Mike Wilkins on Short Selling: Invest For Kids Chicago

We're posting up notes from Invest For Kids Chicago 2014.  Next up is Mike Wilkins of Kingsford Capital who talked about short selling.


Mike Wilkins' Invest For Kids Chicago Presentation

•    Short focused firm with $250MM in AUM
•    Focused on small and micro-cap US listed equities, Founded in FY01.
•    Topic is “benefitting from persistent fraud”
•    Fraud is persistent because fraudsters are persistent. Fraud is a people business.
•    Find a stock promotion and build a network form there.
•    To find a promotion, look for a tell.
 •    Step 1: Look for a tell. Look for money losing companies in south Florida/Nevada. Sometimes the CEO looks like a crook!
•    David Brooks – DHB Industries – sold defective body armor to the army. Ended up going to prison.
•    Sometimes the tell is in the SEC filings. The OCZ filings had suspect filings. IPO is a lawyer document. CEO was convicted in a felony (wrote as youthful discretions in the IPO prospectus).
•    Focus on the investor relation firms, transfer agents, lawyers, accountants, etc. Some of them similar.
•    Interoil (IOC): No production but has over a $2B market cap – look at the networks once again (not a short selling recommendation but a potential stock promotion he saw).
•    Look for the stock promoters.
•    Persistent fraud lets them create a history of the company. Sell-side or money managers never really look into the history of managers and companies.
•    Star Scientific is one short than played out. Formed in 98. Burned through $290MM in multiple offerings. Promoted multiple times over the years. Jonnie Williams was one of the people involved. Became chief ethics officer and on the board.
•    Pumped one of their products that was a chemical found in cigarettes that could supposedly cure inflation, a driver of Alzheimer’s.
•    Patrick Cox was one of the promoters. Called it the last stock you ever need, could cure Alzheimer’s. And makes a great face cream.
•    Came into light that Jonnie Williams gave $11MM in bribes to the former VA governor. Was investigated and Williams worked with authorities gaining a blanket immunity from stock pump and dumps.
•    John Stewart couldn’t believe that Jonnie Williams got away with it.
•    John Isner was sponsored by the company
•    John Isner was also sponsored by Ebix another potential promote.
•    Paid promoters: Red Chip, Dave Gentry – involved with L&L Energy. Talks about many of the Chinese frauds. L&L claimed to have coal mines, but did not.
•    Dave Gentry went on CNBC to talk about the company. In FY13, went back up to 5 after new promoters where hired.
•    This March LLEN was charged with fraud and the CEO plead guilty.
•    Tobin Smith was a former Fox contributor on business. Fox fired him for a pump and dump scam. Must be bad if Fox fires you.
•    The DreamTeam Group is another stock promoter group that pays writers to write positive investments. Galena Biopharma was one company that was pumped by the DreamTeam.
•    Lightdingo is one promote.
•    GALT is one idea. Who is GALT?
•    Galectin Therapeutics – went from $2 to $19 since FY13. Zero revenue and more board members than employees. Working for a cure for liver disease.
•    History goes back to another name and founded in FY98. Sold an orange derived product and a home cleaning product. No miracle ingredients – used the same chemicals of that everyone else had, just used more water. Pumped as a safe cleaner, while all it had was watered down chemicals.
•    Then went to pitch a cancer cure. Didn’t work. Brought in new money and directors in FY09. Brought in John Mauldin to the board.
•    Added Dave Gentry, John Fugler, Tobin Smith, and other promoters.
•    Liver drug flopped – was safe (just pectin) but didn’t work (not a surprise). 


Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

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

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

Whitney Tilson On Various Longs/Shorts & Lessons Learned

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

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

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


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


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

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

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

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

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

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


Q&A Session:

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


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

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

- David Einhorn Question & Answer Session

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

- Distressed Investing Panel (Dan Loeb & Daniel Krueger)

- Bill Miller on What Stocks He Likes Now

- Michael Karsch on Risk Management

- Bruce Greenwald's Market Comments

George Soros Raises InterOil (IOC) Stake

Soros Fund Management just filed an amended 13G with the SEC regarding their position in InterOil (IOC). Per activity on October 25th, George Soros' hedge fund now shows an 11.9% ownership stake in IOC with 5,257,422 shares. This comes after we just disclosed that Soros boosted stakes in two other positions.

