Third Point's Q4 Letter: Updates on Baxter, Campbells Soup, United Technologies & Nestle

Dan Loeb and Third Point are out with their fourth quarter letter to investors.  Third Point finished 2018 down 11.3%, only the 4th time in 24 years they've lost more than 1% in a year. 

Their Q4 letter includes a large section on the state of the credit markets, as well as portfolio updates on some of their equity holdings like Baxter (BAX), Nestle (NSRGY), Campbells Soup (CPB), and United Technologies (UTX).


Third Point's Q4 Letter: Updates on Equity Positions

On CPB: They settled their proxy fight that gave them a mix of board representation as well as regular access to the board and executives.   They helped CPB recruit Mark Clouse as new CEO.  They're looking for the company to "repair the balance sheet, execute an operational turnaround of the business, and explore all options to create long-term value for  shareholders."


On UTX:  "Despite the separation announcement, UTC’s sum-of-the-parts  discount  has  continued  to widen  and  the  valuation  gap  versus  UTC’s  closest  multi-industry   peer,   Honeywell International, has reached a new 10-year high.The coming separation will shine a greater spotlight on the large valuation gap to UTC’s pure-play peers.During the separation process, we  expect  the  management  team  to  highlight  UTC’s  asset  quality  and  to  increase transparency  around  Pratt & Whitney’s very significant multi-year  inflection  in  free  cash flow generation."


On BAX: Operating margins of 17.4% have been achieved and they think there's further upside to 23%.  Since 2016 the company has returned $4 billion to shareholders and used another $1 billion for business development.  "Over the next 12-24 months, Baxter  expects  to  start  reaping  the  fruits  of  its  labor  with  several  new  product  launches including Spectrum IQ and Evo IQ pumps, and new generic injectable drugs. The innovation cycle  should  serve  to  drive  revenue  growth  acceleration  and  contribute  positively  to underlying operating margins."


Embedded below is Third Point's Q4 letter:



For more recent investor letters, we also posted up Warren Buffett's annual letter, as well as excerpts from Baupost Group's letter and Sequoia Fund's letter too.

Third Point's Q3 Letter: New Dover Position

Dan Loeb's hedge fund firm Third Point has released its third quarter letter.  Thus far for 2017, they're up 14.5% in their Offshore Fund and up 23% in their Ultra Fund.

While they feel earnings multiples are high by historical standards, they think earnings growth and low interest rates combine to make an environment ripe for higher valuations anyways.

The biggest risk they see currently?  A recession.  However, they feel the risk is low as economic growth rates are high.

Third Point's New Position in Dover (DOV)

During the third quarter, Third Point initiated a brand new position in Dover (DOV), an industrial conglomerate.  They've engaged management and think there's a 3 main areas for value creation: separate the energy segment, address the underearning core industrial portfolio, and optimize capital allocation.

Their letter also gives updates on DowDuPont, Honeywell (HON), as well as their activist position in Nestle.

Embedded below is Third Point's Q3 letter:



You can download a .pdf copy here.

Third Point Q2 Letter: Re-enters Alibaba, Adds BlackRock Stake

Dan Loeb's hedge fund firm Third Point was up 4.6% for the second quarter and is up 10.7% for the year.  Third Point's second quarter letter reveals they've re-entered Alibaba (BABA).  They feel now is the time to re-enter due to the company's launch of personalized advertising, new ad tech for brand advertisers, as well as revenue potential from higher ad loads, among other reasons.

Backing out net cash and some other stakes, Loeb's firm feels Alibaba's core business alone is worth $121 per share (around 15x their 2019 EPS estimate of $8.20) with earnings growing 30% year-on-year.  They feel BABA can close the valuation gap with competitors like Tencent, which trades at 32x consensus 2018 EPS.

Third Point also reveals a stake in BlackRock (BLK) in the letter.  Rather than simply being an asset manager. they feel it's "becoming a network or index-like business, with earnings power driven by ETFs (via iShares) and data & analytic services (via Aladdin).  They point out they're basically oligopoly businesses.

Also, a few months ago we highlighted how this hedge fund has gone activist on Nestle and we posted Third Point's letter on Nestle here.

Embedded below is Third Point's Q2 2017 letter:



You can download a .pdf copy here.

For other recent hedge fund letters, you can also read Greenlight Capital's Q2 letter here.

Third Point Takes $3.5 Billion Nestle Stake: Letter

Dan Loeb's hedge fund firm Third Point has released a letter that reveals they've taken a $3.5 billion stake (including options) in Nestle in their hedge funds as well as a special purpose vehicle they raised for the opportunity.

