Keith Meister's Thesis on YUM Brands China Spin-Off; Talks Pandora & Williams

Keith Meister of activist firm Corvex Capital was just interviewed by CNBC where he talked about YUM Brands (YUM), Pandora (P), shareholder activism and more.  On the market in general, he said he's bullish on his individual positions but not necessarily the market in general.  He notes, "I'm not a buyer of the market here, per se.  My guess is we're more near a top than a bottom."

Meister on YUM Brands Spin-Off

Corvex is the largest shareholder of YUM and will spin-off its China business to shareholders on November 1st and he believes it's "1 plus 1 equals more than 2."

He notes that the remaining HoldCo will be a 98% franchised, asset light business in the quick service food industry.

Meister says the China co is a different story as 7,500 restaurants (KFC, Pizza Hut) in China gives them a huge advantage as they were first to move and have become the dominant player there in the QSR space and they can now go into tier 2 and tier 3 cities.  He acknowledges that it will be a volatile ride, but says it can be an 'up and to the right' chart over time.

He argues it should trade at 10-12x EBITDA after spin-off, but acknowledged it could start trading around 8x which would basically be trough earnings.  "The market's not gonna make it easy to own YUM China, but that's where I think the best return will be."

He feels the remaining HoldCo will trade more like an annuity, with smoother returns. 

On shareholder activism, Meister says that these types of investors are simply trying to buy good businesses, help make positive changes, and acting like an owner in the public markets.


Meister on Pandora (P)

Meister still owns Pandora (P).  When asked if they're going to sell themselves, he said he didn't know.  He compared the company to competitor Spotify and notes the gap in valuation as one is private and one is public.   He argues that music is so core to many tech players these days (Apple, Amazon, etc) and he says "so it's a hugely valuable piece of property for someone who wants to win."

He concedes the streaming business is a commodity business, but argues that Pandora isn't due to the built up userbase as an asset.


Meister on Williams (WMB)

The Corvex founder also talked about Williams (WMB) and has left the board and commended the company on the work done.  He personally feels that the company has "undermaximized the opportunity set" over the past 5 years.

He thinks it could probably be worth more as part of another entity.  He thinks consolidation is happening and you don't want to be left out.  "It's hard to build new pipeline, so it makes existing pipeline more valuable." 

We'll post up the video of the interview once it's released.  Be sure to also check out CNBC's interview with David Tepper from yesterday, as well as their conversation with Carl Icahn.

Dan Loeb at SALT Conference on Japan, Yum Brands, China & More

Skybridge's Alternatives Conference, otherwise known as SALT, is underway in Las Vegas.  Dan Loeb of Third Point spoke last night with Anthony Scaramucci and here's a summary of his comments.

Dan Loeb's Comments at SALT Conference

- Loeb seems constructive on Japan, says the Abe administration was very encouraging when they were involved with Sony (SNE) pushing for change.  Says Third Point probably exited that name "too soon" and probably left $1 billion on the table there as Japanese businesses are starting to focus on changing their ways.  They're more receptive to activism/suggestions and starting to focus more on shareholder return.  Thinks there will probably be more activist opportunities in the country but "they will become their own activists".

- Yum Brands (YUM) isn't really an activist play for them, it's an emerging markets opportunity.  They saw a play and as the food safety issues are taken care of, there's "enormous" upside.  There's basically 3 pillars to his investment here: turnaround potential (undervalued), franchising, and possible China spin-off.  You can read Third Point's thesis on YUM in their Q1 letter.

- Activism can help power the 'powerless' by helping other shareholders.

- On China (paraphrase): I don't know anyone who's gotten rich betting against China.

- Loeb thinks markets will more likely than not be higher over the next 1-3 years from now.  2 rules: Don't fight the Fed and don't fight the 'godfather' (David Tepper).

- On Warren Buffett: "I love reading Warren Buffett's letters.  I love contrasting his words with his actions ... I love his wisdom.  He's a very wise guy.  But I also love how he criticizes hedge funds, yet he really had the first hedge fund.  He criticizes activists, yet he was the first activist."

- Also talked about how the lack of educational opportunities here in America is a big issue.

Third Point's Q1 Letter: New Stakes in Yum Brands, Devon Energy

Dan Loeb is out with Third Point's first quarter letter.  In it, he details how he's "constructive on the US" mainly for 3 reasons: economic data improving, the Fed not raising rates in June, and when they do raise, the expectation is they'll do it gradually. 


New Stake in Yum! Brands

Third Point also reveals two new equity longs.  They've built a stake in Yum Brands (YUM) which includes KFC, Taco Bell and Pizza Hut restaurants.  They see the company turning around its troubles in China with KFC and note Pizza Hut needs to improve to battle competitors on margin. 

