What We're Reading ~ 10/16/18

Why family businesses outperform [Credit Suisse]

Exclusive interview with Amazon founder Jeff Bezos [Forbes]

Op-ed from AQR's Cliff Asness: Buyback derangement syndrome [WSJ]

The untold story of Stripe, the secretive $20 billion payments startup [Wired]

Profile of the owner of the In-N-Out burger chain [Forbes]

Bob Iger's bets are paying off big time for Disney [TIME]

Pitch on Henry Schein (HSCI) [Spruce Point Management]

A pitch on Tempur Sealy [Barrons]

A capacity to suffer and setting the right expectations [Scuttlebutt Investor]

Can Larry Culp fix General Electric? [WSJ]

LendingTree is the secret success story of FinTech [TechCrunch]

Why facts don't change our minds [James Clear]

Atomic Habits: An easy and proven way to build good habits [James Clear]

A day in the life of a Waymo self-driving taxi [The Verge]

The gambler who cracked the horse-racing code [Bloomberg]

Greenlight Capital Q3 Letter: New Stakes in HPE, Tempur Sealy, Micron

David Einhorn's hedge fund firm Greenlight Capital returned 6.2% in the third quarter and is now up 3.3% year-to-date.  Their third quarter letter outlines they had average exposure of 118% long and 73% short.

At the end of Q3, Greenlight's top five positions (alphabetical order) were AerCap, Bayer, CONSOL Energy, General Motors, and gold.

New Positions in Hewlett Packard Enterprise, Tempur Sealy, Micron

The letter highlights that they established a few new positions.  First, they entered Hewlett Packard Enterprise (HPE) shares.  They see earnings of $1.40 to $1.70 over the next few years as the company recently sold its outsourced services and software businesses.  They bought at $13.29 per share.

Second, they re-entered a previous holding: Micron Technology (MU).  They feel the DRAM market has improved as have the company's earnings, though think investors are underappreciating the improvements.  They bought around $29.21.

Thirdly, Einhorn's firm entered Tempur Sealy (TPX).  We posted Einhorn's presentation on Tempur Sealy from the GIBI Dallas Conference recently as well.

Other interesting notes: they covered their short of Best Buy (BBY), closed their longs in PVH and Axiare Patrimonio.

Embedded below is Greenlight Capital's Q3 letter:



Credit to ValueWalk who posted it first.

For more hedge fund letters, we also posted up Third Point's Q3 letter here.

Notes From Great Investors Best Ideas Conference (GIBI) Dallas 2017: Ackman, Einhorn & More

The 11th annual Great Investors Best Ideas (GIBI) Dallas Investment Symposium just took place where managers shared investment ideas to benefit The Michael J. Fox Foundation for Parkinson's Research and Vickery Meadow Youth Development Foundation.  Below are some brief notes on the event:


Notes From GIBI Dallas Conference 2017

David Einhorn, Greenlight Capital

Still owns a huge position in General Motors (GM) but has been trimming it since it's grown too large (risk management, position sizing, etc).  Still his largest position by a longshot though.  Still thinks it's very cheap and points to an opportunity for a new shareholder base to get into shares.  Likes they've gotten rid of its riskiest international business and is investing in autonomous cars and electric vehicles: the future.

He also likes Tempur Sealy (TPX).  Thinks estimates are way too low (notes that management's incentives are way higher).  The company had a dispute with Mattress Firm and stopped selling its mattresses there.  Despite that, customers still actively sought out the TempurPedic brand, so the co is replacing its lost Mattress Firm sales elsewhere at higher margins.  Thinks there's also a reasonable chance MF comes back to them since MF has lost sales.

Einhorn said that his 'bubble basket' of shorts in highflying tech stocks like Amazon and Tesla are valued like profits don't matter ... ever.  He says eventually people will wake up and profits will matter and their stocks will crater.  He also pointed to somewhat of a cult following status that is attached to Tesla's stock with all the hype that Elon Musk continuously builds with various projects.  There's around 30 stocks in Einhorn's bubble basket.   He noted he owns a Tesla, but also points out that the company probably lost $20-30k selling it.  Says company hasn't figured out how to make cars profitable on a unit basis.  You can also read Greenlight Capital's Q2 letter here.


