Fairholme Capital Adds To St. Joe Position

Bruce Berkowitz's investment firm Fairholme Capital has filed an amended 13D with the SEC regarding its stake in St. Joe (JOE).  Per the filing, Fairholme now owns 40.5% of the company with just over 27 million shares.

The filing notes that Berkowitz was out buying across August and into early September, at prices ranging from $18.3016 to $19.2174.  In total, he purchased just over 1.55 million shares.

For more on this manager, we've also highlighted other recent portfolio activity from Fairholme Capital here.

Per Google Finance, St. Joe is "a real estate development, asset management and operating company. The Company operates through five segments: residential real estate; commercial real estate; resorts and leisure; leasing operations, and forestry. Its residential real estate segment plans and develops primary residential and resort residential communities of various sizes on its existing land. Its commercial real estate segment plans, develops, manages and sells real estate. Resorts and leisure segment features a portfolio of vacation rentals and hotel operations, as well as golf courses, a beach club, marinas and other related resort amenities. Its leasing operations business includes its retail and commercial leasing. Its forestry segment focuses on the management of its timber holdings in Northwest Florida."

Fairholme Capital Increases St. Joe Position

Bruce Berkowitz's investment firm Fairholme Capital has filed an amended 13D with the SEC regarding its position in St. Joe (JOE).  Per the filing, Fairholme now owns 36.1% of the company with over 25.47 million shares.

This is an increase from the 25.1 million shares they owned at the end of May per a previously filed form 13D.

The filing notes that Berkowitz was buying JOE shares in late May, and early-to-mid June at prices ranging from $17.2483 to $17.8468.

You can view previous portfolio activity from Fairholme here.

Per Google Finance, St. Joe is "a real estate development, asset management and operating company. The Company operates through five segments: residential real estate; commercial real estate; resorts and leisure; leasing operations, and forestry. Its residential real estate segment plans and develops primary residential and resort residential communities of various sizes on its existing land. Its commercial real estate segment plans, develops, manages and sells real estate. Resorts and leisure segment features a portfolio of vacation rentals and hotel operations, as well as golf courses, a beach club, marinas and other related resort amenities. Its leasing operations business includes its retail and commercial leasing. Its forestry segment focuses on the management of its timber holdings in Northwest Florida."

Fairholme Capital Updates Stakes in Sears Canada, St. Joe's

Fairholme Capital's Bruce Berkowitz recently made a few filings with the SEC.  First, an amended 13G on its position in Sears Canada (SRSC).  According to the SEC filing, Berkowitz now owns 17.23% of the company with 17.55 million shares.  The filing was made due to activity on September 29th.  This compares to the 16 million shares that Fairholme reported in its last 13F filing as of the second quarter.

Second, Fairholme also filed an amended 13D on their longtime holding St. Joe's (JOE).  Per the filing, Fairholme now owns 32.3% of the company with 24.4 million shares.  This filing was required due to activity on September 28th.  This is a slight decrease from the 24.6 million shares Fairholme was shown to own at the end of Q2 per its most recent 13F filing. 

Fairholme's latest 13D shows they sold 105,000 shares at $18 on September 21st and 2,200 shares on August 21st at $16.78 and the fine print notes theses sales were "sold in an issuer tender offer at the direction of an advisory client" and then "sold at the discretion of an advisory client" respectively.

You can view past Fairholme portfolio activity here.

Berkowitz's Fairholme Fund Annual Report: AIG, Bank of America, Fannie/Freddie

Bruce Berkowitz is out with his Fairholme Fund's (FAIRX) annual report for 2014.  The concentrated investor outlines his thoughts on AIG (AIG), Bank of America (BAC), Fannie Mae & Freddie Mac, Sears (SHLD), Leucadia (LUK), and St. Joe (JOE).

Berkowitz dedicates the majority of his letter to his Fannie & Freddie investments, saying that, "Today, Washington bureaucrats are unlawfully holding these profitable companies captive in perpetual conservatorship."

Regarding his two largest positions (AIG and BAC), Fairholme's manager says that both need to "prove that core operations are capable of earning an average of 10% return on equity and demonstrate that such profits are distributable to shareholders.  We anticipate growing profits, dividends, and buybacks from both in the future, particularly when interest rates normalize."

Embedded below is the Fairholme Fund's annual report for 2014:



For more from this manager, be sure to also check out Berkowitz's Wealthtrack interview.

Bruce Berkowitz's Fairholme Buys Sears Shares

Bruce Berkowitz's firm Fairholme Capital just filed a 13D with the SEC regarding shares of Sears Holdings (SHLD).  Per the filing, Fairholme now owns 24% of SHLD with over 25 million shares.

This means Berkowitz has added to his position size by over 850k shares since the end of the second quarter.  He's been a long-term Sears shareholder and shares have nosedived from $45 earlier in the year down to current levels of under $27.

The vast majority of this decline has been in recent days as news came out that the company was borrowing $400 million from its CEO Eddie Lampert's hedge fund (ESL Investments).  This has prodded fears that the company could eventually be in trouble.

Berkowitz was buying in early September around $32.28 but then ramped up purchases on September 5th and 8th around $33.21. It will be interesting to see if he ramps up his purchases even further now that shares are even lower.

Fairholme's filing also notes that one of their other investments is potentially involved here: St. Joe (JOE).  The filing indicates that, "The St. Joe Company, an affiliate of the Fund and Fairholme, is in discussions with the Issuer regarding the $400 million secured short-term loan disclosed on the 8-K filed by the Issuer on September 15, 2014.  The St. Joe Company may invest up to $100 million in participations relating to theShort Term Loan."

Berkowitz's 13D filing didn't note any other plans or proposals at this time.