Third Point writes, "We think investors should want to own Yum! for its unique open-ended middle-class growth story in China and its strong and growing franchise-led cash flows outside China."


New Position in Devon Energy

Also, the hedge fund revealed a new position in DVN.  They like certain steps the company has taken such as exiting certain businesses, entering joint ventures, and sale of non-core assets.  However, they want the company to continue to streamline its portfolio "to focus on top-tier US assets in the Permian Basin, Eagleford, and Cana-Woodford."


Lastly, it's also worth noting that Third Point now has 10% of its assets invested in Japan.  They also update their positions in Fanuc and IHI.

Embedded below is Third Point's Q1 letter:



For more from this hedge fund, head to Third Point's Q4 letter which outlines their thesis on Fanuc.

Graham & Doddsville Newsletter: Interview With Li Lu (Columbia Business School)

Columbia Business School is out with its Graham & Doddsville investment newsletter for Spring 2013.  It features an interview with Li Lu of Himalaya Capital, a man who was dubbed one of Charlie Munger's favorite investment managers.

This interview is really fantastic as he touches on investment process a lot so we'd recommend reading the whole thing below.  But for those pressed for time, here are the takeaways:


Highlights From Li Lu's Interview

On value investing: "There are few people that switch in between or get it gradually.  They either get it right away or they don't get it at all.  I never really tried anything else.  The first time I heard it, it just made sense; and I heard it from the best."

On defining yourself as an investor:  Lu also touched on how you still have to find your own style of investing that matches your personality.  He says, "The game of investing is a process of discovering: who you are, what you're interested in, what you're good at, what you love to do, then magnifying that until you gain a sizable edge over all the other people."  He also added that, "The only way to gain an edge is through long and hard work."

On why he doesn't short anymore:  He listed 3 reasons:  "Three things about shorting make it a miserable business. On the long side, you have 100% downside but unlimited upside. On the short side, you have 100% upside and unlimited down-side. I do not like that math. Second, the best short has some element of fraud. However, a fraud can be perpetrated for a longtime. Of course you borrow to short, so they could really just wear you down. That’s why I could be 100% right and bankrupt at the same time. But, you know what, you go bankrupt first! Lastly, it screws up your mind. Shorts just grab your mind and take away from the concentrated effort that is required to do proper long investing."

On how he finds ideas: "Ideas come to me from all sources, principally from reading and talking."  What's interesting is he doesn't really talk to other investors that much.  He's more keen on chatting with people running businesses.

On the importance of management teams: "(They) always have a big influence on your success, no matter how good or how bad the business is itself.  Management is always part of the equation of making the company successful, so the quality of management always matters.  But to assess that quality is not always easy."

On decision making:  "I think you want to avoid wrong decisions as much or more than you want to get it approximately right.  If you avoid the wrong decisions, you'll probably come out okay over time."


The issue also features pitches from Columbia Business School MBA students on: Motors Liquidation Company (MTLQU), Precision Castparts (PCP), Hertz (HTZ), Advance Auto Parts (AAP), Dollar Tree (DLTR), Stanley Black & Decker (SWK), & Yum Brands (YUM).

Embedded below is the Spring 2013 Graham & Doddsville issue:




You can download a .pdf copy here.

David Einhorn's Presentation on General Motors, Cigna, Chipotle & GMCR: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of David Einhorn of Greenlight Capital.  His talk was entitled 'Kicking the Tires' where he covered a range of topics, but mainly pitched General Motors (GM) and Cigna (CI) as longs and Chipotle (CMG) as a short.

"Do your homework and kick the tires." It's not the answers that make you good in this business, it's the questions you ask. Talked about how Green Mountain Coffee Roasters (GMCR) was down 6% as he spoke during his presentation last year, but the point is it dropped right away, before people listened to the slides.  So he says you must do your own work.

Einhorn also mentions Herbalife (HLF), talks about him asking questions on the conference call. Because he said people were worried about the quarter.  Says he was quite surprised by the reaction.  Caris actually downgraded the stock based on the probability he was short. 

He mocks investors for not doing the work, but just trying to blindly follow him.    DO YOUR OWN WORK!  This is something we try to emphasize on MarketFolly.  Tracking hedge funds is a great way to find ideas, but only use it as a starting point.  Due diligence is key.


Einhorn's 4 Ideas This Year

1.  Long General Motors (GM): Remains an "ugly duckling" due to long investor memories, government ownership overhang and weak Europe division.