Of this total, 1,200,000 shares are represented by call options. Since the second quarter ended, Soros has increased their position size by 53.5%. Interestingly enough, InterOil just yesterday afternoon announced that they would offer convertible senior notes due 2015 and common shares to raise proceeds of up to $280 million.

InterOil has been somewhat of a controversial stock in the hedge fund world. While Soros has amassed a hefty long position, Whitney Tilson's hedge fund T2 Partners has been an ardent detractor of the company as they are short IOC. Soros has clearly been the winner on this play thus far and we'll have to see what happens in the future.

Taken from Google Finance, InterOil is "an integrated energy company operating in Papua New Guinea and its surrounding Southwest Pacific region. The Company operates in four business segments: upstream, midstream, downstream and corporate."

For a complete update on Soros' entire equities portfolio, subscribe to our Hedge Fund Wisdom newsletter as the new issue will be released in two weeks detailing his latest holdings.

Hedge Fund T2 Partners: Latest Investor Letter

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners is out with their August letter to investors. In it, we see that they're up 12.3% net for the year compared to the S&P -2.1%. Some of their long positions that have performed well include: Osteotech, Resource America, Liberty Acquisition (warrants), and Wesco. On the short side of the portfolio, they found success in homebuilders, for-profit education plays, Ambac, and Lululemon Athletica (LULU).

Tilson's hedge fund has been positioned conservatively as they see an unfavorable economic outlook. Their letter takes a closer look at their position in Liberty Acquisitions warrants which you can read below. Tilson then confirms that they've added to their bearish bet against InterOil (IOC) after the company reported second quarter earnings. He also goes into detail about his rationale behind this short in the embedded letter below:



You can download a .pdf copy here.

Tilson and Tongue will be presenting their latest investment ideas at the upcoming Value Investing Congress in New York City on October 12th & 13th. Market Folly readers can receive a discount to the event here.

Lesson on 13F's From Whitney Tilson & an Update on Their InterOil Short Position

Whitney Tilson, hedge fund manager of T2 Partners recently commented on the latest round of SEC 13F filings and how people tend to misread them. We thought this was an excellent time to continue our impromptu lessons on 13F filings that we started yesterday. Today's topics? Discerning net exposures in positions and distinguishing when ownership of common stock is not necessarily a long position. The following is printed with permission from Mr. Tilson regarding message board participants improperly reading his firm's 13F:

"It says a lot about who owns InterOil when folks on the company’s message boards are saying we’ve gone long the stock based on our 13-F. HA! This is a very large bearish bet for us. A lot of people make this mistake when reading 13-Fs: managers often own puts (which are also disclosed in the 13-F) or are short a stock (which isn’t disclosed) and then own a small offsetting long position to make it easy to trade around it.

In our case, our 13F shows that as of 6/30, we owned 1,623 put contracts (representing 162,300 shares of stock) on IOC and, in addition, were long a mere 10,400 shares. Puts can be very hard to trade, so we just bought more puts than we wanted and offset the extra amount by buying some stock, resulting in the desired net exposure. Then, if we want to increase or decrease our bearish bet, we can simply buy or sell the stock."

This just reinforces the need for investors to *read* 13F filings carefully. In particular, make sure to glance at the right-hand columns on the filing to distinguish whether a position is a stock option (put or call) rather than just common stock. Just yesterday, Bloomberg omitted options positions from an article on 13F analysis. And today, we see that message board readers have either overlooked the options portion of T2's filing or misinterpreted their common stock position.

T2's actions of buying puts and then buying a small slice of common stock illustrate an important example of liquidity and having the ability to trade around a position. This becomes even more important in stocks that are heavily shorted and can swing wildly with volatility. So if a hedge fund owns multiple securities of the same company, you have to assess the values of each individual security to ultimately determine if it is a bullish or bearish wager. And in T2 Partners' case, they own way more puts than common stock, resulting in an obvious bearish bet.

Tilson also updated us on T2 Partners' short position in IOC. We've detailed this stake numerous times in the past as it's rare you see fund managers talk openly about their short positions. As such, we've taken the opportunity below to highlight Tilson's recent thoughts on InterOil:

"We added to our bearish bet (yesterday), as InterOil reported Q2 earnings yesterday that reinforced our investment thesis. The earnings and EBITDA (driven by the refinery operation) are irrelevant for a company that has a $2.9 BILLION (not a typo) market cap; what really matters if whether there is, in fact, the Sierra Madre of oil and gas in the areas being explored by InterOil and, if so, whether they have the cash to find it, develop it commercially, etc.