They see four areas for improvement:

1) Improving productivity: adopt a formal margin target

2) Capital return: adopt a leverage target and buyback stock

3) Re-shape the portfolio: perhaps sell some businesses

4) Monetize their L'Oreal stake


Third Point feels that Nestle can hit earnings per share 50% higher than today.

Embedded below is Third Point's letter on Nestle:



You can download a .pdf copy here.

We've also posted other recent portfolio activity from Third Point here and you can also read Third Point's Q1 letter.

What We're Reading ~ Analytical Links 2/5/13

M&A world: stacks of corporate cash looking for deals [All About Alpha]

Taking money off the table to diversify emotionally [Abnormal Returns]

Looking at annual trends in shareholder activism [Activist Insight]

Observations of individual stock returns 1983-2006 [Longboard]

Time Warner breaks out HBO results [Barrons]

Will Valeant overdose on acquisitions? [Herb Greenberg]

FCC chief tells Sprint chair he is skeptical of T-Mobile deal [Reuters]

Cable TV mogul looks to add Formula 1 to sports bag [NYPost]

Taking a look at Kinder Morgan [Glenn Chan]

Did Google really lose on its original Motorola deal? [Dealbook]

Nestle looking at selling even more assets? [Reuters]

Top destinations for foreign investment dollars [Business Insider]

Great Investors' Best Ideas Conference Notes 2013: Price, Akre, Gabelli, Pickens, Russo & More

Below are some brief notes from the 7th annual Great Investors' Best Ideas Conference in Dallas benefiting the Michael J. Fox Foundation for Parkinson's Research and the Vickery Meadow Youth Development Foundation.


Notes From Great Investors' Best Ideas Conference


Michael Price (MFP Investors): He pitched three ideas:  long Hospira (HSP), long Songbird Estates (SBD.LN) and long Dolby Labs (DLB).  HSP has seen value guys buying it, transitioning away from growth investors as the investor base changes.  The company has good free cash flow and he thinks the stock can hit $60.  His thesis on Songbird is a discount to NAV story (around 30%).  Dolby (DLB) has a ton of cash and no debt with huge royalty streams (80% of revenue).  As tablets and PCs continue to grow, they'll make money.


Chuck Akre (Akre Capital Management):  His picks were Moody's (MCO) which he likes due to its oligopoly position, solid return on equity and pricing power,  as well as O'Reilly (ORLY), the auto parts supplier which recently bought CSK Auto and the integration has gone well and now they're buying back shares.  His presentation also focused on how you should stick with your circle of competence and acknowledge when you're unsure of things. Focus on 3 things in a business:  growth of capital (high ROIC), good management, and solid reinvestment (how they used past FCF).  The price you pay is very important.


T. Boone Pickens (BP Capital):  He pitched Diamondback Energy (FANG) which he likes for its growth potential, no debt and a lot of cash.  He also likes Basic Energy Services (BAS) as excess capacity has been taken out.  He also touched on his picks from last year: National Oilwell Varco (NOV) which he still likes, as well as Pioneer Resources (PXD), almost a double and he likes the Permian basin acres (continues to like this stock as well).


Karen Finerman (Metropolitan Capital Advisors):  She pitched North Atlantic Drilling (NADL.NS) traded in Norway which was a spin-off from Seadrill (SDRL).  The spread between non-Norway rates and Norway rates is very big and many contracts already locked in.  She likes the cheap valuation, big dividend (potential for it to grow), says there's limited downside due to the backlog. There's also a catalyst with an IPO coming for a US listing and it won't be too dilutive. 


Tom Russo (Gardner, Russo & Garnder):  He pitched Nestle (NSRGY) and Berkshire Hathaway (BRK.A/B).  It seems like Russo always pitches Nestle when he speaks somewhere.  He's a global value investor and is looking for companies like See's Candies and invests for the long-term.  They have a lot of European companies in their portfolio and like market volatility as it provides opportunities to long-term investors.  The last major portfolio buys they made were AB Imbev (BUD) and Mastercard (MA) 3 years ago.


Mario Gabelli (Gabelli Funds):  He presented Cablevision (CVC) as a potential buyout candidate with John Malone (and Charter Communications) active and pushing for consolidation.  Will the Dolans sell CVC?  Argues that the company is worth up to $23 in a buyout, versus current levels of around $16.


Caroline Cooley (Crestline Investors):  She's focused on event-driven plays.  She specifically mentioned Macquarie Infrastructure (MIC) which is involved with infrastructure building, has a nice yield and could see it head higher.  It's undervalued because it cut the dividend in '09 and has limited sell-side following. says this story is probably in the middle innings.


Tom Gayner (Markel):  He pitched General Electric (GE).  He pitched the same stock at GIBI in 2007 when it was $40 and now the stock's at $25.  They still own shares and now have a $23 cost basis.


