Third Point's Q1 Letter: United Technologies, DowDuPont, Lennar & Dover

Dan Loeb's hedge fund firm Third Point is out with its first quarter letter.  During Q1, they returned -0.6%.  The letter talks about their new stake in United Technologies (UTX). 

They're pushing for a split-up into 3 companies: Otis, CCS, and an aerospace company.  They see this driving $20 billion of excess value (>20% of market cap) due to the fact that all three standalone companies should trade at higher multiples based on equivalent peers. 

They write, "Otis peers Kone and Schindler trade on average at 15x forward EV/EBITDA.  CCS peers, Allegion, Ingersoll-Rand, and Lennox, trade on average at 13x forward EV/EBITDA.  The remaining aerospace company would be the only liquid, US large-cap aerospace supplier other than TransDigm, which trades at 15x forward EV/EBITDA."  They also note though that management seems 'less open' to a three-way split than shareholders might want. 

Third Point also provide updates on their positions in DowDuPont (DWDP) and Lennar (LEN).  The former is one of their largest positions and they see a discount to intrinsic value that has widened.  The latter they view as the best homebuilder in the industry with the best set of veterans.  They also updated their Dover (DOV) position, noting the event-driven nature of the company now. 

You can read Third Point's full Q1 2018 letter embedded below:



You can download a .pdf copy here.

Bill Miller Thinks We're in a Secular Bull Market, Talks Stocks He Likes

Value investor Bill Miller of LMM Investments appeared on CNBC today and thinks we're in a secular bull market that began in March 2009.

"Bonds are unattractive in my view.  I believe we hit a double bottom in bonds in the summertime... 35 year bull market in bonds is over."

"As long as stocks yield more than bonds, stocks are attractive."

Miller is fully invested and says, "Cash earns zero, why do I want something that earns zero?"

He likes One Main Financial (OMF), bought in the spring, still thinks it's 'crazy cheap.'  Thinks smaller financials are attractive, mentioned MGIC (MTG) and Radian (RDN), mortgage insurers. 

Miller also likes big financials as well: Bank of America (BAC), Citigroup (C), JPMorgan (JPM).  Value investor Rich Pzena also likes financials, as he mentioned in his interview last week.

Bill Miller has owned Amazon (AMZN) since the IPO and still owns it today.  He says that was one of the best decisions he's ever made, and one of the worst has been selling any shares of it.  It's his largest position and says people have misunderstood AMZN's valuation from the beginning.  "Amazon's total addressable market is just so much bigger than any other company on earth."

He also talked about Twitter (TWTR), saying he sold half of his call options when it was in the $20s, and thinks it's a unique asset as a 'network of interests.'  He thinks they need a fulltime CEO and suggested they could perhaps switch to a paid monthly platform.  "We own Twitter because of the optionality."  He think it has a floor of $15-16.

Miller also owns various homebuilders such as Lennar (LEN) and TriPointe (TPH).  Feels builders will grow double-digits for the next few years.

On airlines, Miller still owns them and says Delta (DAL) is trading at a 15% free cash flow yield and will generate $5 billion in free cash and return 75% of that to shareholders.  He likes United (UAL) with more upside as the margins are depressed and they've got new management there.

Miller also commented on former hedge fund hotel Valeant Pharmaceuticals (VRX):  "It's probably the most toxic stock in the overall market.  It's blown a hole in Ackman's portfolio, it cost Bob Goldfarb, one of the best investors in our generation his job.  Our cost is from $20-35, we just bought more last week." 

He says they have 2 issues: the legacy issue of transitioning new leadership and then the debt load.  He thinks it doubles in 3 years as the company has a lot of cashflow and will look to sell non-core assets.

He also talked about Netflix (NFLX), noting it's an incredible company and he's owned it twice before, but thinks it's expensive now.  Also thinks Tesla (TSLA) is expensive and most energy plays are as well, especially the integrated players.

For more from prominent investors, check out David Tepper's recent interview, as well as Keith Meister's thesis on YUM China. 

Steve Eisman's Sohn Conference Presentation on Housing Plays: Long US, Short Canada

We're posting up notes from the Ira Sohn Conference 2013 in New York.  Next up is a summary of the presentation from Steve Eisman of Emrys Partners (he was previously at FrontPoint).  He presented "Housing: A Tale of Two Countries.  US vs. Canada."  


Long US Housing Plays

US: Fundamentals improving and accelerating. Affordability levels best in decades, Monthly principal and interest, only 14% of incomes. Inventory now at a 30 year low, shadow inventory is fading. Single- family starts should boost public builders. Last year was volume; this year is volume and pricing. California, AZ, NV, and TX are strongest- they were weakest.

3 ways to play it:

1. Homebuilders. Not cheap, but are not pricing in how much fundamentals have improved. Lennar (LEN), Standard Pacific (SPF), Pulte Homes (PHM).

2. Home building products: American Woodmark (AMWD), Fortune Brands Home & Security (FBHS).

3. Land: Forestar Group (FOR). Pure play in land. Colony Financial (CLNY) - real estate loans. Ocwen Financial (OCN) Largest non-bank mortgage servicing company. 25% FCF yield. Growth company, 7x p/e.  OCN seemed to be his favorite pick.  Our Hedge Fund Wisdom newsletter analyzed OCN back in our Q3 2012 issue.  Subscribe to the letter if you want a great company/stock overview to get up to speed.


Short Plays on Canadian Housing

He says that if a housing slowdown comes in Canada, the Canadian banks will really get hit.  "Misaligned incentives and poorly understood housing finance market."

Canada has their own Fannie Mae- called CHMC, which stepped in during 2008-2010 to do almost ALL the loans. Now CHMC is not doing loans, so banks must do it. Says these banks are all over-priced and "over-earning" because the boom from issuing insured loans is over. 

Canadian banks: Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CM), Royal Bank of Canada (RY), Toronto Dominion Bank (TD).

Short Idea: Home Capital Group (HCG.CA). Listed only in Canada. Largest non-prime mortgage originator in Canada. Carries $8.8B on their balance sheet. Has less than $1B equity, yet 100% of the credit risk on those loans. Trades at twice tangible book, expensive.


We've highlighted some past resources on this hedgie, including Eisman's pitch on for-profit education as well as Eisman's thoughts on insurers.


Check out the rest of the hedge fund presentations from the event: notes from Ira Sohn Conference 2013.