually, everyone gets used to using debit/credit cards and starts carrying less cash. I can't underscore this point enough. The international opportunity for these names is huge. If they can get consumers in other countries to use their cards even HALF as much as American consumers, they will see record numbers.

Plain and simple, MA and V are payment processors who bear ZERO credit risk. If you want some credit risk, you can always go with some American Express (AXP), if that's your cup of tea. I can see the appeal there, and so does Blue Ridge Capital (seeing as they really loaded up on shares of AXP last quarter). But, I prefer MA and V due to the sheer volume of cards they have in consumers' hands worldwide. I want to stress again that I usually do not pay a ton of attention to individual analyst estimates. But, when you see a firm come out with street-high estimates, constantly leading the pack of analysts, it gets your attention. I think these guys are right on the money and that's why I wanted to point it out. They've been talking my investment thesis in these processors all along. Oh, and did I mention that Lone Pine Capital has a pretty hefty position in MA and V, as detailed here.

Disclosure - long MA and V at the time of writing, but have been selling into strength lately. Looking for a pullback of any size to really begin to add. Keep these names on your radar.