Bull case: Fixed cost structure improved. Pension risks overblown, unfunded liability may have narrowed by several billion, rising interest rates would help, too.  No required pension contributions until at least 2019.  Balance sheet cleaned up, brand quality improving across the board, improving pricing. $23.09, $42B, cash is 3/4 of the market cap.  $70B in tax shields; no taxes in US for a decade. EV is actually only $6B when you take these things out. $6.6B in EBIT this year, P/E depressed due to cash hoard earning nothing.  Consensus is too low, SAAR may be higher than street.

GM is #1 in China and growing faster than industry.  Europe is a problem and should restructure to at least break even by 2015. Government stake is an opportunity, not an overhang. US demand is 16M units:  Scrap is 13.2M units/year in a normal year. Ave age is now 11 years, up from 9 a decade ago.  5.5% scrap rate implies 19 year average life. Population growth alone is 2M units of annual demand. Recessions cause less vehicles per driver, but it rebounds as economy does.  This is 500k units/year. His SAAR is 16M units, not peak, but midcycle. Implies 315k incremental units for GM, $1.00 per share eps. 60% of units new in 2013/14 vs. 23% in the last 2 years. 2013 Cadillac ATS- "Esquire Car of the Year"

Does not believe European losses will persist indefinitely. $42B market cap, $32B cash, and $6B revolver.  So $38B total liquidity.  What should it do with its cash?  Government has 50M shares.  Repurchase of these is accretive, even at $30 per share, costs $15B.  $53 is break-even, so no sale will occur before election.  If Obama is re-elected, he may be willing to sell at a loss. Otherwise, they could still do a large open market buyback instead. 2014 "taxed" earnings could be $6 in 2014, $8 cash earnings.  This is midcycle, not peak result, so deserves a better multiple.


2.  Long Cigna (CI):  Lots of work. Have to understand HMOs, then Obamacare, then how it influences CI.  Then you have to understand their non-HMO businesses. Investors don't like HMOs now.  Earnings are hard to predict from Q to Q.  Obamacare scares investors.

Scary things: Humana (HUM), Wellpoint (WLP), Healthnet (HNET) all missed this year.  Obamacare: capped profits, risk of financial penalties 

Bull case: Secular growth, high barriers to entry, big players have scale already.  Still, ROE has been strong over time. CI is the best performer in the group.

Things that won't affect HMOs: Greek debt, Europe, China slowing, etc. They reprice annually so they always make money.  Obamacare is just "a homework problem" that can be analyzed. Also has Group Disability/Life and International business. 82% is non-risk bearing ASO business.  PBM is a potential high multiple sale GDL segment is consistent source of earnings despite weak employment trends. International is for multinational corporations' employees living overseas.

Trades at 7.7x 2013E, at a discount to sector which is cheap already.  You can see further comments from Einhorn on Cigna in Greenlight's Q2 letter.


3.  Short Chipotle (CMG):  Trades at 35x, nosebleed valuation. Average sector multiple is 22x. Compares to PF Chang, Boston Market.

Restaurant business:  low barriers to entry, Obamacare brings additional costs since they don't currently provide health care for employees, summer drought affects costs in coming periods.

The biggest near-term challenge: A resurgent Taco Bell (part of Yum Brands ~ YUM).  Most analysts think Taco Bell is low-end quick service restaurant, and CMG competes with higher end Panera.

He did a survey of CMG customers, and they actually visit Taco Bell almost as much.  Taco Bell SSS up 12% last year, while CMG missed. Taco Bell has more locations and cheaper menus. Taco Bell has decided to compete directly with CMG with their "Cantina Bell" menu which is almost exactly the same, but with 35% lower prices. 2/3 of CMG customers that tried Cantina Bell thought it was good; almost 1/2 liked it as much or more. Makes sense, Taco Bell has more money, locations, and can just add the Cantina Bell menu items to blunt CMG competition. Lots of insider selling as well.


4.  Short Green Mountain Coffee Roasters (GMCR):  He believes there is still accounting fraud. CEO said they had an investigation, but only took 23 days. Cites the SBUX "Verismo" system. Agreement for K-cups with SBUX is vague- how long?  CAPEX/sales is very high, 9-11-13% of sales, vs. industry average of 3.3% He also says a price war is coming, and GMCR generated no FCF during it's years as a monopolist.  Thinks the stock has further downside.  You can view Einhorn's presentation on GMCR from last year if you haven't seen it.


Question & Answer Session:

Does he like Yum Brands (YUM)?  Likes Taco Bell, but KFC in China may hurt too much. Not long.

Future price for CMG?  He says "we don't have to worry about that, we just think risk-reward favors the downside." GM, is government stake affecting sales?  He says they will sell sooner rather than later, and they are a passive role.  Chevy Volt obviously not going well and it's a tiny part of GM's business.