Per Google Finance, Sears Holdings is "is a retailer with 2,172 full-line and 1,338 specialty retail stores in the United States operating through Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. (Sears) and 500 full-line and specialty retail stores in Canada operating through Sears Canada Inc. (Sears Canada), a 95%-owned subsidiary. The Company operates in three segments: Kmart, Sears Domestic and Sears Canada."

Greenlight Capital's Q1 Letter: David Einhorn Defends Apple, Still Short St. Joe

David Einhorn's hedge fund Greenlight Capital is out with its first quarter letter to investors.  In it, the hedge fund details why they're long Apple (AAPL), why they're still short St. Joe (JOE), as well as updates on Seagate Technology (STX) and the Japanese Yen.


Net Exposure & Top Positions

Greenlight's average net exposure during the quarter was 36% net long (95% long & 62% short).  Their top five largest disclosed long positions were (in alphabetical order): Apple, Arkema, General Motors, gold, and Seagate Technology.  The hedge fund opened up to new money for the first time since 2008 which is also worth pointing out.


Refuting Apple Concerns

Greenlight presents the 'bear case' concerns often highlighted by investors and then refutes them.  They write,

"1. Too many hedge funds own AAPL.  It's not clear what the objection is here.  We suppose the worry is that there is a herd mentality among hedge funds, and that when one fund sells, there could be a cascade of hedge funds selling shares and the stock price will collapse.  Moreover, if everyone already owns AAPL, who is left to buy it?  Collectively, hedge funds currently hold less than 5% of AAPL's outstanding shares, and no hedge fund ranks among the top 40 holders of the stock.  The average hedge fund has less than 2% of its equity assets in AAPL versus AAPL's 4% weighting in the S&P500, which means hedge funds are actually underweight AAPL."


Einhorn's fund also points out that while many detractors view Apple as a hardware company potentially subject to decline, Apple is actually a software company that has repeated sales of high margin hardware. 

This is a perfect characterization that many seem to miss.  After all, many users bought Mac computers to get away from various viruses and "blue screens of death" often associated with Microsoft Windows.  In order to get the software, though, consumers have to buy the expensive hardware.

For more from this hedgie, head to David Einhorn's presentation at Ira Sohn as well as his slideshow on preferreds.

Embedded below is David Einhorn & Greenlight Capital's Q1 letter to investors:




Einhorn will be presenting his latest stock pick at the Value Investing Congress in NYC in October.  Market Folly readers can receive a discount to the event by clicking here and using code: N12MF3

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

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

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

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

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


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


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

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


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


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


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


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


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

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


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


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


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


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


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


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


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

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


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

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


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


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


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


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


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

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


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


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

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

- Distressed Investing Panel (Dan Loeb & Daniel Krueger)

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

- Long/Short Equity Investing Panel: Whitney Tilson

- Bill Miller on What Stocks He Likes Now

- Michael Karsch on Risk Management

- Bruce Greenwald's Market Comments

Whitney Tilson's Presentation on St. Joe (JOE) & Howard Hughes (HHC)

Yesterday at the Value Investing Congress, T2 Partners founder Whitney Tilson presented a short of St. Joe (JOE) and a long of Howard Hughes (HHC). You can view a summary of the Value Investing Congress here, but we also wanted to post up Tilson's actual presentation.

St. Joe (JOE) is currently his hedge fund's largest short position. They've elaborated on David Einhorn's presentation on JOE by evaluating the company's WindMark assets and argue they're overvalued. T2 says, "in summary, WindMark (like many of St. Joe's developments is a ghost town. The only restaurant has closed, as have all but one retail shop. Virtually no construction is going on, sales of lots are few and far between, and there is huge shadow inventory."

T2 is also long Howard Hughes (HHC), a spin-off from General Growth Properties (GGP) that contains the developmental real estate assets. Tilson argues the company has attractive risk/reward, a solid management team (with Pershing Square's Bill Ackman as Chairman), and a strong balance sheet that provides protection. He thinks the company is worth anywhere from $77-141 per share on the low and high ends, respectively.

Embedded below is T2's full presentation on JOE and HHC (email readers come to the site to view it):



Be sure to also check out a summary of the Value Investing Congress.

Value Investing Congress Summary: Marks, Romick, Tilson, Leonard & More

Below is a summary of yesterday's Value Investing Congress in California. Tomorrow we'll provide a summary of day two so if you haven't already, make sure to sign-up to receive our free updates via email.


Howard Marks (Oaktree Capital): Oaktree manages over $80 billion and we've covered Marks' insightful commentary numerous times. His presentation highlighted the "human side of investing" and the difference between theory and practice. The manager said he splits investors up into two categories: those who know and those who don't, pointing out that it's what investors *think* they know that gets them into trouble. Risk can be introduced when investors overestimate what they know about the future.

Marks says that the main difference between value and growth investors is that value investors focus on the present. He went onto say that, "(The) most important science for investors is psychology. Investors who have their psyches under control will do best." This of course beckons the age old concept of not letting your emotions get in the way of making rational decisions.

He also went on to focus on the importance and difficulty of being contrarian and that market tops typically occur during a time of rampant bullish euphoria. Marks noted that pro-cyclical behavior is a huge mistake.

Oaktree's funds currently have a lot of cash on hand as opportunities are not abundant; Oaktree seems to be doing more selling than buying these days. He also mentioned he thinks that most institutions over-diversify.

Marks said that the gist of his presentation is featured in his new book that we highlighted yesterday, The Most Important Thing: Uncommon Sense for the Thoughtful Investor.



Steve Romick (First Pacific Advisors): Romick noted that enticing opportunities today are scarce and compared it to trying to ski in the middle of summer. The one pocket of snow he does see potential in is large cap stocks as he believes small caps are overvalued.

Romick presented CVS Caremark (CVS) as a business with good tailwinds and a store footprint that's hard to replace. He says the company is undervalued, trading at a P/E of 12.2x net of the pharmacy benefit management (PBM) hedge. He also points out that management owns a lot of stock and that private label is an opportunity for them to grow as it's only 17% of revenue right now.

