Chuck Akre's Talk at Google: Three-Legged Stool Investment Construct

Chuck Akre of Akre Capital Management recently had a talk at Google about investing entitled "The Peregrinations of an English Major Trying to Solve the Investment Puzzle."

If you're unfamiliar with Akre, he focuses on finding long-term compounders and runs a somewhat concentrated portfolio.  Here's notes from his talk:


Chuck Akre's Talk at Google

- Reads voraciously to this day.  Cited one of the very first books he liked: The Money Masters.  Also noted that 100:1 in the Stock Market is the book he took the idea of compounding from.  Said he read The Intelligent Investor as well as business biographies.

- What makes a great investment?  "Rate of return is the bottom line of all investing."

- Looks at free cashflow return and focuses on valuation as the key to compounding; buy it right.

- How do they identify investments that will generate above average returns?  "We like to fish in the pond of high return businesses."  Asks: what kind of returns on capital?  What are the net margins?  Thinks an 'average' business returns high single digits.  Cites Mastercard (MA) and Visa (V) with 30% margins.  "What is it about the essence of that business that allows them to earn returns that cause them to have a big bullseye on their back?"

- Three-legged stool:  Their investment construct that lets them think in simple terms.  First leg is the quality of a business: a high return business.  Second leg is operations: want management to have skill and integrity (a demonstrated record) and treat investors as partners.  Third leg is reinvestment: would love the company to put cash back into the business if there's great opportunity.  Cited the book Dear Chairman (which we've reviewed here).

- "I have never been able to learn from other people's mistakes.  I have to make my own."

- Wants to be an investor in a business rather than a speculator in shares.

- His goal is to compound capital at an above average rate while incurring a below average level of risk.  Volatility is only a risk in the short run.

- Akre's separately managed accounts over 27 years have compounded at 12.7% versus S&P at 9.4%.  Also has a partnership that's done 15.25% versus S&P 9.2% and mutual funds that have done 13.2% annual.

- Mastercard: originally purchased in 2010 at around $22 with regulatory worries around Durbin amendment.  Business has fantastic returns, had a low valuation (13-14x at the time).  "Their returns are so high they can't possibly find a place to reinvest their money, so our compounding is diminished modestly because of that."

- Moody's (MCO): Bought in January 2012 at $39.  Any company that wants debt has to get a rating on it and it's basically an oligopoly: MCO, S&P (SPGI), and Fitch.

- Enstar (ESGR): Been involved for 10 years.  They buy insurance that's in run-off.  Paid 3 times book when he bought shares. 

- Quotes Einstein: "You should make everything simple as possible but no simpler."  "We cannot solve our problems with the same thinking we use to create them."  "The only source of knowledge is experience."  "Imagination is more important than knowledge."  That last quote is what's on the front of Akre's book:

- Two of his best investments (100 baggers): Berkshire Hathaway (BRK.A) and American Tower (AMT).  "Most of the time you can buy these businesses at reasonable valuations... sometimes you can buy them at a steal."

- On selling: "The most difficult thing to do in our business is not sell, if you're a long-term investor."

- Bought Visa (V) because they have concentration limits in their funds and were bumping into that with their stake in MA.  Did the same with SBA Communications (SBAC) as it relates to their AMT position.  Gaining more exposure to the themes via competitors since individual position limits kicked in.

Embedded below is video of Chuck Akre's talk at Google:



We've covered many other investor talks at Google, including:

- Howard Marks' talk at Google

- Michael Mauboussin's talk at Google

- Jim Grant's talk at Google

What We're Reading ~ 10/22/15

10 poor investment theses [Irrelevant Investor]

The case against short selling [Long Short Trader]

The five "why's" in problem solving [Wallbuilder]

The danger of 1-year performance numbers [A Wealth of Common Sense]

Latest post from the Valeant (VRX) bear camp [Bronte Capital]

How bad will it get for American Express? [Bloomberg]

China is not collapsing [Project Syndicate]

Kingmakers of China's internet: Baidu, Alibaba and Tencent [WSJ]

A look at wireless tower stocks [Barrons]

Tribune Media shares at a 50% discount [Barrons]

Fossil Group (FOSL): a value stock with temporary problems? [Value & Opportunity]

Netflix is creating a cordless nightmare for traditional media [Institutional Investor]

Light beer gets in touch with serious side [WSJ]

Auto parts retailers' immunity to Amazon drives stock surge [Bloomberg]

Why investors don't fund dating [Andrew Chen]

Robots and us [MIT]

Lone Pine Capital Starts SBA Communications Position

Steve Mandel's hedge fund firm Lone Pine Capital has disclosed a brand new position in SBA Communications (SBAC).  They filed a 13G with the SEC indicating they own 6.4% of the company with almost 8.2 million shares. The filing was required due to portfolio activity on January 8th.