Anything on Moody's (MCO)?  Still thinks it’s a short, lawsuits are very persistent.

What about Apple (AAPL)?  His opinion unchanged

He's short steel, which he says is a hedge in a way, and lower steel prices are good for autos.

On Cigna (CI)?  "Less than 1% of the business is individuals"

Comments on St. Joe (JOE)?  Says they finally had a conference call, sales are zero, says you should listen to it.  Management, other than CFO, were too busy to take questions.


Embedded below is Einhorn's slideshow presentation from the Value Investing Congress: 

(.PDF coming soon)

Check out the rest of the hedge fund presentations from the Value Investing Congress.

Lone Pine Capital's Current Investment Themes

Today we're covering the current investment themes from Steve Mandel's hedge fund Lone Pine Capital.


*Update: excerpt removed per request by representatives of Lone Pine


In more recent portfolio activity, we've detailed how Lone Pine nearly doubled its SolarWinds (SWI) stake and has been buying the dip in VanceInfo Technologies (VIT).

Dan Arbess Ira Sohn Presentation: Investing As The Foundation Shifts

Today again courtesy of Dealbreaker we wanted to highlight Dan Arbess' recent presentation from the Ira Sohn Investment Conference entitled, 'Investing As The Foundation Shifts'. We had previously summarized the Ira Sohn Conference and have detailed numerous presentations from the event. This time around, we're taking a deeper look at the slideshow from Dan Arbess, the Xerion Fund manager at Perella Weinberg Partners. Just yesterday, we looked at Dan Arbess' portfolio commentary and identified that he is seeing opportunity in stressed credit and owning what China wants to buy. And now, we'll focus on some of his additional investment ideas.

When we summarized the Ira Sohn Investment Conference, we noted that Arbess was bullish on China exposure and in particular, Yum Brands (YUM) given their prolific expansion into the country. He isn't alone in his conviction here as we've seen a slew of hedge funds add positions in Yum Brands in recent quarters. In particular, we made note of Bill Ackman's YUM stake.

If you hadn't already guessed from the title, the theme of Arbess' presentation centered around a shift in the global economy. He wants to 'shake hands' with China and overall sees less borrowing in the Western world coupled with more consumption in the Eastern world. He says you can play this theme by shorting overleveraged Western producers, shorting weak currencies, and hedging monetary debasement with precious metals and miners. Arbess is also bullish on Ivanhoe (IVN) due to its solid assets and position in the metallurgical coal space.

This echoes what many hedge funds have already practiced. Hedgies have been quite short the euro (currently a weak currency) but they have been covering as of late. Additionally, tons of prominent investment managers have boosted gold exposure in their portfolios either by adding the physical metal or gold mining companies. Arbess doubts this is a top in gold and is using exposure there to hedge against inflation.

Sticking with the Asian growth theme, the Xerion Fund manager also likes Solutia (SOA) and Celanese (CE) as they both are seeing solid growth overseas. Arbess also seemingly pokes fun at a previous presentation we've posted up from Vitaliy Katsenelson entitled, China: The Mother of All Black Swans by including a picture of the lead slide from that slideshow with a giant "NOT" stamped across it. (How about a nice little Borat impersonation here for our comedic readers: "China is the mother of all black swans..... ... .....NOT.")

Ahem, anyways. Embedded below is Daniel Arbess' presentation from the Ira Sohn Conference, "Investing As The Foundation Shifts":



You can download a .pdf copy here.

For more from Arbess, head to his Xerion Fund portfolio commentary. We also recommend viewing the other presentations from the Ira Sohn Conference including David Einhorn's speech, as well as Bill Ackman's presentation and last but not least, Steve Eisman's latest investment thesis. You can also view a summary of the conference here.

Ira Sohn Conference Notes: Investment Ideas From Hedge Fund Managers

This year's Ira Sohn Conference was packed with investment presentations from heavy hitting hedge fund managers including Seth Klarman, David Einhorn, Bill Ackman, David Tepper, Larry Robbins and more. Like the Value Investing Congress (in-depth notes from that recent event here), you get a plethora of ideas from top talent. Presentations at Ira Sohn in years past include Greenlight Capital's David Einhorn blasting Lehman Brothers before it failed and Pershing Square's Bill Ackman detailing his bullish stance on shares of General Growth Properties when they were trading below $1 (as they now trade north of $13).

We covered many of last year's Ira Sohn presentations for those interested and the list goes on, but you get the picture. Without further ado, let's dive into some of the investment presentations we've aggregated from various sets of notes that were sent to us, as well as the live-tweeting of NY Times' Michael de la Merced and additional coverage from Barron's Tiernan Ray. We'll post up more in-depth presentations as they become available.