Interestingly enough, CVS also seems to be under pressure to split up from its previous merger (combining drugstore chain CVS with pharmacy benefit manager Caremark). Numerous analysts and investors believe the break-up value is much higher than CVS' current share price. Rival Walgreen's (WAG) recently sold-off its PBM segment.

Lastly, Romick also gave another investment idea in Hong Kong traded Goldlion (HK 533). It is an apparel and goods manufacturer in China that caters to the mid-high end consumer, akin to Coach or Polo.



Steve Leonard (Pacifica Capital Management): Pacifica focuses on picking good businesses, but more importantly places emphasis on not making mistakes since they run a highly concentrated book (typically with 10 or fewer holdings). Pacifica originally started out as real estate investors and currently does not see any opportunities in commercial real estate. After shifting their focus to equities, they've beaten the S&P 500 by 9.4% each year since inception.

They primarily invest in domestic companies but like plays with exposure to global growth. They started buying Fairfax Financial (FRFHF) 10 years ago and today it's their largest position. Their second largest holding is Berkshire Hathaway (BRK.A). They haven't really stepped too far out of the box as those are perennial value investing picks.



Whitney Tilson & Glenn Tongue (T2 Partners): Their ideas centered on land companies: one long and one short. They provided an update on St. Joe (JOE ~ their largest short position) and said that the company had incentive not to writedown its developments because around $1 billion of its market cap was attributed to them. As an example, T2 cited how Windmark is worth $12 million, but St. Joe is carrying it at an inflated value 92% higher (T2 said that JOE can do this because of accounting rules). For more on this rationale, head to David Einhorn's short thesis on JOE.

T2's is also long a land-oriented company in the form of General Growth Properties' spin-off, Howard Hughes Corp (HHC). They like HHC because it's undervalued and has a portfolio of high quality assets in desirable locations. The company is difficult to value due to various development properties and other assets, but T2 says that it's obviously worth much more than the $0 carrying value some pieces currently garner (like the air rights over Fashion Mall in Las Vegas). We posted up Tilson's presentation on JOE & HHC here.

Tilson also appeared on CNBC to talk about their stance on JOE and HHC (video embedded below):



On their recent conference call, T2 mentioned they were adding to their HHC position on the recent pullback. Bill Ackman is the Chairman of HHC and his hedge fund Pershing Square owns HHC too. For more from Tilson, head to T2's thoughts on contrarianism.



Rahul Saraogi (Atyant Capital India Fund): Given that Saraogi manages an Indian-focused fund, it should come as no surprise that his presentation focused on this country and the ability to find gems in a "minefield of value traps." Overall, he thinks India has nice tailwinds: depth of markets, domestic demand, and solid demographics. The main question he focused on was what prevents a stock from reaching its intrinsic value?

While there are 6,000 publicly traded companies in India due to the low cost of going public, the trick is identifying the real value. Saraogi thinks the country is a paradise for value investors who are willing to put in the work to separate the gems from the value traps. Liquidity is volatile and there's little analyst coverage outside of the top stocks, so there's some hairy situations investors can dig into. However, he also notes that corporate governance is still a problem there, citing examples of frequent equity dilution.



David Nierenberg (D3 Family Funds): Nierenberg works directly with companies in a constructive manner in order to unlock value. Back in 2008 he learned a valuable lesson that the macro picture matters as cheap got even cheaper. He offered two investment ideas: Multiplus (SAO: MPLU3), a Brazilian loyalty program administrator and MBAC (NEX: MBC), another Brazilian play that focuses on phosphate.



Guy Gottfried (Rational Investment Group): Gottfried, previously of Bruce Berkowitz's Fairholme Capital, turned to Canada for value investing opportunities. The inefficient market there has priced Morguard Corp (TSX: MRC) quite cheap at less than 5x cashflow while the company is very well-run. He argues that you essentially get their owned properties for free.



Ori Eyal (Emerging Value Capital Management): Eyal's presentation focused on a company's management and their (lack of) care about minority shareholders. Eyal's global focus means he has to research not only the company, but the country as well.

He presented two ideas: first, a share-class arbitrage of Grupo Prisa. He says to simply long the B shares (PRIS/b) and short the A shares (PRIS/a) as the risk/reward is skewed favorably with 50% potential upside and limited downside.

His second idea was Israel-traded Willi Foods, the leading kosher food distributor in Israel that is also looking to acquire a distributor in the United States. The company trades for around 5x this year's earnings net of cash (the $50 million cash stockpile represents half the market cap).



Kian Ghazi (Hawkshaw Capital Management): Hawkshaw runs a concentrated long/short fund and focuses on high quality companies. Ghazi presented Ingram Micro (IM) as a one-stop-shop and says that the threat from "the cloud" is overblown and that not all software is shifting there.

The company has 25% market share (leading its competitors) and Ghazi thinks it can still grow 3-4% as the industry has been focusing on ROIC. While Ingram Micro trades at .9 times tangible book value, the primary risk here is a global slowdown in IT spending.


Tomorrow we'll post a summary of day two so be sure to subscribe to our free updates via email or via RSS reader.

Whitney Tilson Reduces Short Exposure, Refocuses on Buying Cheap Stocks

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners have had some rough sledding the past few months, mainly due to their large short exposure. Over the last five months, they are down 4.3% net while the S&P 500 has rallied 23.5%. As such, they've re-examined their portfolio construction and have concluded to reduce short exposure and get back to basics: buying cheap stocks.

Rationale for Reducing Short Exposure

Tilson cites the fund's maintenance of a large short book after the crisis as the primary mistake. Additionally he writes,

"Over time we've been quite successful shorting fads, frauds, promotions, declining businesses, and bad balance sheets. Where have had much less success, however, especially in recent months, is shorting good businesses that are growing rapidly, even when their valuations appear extreme. Such open-ended situations, regardless of valuation, are very dangerous, so going forward we will avoid them entirely unless we have a high degree of conviction about a specific, near-term catalyst."