For more conference notes, we also posted up notes from Invest For Kids Chicago (Lasry, Eisman, Cooperman).

David Winters' Wintegreen Fund Focused on the Emerging Market Consumer: Wealthtrack Interview

Consuelo Mack's show Wealthtrack had David Winters of the Wintergreen Fund on this past weekend.  Their interview touched on what stocks he's seeing value in these days.  Winters is a value-oriented investor and he runs a somewhat concentrated book with his top 5 holdings representing 30% of the portfolio.  


Winters' Focus on the Emerging Market Consumer  

One of the main themes in Winters' portfolio is the emerging market consumer.  This is by no means a new theme, but Winters argues you can buy stakes in some great companies with exposure to a rising consumer at good prices still.  

In particular, he's focused on luxury brands as he's seen these aspirational consumers crave these brands in his many trips to Asia (he's been 20 times).   Richemont (VTX:CFR) is the owner of Cartier and is one name he likes.  He says it's the most aspirational jewelry brand and he notes that the Wynn Macau has two stores there since they were selling so much.   

Winters also likes Wynn Macau (HK:1128) as a beneficiary in the Asian gambling hub since there's only 6 operators there.  He notes there's no social stigma in Asia associated with gambling.  He also likes Steve Wynn as an operator  They're the high-end provider of gaming in Macau.  He likes that you get paid 5% (dividend) to wait while the company builds out its property in Cotai.  Winters likes the conservative balance sheet and the fact that there's so much demand.  

Jardine Matheson (SGX:J36) is another name he likes and has been involved with for a long time.  It has 3 principal businesses: small convenience stores, a dairy farm, and it controls Astra, the biggest company in Indonesia, and they also own Hong Kong land, some of the most valuable assets in the world. 

One of the companies Winters has been newly buying is Cielo (CIOXY), Like his thesis on Mastercard (MA), his play on Cielo is the secular shift from cash to plastic.  Cielo is a payment processor that has 50% market share and trades at 13x earnings.  While short-term Brazil might face headwinds, he likes the opportunity long-term as 190 million people can start paying via credit/debit cards. 

Given Winters' emerging market consumer focus, Consuelo Mack prudently highlighted a term from a Bain & Co report: HENRYS: High Earnings, Not Rich Yet consumers.    This is a sweet spot Winters is targeting.  


Winters Loves Companies With Pricing Power  

The Wintergreen Fund manager says, "In my life and in everybody's life I know, everything costs more."  For this reason, he loves businesses with pricing power. 

For instance, he loves the watch and jewelry business.  For men, he notes, the only jewelry they wear (aside from a wedding ring), is a watch.  Swatch (VTX:UHR) has low, medium, and high-end watches and it's one of his major holdings.  He likes the management team and says the company is shareholder friendly. 

He also likes Nestle (NSRGY), especially for their pet food business as humans will spend a lot of money on their pets.  

Pricing power is a valuable asset for any business and we've outlined Warren Buffett's focus on pricing power in the past.


Interest Rates Rising = Inevitable

He thinks interest rates will go a lot higher over the years, saying "it's inevitable." 

In a rising rate environment, he likes companies with the trifecta: good management, a cheap price, and improving economics.  As long as the company can grow earnings and cashflows, they can outpace.  Winters says this is a stockpicker's market and notes the economy in the US is rebounding and some companies trade at the wrong prices. 

He also made sure to point out the asset allocation of many investors these days: safety.  "Most of the public is in cash and bonds, and they'll get annihilated."  

Winters ended with this bit of investing wisdom: "Headlines are often an opportunity, because people today focus on the negative, and we're very focused on where can we make money out of this?"


Embedded below is the video of Consuelo Mack's Wealthtrack interview with David Winters of the Wintergreen Fund:



For more Wealthtrack interviews, we've also posted up Consuelo Mack's talk with Bruce Berkowitz.

What We're Reading ~ Analytical Links 7/10/13

On saving investors from themselves [WSJ]

Smart and stupid arguments for active management [Reformed Broker]

Incorporating right-brain thinking into your investment process [Investing 501]

How gold lost its luster [The Big Picture]

A dozen things I've learned about the psychology of investing [25iq]

Steel: an inferno of unprofitability [The Economist]

On dealing with a rising interest rate environment [WSJ]

30-year mortgage rates surge to highest level in 2 years [Zillow]

The Dow Jones Index between 1789 and today [Go Infront]

MJN, ABT, NSRGY: China investigates foreign makers of baby formula [WSJ]

DVA: dialysis pay would drop $970 million under CMS proposed rule [BNA]

DIS: An interview with head of ESPN John Skipper [HollywoodReporter]

Talk of mergers stirs cable TV's big players [NYTimes]

Labor market spider chart [Federal Reserve Bank of Atlanta]

The best investment advice you'll never get [San Francisco Magazine]

Merchant banks make a comeback [WSJ]

The scam Wall Street learned from the mafia [Rolling Stone]

A report on Corrections Corp of America (CXW) [Scribd]

Introducing the Winklevoss Bitcoin trust [FT Alphaville]

Notes From CSIMA 2013: Columbia Investment Management Conference

Below are some notes from the recent 2013 Columbia Student Investment Management Association Conference (CSIMA).  The following is a guest post from CapitalObserver. 