David Tepper of Appaloosa Management: Tepper was nonchalant in the outset of his presentation where he mentioned that his firm had lost $1 billion in AUM over the past month, yet he shrugged his shoulders and joked 'what are ya gonna do?' He then shifted to his current investment ideas such as his bet on AIG 8.175 junior subordinated debt. It trades somewhere around 70 cents on the dollar and he thinks this mispricing is due to a misunderstanding of AIG's capital structure. Additionally, Tepper likes Bank of America (BAC) and thinks it could see $27 in the next year. Sticking with banking, he also likes Spanish giant Banco Santander (STD). Lastly, Tepper also likes commercial mortgage backed securities (CMBS) here. Regarding the economy and a potential turnaround, he is hopeful and thinks we can handle it. His funds are typically invested in 70% debt and 30% equity. Currently, his debt exposure is 50% corporate and 20% asset backed. We recently detailed Appaloosa's portfolio for those interested in the rest of Tepper's investments.


David Einhorn of Greenlight Capital: Einhorn had all kinds of negative things to say about the creditworthiness of the US. His presentation was entitled, "Good News for the Grandchildren" implying that grandchildren won't have to pay off the government's spiraling debt. Einhorn actually thinks that a crisis has unfolded already and our generation will be the ones paying for it. He says it is very necessary to address the situation now rather than spiral into a debt crisis. Einhorn again lambasted the credit ratings agencies and thinks official ratings should be eliminated. He notes that Treasury Secretary Timothy Geithner is 'all-in' because he thinks that the US's credit rating will never be cut. To this though, Einhorn said, "I don't believe a US debt default is inevitable." In his presentation, Einhorn mentioned that he is still short Moody's (MCO) as well as McGraw Hill (MHP), the parent company of ratings agency Standard & Poors. Einhorn originally laid out a short thesis on these names at last year's Ira Sohn Conference in a presentation, The Curse of the Triple-A.

Einhorn then shifted the discussion to real-world costs and inflation. He went on to say that, "if your goal is to never see inflation, you will never see it until it is rampant." Einhorn was critical of the government's zero interest rate policy and warns it can create another bubble. He thinks that higher rates would actually lead to increased lending in the private sector because right now all you're seeing is banks playing the yield curve. Einhorn outlined all the past scenarios where the Federal Reserve didn't see a bubble until it was too late: from Long Term Capital Management to the dot-com bubble to the housing bubble and now to the sovereign debt crisis.

In terms of investment ideas, he likes African Barrick Gold (LON: ABG) traded in London. He thinks this name is cheap and could eventually be added to various indexes as well which would serve as a catalyst for institutional buying. Einhorn ended by saying, "We own some gold and some gold stocks for our investors and for ourselves. We will worry about our grandchildren later." If you'll remember a long while back, we first detailed when Greenlight Capital started storing physical gold. In recent activity, regulatory filings disclosed Einhorn's new position in NCR and we've also detailed Greenlight's portfolio. To learn more about Einhorn and his investment process, we recommend checking out his book, Fooling Some of the People All of the Time.


Bill Ackman of Pershing Square Capital Management: In typical Ackman fashion, he crammed an 80-slide presentation into 15 minutes. He proposed a "Wait to Rate" system to reform the rating agency business where it would be illegal for an agency to issue a rating within sixty days of the security's issuance. And if the agencies mess up, then they should lose their status. Turning to specific investment ideas, Ackman again focused on General Growth Properties (GGP). Some of you will remember that Ackman presented this same idea last year when shares were ridiculously cheap. Last year's premise with this name was an argument that the company's assets were worth more than their liabilities and that this bankruptcy was different than most.

This year, Ackman's GGP thesis continues on in that he sees very little mall construction over the next three to five years, an area GGP already has a dominant position in. He highlights that GGP is being split up into two entities: GGP & GGO. GGP would be the cash-flow generating side of the business and GGO would represent underperforming but valuable assets. Lastly, Ackman quickly remarked that his firm Pershing Square has been buying Citigroup (C) in recent weeks and has assembled a position of 150 million shares, but ran out of time to elaborate on the stake. For more on Ackman's investing style, he is the subject of Christine Richard's new book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. Additionally, we've previously profiled Pershing Square and detailed Ackman's portfolio.