Bill Ackman, Pershing Square Capital

Pitched his newest long: Automatic Data Processing (ADP).  Has an activist position.  Thinks it's a quality business: simple, not capital intensive, secular tailwinds (sees lots of growth ahead).  Automating employees.  Ackman thinks the stock's a double.  We've posted Ackman's presentation on ADP previously.

Also mentioned the GSEs he's involved with: Fannie Mae & Freddie Mac.  Still owns and thinks there's huge upside there.  He originally pitched these plays three years ago at the same conference.  Thinks they will eventually trade multiples higher of where they are now.

He's still short Herbalife (HLF) and has lost millions on the bet as the stocks' up around 40% from his average short price.  Said that of the risk factors considered for the position, Carl Icahn coming in and buying 20+% of the company wasn't one he considered.

Noted he still owns Howard Hughes (HHC) and while he doesn't see any immediate catalysts, thinks it's a long-term play as a high quality business.

Says average investor can be plenty concentrated with 10-15 holdings.  Biggest mistake of his career?  Not selling when new information emerged that didn't jive with his investment thesis.  You can read Pershing Square's Q2 letter here.



Tom Russo. Gardner Russo Gardner

Spoke about global brands and various companies still controlled by the founding families.  His best idea was the company hit with a scandal and PR crisis: Wells Fargo (WFC).  Previously he had noted how his WFC stake has remain unchanged (around 6% of his assets) and that he thought the company simply became too fixated singly on one variable (cross-selling) which lead to a bunch of accounts being opened in customers names.  The company now suffers from poor optics but on a risk level, direct financial harm has been modest and he has faith in the legal process.



Andrew Wellington, Lyrical Asset Management

A couple of picks:  Flex Ltd (FLEX), co is seeing double digit growth in its bottom line and 50% of FCF going to shareholders.  Trading around 12x earnings.

Affiliated Managers Group (AMG): asset management play, owns equity stakes in boutique management firms.  Says they own really good managers.  Trading around 12x NTM earnings.



Van Hoisington, Wasatch-Hoisington US Treasury Fund

He concluded that we're heading to a recession as the Fed has restrictive policies already in effect and money and credit are slowing noticeably.  Structural impediments to growth are over-indebtedness globally as well as adverse demographics.  Thinks rates will stay lower. 



Jeanie Wyatt, South Texas Money Management

A few ideas: Citigroup (C) as a value play.  Thinks it could re-rate from almost 1x book value to closer to 1.4x.  Since the crisis the company has a better situation and less subprime.

KAR Auction Services (KAR):  notes 20% EPS growth, end markets that are accelerating as well.  Trading just over 22x next year's earnings but with a big opportunity ahead as various leases will be coming to term.

Electronic Arts (EA): video game stock that's benefited from going over the top (OTT) as it leads to higher margins than the typical video game distribution model of physical games, etc.  Accelerating sales growth.  Also sees new potential upside in e-sports. 

Vodafone (VOD): Stock has traded sideways but the company has improved in end markets.  Thinks it offers good downside protection as sales growth has accelerated.


For more stock picks from recent investment conferences, we posted up notes from the Sohn San Francisco Conference yesterday.

