Graham & Doddsville Spring 2017 Issue: Begg, Sosin, Krishna

Columbia Business School is out with its spring 2017 issue of Graham and Doddsville.  It features:

- Interview with A. Rama Krishna of ARGA Investment Management who talked about investing in international markets and in particular, Russia.

- Interview with Cliff Sosin of CAS Investment Partners talking Herbalife (HLF) and World Acceptance (WRLD).

- Interview with Chris Begg of East Coast Asset Management, who we've featured on the site numerous times in the past.  He shares his thesis on TransDigm Group (TDG) and thoughts on Sherwin Williams (SHW).

The new issue also includes student investment pitches such as long Yum China (YUMC), long Alaska Airlines (ALK), long Corning (GLW), and long Dollarama (DOL).


Embedded below is the spring 2017 issue of Graham & Doddsville:



You can download a .pdf copy here.

For more of their past issues, we've also posted up their interview with Kingstown Capital as well as their interview with Meritage Group and MSD Capital.

SALT Conference Notes 2016: Griffin, Cooperman, Burbank, Chanos & More

The Skybridge Alternatives Conference, better known as the SALT Conference, is taking place in Las Vegas this week.  It's a multi-day affair with many speakers on a broad range of subjects.  We've condensed notes into primarily finance/investing thoughts from various hedge fund managers and investors below.


2016 SALT Conference Notes


Ken Griffin (Citadel):  Talked about how he built Citadel and the importance of culture at an organization.  'Avoid marrying a strategy' and instead focus on building a platform with the best people.  Business really taught him how to delegate and manage people.  On finding good talent: you've gotta be able to sell them on why they should leave and come to you.  You have to go out and find that talent instead of waiting for them to come to you.  The ones that 'knock on your door' aren't the best.  One interesting quote:  "Who is the number five manufacturer of personal computers?  Who cares?  We're in a more and more winner take all world."


Leon Cooperman (Omega Advisors):  He talked about a trend of investors moving from active to passive strategies and says that hedge fund performance can't really justify the fees these days, so fees need to come down.  He said that long-term (i.e. 'permanent') capital is doing good because they don't have to worry about lockups (citing Warren Buffett).  The other winner has been quant strategies.  Pitched the stock First Data (FDC) which recently IPO'd.  Says he's got around ~20% of his fund in structured credit at the moment.  Reiterated his belief that conditions for a recession are not present (a concept he's talked about for a while now).  Thinks the bubble is in fixed income.  Government bonds are a bad idea.  Likes Tetragon Financial, yields 7%, dividend coverage of 4x.  Buying a stock trading at half of book.


Kyle Bass (Hayman Capital):  Implied that investors need to lower their return expectations over the next few decades (5% global real return expectation).  Also agreed that fees for funds need to come down.  Says it's much harder to maintain investors than it is conviction.  Thinks we're in the early part of '07 in terms of credit/equity markets.  Says a hard landing in China is happening as we speak. Argues that China credit system is one of the biggest macro imbalances, something has to give sooner rather than later.  Hong Kong real estate is collapsing.


Roslyn Zhang (China Investment Corp):  Sovereign Wealth Fund.  Disappointed with hedge fund performance.  Compared Chinese retail investors to hedge fund herding.  Criticized those betting against the Chinese Yuan.  Argued that China's economy is still strong and that all of the building is due to the massive population; supply can be absorbed.


Sam Zell (Equity Group Investments):  Cost of regulation has gone up around 5x over the last decade.  Have been big investors in Brazil, Far East, Mexico. 


Ty Wallach (Paulson & Co):  Thinks specialty pharma stocks are oversold.  Specifically pointed out Valeant Pharmaceuticals (VRX) bonds.  Bought at 80cents on the dollar and says the co still has $10bn in equity value.  Could sell one of the many companies they've acquired if they need to cover debt payments.


Jeff Smith (Starboard Value): Activist investor.  Says settled with Yahoo (YHOO), put four new members on the board.  Notes the parts of the company are worth more than where its trading.  Core biz with $4bn in revenue, huge stake in Alibaba, Yahoo Japan, add it all up and it's more than the current market cap.  Said 'we're friendly but no one describes us as passive.'


Scott Ferguson (Sachem Head Capital):  Sold out of Zoetis (ZTS).  We noted how Pershing Square was also selling ZTS recently.  Ferguson was the one that brought the idea to Ackman to begin with (he used to work at Pershing).  Talked about how to change leadership and achieve things on behalf of investors: "Money's a great way to effectuate things" i.e. severance for getting rid of a CEO.  Says things are easier for activists these days and companies are more likely to engage. 


Clifton Robbins (Blue Harbour Group):  Activist investor.  Owns 10% of Investors Bancorp (ISBC), says it's trading at a discount to peers.  Also talked about Xilinx (XLNX), a net-cash semiconductor play; says they have some ideas as to how to utilize the balance sheet.


