Ricky Sandler Long GMCR & ZNGA, Short WAB (Invest For Kids Chicago Presentation)

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Eminence Capital's Ricky Sandler who pitched a long of Keurig Green Mountain Coffee (GMCR).


Ricky Sandler's Invest For Kids Chicago Presentation

•    At 25 launched his own business Fusion Partners. In '98 started Eminence
•    Long idea: GMCR/Keurig Green Mountain.
•    Controversial there is a credible short story. Thinks it’s already priced in and an incredible long opportunity.
•    Two businesses, hot biz (kcups) and Kold with sodas, brand new.
•    Hot platform sell 9MM to 10mm brewers/year and sell 10B to 11B kcups per year.
•    Razor/razorblade model.
•    Significant room for increased household penetration. Current penetration at 21M to 22M households compared to 70MM homes. With a coffeemaker.
•    Think market goes single serve.
•    Industry kcup should grow in the LDD range.
•    $4 of EPS from the hot business in FY15 estimated.
•    Think hot EPS can reach $5 over the next couple years driven by volume growth, $300MM restructuring, normalizing brewer losses form the last holiday season, normalized coffee costs, share buybacks and offsetting some headwinds.
•    Kold launched in September with Coca-Cola. Addressable market thinks its 5x – 10x hot.
•    Reviews are high on quality but negative on price/value.
•    $375 asp per machine and pods more expensive than a can of coke.
•    Not so much price of pod, but thinks the range of pods/products.
•    Think its convenience/choice. Negatives looking at just price.
•    Kold loss 50 cents per share.
•    Trades at 15.5x FY15E sept EPS and 13.5x EPS ex kold.
•    EPS estimates under pressure – poor 2.0 brewer launch execution and K-cup profitability impacted by mix shift. Finally negative reaction to kold.
•    Hot value = 17x -20x hot EPS ($5) or 85-100 plus option value for kold.
•    KO owns 17% at $92. Insiders bought at $90.


•    Loves Baidu (BIDU), and a top five position.


•    Zynga (ZNGA) – mobile gaming. Franchises include Farmville, words with friends.
•    Some think games are obsolete, ZNGA has 75MM active users.
•    Zynga was late to the consumer shift from desktop to mobile making the last two years rough. •    Mobile games for the last year =70% of bookings vs 30% a year ago.
•    Expect new titles over the next 12 months.
•    Trading at 1x sales when backing out SF real estate ($500MM value). $687MM EV.
•    Launch 6 new games, $300MM incremental bookings bringing total bookings to $900MM.
•    KING sold for 2.6x sales, using that valuation = $5.
•    At a 35% margin, ZNGA generate $315MM EBITDA or trading for 2x.
•    Has big infrastructure to support bigger biz. Downside protection by cash and real estate.
•    Top hit potential = $1B rev potential.
•    Mobile gaming is $20B biz. New categories such as esports and real money gaming growing.


•    Wabtec (WAB) – Short.
•    Leading supplier of brakes, electronics and other railroad components to the global rail industry.
•    55% - 60% of EBIT comes from NA freight segment.
•    LT rail is GDPish industry and cyclical.
•    Track record is fantastic – only US listed co whose stock price increased every year for 14 straight years, 19% EPS CAGR form 06 to 15E and hadn’t missed earnings since 09 and 3Q15.
•    Bull thesis – not cyclical, high ROIC/ high market share high after market mix/quality biz.
•    Product mix is opaque due to acquisition strategy.
•    Bulls think EPS will grow double digits for ever.
•    WAB is cyclical and currently at the peak of rail equipment super cycle driven by NA O&G activity.
•    Demand driven by trail traffic, production of new locomotives and freight cars.
•    Rail traffic is weak – CNI talking about laying off employees.
•    Locomotives – NSC storing locomotives, expect it to be up to 200. GE orders dropped significantly, only sold compared 3 the last quarter.
•    Freightcar peak – industry backlog driven by tank cars oil and covered hoppers i.e. frack sand. 40% downside to deliveries.
•    Trading at 20x EPS, 13x EBITDA. Could be peak earnings in FY15. Mid cycle earnings $3.5 - $4. At 16x = $60 or 30% downside.
•    Low short interest, favorable sell side ratings.
•    Consensus calls for positive organic growth.


Check out the rest of the presentations from Invest For Kids Chicago 2015.

Market Strategist Jeff Saut: Best Stock Ideas For Next 3-5 Years

Given that markets have been ripping higher, we thought it a prudent time to check in with market strategist Jeff Saut.  His latest investment outlook is entitled "For All the Sad Words of Tongue and Pen" where he looks at how market rallies can last longer than one would think.

He highlights how at around the 18th day of a typical 17-25 day buying stampede, certain investors will start to question whether or not they've missed "the bottom."  This then leads to a new round of buying from people who don't want to miss the big move, and thus the rally extends.

So when might this rally cease?  Saut mentions rallies can typically last up to 30 sessions while today is session 18.  He points out some of the cautious signals he is seeing:

"The S&P 500 (SPX/1502.96) remains overbought with 92.6% of its stocks above their respective 50-day moving averages (DMAs), as  well the NYSE McClellan Oscillator is still overbought in the short-term.  However, the stock markets can remain overbought for longer than most think in a bull move.  Further, the Volatility Index (VIX/12.89) is not confirming the renewed stock strength and  some of the hitherto leading stocks are not acting well."


Raymond James' Best Stock Ideas For 3-5 Years

Saut recalls Ray Dalio's recent interview where the legendary manager said that "the shift of that massive amount of cash is what will be a game changer."  If it moves into stocks (from pension funds and other large institutions), he wants to be prepared.

As such, Saut has highlighted his analysts' best stock ideas for a 3-5 year holding period with the following criteria:

- Recurring revenue stream
- High barriers to entry
- Not as dependent on economy/financial markets
- Can grow EBITDA at 5-10% annually
- Competitive edge in its sector
- Strong management

His analysts recommended the following stocks: Altera (ALTR), Conceptus (CPTS), Denbury Resources (DNR), NIC Corp (EGOB), Equinix (EQIX), EV Energy Partners (EVEP), IDEXX Labs (IDXX), Iridium Communications (IRDM), LKQ (LKQ), National Oilwell Varco (NOV), Verisk Analytics (VRSK), and Wabtec (WAB).

Embedded below is Saut's weekly commentary:




For more from this strategist, we've highlighted how Saut has been short-term conflicted and long-term bullish and how he's focused on housing as the key driver.