Seth Klarman of Baupost Group: Klarman continued his stern and gloomy comments from last week. He essentially gave a speech on what he would say if he were called in front of Congress to discuss Wall Street. He likened short sellers to policeman and reiterated the fact that they are not evil. He commented negatively on risk regulators, saying that they will inevitably make mistakes and that they won't be able to head off the next crisis at the pass. He feels the market should work itself out and that there should be no bailouts and that only the strong should survive. Klarman noted that many institutions have been bailed out and that the government's action related to AIG has 'raised moral hazards to new heights.' Klarman also joined in on the berating of the ratings agencies saying something should be done about them. Lastly, Klarman says that anyone in a transaction with a counterparty thinks the other investor is wrong, that's the beauty of a market. Just a few days ago we highlighted Seth Klarman's recommended reading list so definitely check that out. We also posted a summary of Klarman's speech at the CFA conference and have previously detailed Baupost Group's portfolio as well.


Steve Eisman of FrontPoint Financial Services Fund (Morgan Stanley): This name should be familiar to those of you who have read Michael Lewis' The Big Short, as he was one of the investors profiled in the story of the subprime trade. His presentation was entitled, "Subprime Goes to College" and as you can guess, he's negative on for-profit education companies. Those of you who followed the Ira Sohn Conference last year will remember that Jim Chanos gave a similar presentation berating these companies. Eisman sees Washington continuing to clamp down on the industry after these companies hired seemingly every lobbyist out there in previous years. He notes that a key to the problem here is the 'rating' these institutions receive from accreditation boards and he likens these boards to the ratings agencies who blessed subprime mortgages.

Eisman focused specifically on Apollo Group (APOL) and noted that if employment figures started to rise, APOL & others could see EPS declines of 40% annually. His presentation called out numerous other players in the space, including ITT Educational (ESI), Corinthian Colleges (COCO), and Education Management (EDMC). Eisman also painted Washington Post (WPO) in a negative light due to their ownership of the Kaplan test preparation business. That last one is intriguing because we recently saw Roberto Mignone's hedge fund Bridger Management buy shares of Princeton Review (REVU), a fellow test prep service.

The dichotomy of opinion continues as the for-profit education space has been an area ripe for debate. We've seen many prominent hedge fund managers own sizable stakes as Stephen Mandel's Lone Pine Capital has been bullish on education plays. That said, we've also noted that some of these managers have had a recent change of heart. David Stemerman's Conatus Capital had been long and sold out of their education plays. Andreas Halvorsen's Viking Global also exited Apollo Group recently. Additionally, there are also numerous high profile detractors such as Chanos and now Eisman.


Jamie Dinan of York Capital: Dinan's first idea was Coca Cola Enterprises (CCE) as they saw Coca Cola buy their bottling operations in the US earlier this year. He loves CCE's free cash flow. We've actually seen numerous other prominent hedge funds owning CCE shares as well, so they're definitely not alone in this pick. Dinan's second bet is on ING (ING). He values it at 1.2x book resulting in a value of 9.32 euros a share. He also noted that post bankruptcy equities are good places to be. This is a sweet spot for York Capital given their focus and he cited Lyondell (LALLF) as an example as he thinks it's worth $22 (it currently trades around $17). We just yesterday detailed some of York's recent portfolio activity for those interested.


Larry Robbins of Glenview Capital: Robbins highlighted that the market's P/E multiple is 12.3x and as the political presence in Washington grows, the P/E shrinks. He thinks now is a great time for stockpicking and not cash, 10 year treasuries or debt. He says to buy definitive growth and avoid high valuations. In particular, Robbins likes McKesson (MCK), Express Scripts (ESRX), Life Technologies (LIFE) and Fidelity National Information (FIS). Regarding FIS specifically, he agrees with the board's decision to reject Blackstone's bid and is in favor of the leveraged recapitalization plan. Regarding Express Scripts, he sees stable earnings and points out they have cash on hand to buy back stock or make acquisitions. We've pointed out that Andreas Halvorsen's Viking Global is bullish on ESRX as well. On Life Technologies, Robbins highlights organic growth, a defensive business mix, and potential industry consolidation. He also likes McKesson because it has a ton of cash, great free cash flow, and is trading at 11x earnings. For more from Robbins, we've previously outlined his thoughts on the case for global equities in 2010 at a hedge fund panel.


Jon Jacobson of Highfields Capital: Jacobson, formerly of Harvard's endowment and now one of the founders of Highfields, listed Sallie Mae (SLM) as his favorite pick. The main thesis here is that it is moving into a fee-based business with a great management team. He noted that the street has had a hard time valuing shares due to the gross leverage. And while this play is risky, he thinks it's undervalued. In a run-off scenario, Jacobson thinks SLM is worth between $15 and $25. While Sallie Mae is term funded, he argues they are adequately capitalized. He mentioned its legacy "FFELP" business is worth $6-8 a share on its own. SLM trades at 2x earnings and many of their competitors are essentially gone. SLM enjoys economies of scale, the credit quality of their loans is getting much better, and Jacobson also mentioned insider buying. Shares were up in aftermarket trading following his presentation. Shifting to the general commentary, Jacobson also cited his concern for the climate in Washington as he claims there is no leadership and that many US states are the American equivalent of Greece, bankrupt or about to be. Overall, he feels that the government is simply delaying these problems for future generations. We've covered some of Jacobson's previous thoughts at a hedge fund panel where he addressed whether or not there is alpha in asset allocation.