The immediate thing that comes to mind is their well-documented short position in Netflix (NFLX). This short is obviously classified as a 'valuation short' but T2 notes that they are still digesting the company's recent earnings as well as other channel checks and it is unclear as to whether or not they've adjusted their position in anyway.

Buying Microsoft (MSFT) & Berkshire Hathaway (BRK.A)

Sticking to T2's 'back to basics' mantra, they've recently been adding to their positions in MSFT and BRK.A. You can see their analysis of Microsoft here and a summary of their other positions in their year-end letter.

Embedded below is T2 Partners' January 2011 letter to investors:



Be sure to also check out a ton of other hedge fund letters we've posted recently:

- John Paulson's year-end letter to investors
- David Einhorn's Greenlight Capital letter
- Summary of Kleinheinz Capital's letter
- Dan Arbess & Xerion Fund's 2011 strategy

St. Joe Receives Inquiry From SEC, BlackRock Increases Stake

Since The St. Joe Company (JOE) is now a battleground stock (Bruce Berkowitz versus David Einhorn), it's only fitting that we continue our coverage of the name. Just yesterday, some interesting developments arose that we wanted to highlight.

First, JOE revealed in an 8-K filed with the SEC that the company is the subject of an SEC "informal inquiry into St. Joe's policies and practices concerning impairment of investment in real estate assets."

SEC Inquiry

Shares of JOE plunged almost 10% in after-hours trading yesterday on this news. Market Folly readers will of course recall that Greenlight Capital's David Einhorn is short JOE. His bearish thesis centers largely around the company needing to take impairments and writedowns, the exact issue the SEC seems to be looking into.

The 8-K went on to say that, "St. Joe intends to cooperate fully with the SEC in connection with the informal inquiry. The notification from the SEC does not indicate any allegations of wrongdoing, and an inquiry is not an indication of any violations of federal securities laws."

Einhorn has garnered a reputation as a successful short-seller and it might not be too much of a stretch to suggest that his involvement has piqued the SEC's interest. After all, Einhorn had correctly identified problems at both Allied Capital and Lehman Brothers in the past and profited from his short positions. You can read about his short-selling battle in his book, Fooling Some of the People All of the Time.

BlackRock Boosts Stake

In a separate development involving St. Joe, we also saw an updated 13G filed with the SEC by BlackRock. The money manager has disclosed a 12.59% ownership stake in JOE with 11,668,299 shares, boosting their collective position. This disclosure was made due to activity on December 31st, 2010.

This development is interesting because it brings another large institutional player into the ring. Previously, the main notable JOE long was Bruce Berkowitz's Fairholme Capital, who owns almost 29% of the company. However, Berkowitz is currently in a standstill agreement and can't purchase more shares. Instead, he has joined the company's board. BlackRock's position increase marks a second vote of confidence on the long side of the trade.

Battleground Stock

So now that Berkowitz has BlackRock for company, the two major shareholders will square off against David Einhorn and a bevy of other short-sellers, including Whitney Tilson's T2 Partners, among many other hedge funds who have undoubtedly not disclosed their position (yet). With word of the SEC's informal inquiry, the short sellers have delivered another potential blow to JOE longs. What comes out of the inquiry, though, remains to be seen.

Berkowitz Joins St. Joe (JOE) Board, Einhorn Skeptical of Any Potential Acquisition

There are two enthralling recent developments in the ongoing saga surrounding The St. Joe Company (JOE). As we've detailed before, Bruce Berkowitz's Fairholme fund is long JOE. David Einhorn's hedge fund Greenlight Capital has taken the other side of the trade and is short JOE. Recently, rumors surged that St. Joe could be taken private which caused shares to jump 15% over the past few days. The company refused to comment on such rumors, citing company policy.


Einhorn Skeptical of Potential Takeover

We originally posted Einhorn's short thesis on JOE in which he laid out a bear case where the company could be worth $7-10 per share if it were converted into a rural land company. When Einhorn made his bearish presentation at the Value Investing Congress, his speech caused shares to plummet. Recently, shares have staged a slight comeback due to recent takeover rumors. Einhorn addressed this concern in a recent interview with Bloomberg TV:

"Well, I don’t think taking over St. Joe would make very much sense. The talk yesterday was that Bruce Berkowitz and maybe some private equity guys were going to pay a big premium for the company and so that caused a lot of excitement. What I think is that this is going to be a very hard thing to take private on a reasonable basis because there is no cash flow in the company. The company has negative profits and they have no means of generating ongoing cash to service debt. Which means that there’ s not a lot of bank lending for the sort of undeveloped land that St. Joe has at this stage of the cycle which means that it’s going to be very tough, I think, to finance a leveraged transaction for this company."

The Greenlight Capital fund manager also touched on how this short position is somewhat different than a typical short, saying:

"What’s kind of neat about the St. Joe analysis as a short as opposed to some other things is that there’s no ongoing business. They have this many acres. Ten years ago they had twice as many acres. All they do is sell acres. They take in cash for selling the acres. Most of it goes to the operating expense of the company so there’s not a lot of profits left for shareholders. And so basically, this isn’t an ongoing business, it’s basically a run-down of the assets. And my feeling is that if they continue on their current course, it’s going to take them a few decades, but, by the end of the day, there just won’t be anything left."

It's clear that Einhorn feels a takeover would be hard to secure and he is sticking to his guns with his thesis. After all, he has been short the company in the past as well.


Fairholme Duo Joins JOE Board

On the other side of the spectrum, you have Bruce Berkowitz's Fairholme Capital in the 'long' camp. News came out recently that both he and Charlie Fernandez (also of Fairholme) would join St. Joe's board of directors. Fairholme is JOE's largest shareholder and owns almost 29% of the company. As we've detailed in the past, Berkowitz's ownership stake is effectively capped at that level due to a standstill agreement with the company.