What We're Reading ~ 6/15/16

Calculating the return on incremental capital investments [Base Hit Investing]

The history of the online travel industry [Skift]

A conversation with Alphabet's Eric Schmidt [Charlie Rose]

Armstrong Flooring: a spinoff with big upside [StockSpinoffInvesting]

Time Warner's Jeff Bewkes fights the industry's urge to merge [Variety]

Why housing is about to eat the US economy [CSen]

Student loans as economic depressant [Across the Curve]

The college debt crisis is worse than you think [Boston Globe]

Thoughts from a recent trip to China [Going Long]

The future of banking is in China [WSJ] 

China's credit card clearing market now open for competition [SCMP]

China is close to having its own Silicon Valley [Business Insider]

Are we in a mattress store bubble? [Freakonomics]

The U.S. is richer than ever [Calafia Beach Pundit]

Welcome to Larry Page's secret flying car factories [Bloomberg]

What's the best management advice you've ever received [Alan Murray]

What's one thing you've learned at Harvard Business School [Medium]

Profile of Nike's CEO Mark Parker [SurfaceMag]

Struggling Ralph Lauren tries to fashion a comeback [WSJ]

Chieftain Capital Trims Tempur Sealy Stake

John Shapiro's investment firm Chieftain Capital recently filed an amended 13G with the SEC regarding its position in Tempur Sealy (TPX).  Per the filing, Chieftain now owns 5.21% of the company with over 3.22 million shares.

This is a decrease from the 3.55 million shares Chieftain owned at the end of the second quarter.  The latest filing was required due to portfolio activity on September 10th.

Chieftain has owned this stake since 2010 but has slowly been trimming the stake since the end of 2014.

Per Google Finance, Tempur Sealy is "a bedding provider. The Company develops, manufactures, markets, and distributes bedding products, which it sells globally. The Company operates in three segments: Tempur North America, Tempur International and Sealy. The Company’s brand portfolio includes TEMPUR, Tempur-Pedic, Sealy, Sealy Posturepedic, Optimum, and Stearns & Foster."

H Partners & Chieftain Capital Both File 13D's on Tempur Sealy

Two investment firms have recently filed 13D's with the SEC regarding shares of Tempur Sealy (TPX).


H Partners Sends Letter to Tempur Sealy's Board 

Rehan Jaffer's hedge fund H Partners currently owns 9.97% of the company with 6,075,000 shares, according to their latest 13D filed with the SEC.  This is the same amount of shares they owned as of the end of 2014 as well.

H Partners runs a highly concentrated portfolio focused on long-term investments.  Prior to founding H Partners, Jaffer worked at Third Point.

The hedge fund also sent a letter to the Tempur Sealy, calling for a new CEO, among other things.  They highlight the company's underperformance and their entire letter is embedded below:




Chieftain Capital Echoes Support

Second, John Shapiro's investment firm Chieftain Capital has filed a 13D on shares of the company as well.  In it, they disclose they own 5.78% of the company with over 3.51 million shares.

They've trimmed their Tempur Sealy position size by around 10% since the end of 2014.  The filing was made due to activity on February 19th and they were selling some shares around $55. 

Chieftain has owned TPX since 2010 and their 13D echoes support for H Partners' proposals for new management and would like to see H Partners get a seat on the board as well.

Per Google Finance, Tempur Sealy is "a bedding provider. The Company develops, manufactures, markets, and distributes bedding products, which it sells globally. The Company operates in three segments: Tempur North America, Tempur International and Sealy. The Company’s brand portfolio includes TEMPUR, Tempur-Pedic, Sealy, Sealy Posturepedic, Optimum, and Stearns & Foster."

Tempur-Pedic (TPX) Plummets: Analysis Excerpt From Our Newsletter

Today, shares of Tempur-Pedic (TPX) are down 48% after the company cut its full-year forecast.  We wanted to draw attention to this because we featured analysis of TPX two weeks ago in our premium Hedge Fund Wisdom newsletter which pointed out that the potential warning signs were there.

TPX today cited that an "unprecedented" number of rival products with huge marketing/promotion have hit their sales. 

Below is an excerpt from the current issue of our newsletter which drew attention to these potential red flags two weeks ago:


Excerpt From Our Hedge Fund Wisdom Newsletter

"Tempur-Pedic (TPX)

Current Situation

Following its 1Q earnings call after the market close on April 19th, TPX shares lost 20% from $84 to $67. The company reported robust growth of 18% in sales, which was in line with analyst expectations, as were its earnings. However, the impression is that the industry grew faster than TPX, which was a big blow to the stock. Also, the company reaffirmed its 2012 guidance of $3.80-3.95 on $1.6bn of sales, which fell short of consensus of $4.06 EPS and $1.7bn sales. Analysts became less sanguine about the stock’s growth prospects because of intensifying competition in the specialty bedding segment and the potential of cannibalization from the introduction of lower-priced beds.

