What We're Reading ~ Analytical Links 2/13/13

On knowing a company's relevant metrics and the investment thesis [MicroFundy]

The great equity rotation myth [CapitalObserver]

Thorp and Buffett on beating the market [Abnormal Returns]

Secular bear market 'hibernation' [The Big Picture]

Bond convexity and price risk [Business Insider]

Where are we in 2013? [Joe Kusnan]

The biggest housing bubble in the world is in Canada? [The Atlantic]

Should you gamble on Tropicana Entertainment? TPCA [Seeking Alpha]

Valero (VLO) updates its CST Brands spinoff [StockSpinoffs]

Hewlett Packard (HPQ) board studying break up [Quartz]

Bullish pitch on Merck (MRK) [Barrons]

Beating the market by buying back stock [Fortune]

A third of student loan debt belongs to subprime borrowers [WSJ]

Industrial revolution: The insourcing boom [The Atlantic]

Insider selling picks up [Marketwatch]

Create your own Apple (AAPL) stub [Brooklyn Investor]

Mexican banks: from tequila crisis to sunrise [Economist]

Delivering Alpha Best Ideas Panel: Cooperman, Chanos, Feldstein & More

CNBC and Institutional Investor's Delivering Alpha Conference is going on today and we wanted to aggregate the highlights.  The "best ideas" panel included Omega Advisors' Leon Cooperman, Kynikos Associates' Jim Chanos, BlueMountain Capital's Andrew Feldstein, Queen Anne's Gate Capital's Kathleen Kelley, and BlackRock's Robert Kapito.

From the conference, we've also posted up the global opportunities panel as well as the chasing yield panel.


Leon Cooperman (Omega Advisors):  He pitched going long US stocks and called them the best house in the financial neighborhood, a tune he has been singing for well over a year.  However, he did make an excellent point that the maximum "pain trade" is going higher as tons of people are sitting on large sums of cash earning nothing. 

As for specific names he likes: Capital One (COF), Express Scripts (ESRX), Halliburton (HAL), Gannett (GCI), Kinder Morgan (KMI), MetLife (MET), Qualcomm (QCOM), Watson Pharma (WPI) and Western Union (WU).  He also likes AIA Group (1299.HK) traded in Hong Kong.

The Omega Advisors founder also continued to bash bonds, saying "buying US bonds right now is like walking in front of a steam roller and picking up dimes.  It's just not a good policy."

As far as the election goes, he thinks that if Romney wins, the market will spike by 150 points, but if Obama wins, it drifts lower. For more from the Omega man, we just posted up Leon Cooperman on 14 attributes that make a good portfolio manager.


Jim Chanos (Kynikos Associates):  The noted short-seller was out again negative on tech companies.  He mainly pitched the bear case on Hewlett Packard (HPQ), calling it a value trap.  We just recently highlighted Chanos' presentation on global value traps where HPQ was highlighted among other names.

He says that "when you lose the paradigm shift, you spend an awful lot of money defending what you have."  He compared HPQ to Eastman Kodak as the company is in declining businesses.

Chanos also touched on how instead of giving cash back to shareholders, companies will make value-destroying acquisitions.  He cited HPQ's buy of Autonomy last year.  The Kynikos man argues that HPQ has overspent on acquisitions and they're hiding research & development expenditures through them.

He's also negative on Dell (DELL) saying that the company finances its subprime customers (financing their revenue growth).  For more on Chanos we just recently posted up his thoughts on the psychology of short selling.


Andrew Feldstein (BlueMountain Capital):  He likes less liquid credit, angling for 8-12% returns over a 3-7 year time horizon.  He says you have to be patient as this opportunity is available due to everyone's obsession with liquidity (i.e. don't put your money here if you don't have an appropriate time horizon).  He mentioned bonds such as Prospect Medical if you can buy and hold.  Feldstein also mentioned he's less excited about legacy distressed assets in Europe.


Kathleen Kelley (Queen Anne's Gate Capital):  Formerly of Tudor and Kingdon, she pitched two ideas: short the British pound (against long US dollar) as well as short platinum, targeting 20-30% moves to the downside.  She wants to be long the USD against the sterling because the USD can be a commodity currency.

She also likes shorting platinum as there's an oversupply due to slowing Euro auto sales.  At the Ira Sohn conference two months ago, Ospraie's Dwight Anderson pitched going short platinum as well (in addition to going long palladium).


Robert Kapito (BlackRock):  He's going for the "income hog" approach by focusing on equity dividend funds, dividend stocks like AT&T (T), Verizon (VZ), Merck (MRK), Johnson & Johnson (JNJ), high yield bond funds (or individual issues from Sprint, Ally) and municipal bonds such as the San Francisco Airport, New Jersey Tolls.  He thinks that default worry surrounding munis is "overrated."