Notes From CSIMA 2013: Columbia Investment Management Conference

(MarketFolly note: rules from the event prevent direct attribution to a specific speaker's comments.  However, we found the list of speakers on Columbia's website so you at least know who was presenting at the event.  Even though the comments are not attributed, we still thought there would be value in posting these notes given the quality of speakers.)

Seth Klarman (Baupost Group)
Bruce Berkowitz (Fairholme Capital) 
Jeremy Grantham (GMO)
Timothy Hartch (Brown Brothers Harriman)
Thomas Russo (Gardner Russo & Gardner)
Jane Siebels (Green Cay Asset Management)
Mark Cooper (PIMCO)
Jean-Marie Eveillard (First Eagle Investment Management)
John Spears (Tweedy Browne)
Jennifer Wallace (Summit Street Capital Management)
Bill Miller (Legg Mason)
Mason Hawkins (Southeastern Asset Management)
Christopher Davis (Davis Advisors)
Robert Koenigsberger (Gramercy)



Presenter A: Natural Resources 

Buy good resources in the ground, farmland & forestry. Natural resources are finite. Global warming is real. Oil is running out. Much more expensive to find new oil. Even the cheapest shale oil costs $60 to take out of the ground. Higher oil prices are a paradigm shift. It is different this time.


Presenter B: Universal Display (PANL)

OLED market (organic light emitting diodes). Smartphones & TVs are moving to OLED. Lighting will likely move to OLED. 25% of market cap short. Cheaper to manufacture, better & more efficient. Trades at 16 times 2014 estimates. Holds key patents in OLED market. Patents are where the hidden value is. Replacement value calculation is $24. Paying a 15% premium  to replacement cost for the best company in a growth market. The Qualcomm of the OLED market. $240 million in net cash + value of patents+ value of R&D + PP&E . Growth stock in value category trading close to replacement value.


Presenter C: Nestle (NSRGY)

Compounded at 15% total return since 1991 and can continue. Strong brands now affordable to quickly growing developing world.  Don’t like selling companies and incurring taxes. Prefer to own stocks that never need to be sold. There are numerous members of management that speak 5 different languages. Truly global company. Go find somebody at Kraft management that speaks 5 different languages. Were willing to lose money on R&D for years on Nespresso and are now making billions on it. Willing to make long term investments even if there is no immediate payoff.


Presenter D: Bed Bath & Beyond (BBBY)

Greater than 25% ROE. Reduced share count by 25% over past decade. Leading home furnishing retailer. The store to go to for middle & upper class families when moving into a new house/ getting married. Entrepeneurial culture.  Declining margins & threat from Amazon are legitimate concerns. Margins were unsustainably high  after Linens –N- Things, their primary competitor, went bankrupt. They are spending a lot on technology & opening  many new Buy Buy Baby stores.  Same prices as Amazon. People prefer to touch & feel these types of items before buying. 12 times FCF after net cash. 75% of conservative intrinsic value. No near term catalyst. 5 year holding.


Presenter E: Vishay Precision Group (VPG)

Vishay Precision Group (VPG) is an internationally recognized designer, manufacturer and marketer of: components based on its resistive foil technology; sensors; and sensor-based systems specializing in the growing markets of stress, force, weight, pressure, and current measurements. VPG is a market leader of Foil Technology Products, providing ongoing technology innovations in precision foil resistors and foil strain gages, which are the foundation of the Company's Force Sensors Products and its Weighing and Control Systems. The product portfolio consists of a variety of well-established brand names recognized for precision and quality in the marketplace.  Less than 5 times EBITDA to EV. Great list of customers. No near term catalyst. 5 year holding.


Presenter F: Investing Advice

·         Get away from the game of trying to figure out where the market is going to go. Buy value and companies you can hold for years. Buy companies that you can own even if a depression is around the corner

·         Government involvement is masking what companies could really earn without the training wheels. 2008 only emboldened regulators to get more involved. Treacherous investment conditions. Interventions are causing distortions & future disasters are being set up.

·         How firm is run: Learn from failures. Senior partners at firm work with new employees. Flat structure. Always allow new opinions and change.