Daniel Arbess of Perella Weinberg Partners/Xerion Capital: Arbess' presentation focused on China. He specifically likes Yum Brands (YUM), as the fast food chain has great exposure to that country. Additionally, he likes Ivanhoe (IVN) in the metallurgical coal space as he's bullish on gold and commodities as well. On gold specifically, he says "I doubt we're at a top" but at the same time he does not like it as a safe haven against inflation. In currency trades, he likes a trade of short the Japanese yen and long the Canadian dollar. Arbess also listed Celanese (CE) as one of his picks. Lastly, he sees more distressed credit opportunities coming up as maturities start to roll in. And like many other presenters, he had an unpleasant view of the current political administration and their actions. Turning lastly to the debt crisis, Arbess thinks there are no quick fixes and the outcome is unpredictable. In the past, we've previously covered some brief portfolio activity out of Perella Weinberg.


Jeremy Grantham of GMO: His favorite picks were commodities and in particular, timber. He highlights this because it's the only asset class that did not lose value in the 1970's or during the Great Depression. His second pick centered on emerging market equities and thirdly, Grantham also favors high quality US stocks. Armed with a chart displaying equity valuation of mega caps since 1955, he points out that mega cap valuation has declined since 1955 and they currently represent great value. Shifting to macro thoughts, he thinks the UK housing bubble has yet to burst and that prices could fall as much as 33% more and also warned of a possible bubble in Australia.


Niall Ferguson: He mentioned that now is not the time to short Treasuries. However, he also cautioned to avoid holding 10 year bonds to maturity. Scarily enough, Ferguson thinks the US will be like Greece by 2013 and that we won't be able to 'print' our way out of this mess.


That wraps up our aggregation of notes from the Ira Sohn Investment Conference. If you enjoyed our coverage, please consider receiving our free hedge fund updates via email or our free updates via RSS reader. Thank you to those that sent us notes and stay tuned as we'll post up in-depth presentations as we receive them.

Bill Ackman's Pershing Square Sells Automatic Data Processing (ADP): Q1 2010 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund filings.)

Next up is Bill Ackman's hedge fund Pershing Square Capital Management. Ackman runs a value and activist fund with a highly concentrated portfolio so it is ideal for tracking purposes. He received his undergraduate degree from Harvard and his MBA from Harvard Business School. As we recently reviewed, Ackman and the saga surrounding his short position in MBIA (MBI) is the subject of Christine Richard's new book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. It's definitely worth a read if you want to learn more about Ackman, the short selling process, and perseverance in general. Additionally, for more background on Bill Ackman's hedge fund, we've previously detailed a profile of Pershing Square.

The positions listed below were Pershing's long equity, note, and options holdings as of March 31st, 2010 as filed with the SEC. All holdings are common stock unless otherwise denoted:


Brand New Positions
Kraft Foods (KFT)


Increased Positions
Yum Brands (YUM): Increased position by 10%


Reduced Positions
Target (TGT): Reduced position by 0.51%


Positions With No Change
General Growth Properties (GGP)
Corrections Corp of America (CXW)
Landry's Restaurants (LNY)
Borders Group (BGP)
Greenlight Capital Re (GLRE)


Positions They Sold Out of Completely
Hyatt Hotels (H)
Automatic Data Processing (ADP)


Pershing's Entire Long US Equities Portfolio (by percentage of assets reported on 13F filing)

1. Target (TGT): 32.79%
   
2. Kraft Foods (KFT): 29.89%
   
3. Yum Brands (YUM): 17.56%
   
4. General Growth Properties (GGP): 11.62%
   
5. Corrections Corp of America (CXW): 6.55%
   
6. Landry's Restaurants (LNY): 0.84%
   
7. Borders Group (BGP): 0.55%
   
8. Greenlight Capital Re (GLRE): 0.20%
   

Given Ackman's concentrated portfolio, there's not a lot to cover in terms of portfolio adjustment. However, we want to first immediately address misinformation that is floating around in mainstream news land regarding Pershing Square's portfolio. Firstly, we'll start with the fact that CNBC yesterday wrongly reported that Pershing added 23.9 million shares of General Growth Properties (GGP). Other news outlets have mistakenly followed suit. This is merely the exact same position that Pershing has held all along. As we've detailed countless times, General Growth Properties traded on the pink sheets for a period of time under the ticker GGWPQ. When this occurred, these shares became a security that was not deemed reportable by the SEC. As such, Pershing Square still owned it but was not required to disclose it.