Re: the former, there continues to be no proven or even probable reserves – just more hype and gibberish like this from the earnings release:

The Antelope 2 horizontal well confirmed a higher condensate-to-natural gas ratio of 20.4 barrels per million cubic feet of natural gas, 27% higher than observed at the top of the reservoir. The horizontal well also demonstrated dolomitization and higher porosity deeper in the reservoir than previously modeled.

And re. the cash, this company is going to hit the wall soon. Over the past four quarters, net income is -$1.3 million and free cash flow is -$181.9 million (cash from operating activities minus “expenditure on oil and gas properties” and “expenditure on plant and equipment, net of disposals”, broken down as follows:

Q3 09: -$48.6 million
Q4 09: -$40.7 million
Q1 10: -$28.5 million
Q2 10: -$64.1 million
TOTAL: $181.9 million)

So with no profits to fund such massively negative cash flows, how is InterOil doing it? Answer #1: Burning through cash (unrestricted cash has declined from $96.4 million a year ago to $31.7 million today). Answer #2: Taking on debt (the working capital facility – short-term debt – is up from $4.0 million a year ago to $57.7 million today, partly offset by a $9 million decline in a secured loan). Answer #3: Issuing stock and conversion of debt ($12.8 million over the past 12 months), resulting in the diluted share count rising 16.1%. Answer #4: Misc. other stuff (“Proceeds from IPI cash calls” ($15.2M in the first two quarters of 2010), “Proceeds received on sale of exploration assets” ($13.9M in Q1), and “Proceeds from Petromin for Elk and Antelope field development” ($5M over the past 12 months).

To summarize, InterOil has only $31.7 million in unrestricted cash as of June 30th and they’re burning an average of $45.5 million of cash each quarter. No wonder the company entered a short-term $25 million credit facility last week on distressed terms: 10% interest (in this environment!), secured by a 2.5% stake in InterOil’s Elk and Antelope fields. Note that the provider of financing was a very dicey outfit, Clarion Finanz and known stock promoter Carlo Civelli – see this post."

In the past, we've also highlighted some of T2's other short positions for those interested. And for more on interpreting SEC filings correctly, head to our post from yesterday regarding Eric Mindich's hedge fund Eton Park and lessons regarding 13F filings.

Tilson's Hedge Fund Positioned Conservatively, Sees Unfavorable Economic Outlook

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners is faring quite well in 2010, up 13.6% net of fees. They've taken a conservative position with their portfolio based on increasing concerns of a weak economy. As we've detailed in their previous presentation, they currently favor undervalued large-cap stocks. Their July letter to investors reveals that they are currently 100% long, 70% short, leaving them 30% net long. This is below the historical average for hedge funds and T2 Partners has taken such a position for two reasons.

Firstly, they're concerned about macro factors and cite Jeremy Grantham's recent letter. Vaguely speaking, they deduce that there are three possible economic scenarios at hand that can take place over the next 2-7 years.

1. A V-shaped recovery: A scenario where the stock market could compound 7-10%.
2. A 'muddle-through' economy: Stock market could compound at 2-5%.
3. A double-dip (or worse): Somewhat similar to what Japan's gone through, stocks could be anywhere from flat to way down.

Tilson and Tongue have built a conservative portfolio as the odds have shifted unfavorably as of late. They are long high quality large-caps such as Berkshire Hathaway (BRK.A), Anheuser-Busch InBev (BUD), and Microsoft (MSFT). They've also been long BP (in-depth analysis of BP here) and Liberty Acquisition Corp. warrants as special situations plays. Additionally, we've detailed T2's new position in Alloy (ALOY). While they like these names, their economic outlook has caused them to reduce longs and add to shorts.

Secondly, they cite numerous opportunities on the short side of the portfolio. When irrationality rears its head, T2 prefers to exploit the inefficiency. As such, they feel they can enhance their returns on this side of the portfolio. Some examples of current irrationality in their view include:

- VistaPrint (VPRT) still at $33 (it's now at $30 after the release of T2's letter). This is a classic 'growth gone bust' story and they are short.