Sources: Notes sent by readers, II's blog, @iimag,  @ldelevingne, @footnoted, @aarontask

For more from Delivering Alpha, head to the global opportunities panel (featuring Richard Perry) as well as the hunt for yield panel (featuring Marc Lasry)

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

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

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


Joel Greenblatt (Gotham Capital): Value Investing

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

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

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

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

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

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

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


Q&A Session:

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

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

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

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

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

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


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

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

Phil Hempleman's Hedge Fund Ardsley Partners Bullish On Pharmaceuticals: 13F Filing

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

This is the first time we've covered Philip Hempleman's Ardsley Partners so let's get a brief background. Hempleman founded the firm in 1987 and it is a long/short equity focused hedge fund that uses bottom-up stockpicking (the ideal type of fund for tracking purposes). Ardsley runs various funds including their Offshore Fund, Partners Fund, Partners Institutional Fund, etc and last we heard, they manage over $1 billion.

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


Brand New Positions
Google (GOOG) Calls
Merck (MRK)
Healthcare ETF (XLV) Calls
Merck (MRK) Calls
Apple (AAPL) Calls
Pfizer (PFE)
Teva Pharmaceuticals (TEVA)
Direxion Small Cap Bear 3x (TZA) Calls
Yuhe (YUII)
Baxter (BAX)
EGO Resources (EOG)
Healthcare ETF (XLV)
China Information (CPBY)
Fuel Systems (FSYS)
Aeropostale (ARO)
H&R Block (HRB)
Kenexa Corp (KNXA)
Avago Technologies (AVGO)
China Valves (CVVT)


Increased Positions
Telvent (TLVT): Increased position by 97.4%
American Public Education (APEI): Increased by 41.7%
Proshares Ultrashort 20 year Treasury (TBT) Calls: Increased by 40%


Reduced Positions
Zhongpin (HOGS): Reduced position by 4.8%
Mylan (MYL): Reduced by 1.15%


Removed Positions (Sold out completely):
Schlumberger (SLB) Calls
Google (GOOG)
Alcatel Lucent (ALU)
Apple (AAPL)
Schering Plough (SGP) ~ merger transaction complete
General Electric (GE) Calls
XTO Energy (XTO)
Gilead Sciences (GILD)
CVS Caremark (CVS)
China Natural Gas (CHNG)
Halliburton (HAL)
Chesapeake Energy (CHK)
Plains Exploration (PXP) Calls
State Street (STT)
Brocade Communications (BRCD)
Tellabs (TLAB)
Smart Balance (SMBL)
Exco Resources (XCO)
Asiainfo (ASIA)
Thermo Fisher Scientific (TMO)


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

1. Google (GOOG) Calls: 6.12%
2. Proshares Ultrashort 20 Year Treasury (TBT) Calls: 5.74%
3. Merck (MRK): 5.41%
4. Healthcare ETF (XLV) Calls: 5.11%
5. Merck (MRK) Calls: 4.51%
6. Telvent (TLVT): 4.39%
7. Yongye (YONG): 4.25%
8. Apple (AAPL) Calls: 3.47%
9. Zhongpin (HOGS): 3.08%
10. Rino International (RINO): 2.54%
11. Pfizer (PFE): 2.24%
12. Teva Pharmaceuticals (TEVA): 2.08%
13. Direxion Small Cap Bear 3x (TZA) Calls: 2.03%
14. Mylan (MYL): 1.95%
15. American Public Education (APEI): 1.92%
    

The most intriguing aspect of Hempleman's portfolio is the fact that the majority of his top holdings are brand new positions and he sold completely out of previous large positions. So, we're definitely seeing some significant turnover here. It's apparent that Ardsley Partners fancies using options to make some of their investment wagers and we see that they are using calls on ultrashort exchange traded funds. Since they are betting that an ultrashort fund will rise via calls, we can interpret this as a short position, a hedge, or just a bearish bet. His largest bearish wager is on 20 year treasuries with calls on TBT. In the past, we've constantly detailed how many hedge funds are betting on rising interest rates.

Turning back to the equities portion of their portfolio, Ardsley initiated Pfizer as a new stake in the fourth quarter, a position we've noted that many hedge funds added. Interestingly enough, they also own two of the major generic pharmaceutical producers in TEVA and MYL. As you can see, health is a very apparent theme in Hempleman's hedge fund portfolio.

Of the stocks that Ardsley Advisory Partners sold completely out of last quarter, there are many notable names. Hempleman's hedge fund dumped past large positions in Schlumberger (SLB) Calls, Google (GOOG), Alcatel Lucent (ALU), and Apple (AAPL). So, there is an apparent shift in their portfolio here as they dump common stock of certain names in favor of call options. Overall, Ardsley reduced basic materials exposure and ramped up healthcare exposure.

Data used for this article comes from Alphaclone, our source for backtesting strategies and sorting through all the hedge fund portfolio maneuvers with ease. Assets reported on the 13F filing were $607 million this quarter compared to $525 million last quarter, a 15% increase. Remember that these filings are not representative of the hedge fund's entire base of AUM.

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

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

As well as hedge funds employing other strategies: John Paulson's hedge fund Paulson & Co, Philip Falcone's Harbinger Capital Partners, Thomas Steyer's Farallon Capital, John Burbank's Passport Capital, Brett Barakett's Tremblant Capital, George Soros' hedge fund Soros Fund Management.

Be sure to check back daily for our new updates.