While this is a new stake, they've had exposure to the wireless tower stock play via their position in Crown Castle International (CCI). 

Their new SBAC position, however, is much larger and it's a bit curious that they would all of a sudden initiate their position now.  The thesis and valuation has largely been unchanged.  

It's also worth highlighting though that SBAC has been a longstanding top position for hedge fund White Elm Capital.  White Elm was founded by Matthew Iorio and before launching his own fund, he worked at Lone Pine.

While the bull case on tower stocks has been a play on the proliferation of wireless data usage, the bear case seemingly hinges on a potential rising interest rate environment and potential consolidation in the wireless carriers.

Per Google Finance, SBA Communications is "an independent owner and operator of wireless communications towers. The Company’s principal operations are in the United States and its territories."

We recently detailed some of Lone Pine's other portfolio activity here.

Goldman Sachs & Hedge Funds Bullish On Tower Stocks

While we don't typically highlight shifts in analyst sentiment, we found some moves out of Goldman Sachs late last week intriguing as they were out positive on tower stocks. They raised price targets on American Tower (AMT) from $52 to $53, on SBA Communications (SBAC) from $40 to $43, and on Crown Castle (CCI) from $42 to $46. While AMT is rated a 'buy,' SBAC in particular is on Goldman's Conviction Buy List.

With their updated coverage, Goldman also added Crown Castle to their Conviction Buy List. They believe that CCI trades at a discount to peers and note that shares have recently underperformed. Goldman also feels that of the tower companies, CCI is the most likely to increase guidance. So, now why did this recent adjustment catch our eye? Well, because plenty of hedge funds own these names, of course!

In our hedge fund portfolio tracking series we've noted that a sizable concentration of long/short equity hedge funds have built up large positions in these various tower companies. Now, before we begin, keep in mind that these funds are set to update their portfolio disclosures with the SEC in the next few weeks so their portfolios could have changed drastically. But for now, we want to focus on the data we have, as this has been a building trend for a few quarters now. Here's what we've found:

John Griffin's Blue Ridge Capital has held shares of Crown Castle for over 3 quarters now. It had previously been their 17th largest US equity holding but most recently CCI was their 6th largest position as they added to their stake in the third quarter of 2009.

David Stemerman's Conatus Capital has previously owned both American Tower and Crown Castle. Their most recent portfolio disclosures show they currently prefer SBAC and CCI (their 17th & 18th largest positions), as they sold out of AMT in favor of those names.

Lee Hobson's Highside Capital Management has owned American Tower (AMT) for at least three quarters now, although it has slipped from their 8th largest holding 3 quarters ago to now their 12th largest holding most recently (SBAC was their 14th largest).

Chase Coleman's Tiger Global has owned American Tower for the past few quarters and it has hovered around their 7th and 10th largest US equity holding. They had last sold some shares when we covered Tiger's portfolio.

Matt Iorio's White Elm Capital had CCI as their third largest US equity holding when we looked at their portfolio via 13F filing and we noted they had also started a new position in SBAC.

Chris Shumway's hedge fund Shumway Capital Partners has been involved with all three in some fashion as they were recently selling out of CCI, reducing their SBAC holdings and starting a new position in AMT which we noticed when looking at their portfolio.


So, quite a few prominent names involved in tower stocks as you can see (and that's not even all of them). Again, keep in mind that this data is set to be refreshed in a few weeks and we could see a completely different story then. However, the fact that many of the above funds have held various tower companies over the past three quarters should say something. We track fundamentally research driven hedge funds with longer-term investment timeframes in hope of finding their next big plays.

We've previously touched on how many of the 'Tiger Cub' funds often hold similar positions in their portfolios and this is no different. (A Tiger Cub is a fund started by someone who was previously involved with legendary hedge fund manager Julian Robertson's Tiger Management). In fact, hedge fund replicator Alphaclone even has a Tiger Cub portfolio that takes the most popular stocks amongst Tiger Cub hedge funds and combines them into a portfolio that outperforms the market by a wide margin. These tower stocks are by far some of their more common holdings.

So, given the recent bullishness out of Goldman Sachs on tower companies, we thought it would be prudent to examine the large hedge fund presence as well. We'll have to see if this theme continues when the new sets of portfolio disclosures come out in a few weeks. As always, we'll cover those in our hedge fund portfolio tracking series.