Michael Lewis (Author of Flash Boys and The Big Short):  Said he was surprised that both Moneyball and The Big Short were made into movies.  Said Christian Bale was dead-on with his interpretation of Michael Burry after just spending some hours with him.


Richard Chilton (Chilton Investments): Sherwin Williams (SHW): makes premium paint and coatings.  Says the company's purchase of Valspar was years in the making and they can repay the price with free cashflow in about 5 years.  Thinks there's a lot of synergies and margin overlap.  SHW does higher margins in paint/consumer and VAL does better margins in industrial coatings.  "You can't buy paint online."


John Lykouretzos (Hoplite Capital):  Takes a bit of an issue with the 'oligopoly' theme of airlines, saying it's still a competitive industry with margin pressure.  Bearish on the industry.  Main threats: excess capacity, union labor wage hikes, and of course higher oil prices.  Says that low cost carriers (LCC's) have basically destroyed the chance for legacy airlines to become a true oligopoly.  Thinks American Airlines (AAL) is the most compelling short play there.  Has some of the highest costs & exposure to rising oil.  High leverage.  Weakest FCF generation of the group.  Thinks that Southwest Airlines (LUV) can still add capacity even at higher oil prices (~$80 or so) and still generate high IRR.


John Burbank (Passport Capital):  Says China won't let outside companies 'win' especially Facebook.  "It's a hard place to win if you're not Chinese."  (While he didn't mention it, just look at Amazon's failed venture there as well).  Burbank owns Tencent (700.HK) with short Chinese Renminbi as partial hedge.  Thinks it isn't as much of a crowded trade as Facebook (FB) is.  His slide also said "Short FXI: Hedge out 'Old China' country-specific risk with China large cap ETF."


Jim Chanos (Kynikos Associates): Still short Cheniere Energy (LNG), calling it a 'pipe dream' and very expensive to peers.  Trades at 11-12x EV/EBITDA using "base case" 2021 EBITDA of $2.1bn.  Peers trading between 5-7x 2020 EBITDA.  Also commented on Alibaba (BABA) saying their accounting is dubious and that you don't really know what they're earning, calls it some of the most questionable he's ever seen. Chanos also recently talked about some of his short positions at the Sohn Conference.


For other recent hedge fund manager thoughts, head to our notes from Sohn Conference New York 2016.

Julian Robertson on the Hedge Fund Industry Past & Present

Tiger Management founder Julian Robertson made a rare media appearance with Tom Keene on Bloomberg Television we wanted to highlight.


On How Hedge Funds Differ Now Versus Then

Robertson says, "the hedge fund business is tougher today than it was 15 years ago... there's more hedge funds in the business.  And hedge funds are the toughest competition for other hedge funds."

He also points to borrowing costs going up for shorting.  In terms of management fees, he feels that it's really a self-fulfilling prophecy based on performance.  Funds that perform well will be able to charge high fees while lower performance could lead to lower fees.

Robertson argues that the problem with hedge fund performance has been stock selection, rather than macro issues.


On How He Invests

In investing, he says he focuses on management and you have to give them a long period of time.  He's a long-term investor of course and doesn't focus on short-term gyrations.

He notes he still has a position in Sherwin Williams (SHW).  We've posted an in-depth resource on his investment philosophy with a recent interview with Robertson by Columbia Business School.

On where he sees value, the Tiger Management man says you can probably find some in Europe right now, even though there are obvious problems (though he didn't mention any specific names).  We've also highlighted Avenue Capital's Marc Lasry on opportunities in Europe.


Embedded below is the 12-minute interview with Julian Robertson:



For more on this legendary manager, we've posted a profile/biography of Julian Robertson.

Hedge Fund Viking Global Likes American Tower (AMT), Invesco (IVZ): Q2 Letter

Andreas Halvorsen's hedge fund firm Viking Global is out with its second quarter 2010 investor letter and courtesy of Dealbreaker we wanted to highlight some of their latest portfolio maneuvers. Here are Viking's latest top 10 positions:

1. Invesco (IVZ)
2. Unilever (UN)
3. American Tower (AMT)
4. Oracle (ORCL)
5. Comcast (CMCSA)
6. News Corp (NWSA)
7. Tyco International (TYC)
8. Sherwin-Williams (SHW)
9. Goodrich (GR)
10. Adobe Systems (ADBE)

Right off the bat there are several changes to highlight between Q1 and Q2. Back in the first quarter, Visa (V) was Viking's largest position. This time around, Visa is nowhere to be found in their top 10 positions. One might assume they reduced or exited this position, but there was no commentary on this stake to verify. If you read into their letter, you'll see that they are more focused on building concentrated positions and as a result ramped up stakes in various companies. Visa, apparently, was not one of them.

It's quite possible that the credit card processor is still a holding at Viking and other portfolio positions merely leapfrogged their V stake. The same could be said for their position in Express Scripts (ESRX) as it was their fourth largest holding in the first quarter and is nowhere to be found on their top 10 holdings for Q2. These positions will certainly be something to look for in their Q2 13F filing that we'll cover when it's released in a few weeks.

