What We're Reading ~ 9/16/15

The most dangerous trade: How short sellers uncover fraud [Richard Teitelbaum]

5 common mental errors that sway your decision making [James Clear]

Forecasting a global recession [Economist]

Avoiding the certainty trap [A Wealth of Common Sense]

What's not to like about wireless towers? [Morningstar]

Alibaba: Why it could fall 50% [Barrons]

Alibaba's response to that article [Alizila]

On the size and scope of Alibaba [Bronte Capital]

A look at fund manager current asset allocations [Fat Pitch]

Why the internet won't be the next TV for advertising [WSJ]

The US economy is just starting to tap into a big source of dry powder [Bloomberg]

Cheniere: America's most unlikely energy project [Bloomberg]

The Bloomberg Terminal faces upstarts [NYTimes]

Why Wall Street loves to hate Mylan's CEO [Fortune]

Nine of the world's biggest banks form blockchain partnership [Recode]

What We're Reading ~ Analytical Links 12/17/14

Good interview with Amazon's Jeff Bezos [BusinessInsider]

122 things everyone should know about investing and the economy [Morgan Housel]

On castles and moats [Sova Group]

Global market sentiment survey 2015 [CFA Institute]

How the rising dollar could trigger the next global financial crisis [WSJ]

Berkshire director offers rare peek into Buffett's boardroom [BizJournals]

On the importance of "knowing the why" re: stock price fluctuations [Micro Fundy]

On how to have fun investing [Value and Opportunity]

Homebuilder sentiment diverges from reality [WSJ]

Inside Facebook's plan to wire the world [Time]

The hole in Google's mobile strategy [The Information]

Why Windows 10 is so important to Microsoft's future [TheStreet]

A look at Tropicana Entertainment [Clark Street Value]

More signs that software is eating investment management [Abnormal Returns]

Throwing money at start-ups in frenzy to find the next Uber [Dealbook]

8 secrets of success [TED]

Jeff Gundlach: Short Homebuilders (Sohn Conference Presentation)

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Jeffrey Gundlach of DoubleLine who argued that housing is declining and said to short homebuilders.


Jeff Gundlach's Sohn Conference Presentation

Pitch: Single Family Housing recovery is not happening.  Household debt fell only because mortgage credit dropped due to default.  Housing market has been supported by a surge in second lien financing and cash transactions.  Cash transactions are 50% of deals, up from 20% in pre-2008.  Existing home sales and new ones are weak. Housing starts have improved, but still below 1M per year.

Housing affordability isn't really that good now if you look at the long-term charts. There are no first-time buyers. Household formation is depressed. Young people are staying with parents much longer and have higher unemployment rates. Student loan debt is higher, another headwind. People moving rate has been in decline for decades. Still 19.4% negative equity nationally.

Generational preference shift - young people prefer to rent. He says home ownership rate will DECLINE further, not rebound like most people think. Says the rest of his career we will NEVER see 1.5M housing starts in a year again. IDEA:  Short XHB. 

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Whitney Tilson, Carlo Cannell, Alexander Roepers: Notes from Value Investing Congress

Continuing our coverage of day two of the Value Investing Congress, we have summaries of the presentations from Whitney Tilson & Glenn Tongue (T2 Partners), Carlo Cannell (Cannell Capital), as well as Alexander Roepers (Atlantic Investment Management).

If you missed it, we've posted a plethora of resources from the event, including:

- Presentations from John Burbank & Lee Ainslie
- Bill Ackman's Q&A session from the Congress
- Presentations from David Einhorn, Kyle Bass, & Mohnish Pabrai
- Summaries of speeches from fund managers Zeke Ashton, Guy Spier, & Michael Lowitt

Next, onto the last round of speakers at the Value Investing Congress:

Carlo Cannell ~ Cannell Capital

The fund manager's presentation was named after 'Megaloceros Giganteus,' or an Irish elk that became extinct. Cannell says that over a long enough timeline, all companies will die and his talk zeroed in on a company he believes to be on the verge of extinction. He is short Pitney Bowes (PBI), a company that he says has an obsolete business model. There has been a decline in mail demand and this is hurting the mail processing equipment company.

Cannell warns that it might not be an 'actionable' short at the moment. At the same time, he cautions that stubborn short sellers can be come extinct just as easily. Remember the old market adage? The market can stay irrational longer than you can stay solvent. This isn't the first fund manager we've seen with a negative stance on Pitney Bowes. In the past, we've seen that Matt Iorio's White Elm Capital has owned puts on PBI for numerous quarters.

Two companies that are on Cannell's watchlist as potential shorts are Buffalo Wild Wings (BWLD) and Texas Roadhouse (TXRH). You can view notes from a previous talk by Cannell here.


Whitney Tilson & Glenn Tongue ~ T2 Partners

Tilson and Tongue began their presentation focusing on the economy and their fund has been positioned conservatively given their tepid economic outlook. The T2 managers highlight that the market is likely to remain range-bound, trading sideways via oscillations in either direction that cancel each other out. Housing remains the biggest issue to the economy as prices still have further to fall and inventories need to be absorbed. As such, T2 Partners is short the homebuilders via the exchange traded fund XHB.