- InterOil (IOC) at $60. We've detailed in the past how T2 feels that InterOil is a public relations hype machine, releasing news tidbit after news tidbit when fundamentally the company doesn't have a whole lot going on. They've been short for a while now.

- MBIA (MBI) at $8.68. They feel that bond insurers are in a precarious position given their struggles. Bill Ackman had previously been short this name and his investment was detailed in the book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff.

- The for-profit education sector. Like many other hedge funds, T2 has joined in on the negativity parade surrounding these stocks. While they don't disclose which specific companies they are short, it most likely includes a basket of these possible candidates: Apollo Group (APOL), ITT Educational (ESI), and Corinthian Colleges (COCO). For the elaborate thesis behind this play, check out Steve Eisman's short sale of for-profit education.


Overall, T2 has been adding to short positions and is increasingly focused on large-cap bluechips on the long side of their portfolio. Embedded below is T2 Partners July letter to investors:



You can download a .pdf copy here.

To hear many other hedge funds' latest investment ideas, Tilson will be presenting at the Value Investing Congress (special discount here) along with Bill Ackman, David Einhorn, Lee Ainslie, Kyle Bass, John Burbank, and many more.

Soros Fund Management Bullish on Petrobras, Suncor & DirecTV: 13F Filing Q1 2010

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

Next up is George Soros' hedge fund firm, Soros Fund Management. While he is still slightly involved, the bulk of the portfolio activity you see below comes from his son Robert Soros who runs the flagship Quantum Endowment. For 2009, Soros' Quantum Endowment Fund was up 28% as noted in our hedge fund performance numbers list. We follow Soros for sector leans due to their global macro tilt. Given that they dabble in pretty much any asset class they please, remember that the equity positions below are only a brief part of a cohesive whole.

George Soros has in the past voiced his concern over the deleveraging of the US consumer as he feels it could hurt consumer spending (and thus growth) in the future. Soros' thoughts from the markets are detailed in his most recent book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. And of course you can receive a primer on all things finance from the man himself in his first book The Alchemy of Finance.

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


Brand New Positions
Conexant Systems (CNXT) Notes
Cobalt International Energy (CIE)
iShares Emerging Markets Index (EEM) Puts
PNC Financial (PNC)
Telecom Argentina (TEO)
Covanta (CVA) Notes
Westport Innovations (WPRT) ~ we previously detailed Soros' new stake
Solar Capital (SLRC)
Petrohawk Energy (HK)
AMR (AMR)
JDS Uniphase (JDSU) Notes
RF Micro (RFMD)
Nokia (NOK)
ADC Telecomm (ADCT) Notes
Global Crossing (GLBC) Notes
Dow Chemical (DOW)
Staples (SPLS)
Exco Resources (XCO)
International Paper (IP)
Armstrong World (AWI)


Increased Positions
NovaGold Resources (NG): Increased position size by 435.8% ~ we previously detailed this
DirecTV (DTV): Increased by 27.3%
Suncor Energy (SU): Increased by 22.4%
Cadence Design System (CDNS) Notes: Increased by 20%
Lawson Software (LWSN) Notes: Increased by 19.6%
Petroleo Brasileiro (PBR): Increased by 17.7%
Verizon (VZ): Increased by 16.7%


Reduced Positions
Plains Exploration (PXP): Reduced position size by 24.7%
Monsanto (MON): Reduced by 17.4%
Hess (HES): Reduced by 16.1%
Emdeon (EM): Reduced by 12.2%
SPDR Gold Trust (GLD): Reduced by 9.6%


Positions They Sold Out of Completely
Mcdata (inactive) Notes
CSG Systems International (CSGS) Bonds
Terra Industries (TRA)
Select Sector Financials (XLF) Calls
Bunge (BG)
Coach (COH)
Heinz (HNZ)
Sandridge Energy (SD)
Energy XXI (EXXI)
iShares US Telecom Sector (IYZ)
CVR Energy (CVI)
James River Coal (JRCC)
Mechel (MTL)
Steel Dynamics (STLD)
Denbury Resources (DNR)
Windstream (WIN)
McMoran Exploration (MMR)
Patterson-UTI (PTEN)
Sterling Construction (STRL)
Century Aluminum (CENX)