For the second quarter, Halvorsen's hedge fund maintains its long-held position in Invesco as it moves back up to their top holding. Halvorsen writes,

"Our largest loss in the quarter was Invesco which cost us 1.3% in VGE and 1.4% in VLF. Invesco has been in our top ten list since we initiated the position in the fourth quarter of 2007 and was our second most profitable investment in 2009. During the second quarter, Invesco sold off along with other asset managers despite reporting better than consensus first quarter earnings and higher synergy estimates from the Van Kampen acquisition. Encouraged by the fundamental strength of the company and financial and strategic benefits from the Van Kampen acquisition, our core thesis has not changed and we continue to believe that Invesco will outperform its competitors. Viking is currently net long 2.4% in the Asset Management and Custody Banks sub-industry group, which includes the Invesco long position and short positions in asset managers that we believe will experience deteriorating fundamentals and are more levered towards a declining market."

In terms of other Viking positions, Unilever also remains a high conviction pick for them. Moving down the top 10 positions list, News Corp and Tyco also retain their status as a top holding from Q1 to Q2. In terms of new additions, Viking has moved up the following positions: Adobe, American Tower, Comcast, Goodrich, Oracle, and Sherwin-Williams.

Of those stakes, Viking has increased conviction in their new American Tower (AMT) position. Viking likes the company due to its solid business model with high barriers of entry, pricing power, and strong secular growth. Additionally, the company has compelling operations overseas in numerous growth markets. Of this stake, Halvorsen writes,

"We have owned American Tower in the past and we re-initiated a position this quarter because we believe the market has taken many of these characteristics for granted and is underestimating future growth opportunities both domestically and internationally. Additionally, we believe that American Tower’s shareholder remuneration will accelerate over the next several quarters and that, in light of certain tax incentives, the company may convert to a REIT. We find American Tower to have a superior business model relative to most traditional REITs, yet it trades at a discount to the REIT-average. We believe the combination of predictable growth, accelerating shareholder returns, and pending REIT status will generate greater shareholder interest over the next several quarters causing the stock to trade closer to our price target over time. As of June 30, American Tower was our third largest long position at 4.3% of VGE capital and 4.9% of VLF capital."

We've touched on this industry as a compelling investment numerous times as hedge funds favor wireless tower stocks. Numerous high profile managers have moved in and around AMT. Additionally, we've highlighted how hedge funds are bullish on rival company Crown Castle International (CCI) as well. SBA Communications (SBAC) is the other player in the sector and some funds have moved in and out of stakes there as well.

In addition to these portfolio changes, it's obviously worth noting that Viking has struggled performance-wise this year as their Viking Global Equities portfolio was down 5% in the second quarter. As such, Halvorsen penned quite an explanation as to how Viking will strive to atone for these errors and the solution apparently circles around the idea of increased concentration in their highest conviction picks. As such, Viking has added to numerous positions, many of which we've detailed recently. It will be interesting to see if Viking's increased concentration (and possibly increased volatility) is a recipe for correcting their recent struggles.

We highly recommend reading Viking Global's entire letter on Dealbreaker here.

Hedge Fund Viking Global Adds to Numerous Positions

Andreas Halvorsen's hedge fund firm Viking Global just filed a 13G with the SEC regarding shares of Owens Corning (OC). Per the filing (which was made due to activity on June 4th), Viking now discloses a 5.4% ownership stake in Owens Corning with 6,974,715 shares. This is a massive increase in their position as they previously only owned 197,955 shares of OC when we took a look at Viking's portfolio as of March 31st. Over the past three months, they've added 6,776,760 shares of OC (a 3,423% boost in their position size).

We also wanted to highlight that due to activity back on May 14th, Viking has disclosed a 5.1% ownership stake in Mednax (MD) with 2,390,987 shares. They've also boosted their holdings here as this marks a 103% increase in their position size (1,215,065 additional shares since the end of March).

Lastly, due to activity on May 6th, Viking Global has filed a 13G with the SEC regarding Sherwin-Williams (SHW). Viking shows a 5.1% ownership stake with 5,602,340 shares. This marks an 85% increase in their position size since March as they've added 2,579,522 shares. For the rationale behind some of Halvorsen's investments, head to Viking Global's investor letter. Other large bets at Viking include Visa (V), Express Scripts (ESRX), and Invesco (IVZ).

Taken from Google Finance, Owens Corning is "a producer of glass fiber reinforcements and other materials for composites and of residential and commercial building materials. The Company operates in two business segments: composites, which include the Company’s reinforcements and downstream businesses, and building materials, which includes its insulation, roofing and other businesses."

Mednax "formerly Pediatrix Medical Group, Inc., is a provider of physician services, including newborn, maternal-fetal, pediatric subspecialty and anesthesia care."

Sherwin-Williams is "engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America, with additional operations in the Caribbean region, Europe and Asia."

You can view the rest of Viking Global's equity investments here.