Since Berkowitz can't purchase more shares, it's clear that he's flexing his activist muscle in a different direction by trying to aid JOE's board. He faces a tough battle against Einhorn in an attempt to restore/create shareholder value and fend off short-sellers and pessimists. Of his position in JOE, Berkowitz said in a statement that:

"St. Joe has uniquely valuable assets and some of the most attractive, concentrated and well-managed real estate in the U.S. The value is in its development expertise, communities, infrastructure, entitlements, master plans, timberlands and most importantly the company's long-term vision."


Battle of Fund Managers

This is the definition of a battleground stock as you have two well-respected fund managers taking different sides of the trade. Einhorn won round one by sending shares spiraling with his bearish presentation. Will Berkowitz win round two? With his new seat on the board of the company, he'll aim to take a hands-on approach. It will be interesting to see if the takeover rumors are just that (rumors), or if there's something more substantial to them. One thing's for certain: this saga is just getting started.

Keep in mind that we've analyzed the portfolios of both Greenlight and Fairholme in the latest issue of our newsletter. For more from David Einhorn, we recently posted up his new position as well as his recent television interview. You can also check out all our coverage of Bruce Berkowitz here.

David Einhorn Talks Gold, Apple (AAPL), Pfizer (PFE), CareFusion (CFN), St. Joe (JOE) & Moody's (MCO)

David Einhorn, manager of hedge fund Greenlight Capital, recently sat down for a rare interview with Consuelo Mack on WealthTrack. The interview encompasses topics ranging from quantitative easing 2, his worries about the financial system, as well as many of his current positions including gold, Pfizer (PFE), Apple (AAPL), CareFusion (CFN) and his shorts of St. Joe (JOE) and Moody's (MCO). Einhorn has returned 22% annualized so it's always worth paying attention to what he has to say.

CareFusion (CFN)

We'll first start with a position that Einhorn hasn't talked much about previously: CareFusion (CFN). This medical device maker was spun-off from Cardinal Health (CAH) and is essentially a mix of various high multiple, high growth, high margin businesses. CFN has an infusion business which Einhorn thinks will benefit due to a competitor (Baxter ~ BAX) having to recall equipment. The Greenlight manager likes that CFN has an opportunity to take market share and a year later receive recurring revenue.

Einhorn says that, "so we think there's an opportunity here for them to expand their revenues, to expand their margins, obviously expand their earnings, and we don't believe that this has been fully adopted by Wall Street, which is very focused on medical devices and health care reform, and all the problems that go within that sector." Interestingly enough, we published an in-depth research report on CareFusion in our new issue of Hedge Fund Wisdom for those of you interested in the full investment thesis.

Apple (AAPL)

Another new position for Einhorn is Apple and we wanted to highlight his comments since he's only briefly mentioned it in a past investor letter. He's admired the company for a while, but has always had a hard time grasping the valuation. Over the summer when shares dipped (he purchased around $248 per share), he was comfortable with the value and pulled the trigger. Overall, he likes the company's growth profile as it has a multiple in the low teens and is unlevered.

Of his AAPL position Einhorn says, "Looking at Apple today, the stock is about $310, or $320 a share. There's about $45 a share in cash. So you're paying about $265 for the business. I think they're going to earn well over $20 a share in the next year, so you're looking at a PE net of the cash in the low teens, which is below a market multiple."

Pfizer (PFE)

This has been a longstanding position for Greenlight Capital so it's always intriguing to re-visit his thesis on this name. He highlights that everyone knows PFE's main issue is that its biggest drug, Lipitor, is coming off of patent. Einhorn feels that after this event the company will still see a lot of earnings. He feels that the company will be able to "sort of cost cut themselves to maintain the profitability that they're promising people, and then when people see that there's still more than two dollars a share of earnings, even without patented Lipitor driving the results, I think there'll be an opportunity for the multiple to improve on those earnings."

St. Joe (JOE)

And lastly, Einhorn revisits his short of St. Joe (JOE). Readers will recall that Einhorn laid out the bear case for JOE at the Value Investing Congress that sent shares spiraling downward. This has been an interesting saga mainly because another guru we track on the site, Bruce Berkowitz of Fairholme Capital, has taken the other side of the trade and is long JOE in size. Einhorn feels that the company trades well above the value of its land.

Embedded below is the video of David Einhorn's entire WealthTrack interview with Consuelo Mack (RSS & email readers will need to come to the site to watch it):



Interesting thoughts from Einhorn all around and it's good to hear elaborations on the theses of some of his investments. You can see what else Einhorn is investing in via our Hedge Fund Wisdom newsletter (new issue just released!) And for more thoughts from this talented hedge fund manager, check out his book: Fooling Some of the People All of the Time.

Bruce Berkowitz Buys St. Joe Company (JOE) Amidst Einhorn-Fueled Sell Off

Over the past two days, shares of the St. Joe Company (JOE) have plummeted almost 20% largely spurred by David Einhorn's bearish presentation on JOE at the Value Investing Congress. Amid the torrential selling, Bruce Berkowitz's Fairholme Capital was buying.

According to a 13D filed with SEC regarding St. Joe, Fairholme now owns 29.0% of the company with 26,891,820 shares. Berkowitz purchased 135,600 shares on October 13th and some of you may be wondering why he didn't buy even more shares given the huge drop. Well technically, he really couldn't.

Berkowitz entered into a standstill agreement with the company in April 2009 that caps his ownership stake at 30%. So given his current 29% stake, he doesn't have much wiggle-room to buy more. The standstill agreement expires in April 2012 and interestingly enough, it prevents Berkowitz from hedging his position.