The hedge fund is still long BP (BP) as they purchased it back in the company's darkest hour as shares tanked due to the unfortunate oil spill. He jokingly said that he's thankful for Jim Cramer, who he has utilized as a contrarian indicator. Tilson thinks the stock is easily worth $50 (it currently trades around $41 per share, so 20% upside potential). Fears from the oil spill have been greatly overblown and T2 feels the company is still cheap and will reinstate the dividend at some point.

Regarding other portfolio positions, recall that Tilson has been short InterOil (IOC). We've also detailed T2 Partners' latest letter to investors for those interested.


Alexander Roepers ~ Atlantic Investment Management

Roepers typically runs a concentrated portfolio and focuses on mid-cap stocks. He likes predictably profitable companies with solid balance sheets and solid cashflows. Roepers will focus on companies with market caps of $1 billion to $20 billion with a holding period of typically 1-3 years.

He pitched Owens Illinois (OI), pointing to its very strong moat and increasing share in emerging markets and thinks it goes to $45 per share (currently trading around $27). Roepers labeled the company a growth business and points to their packaging business in particular. Hedge fund Viking Global had previously held a position in OI, but they sold completely out in the first quarter of this year.

He also mentioned positions in Xerox (XRX) which he views as an acquisition target and targets $18 per share as a fair valuation of the company. The manager also mentioned ITT (ITT). Lastly, Roepers also rattled off positions in Rheinmetall (RHMGY) in Germany, as well as Muraka and Creata Water.


That wraps up our series of notes from the event. You can scroll through our entire coverage of the Value Investing Congress by clicking here. Stay tuned because in the coming days we'll take in-depth looks at some of the investment ideas from select hedge fund managers. Don't miss out! Receive our free updates via email or free updates via RSS reader.

Hedge Fund T2 Partners: Bearish on Housing, Bullish on Beer (Value Investing Congress Presentation)

Today we're covering in detail the recent presentation from Whitney Tilson and Glenn Tongue of hedge fund T2 Partners from the Value Investing Congress. Since inception, T2 is up 184.4% compared to an S&P 500 return of 17.7% over the same timeframe. Earlier in the week we detailed notes from the Value Investing Congress and briefly touched on T2's presentation. Below we'll take an in-depth look as their speech centered on a duopoly of investment ideas: one long and one short. We'll start with T2's bearish stance on the housing market and their short position in homebuilders.

Housing Market

Hedge fund T2 Partners gave a bearish presentation on housing two years ago at the Value Investing Congress and they were back this time around with continued skepticism. In the near term, they felt that the government tax credit and the fear of rising rates has spurred buying activity in the marketplace. However, they are quick to point out shadow inventory that lurks in waiting. The current housing overhang is around 7 million homes, and that doesn't include the 300,000 new defaults that occur each month.

Of the defaulters who haven't made a payment in a full year, 23.6% still have yet to be foreclosed on. Interestingly enough, T2 also notes that homes with negative equity are a much bigger driver of defaults than those affected by unemployment. The mortgage crisis is now being driven by underwater borrowers. This differs from the previous scenario where default was driven by resets. They also present a hypothetical scenario that if house prices were to drop an additional 10%, we'd see an increase of 56% more underwater homeowners.

It's clear we're still not out of the woods here yet. While most wouldn't argue with that statement, the numbers are pretty frightening. A weak housing market was ultimately one of the main contributors to the weak economy. As such, the American economy can't truly be repaired until the housing market itself is repaired. Thus, T2 Partners is short the industry via the iShares Dow Jones US Home Construction Index, ticker ITB. You can read more specifics regarding their short in the presentation at the bottom of the page. T2's presentation is a stark contrast to that of hedge fund Ellington Management's who as we covered earlier are bullish on housing.

Long position

Whitney Tilson and Glenn Tongue also presented an investment idea on the long side: Anheuser-Busch InBev (BUD). Their presentation entitled, 'Return of the King' focuses on how the merger between the two previous entities has created the largest global brewer which is seeing huge beer volumes, revenues, and EBITDA. Their hedge fund's investment thesis on BUD centers on the fact that this is a best of breed business with pricing power and high margins in major markets. On the valuation side of things, BUD trades at 8.5x 2012 free cash flow.

The company has a very wide moat with attractive returns on capital and they are able to generate high EBITDA margins through regional economies of scale. Not to mention, in Anheuser-Busch InBev's top 31 markets, they are #1 or #2 in 25 of them, as they have effectively gobbled up tons of market share. And, one intriguing fact about the company: they are also the largest bottler of Pepsico products outside of the US. Overall, Tilson and Tongue think shares are worth anywhere between $79 and $91 over the next two years. This position joins T2's ever growing portfolio of undervalued blue chip stocks.

Embedded below is hedge fund T2 Partners' entire presentation from the Value Investing Congress:



You can download a .pdf here.

In terms of their general stock market stance, Tilson and Tongue feel that the market is likely range bound as interest rates are low but P/E multiples are high. They don't necessarily see how a sustained bull market can occur in the near future. For more coverage of the Value Investing Congress, be sure to check out notes from day one as well as a summary of day two's presentations as well. Lastly, check back here daily as we'll be posting up more in-depth research from the event.

Overall, a well-illustrated set of ideas from Tilson and Tongue. For more on their hedge fund, we've covered T2 Partners' short positions, Tilson's explanation of their short in LULU, as well as T2's annual letter.