·         Ridiculous short term orientation aided by investment committees & consultants. Ridiculous pressure to keep up with the market in the short run. Pressure of industry makes it hard to be a true long term investor. Clients who could redeem put tremendous pressure on a manager to perform short term.

·         The ability to take a long term view gives one an edge.

·         Fairly priced to expensive market for the better part of the last thirty years. Have been better bargains in distressed debt, distressed real estate. There have been chances to buy stocks but there were more opportunities elsewhere.

·         Get the right clients. It is better to have less clients that are more patient.

·         Act in clients best interest but ignore everything they say. The most terrible sounding investments that would scare the hell out of your clients is likely a great investment. When the news is worst about an investment it is likely the best opportunity.

·         Investing should be absolute, not relative. If there are no bargains then hold cash.

·         There will be a once in a hundred year storm every 3 to 5 years because of the amount of distortions by government.

·         You don’t need the entire market to be cheap to find bargains. Look hard. Be patient. Right now not many bargains in public markets.

·         Hard to analyze, highly complex situations offer opportunity.

·         Most of our investments stand on their own and we don’t hedge. Don’t care about market fluctuations. Not afraid of market risk. Sometimes hedge currency or interest rates.

·         Not expert in technology but after 2001 bought tech stocks trading under cash and doubled our money. Bought HPQ but should have just put it in the too hard pile.

·         Sometimes they speak to management with a cheap stock and ask them why they aren’t repurchasing stock at these cheap levels. Management answers that they bought higher & it didn’t work. Ridiculously annoying when management thinks like that.

·         The importance of having great clients. Investors called and wanted to put in more money because of the amount of bargains.

·         Intellectual honesty. Admit mistakes. Admit when you were lucky rather than smart. I make a lot of mistakes.

Tom Russo's Presentation on Global Equities: Value Investing Congress Omaha

Today we're posting up notes from day 1 of the Value Investing Congress.  Below is the presentation from Tom Russo of Gardner, Russo & Gardner on global equities.  The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.

Capacity To Suffer - Global Value Equity Investing

•    SAB Miller, Pernot Ricard, Nestle, Berkshire: Total 4 above 28% of his portfolio. (total 70% international)
 •    High agency cost risk in public markets
•    Used to speak of Weetabix (cereal company with family control) compound of 21%. Was worth £150MM then sold to Hicks use for £600 pounds
•    Nestle saying Chinese companies are becoming players on the international front.  Sure enough – food firm from China just bought this cereal company for £2,000MM
•    Europe is where they are looking now
•    Culture of Nestle has culture of centuries old Japanese temple – take the time to do it right: Nestle has 35 year planning horizon.
•    Buying brands around the world that are strong and stable – Russo investing in companies’ which are investing across the emerging globe building brands and product lines.
•    Holds positions a very long time to take advantage of attributes compounding returns without taxation
•    Berkshire:  GEICO has $30mm advertising budget in 1996 to $1,000mm over period of owning GEICO.  Reason was $250 loss per new sub but BRK changed - but NPV of sub is $1,500.  So short term profits down with significant growth of subs.  Equity Put Options: $37bn of insurance sold for $5bn. At peak, BRK has $15b of losses on the income statement. $3bn charge for multiple.
•    Pernot Ricard (Credit Default Swap mayhem): Invested in China in early 2000’s, Absolute 2009, India now,  Family controlled – so can take the losses
•    SAB Miller investing aggressively in Africa – huge opportunity over time.
•    300MM bottles of homemade beer – will shift to bottled beer over time in Africa.
•    Just bought Fosters – will do well over time.


Question & Answer Session: ABInBev managers 2nd best in the world only to Buffett and Munger. Mentioned Brazilian railway with a 40% ROE.


Embedded below is Tom Russo's slideshow presentation:




Be sure to click here for other presentations from the Value Investing Congress.

Thomas Russo: Investment Opportunities Abroad & Nestle (Invest For Kids Chicago Notes)

At Invest For Kids Chicago yesterday, Thomas Russo of Gardner Russo Gardner gave a presentation on investment opportunities abroad and going long Nestle (NSRGY).

Be sure to check out all notes from Invest For Kids Chicago where numerous high profile hedge fund managers shared their latest investment ideas.


Find Better Opportunities Abroad

Russo has 70% non-US exposure and he's been looking at European ideas that generate revenue outside of Europe. He lists the benefits of investing globally:

1. Capacity to continue to reinvest in pursuit of corporate wide ROICS
2. Freedom from dividend burdens
3. Corporate ethics / culture knowledgeable
4. Corporate governance
5. Global talent pool
6. Global best practices
7. Lower valuation available (Euro companies loathed)
8. Reduce translation risk

Nestle (NSRGY): He likes that they're focused on better foods. The secure global parent company is much cheaper than underlying national divisions.