Due to the publicity surrounding Einhorn's short thesis on JOE, the value of Berkowitz's position in the company has decreased by over $100 million. In Einhorn's presentation, he mentioned that he attempted to reach out to Berkowitz to discuss the investment but hadn't heard back. St. Joe has now become a battleground stock.


Berkowitz's Thesis

JOE has attracted the eyes of many value investors in the past. At the Value Investing Congress West back in May of this year, Berkowitz mentioned that he thought he purchased the stock for swamp land prices. He highlighted the quality of the land, the fact that it is the last 'open' land left in Florida and that the new airport will help spur interest. The embedded video below outlines his thesis (email readers will need to come to the site to watch the video):




Einhorn's Thesis

Some of you might recall that this isn't the first time Einhorn has shorted the company. Back in 2007, Einhorn laid out the bearish case for JOE at the Ira Sohn Conference. Back then, his valuation pegged JOE at around $15 per share. In fact, Jonathan Heller of CheapStocks exchanged dialogue with Einhorn about the position three years ago and posted up Einhorn's 2007 thesis on JOE.

Fast forward to today and you can compare it with his in-depth JOE presentation from the Value Investing Congress. This time around, the Greenlight Capital fund manager feels St. Joe is worth $7-10 per share if they convert into a rural land company. He feels St. Joe needs to take impairments and has clearly monitored this company for quite some time.


Battleground Stock

So, Berkowitz versus Einhorn. Ding... Round 1. Einhorn has certainly struck Berkowitz where it hurts with his publicized presentation. Some investors will argue that the first 10% the stock fell is more-so attributed to who was presenting the short idea (Einhorn) rather than the idea itself (JOE). After all, Einhorn has found great success with some of his shorts in the past (Lehman Brothers anyone?) But then again, shares of JOE fell an additional 10% the next day so clearly some investors are concerned.

Given the fact that Berkowitz owns 29% of the company and is locked in a standstill agreement that prevents him from hedging, it's pretty safe to say that he's in this for the long haul. We'll have to wait and see if he responds to Einhorn and whether or not he does so privately or publicly. The investing community waits with bated breath.

*Update: Berkowitz has apparently pseudo-responded to Einhorn via his comments to Reuters. Berkowitz said that, "If we were able, we would buy the whole company. I want to send him (Einhorn) a box of chocolates. This is the kind of advertising you just can't buy. The company should hold a David Einhorn memorial investment week." When asked if he had responded to Einhorn, Berkowitz said, "Why would I want to talk to him? If someone wants to lower the price of a product I'm buying, I'm okay with that. We're long-term investors here."

Taken from Google Finance, St. Joe Company is "a real estate development company. The Company owns approximately 577,000 acres of land concentrated primarily in Northwest Florida. St. Joe is engaged in town and resort development, commercial and industrial development and rural land sales. It also has interests in timber."

Be sure to check out all of our coverage from the Value Investing Congress where you can read about presentations by some of the top hedge fund managers in the game.

Why David Einhorn is Short St. Joe (JOE): Presentation from Value Investing Congress

At yesterday's Value Investing Congress (our extensive notes from the event here), David Einhorn of hedge fund Greenlight Capital presented the short case for the St. Joe Company (JOE). Einhorn lays out why he is short JOE with the main reason being that the company has a vastly overvalued portfolio of land and needs to take impairments.

He argued that should St. Joe convert into a rural land company, it would be worth around $7-10 per share. JOE currently trades in the low $20's, and that is after taking a 10% haircut solely due to Einhorn's speech yesterday. Alternatively, the Greenlight Capital manager argues that if the company keeps with its current practices, the stock could be worth $0 in 10 to 15 years.

Below we have embedded an audio file of Einhorn's speech, as well as the actual slideshow of his presentation further down the page. This way, you can follow his walk-through as if you were there (email readers will need to come to the site to hear the audio).

Simply press play to hear Einhorn and don't turn your volume too high because the background applause/laughter is loud on occasion. Please use either the Firefox or Internet Explorer web browser for the best compatibility with the audio file.

Notes From the Value Investing Congress: Einhorn, Bass & Pabrai (Day 2)

Today is the second day of our coverage of the Value Investing Congress including presentations from Kyle Bass (Hayman Capital), David Einhorn (Greenlight Capital), and Mohnish Pabrai (Pabrai Investment Funds). Their latest ideas are outlined below and be sure to check back frequently as we will be updating this post throughout the day.

We've already posted a wealth of information from the event, including:

- Presentations from John Burbank, Lee Ainslie, & Francisco Parames
- Further notes from day 1 of the Congress
- Bill Ackman's Q&A session

Let's now dive right into day two's presentations from the Value Investing Congress:

David Einhorn ~ Greenlight Capital

Three years ago, Einhorn pitched a short of Lehman Brothers at the Value Investing Congress. We all know how that turned out. This year, he doled out his latest short sale: a 139-slide presentation against the St. Joe Company (JOE). In essence, Einhorn believes Joe's whole portfolio of land is incredibly overvalued. He joked that he'd be wrong if JOE discovers oil on its land. After news got out of Einhorn's short, shares of St. Joe plunged more than 9%.

He highlights that the company should have impairments from their riverfront properties but that they have taken none. JOE is counting untouched land as 'developed'. He believes St. Joes's rural land is worth somewhere around $900 million, or between $7-10 per share (JOE shares are currently trading in the low $20's). Einhorn argues that if the company continues current practices, it will eventually be worth $0 in 10-15 years.

In his presentation, the Greenlight Capital fund manager went through specific properties of JOE. He highlighted Windmark Phase II which JOE carries as $165 million on their 10K while Einhorn argues its only worth $18 million or so. He also believes an impairment should be taken on their Rivertown property that is selling lots below cost. Overall, he takes issue with the fact that St. Joe only writes down an investment when they exit it.