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

1. SPDR Gold Trust (GLD): 6.95%
2. Petroleo Brasileiro (PBR): 4.63%
3. Hess (HES): 3.46%
4. Suncor (SU): 3.26%
5. LSI Corp (LSI) Notes: 3.2%
6. Petroleo Brasileiro (PBR-A): 2.66%
7. Monsanto (MON): 2.62%
8. Linear Tech (LLTC) Notes: 2.49%
9. Lawson Software (LWSN) Notes: 2.22%
10. Interoil (IOC): 2.19%
11. RF Microdevices (RFMD) Notes: 2.11%
12. DirecTV (DTV): 2.03%
13. Verizon (VZ): 2.00%
14. Flextronics (FLEX) Notes: 1.98%
15. Plains Exploration (PXP): 1.80%

Firstly, please note that since Soros Fund Management is a global macro oriented firm, they undoubtedly have positions in other markets (debt, currencies, commodities) that are not required to be disclosed by the SEC. As such, the above is only partially representative of Soros' portfolio. That said, you can definitely see some themes via their equity exposure as they are long various oil and agriculture names.

Additionally, they seem to like the satellite play DirecTV (DTV). As we've detailed previously, Chase Coleman's hedge fund Tiger Global is bullish on DTV. It was also interesting to see Soros have a sizable long in Interoil (IOC) as many investment managers and pundits have labeled IOC as a potential fraud. Whitney Tilson's hedge fund T2 Partners has been short IOC under the notion that IOC has no real proven reserves and is essentially just a public relations hype machine. This dichotomy of opinion is what truly makes a market.

Overall, the natural resource and energy theme continues to garner a prominent position in Soros Fund Management's portfolio. Gold is their top holding, followed by large stakes in Petrobras, Hess, Suncor, Monsanto, Interoil, and Plains Exploration. They also show a large addition to NovaGold Resources, but we had already mentioned this position increase back when the transaction took place as both Soros and John Paulson bought shares.

Assets reported on Soros' 13F filing were $8.75 billion this quarter. Data from the SEC is aggregated and sorted automatically by Alphaclone, our source for hedge fund tracking, replicating, and performance backtesting (Market Folly readers can receive a special free 14 day trial). Remember that these filings are not representative of the hedge fund's entire base of AUM.

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

Hedge Fund Pequot Capital's 13F Filing: One Position Left

Hedge fund portfolio disclosures are starting to come in via 13F filings for the fourth quarter 2009 and this one surprised us. A while back we mentioned that Art Samberg's hedge fund Pequot Capital was shutting down and we already covered their portfolio unwind. Interestingly enough, Pequot Capital has filed their latest disclosure and they still own one last position: 212,821 shares worth of InterOil (IOC) worth $16.3 million.

We just thought we'd highlight it for those interested, as it seems this would be their last position left to unwind. And speaking of InterOil, when we looked at Whitney Tilson's investor letter, we saw that his hedge fund T2 Partners was short IOC.

Taken from Google Finance, InterOil is "an integrated energy company operating in Papua New Guinea. The Company operates in four business segments: Upstream, Midstream, Downstream and Corporate."

Whitney Tilson's Hedge Fund T2 Partners: Annual Letter

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners has put out their annual letter. In this latest letter to investors, they address the macro environment, talk about how their portfolio fared, and discuss their largest long and short positions.

Since hedge funds often do not reveal their short positions, we wanted to make special note of this glimpse we get into their short book. We had previously seen some of their shorts, but the list below is more expansive. Whitney Tilson and many other prominent hedge fund managers will be presenting investment ideas at the Value Investing Congress May 4th & 5th in Pasadena and we highly recommend attending. We've secured a discount to the event for our readers so make sure to use discount code: P10MF5.

T2 Partners' ten largest short positions heading into this year were (in alphabetical order):

1. Capital One (COF): In T2's letter, Tilson and Tongue mention that this is a hedge to their long of American Express (AXP).

2. Dow Chemical (DOW): This is a hedge to their long position in Huntsman (HUN).

3. Homebuilders (various plus an ETF): T2 Partners has been bearish on the housing market.

4. InterOil (IOC): Tilson has been bearish on this name for a while and argues that all their press releases (there's a lot of them) have artificially lifted the stock higher on no substantial news.