Russo focused on how companies must have a chance to reinvest (strength in brands). He alluded to Kraft Foods and its domestic history where the core business lacked ability to effectively expand overseas. He says you must have long tail to expand abroad.

Pernod Ricard: They went to China with large capacity to grow and invest. 15% of profits are in China and it's family controlled. India is a huge opportunity for spirits.

SAB Miller: The company just purchased Fosters and local brewed beer is a big opportunity. Their sales are rising but EBITDA margin is down and.

He says that market volatility is a friend of the long-term investor. It permits more efficient capital reinvestment, offers M&A opportunity, and enhances share repurchase opportunities. He also says that investment managers have to have the capacity to suffer, in 1999 he was down 2% while the market was up significantly.

At the Leaders in Investing Summit earlier this year, Russo said he likes SAB Miller as well.


You can view full notes from Invest For Kids Chicago here.

Notes From Leaders In Investing Summit: Leon Cooperman, Larry Robbins, Bill Ackman, Howard Marks & More

The CIO/CEO Leaders in Investing Summit took place on Tuesday at The Metropolitan Club of New York and featured presentations from numerous high-profile hedge fund managers.

The summit is a peer-only event only open to those investing third party capital. We're pleased to present notes from the event concerning specific investment ideas and/or commentary on the economy:


Leon Cooperman (Omega Advisors): The legendary hedge fund manager's talk centered on equities as the best house in the financial asset neighborhood. He argued that you need to believe four issues in order to have a positive view on today's market:

1. The U.S. is not another Japan and will not suffer a lost decade.
2. The European Central Bank (ECB) will act to stabilize Europe.
3. President Obama will move to the center.
4. The Middle East's turmoil leads to democracy and oil stays below $135.

Cooperman continued to voice his concern over employment. He also pointed out that the yield curve is quite steep and that the Federal Reserve is trying to inflate the country out of debt. Cooperman says inflation is not bad for stocks (see the best investments during inflation).

He argues that stocks are cheap trading at 13.6x relative to bonds and history. The Omega Advisors founder also thinks that bonds are 'screaming' to be shorted. Other hedge fund managers have also advocated shorting bonds. Don't forget that you can also hear Cooperman's latest investment ideas at the Value Investing Congress in October (click here for a discount).



Larry Robbins (Glenview Capital): Formerly of Cooperman's Omega Advisors, Robbins founded Glenview Capital. His presentation yet again focused on Life Technologies (LIFE). The company trades at a 11x P/E and is likely to grow EPS 20% over the next few years as they were able to grow EPS throughout the slowdown and 95% of their business grows with research spending.

Robbins highlighted free cashflow is 91% of EPS and that the company will have 80% market share versus competitor Illumina (ILMN). One could postulate that he's short ILMN as a hedge but when asked about it he said that he's "only here to discuss my longs."

And speaking of longs, he said some of his top holdings are Expedia (EXPE), Flextronics (FLEX), Xerox (XRX), and BMC Software (BMC) in technology. We've detailed the in-depth investment thesis on EXPE in the latest issue of our Hedge Fund Wisdom newsletter.

In general, Glenview looks for good businesses, low valuations, excess capital, a business that can succeed regardless of economic environment, and pricing power. Currently, Robbins thinks the economy will grow slowly and with heightened volatility due to excess government intervention.



Tom Russo (Gardner Russo & Gardner): The long-only manager is still bullish on China and pitched Nestle (NSRGY) at the event. His idea is simply to buy prominent international players and hold through the ups and downs. In the past, he's talked about how Nestle can invest large amounts of money in emerging markets and see high rates of return.

He is also still holding SAB Miller (LON: SAB) despite declining EBITDA margins as the company is now making acquisitions to make up for the lack of growth. Russo did not seem to like the Foster bid.



Howard Marks (Oaktree Capital): His presentation focused on the keys to success in a low return world. Marks focused on three key questions to ask yourself as an investor today:

1. Should we prepare for prosperity? He argued no because the economic recovery is faltering.

2. Should we worry about losing money or missing opportunity? For now, he says to be mindful of losing money.

3. What holds the key? Capital and nerve? Or discernment, discipline, risk control and selectivity? Marks argues the latter right now, saying that stocks are slightly cheap, but not by much.

Marks says that your choices today are as follows: invest for the long-term, go to cash, take more risk (chase yield), or find niches. Take your pick. Marks also brought up a good point that just because stocks are flat over a ten-year period doesn't mean they are a buy because the P/E was 30x ten years ago.