Market Folly readers will recall that Bruce Berkowitz (Fairholme Fund) is on the other side of this trade, long the stock. And 'long' is an understatement; he owns almost 29% of JOE. In the question and answer session, Einhorn mentioned that he reached out to Berkowitz but is awaiting his response. Berkowitz started buying JOE in late 2007 and purchased additional shares in February 2009. This is the beauty of markets and the dichotomy of opinion. For a counter-argument, we've also posted up the bullish case for St. Joe from Broyhill's Affinity hedge fund.

Lastly, in Einhorn's Q&A session, he said he is excited about Vodafone (VOD) and that the market is still not giving the company credit for their stake in Verizon Wireless. We've previously covered Einhorn's Vodafone thesis here.


Kyle Bass ~ Hayman Capital

Bass' presentation, 'Does Debt Matter?' is by far the gloomiest of all the speakers thus far. He immediately cites the high levels of US credit market debt and not only the staggering amount of unemployment, but the fact that we are seeing permanent job loss. Bass notes that there's now $200 trillion in total credit debt throughout the world and this amount has tripled over the past 8 years.

He is very concerned about Ireland and says they're very likely to default. Bass is also 100% certain that Japan will default. It's not a matter of 'if', but 'when.' In fact, we've covered how Bass is betting against Japanese Government Bonds (JGBs). Bass mentioned that he is using out of the money interest rate call options to play the potential (or in his mind, inevitable) Japanese default. Should he be correct, he will make 50x to 100x his original investment.

Additionally, Bass says Greece and Iceland are the two other countries in peril here. Greece's default is inevitable and people's reaction will be to buy US dollars. Lastly, the Hayman Capital manager shifted his focus to Australia where he believes the country is due for a housing crisis.


Mohnish Pabrai ~ Pabrai Investment Fund

Pabrai's presentation centered on his 'checklist,' a system of questions/guidelines on how to approach an investment. Pabrai's presentation at the Value Investing Congress West back in May also focused on his checklist. Pabrai will tell you about the checklist, why he created it, and how you can create your own. However, he seemingly does not tell you what is on his checklist as he must regard it as proprietary.

He says the best way to craft an investment checklist is to look at crashes and hone in on others mistakes. By learning from them, you can ensure you don't make the same ones. His checklist is an ongoing process and he's had around 97 questions on the list broken down into categories such as management, ownership, moat, and leverage. While no company can give him the green light by successfully answering all 97 questions, it helps him decide how he should allocate position sizes. This has led to a change in his portfolio allocations. He was previously more concentrated and now is more diversified. A 2% position is a basket trade, a 5% bet is baseline, and a 10% position would be considered a 'home run.'

In his presentation this time around, Pabrai addressed the mistakes that famous value investors have made in order to learn from them. Currently, he is seeing opportunity in Japan and he's building a basket of high quality Japanese stocks. It's interesting to see Bass pound the table on Japan's demise one minute, and the next to see Pabrai recommending the country. Lastly, Pabrai echoed the sentiment from yesterday's presenter Zeke Ashton as he also likes Fairfax Financial (FRFHF). For more from this value investor and Warren Buffett emulator, we've highlighted notes from Pabrai's annual meeting as well.


Michael Kao ~ Akanthos Capital Management

Kao invests across the capital structure including equity and debt. While he usually takes around 40 positions, his top ten positions typically comprise up to 50% of his portfolio. Giving a case study, Kao in particular liked GM convertible bonds. He mentioned he was long the convertible bond and short the stock. Overall, he thinks we're close to a bottom in vehicle sales.

Speaking on GM, Kao highlights their 13% market share in China and consolidation of car brands. The current iteration of the trade would be long GM convertible bonds and then short Ford (F). We've detailed in the past how Jim Chanos is short Ford as well, although his does not seem to be a pair trade. The Akanthos manager thinks GM debt has around 50% upside. He says that GM convertible debt is trading at 2x EBITDA while F is over 4x EBITDA.


That wraps up this set of presentations. To see what top hedge funds are buying and selling on a daily basis, receive our free updates via email or our free updates via RSS reader.

Buy When There's Oil In The Water: Bullish Case for The St. Joe Company (JOE)

Below you'll find an in-depth presentation from Broyhill Asset Management on an intriguing way to play the Gulf oil spill from an investment standpoint. Hedge funds like Whitney Tilson's T2 Partners are buying oil giant BP (you can see their in-depth analysis of BP here). Others are buying drilling companies such as Transocean (RIG), Noble (NE), and Ensco (ESV). Broyhill, however, takes a slightly different approach. Their presentation "Buy When There's Oil In The Water" presents the bullish investment case for The St. Joe Company (JOE).

As you'll see in the presentation, the case for St. Joe starts with the fact that they own numerous real estate assets along the Gulf coast of Florida (assets that unfortunately could possibly be in danger from the oil spill). Christopher Pavese, Chief Investment Officer of Broyhill outlines St. Joe's competitive advantage in their near-zero cost of land. He writes, "Its massive scale and low-cost basis is impossible for other developers to replicate, making JOE the partner of choice for all development activity in Northwest Florida."

Broyhill is a Family Office that was started to manage the assets of Paul H. Broyhill and has since evolved into a multi-pronged investment firm. We've previously detailed commentary from Broyhill's Affinity hedge fund with their contrarian bet on long-term treasuries. Additionally, we've covered their ten reasons to buy bonds. And now below, we'll detail their hedge fund's latest investment idea.

Aside from its real estate assets, JOE has a pristine balance sheet with tons of cash and practically no interest-bearing debt, a much 'leaner' cost structure compared to prior years. A true investor often models and examines the worst case scenario for a given company. Broyhill has done just that, outlining a scenario where no one is really ever interested in JOE's land. In such a case, they estimate the stock is worth $15 (JOE currently trades above $25), assuming the land is sold for a paltry $2,000 an acre. To put this in context, consider that Leucadia recently paid $80,000 per acre in the same region.