More intense competition in specialty beds will translate into slower growth for TPX and potentially lower prices and margins. Also, TPX has been focused on the higher end of the premium segment with very few low-priced offerings. In order to continue growing, it has to expand its product line into lower-priced products. These products may satisfy some of TPX’s current customers, thus resulting in a down-mix shift.

On May 7, TPX made a surprise announcement that it will be offering its Cloud Supreme mattress on sale from mid-May to July. Offering sales discounts is very uncharacteristic of TPX and goes against its strategy, which is why the market reacted so negatively. The stock lost almost 20% within a couple of days as the move was interpreted as a red flag that could signal deeper fundamental issues and slowing growth.


The Bear Case

The company's growth cycle has matured, so it doesn't deserve the historically high valuation multiples that reflected much higher growth. The risk is that competitor Select Comfort (SCSS) has a lot of ground to cover in terms of increasing its brand awareness and distribution before it can catch up to TPX, which means that SCSS may capture most of the incremental segment growth. In addition, the high growth of the segment has attracted significant competition. Therefore, growth may be more difficult to achieve than expected. What’s more, TPX has leading margins, but as competition intensifies it may have to give back some of its pricing power. If EPS growth doesn’t materialize at ~20% for the next couple of years, there is downside to the stock.

Summary

Hedge funds have been attracted to TPX because of its strong balance sheet, shareholder-friendly management, robust growth, and solid execution. It has all the ingredients to continue growing earnings at a rapid pace. However, competition is intensifying and what has made TPX successful can also be viewed as a source of risk to the relatively rich valuation: growth can slow down with more players, and margins can compress. The stock price took a big hit following disappointing guidance and concerns that the company needs to resort to discounts in order to boost sales."

Then fast forward two weeks ahead to today and the company has now cut its full year forecast.


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The above is just a brief excerpt from the current 85-page issue of our quarterly newsletter.  Sign up below to read additional equity analysis of AutoZone (AZO) and Equinix (EQIX).

Also included in the issue: the latest portfolios of 25 top hedge fund managers.  See what they've been buying & selling by subscribing below:


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Included in the new 85-page issue:

- List of consensus buys & sells among top hedge funds

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Jeff Saut: Putting Money to Work in Stocks, But Correction Not Over

Market strategist Jeff Saut is out with his latest commentary and begins with a focus on oil. Unrest in the Middle East has caused prices of black gold to surge from $84 to over $100 per barrel and this is worth keeping an eye on. Turning to his latest stance on the stock market, he thinks the correction is not yet over, even after last week's sell-off.

He writes,

"The recent stock 'high' was accompanied by the most bullish stock sentiment since the DJIA's peak in October 2007 (69% 'Bulls' according to Market Vane); as well, the Volatility Index (VIX/19.22) recorded its lowest reading since the summer of 2007 (read: too much complacency). Ladies and gentlemen, it is rare to see those kind of extreme readings worked off in a mere three sessions. So yeah, I believe the correction has more to run, yet I continue to think it is a mistake to become too bearish."

As such, Saut has gradually begin to put money to work in stocks during the pullback. He sees the intermediate trend as up and thinks you should buy stocks on your watch-list during further sell-offs.

He points to his own watch list and highlights some of the stocks that have held up best like Skyworks Solutions (SWKS), Stanley Black & Decker (SWK), Tempur Pedic (TPX), and Williams Companies (WMB). For the investment thesis on WMB and to see why hedge funds have been buying, we featured the stock in the equity analysis section of the new issue of our Hedge Fund Wisdom newsletter that was just released.

Embedded below is the latest investment strategy from Jeff Saut:



You can download a .pdf copy here.