Oaktree recently filed for an initial public offering and Marks' recently released his new book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor which has received praise from legendary investors Warren Buffett and Seth Klarman.



Paul Singer (Elliott Associates): This hedgie's talk focused on the shape of the next crisis. He mentioned that all major banks are quite opaque and no one can truly analyze them, meaning the next crash could be even faster because the leverage is still there. He doesn't seem to be a fan of Bernanke.

Singer points out that the lesson was "sell first, move assets first, ask questions later." Those that took more time to do so got stuck and that is dangerous. He also believes that Dodd-Frank has made the system more brittle and thinks there should be NO financial institution that is too big to fail.

Lastly, he also mentioned that monetary policy has caused commodity inflation (Howard Marks also thinks this is the case).



Bill Ackman (Pershing Square Capital): Speaking on activist investing, Ackman said that you have to work *with* management. He cited his investment in J.C. Penney (JCP) as an example as the company has a new CEO who redesigned Target (TGT) then most recently headed Apple's (AAPL) wildly successful retail operation. He also says that the company has a big advantage by owning its own real estate and not paying rent. We've covered Ackman's JCP thesis here in-depth for more.

Concerning his recent investment in Family Dollar (FDO), Ackman said that Nelson Peltz's Trian Fund is driving the effort. The company has a bid on the table and is a prime leveraged buyout candidate. The vote is in January and management has to fix the company or sell it. We've also posted Ackman's presentation on FDO.

Ackman also talked about lessons he learned from his mistakes. He said that liquidity is very valuable and lack of it is a big opportunity cost. Also, he pointed out that as you get older, you further understand the opportunity cost of time. He likes to measure whether the potential return justifies the time and risk.

Citing his past failed investment in Borders (BGPIQ), Ackman said he underestimated the risk of technological change. He would rather invest in a good business than just good management. He said the limitation of his approach is that although the stocks he invests in are liquid, his concentrated stakes are not (Ackman also mentioned 27% of his fund was redeemed during the crisis).



Ron Gutfleish (Elm Ridge Capital): Gutfleish likes the defense sector and in particular, Lockheed Martin (LMT). He argues the company doesn't make bad acquisitions, pays a good dividend and does smart buybacks. While he admits to being "usually too early," the hedgie thinks that these stocks are very cheap no matter what you think about the defense sector.

The bear case there is very obvious, he notes, pointing to a budget under pressure. However, he argues that these companies generate huge cash flow during down cycles and deploy it in shareholder friendly ways.



Joel Greenblatt (Gotham Capital): Greenblatt's presentation focused on the 'big secret for value investors.' He was, of course, referring to his new value-weighted indexing method which is detailed in his new book, The Big Secret for the Small Investor: A New Route to Long-Term Investment Success.

He argues that indexes have the flaw of market cap weighting. Evenly weighted, the SPX outperforms by 3% per year over the last 20 years. A value weighted index of 800 stocks beats the SPX by 7% a year.

Right now, Greenblatt says his statistics point to stocks being at about average valuations. Some of the stocks on his list right now include: Gamestop (GME), Wellpoint (WLP), and Intel (INTC). He says that these companies are trading at bargain prices either due to uncertainty or because they are troubled.




That sums up notes from the summit. Keep in mind that many of these hedge fund managers will be presenting investment ideas at the upcoming Value Investing Congress in October and Market Folly readers can receive a discount to the event by clicking here.

Jeremy Grantham Favors High Quality US Stocks: Market Commentary

Today we're doing a bit of 'market-strategy-Monday' here on Market Folly and will kick things off with the often-read missive of GMO's Jeremy Grantham. He is now a deflationista as he thinks it has trumped inflation as the biggest concern in the near-term. While Grantham doesn't seem too anxious to be a buyer of many asset classes, there are three areas he has deemed compelling. GMO's asset allocation portfolios are built on a seven-year forecast and here are his thoughts:

Firstly, Grantham sees value in high quality large cap US companies. The main argument? Valuation. Just last week, we highlighted hedge fund T2 Partners' bullish presentation on 3 large cap stocks. The 'buy high quality large cap' theme has been long underway in hedge fund land as a plethora of managers have now sung the praises of this opportunity. Pershing Square's Bill Ackman went long Kraft (KFT) on this notion (among other reasons) and East Coast Asset Management likes quality names as well. Grantham's GMO colleague Edward Chancellor echoes these thoughts. He says,

"When we look through the various classes of equities, we find in the U.S. that companies that are so-called quality have high expected returns relative to the market; in other words, companies that tend not to go bust, and tend to maintain their positions—the sorts of businesses that Warren Buffett made his fortune investing in and are trading at a P/E of about 14. Johnson & Johnson (JNJ) and Pfizer (PFE) are key companies—the sort that your grandmother had in her portfolio or are typically owned by trust companies. Normally they trade at premiums to market, but right now they’re not."