The key for this company is monetizing their assets and the assumption that they will be able to do so. This play obviously requires patience on the investing end and Pavese highlights that St. Joe already has some near-term catalysts already lined up. However, as the oil spill nears St. Joe's properties, the stock has become more volatile. Broyhill argues that JOE's volatility leads to opportunity. Embedded below is the full in-depth presentation on The St. Joe Company (JOE) from Broyhill Asset Management:



You can download a .pdf copy here.

So while many other hedge funds and investment managers target oil companies as a proxy for oil spill plays, Broyhill has taken a roundabout approach. And, they aren't alone in this investment either. Bruce Berkowitz's Fairholme Fund has St. Joe as one of their largest positions and has for some time. So while Pavese fully acknowledges that JOE is a slow and boring story, he is confident this unfortunate oil spill has presented a fantastic opportunity for the long-term. For more from Broyhill's Affinity hedge fund, head to their contrarian bet on long-term treasuries as well as their ten reasons to buy bonds. Stay tuned tomorrow as we'll be covering their latest market commentary as well.

Broyhill's Affinity Hedge Fund: Contrarian Bet on Long-Term Treasuries (Investor Letter)

In a continued effort to expand our hedge fund coverage, we're always on the lookout for intriguing insight from 'under the radar' investment managers. As such, today we present you with market commentary and investment ideas from Broyhill Asset Management's Affinity hedge fund. Broyhill started as a family office managed by Paul H. Broyhill and has developed a long-term investment philosophy focused on capital preservation first and foremost. In their first quarter investor letter, we see they were right on the money recommending a cautious stance. As we all know, last week marked a precipitous drop in the market via the flash crash. To arrive at such a viewpoint, Broyhill used contrarian indicators such as the CBOE equity put/call ratio as well as extreme magazine covers & headlines. These are some of the same signals we pointed out in Jeff Saut's sell in May and go away missive.

To get a better idea as to Broyhill's investment exposure, let's take a look at their latest portfolio. Do you like going against the crowd? Well then you've certainly come to the right place. While numerous hedge funds (a.k.a. the crowd) have been shorting long-term treasuries, Broyhill is bullish on long-term treasuries and it marks their largest exposure today. Chief Investment Officer of their Affinity hedge fund, Christopher Pavese, wrote in a past commentary that, "It is important to note that in the near term, the contraction in private section credit combined with the threat of fresh credit concerns ahead, will likely keep a lid on inflation pressures. This view is perhaps where we differ most from today's consensus thinking, where many expect an immediate and permanent increase in inflation levels. We aim to capitalize on this departure from consensus later in the year, but importantly, the difference is simply one of timing."

Well for them, 'later in the year' quickly became 'now'. Investors flocked to safety in US treasuries during the flash crash last week and Broyhill expects the move out of risk assets and into government bonds to accelerate. Again this marks a contrarian stance as we recently saw global macro hedge fund Prologue Capital outline why macro factors are positive for risk assets. Broyhill has clearly taken a converse view. We like to present both sides to a compelling argument and Broyhill has certainly helped us in that regard. Interestingly enough, Chief Investment Officer Chris Pavese notes that they were previously short treasuries but covered in late march and then became buyers. Keep an eye out later today as we'll be posting up a separate piece from Broyhill outlining ten reasons to buy bonds.

Turning to equities, we also got a recent look at their top ten holdings, listed below:

1. St. Joe Company (JOE): 4.3% of assets
2. Wal-Mart Stores (WMT): 4.2%
3. Vodafone (VOD): 4.1%
4. Microsoft (MSFT): 4.0%
5. Kraft Foods (KFT): 3.9%
6. Nintendo (NTDOY): 3.8%
7. Humana (HUM): 3.6%
8. iShares Silver Trust (SLV): 3.3%
9. Market Vectors Gold Miners (GDX): 3.3%
10. ConocoPhillips (COP): 3.1%

As you can see, Broyhill favors high quality names which is in line with numerous other hedge funds. As we've detailed before, David Einhorn of hedge fund Greenlight Capital is bullish on Vodafone, Bill Ackman of Pershing Square had assembled a large Kraft position, and numerous hedge funds have added Microsoft shares, citing undervaluation. So while Broyhill has gone against the crowd with their treasuries play, they are certainly with the crowd in the equity arena.

We also got a recent look at some of Broyhill's short exposure. Like the majority of hedge fund land, they are keeping individual names close to the vest, but they have listed their top sector shorts:

Education (9.6)% of assets
Automotive (4.1)%
Recreational Vehicles (3.9)%
Business Equipment (3.9)%
Global Financials (3.9)%

This information is intriguing because they clearly have a large bet against education related stocks, a sector many Tiger Cub hedge funds have been quite bullish on. David Stemerman's hedge fund Conatus Capital had been long education plays but then sold out of them. We'll have to keep an eye on that as it has become a sector ripe with difference of opinion. Overall, Broyhill is 75.3% long and 44.7% short, leaving them 30.6% net long. This falls directly in line with what we've seen recently as hedge funds have reduced equity exposure.

In currencies, Broyhill has been long the Renminbi and short the Euro and the Yen. This again coincides with what we've seen in terms of hedge fund currency exposure. In commodities, Broyhill is long gold 9.6%, long oil 4.6%, and short copper -4.4%. Embedded below you will find their latest market commentary via Broyhill's first quarter 2010 letter:



You can download a .pdf here.

Intriguing stuff from Pavese and Broyhill and we'll certainly keep an eye on their contrarian wager. We've been covering a lot of excellent hedge fund commentary as of late and we posted up the following investor letters which we highly recommend reading:

- Louis Bacon's global macro fund Moore Capital Management
- Ricky Sandler's Eminence Capital
- David Einhorn's latest Greenlight Capital commentary
- Jay Petschek's Corsair Capital investor letter

Check back each day as we continue to chronicle what some of the most prominent hedge funds are up to.