5. iShares Barclays 20+ Year Treasury Bond (TLT): We now see yet another hedge fund shorting long-term treasuries as a bet on rising interest rates, inflation, etc. This was one of Howard Marks' main recommendations in his recent plays for inflation. One of the original hedgies Michael Steinhardt himself has called treasuries foolish. Legendary investor and ex-Quantum fund manager Jim Rogers shares this sentiment and dislikes treasuries. Hedge fund legend Julian Robertson is betting on higher interest rates and is doing so via constant maturity swaps (CMS).

6. iShares Dow Jones Transportation Average (IYT): This appears to be another macro hedge.

7. Moody's (MCO): T2 Partners joins hedge fund colleague David Einhorn & Greenlight Capital who are also short MCO. In Einhorn's recent investor letter, he mentioned how this short position has been causing them pain, but they still feel Moody's faces headwinds.

8. Netflix (NFLX): Shares are up sharply on this name after they just reported earnings. This stock had been heavily shorted by hedge funds and looks to be causing everyone on the short side some pain.

9. Retail HOLDRs (RTH): This seems to be another macro hedge/short as they wager against consumer spending, and in particular discretionary spending. This gives them exposure to a basket of names.

10. Vistaprint (VPRT): This short position is intriguing because we've known many other hedge fund managers to be short. However, a few prominent hedgies also have long positions, so it's interesting to to note the difference in opinion. When we looked at the portfolio of Stephen Mandel's Lone Pine Capital, we noticed they had a large Vistaprint stake. Additionally, fellow hedgie Matt Iorio and his White Elm Capital had been long. We'll have to see which side of hedge fund land wins this battle.


Moving on, we also got to see their twelve largest long positions as of 12/31/09 and they are as follows:

1. General Growth Properties (GGWPQ): We recently covered their thoughts on GGWPQ.

2. Berkshire Hathaway (BRK.A/BRK.B): Tilson was recently out talking about how he thinks Berkshire is undervalued and how it could be added to the S&P 500. His latter point just recently came to fruition as BRK.B replaced Burlington Northern in the index. This creates a ton of buyers as index funds will need to buy $38 billion worth of BRK.B, around 23% of the total shares outstanding.

3. Iridium stock/warrants: They note that it is growing very rapidly and has taken market share from competitors.

4. Microsoft (MSFT): They think this name is cheap, safe, and rapidly growing.

5. American Express (AXP): While they have been trimming their long position as it has risen, they deem it currently at 'reasonable valuation' and continue to hold.

6. Huntsman (HUN): They believe the company is now well poised to ride out the economic crisis after their net debt declined by almost $3 billion and they have no more meaningful maturities until 2012.

7. Pfizer (PFE): We've started to see a lot of smart investors pile into this name. Fairholme Fund manager Bruce Berkowitz has a large Pfizer position. Also, we recently noted that Pfizer was the second most popular stock held by hedge funds. Berkowitz is certainly not alone in his fondness for this name. John Griffin's hedge fund Blue Ridge Capital had Pfizer as their third largest US equity holding when last we checked.

8. dELiA*s (DLIA): T2 Partners likes this name because it has a low probability of permanent loss of capital and a good chance of making multiples on their money.

9. Sears Canada (TSE: SCC): Tilson notes, "This stock trades at 4.2x trailing EV/EBITDA, around half the valuation of comparable retailers."

10. Yahoo! (YHOO): This is definitely a contrarian play in the tech space as most of the hedge funds we follow are long Google (GOOG). T2 believes that Yahoo's intrinsic value is nearly double its current price.

11. Fairfax Financial (FRFHF): They feel this is a "diverse collection of high-quality insurance businesses at a discount to intrinsic value."

12. Wendy's Arby's Group (WEN): They are confident Nelson Peltz and his team can turn Wendy's around just like they did with Arby's.


So, there you have their long and short positions. Embedded below is hedge fund T2 Partners' annual letter in its entirety (RSS & Email readers will need to come to the site to see it):





For more great investment ideas from hedge fund managers, make sure to check out the Value Investing Congress May 4th & 5th in Pasadena. We've secured a discount to the event for our readers so make sure to use discount code: P10MF5.

For more insight from Tilson & T2, head to our coverage of hedge fund T2 Partners.