Chancellor also sees opportunities in the European high quality equivalent. In particular, he mentions Nestle (NSRGY), Novartis (NVS), and Unilever (UN). Last week we also pointed out how hedge fund Viking Global has a large stake in Unilever as well.

Secondly, Grantham believes that emerging market equities are the next best play. This is mainly attributable to the fact that the fundamentals in these countries are so much better than our own markets. While EAGE equities are slightly expensive, they are a much better option than say, fixed income.

Lastly, Grantham remains staunch on his view of forestry (i.e. timber). He has long advocated a place in portfolios for timber as it serves as a good diversification tool during the good times. And, during periods of uncertainty, it is a "brilliant store of value should inflation unexpectedly run away, and a historically excellent defensive investment should the economy unravel."

Embedded below is Jeremy Grantham's latest market commentary from GMO:



You can download a .pdf copy here.

For more excellent commentary be sure to head to the latest hedge fund letters where prominent managers share their thoughts on the markets.

Consensus Versus Variant Perception in the Markets: East Coast's Q2 Letter

We're pleased to present the second quarter 2010 commentary from East Coast Asset Management. The letter, penned by Chief Investment Officer Christopher Begg, touches on a number of intriguing and hotly debated topics, including inflation. Some of you will recall that we featured some past commentary from East Coast where they examined the deflation-reflation continuum.

East Coast is decisively in the inflationist camp. They believe that central banks armed with printing presses can only lead to one outcome. Their portfolio is positioned to mitigate the effects of any tail risk events such as hyperinflation, a bond bubble, a spike in interest rates, paper currency debasement, and a double dip recession. You'll recall that Baupost Group's Seth Klarman has also protected his portfolio from tail risk events as a form of cheap insurance.

Summarizing East Coast's stance, Begg writes, "The greatest opportunities to compound capital come from periods where dislocations are being driven more by 'what ifs' than the 'what is'. Fundamentals trump hypotheticals and facts weigh heavier than emotions."

Maybe the most intriguing aspect of their commentary though is the list of consensus views they've compiled. They've outlined 10 areas where there are currently consensus views in the market; areas where East Coast has strafed away from the crowd and into an opportunity with a perceived edge. They see these variant opportunities as a means to mitigate risk away from the consensus. This is a topic we've very briefly touched on in our piece where we examined the hedge fund herd mentality.

Below is East Coast Asset Management's list of 10 consensus views and their corresponding variant perception:

1. Consensus: Everyone is a macro-economist. Variant Perception: Fundamental/value investing and focusing on micro themes is the key.

2. Consensus: Binary extreme outcomes of inflation/deflation. Variant Perception: Individual investment merits based on expected return.

3. Consensus: Flood to fixed income as individual investors chase yield. Variant Perception: Bond bubble. Attractive equity total return expectations.

4. Consensus: Inflation protection via TIPS. Variant Perception: Owning businesses with pricing power.

5. Consensus: Gold - speculators are weak holders. Variant Perception: Own gold for mid-long term as paper currencies are debased. John Paulson started his gold fund for the exact same reason: as a bet against the US dollar.

6. Consensus: Overly bearish. Variant Perception: Bullish on fundamentals.

7. Consensus: Short-term time horizons. Variant Perception: Mid-to-Long term time horizons.

8. Consensus: Low rates will be the norm. Variant Perception: Interest rates will dramatically rise across the curve. (Legendary hedge fund manager Julian Robertson had previously placed a bet on sharply rising interest rates).

9. Consensus: Inferior companies can thrive. Variant Perception: High quality companies have a competitive advantage. East Coast specifically highlights Nestle (NSRGY), Waste Management (WM), Colgate (CL), Coca Cola (KO), Novartis (NVS), and Express Scripts (ESRX). We've seen numerous hedge funds become bullish on high quality companies as well. In particular, Andreas Halvorsen's hedge fund Viking Global favors ESRX. Additionally, we earlier today highlighted East Coast's bullish stance on Beckton Dickinson (BDX).

10. Consensus: Complexity. Variant Perception: Simplicity.

Begg examines each of the ten above listed views in-depth in his most recent letter and ends his commentary by giving us a view of their most recent portfolio construction. We highly recommend reading the entire East Coast second quarter letter embedded below:



You can download a .pdf copy here.

For more from East Coast Asset Management, be sure to check out their recent bullish presentation on Becton Dickinson (BDX) that we posted earlier today. Additionally, those intrigued by the inflation/deflation debate should head to their past piece on the deflation-reflation continuum. For more great investment commentary we posted up Perry Capital's latest letter yesterday as well.