Fast forward to the present as the new 13F filings come out and you see that General Growth Properties is listed on Pershing's disclosure. This is merely because shares now trade on the NYSE under ticker GGP, a security that *is* deemed reportable by the SEC. So, people not familiar with tracking 13F's or those who blindly follow sorted data will be viewing what *looks* like a new position in GGP, but in reality, isn't.

Ackman was on television a few weeks back talking about how he thinks GGP could double over the next few years "if done correctly." One thing this disclosure does provide us is knowledge of Pershing Square's total equity ownership in GGP of just over 23.9 million shares. Since there was essentially a 'dark period' when no one knew how much equity they owned due to the disclosure issue we touched on above, we now get clarification. To get an idea as to Ackman's total position, we've in the past detailed Pershing's economic exposure to GGP as they own other securities as well.

Secondly, back in January when we covered Pershing's fourth quarter portfolio, we made special note that they had sold out of Hyatt Hotels as per a 13G filing and it is obviously just now reflected in their latest update. They only owned shares briefly as they purchased them sometime in the fourth quarter of 2009 and then sold them in the first week of January 2010.

Thirdly, regarding their stake in Yum Brands (YUM), we just wanted to highlight that they did not disclose this position until April 2010 when in reality they owned it as of December 31st, 2009. In their original 13F for the fourth quarter 2009, Pershing did not disclose their YUM position. But via an amended 13F in April, they all of a sudden disclosed the position. So now via the first quarter 2010 13F filing we see that they have since added to the position to the tune of 10%. Whew, got all that?

In terms of other recent portfolio activity not covered via 13F filing, we saw that Pershing sold its Sears Canada stake to Sears Holdings for around $560 million. Lastly, in the past we've covered a ton of Pershing's investment presentations regarding their positions and have posted links below for those of you wanting to learn about their specific investment thesis for each name:

- Pershing's presentation on Kraft (KFT)
- Pershing's Corrections Corp of America (CXW) presentation
- Pershing's updated General Growth Properties thesis & we also detailed their original GGP presentation from when they first established the position

Assets reported on Ackman's 13F filing were $3.3 billion this quarter. Data from the SEC is aggregated and sorted automatically by Alphaclone, our source that seamlessly sorts through all the hedge fund portfolio maneuvers and backtests the performance (Market Folly readers can receive a special free 30 day trial). Remember that these filings are not representative of the hedge fund's entire base of AUM.

This post is part of our daily hedge fund portfolio tracking series. We've already detailed activity from numerous managers so click the links below to be taken to the respective portfolio updates: Seth Klarman's Baupost Group, Warren Buffett's Berkshire Hathaway, and Stephen Mandel's Lone Pine Capital. Be sure to check back daily for new hedge fund updates.

Bill Ackman's Pershing Square Discloses Yum Brands (YUM) Position

Bill Ackman's hedge fund firm Pershing Square Capital Management recently filed an amended 13F for the fourth quarter of 2009. We found this a bit peculiar given that the new 13F's that will detail first quarter 2010 portfolio adjustments are due out next month. Nonetheless, upon examining their amended filing, we see that Ackman has disclosed a 13.8 million share stake in Yum Brands (YUM) as of 12/31/09.

It's a bit baffling to us as to how Pershing could omit such a material position from their 13F. After all, when you add this amendment to their original 13F, you see that YUM was their second largest position! When we originally t0ok a look at Pershing Square's portfolio, they did not show a position in Yum Brands. Obviously now looking back, that was not the case.

So, to sum up: Pershing Square owned a $483 million stake in Yum Brands as of the fourth quarter 2009 which means it was a new position for them at that time as they did not own shares in the prior quarter. However, Pershing had owned shares of YUM in the past, but not since the first quarter of 2009. Bill Ackman's hedge fund was up 3.7% for the month of March and up 5.62% for the year as noted in our first quarter hedge fund performance update. Our prior coverage of Ackman's firm includes examining Pershing's economic exposure to General Growth Properties (GGP) and their presentation on Kraft (KFT).

Taken from Google Finance, Yum Brands is "is a quick service restaurant (QSR) with over approximately 37,000 units in more than 110 countries and territories. Through the five concepts of KFC, Pizza Hut, Taco Bell, LJS and A&W (the Concepts), the Company develops, operates, franchises and licenses a worldwide system of restaurants, which prepare, package and sell a menu of food items. In addition, the Company owns non-controlling interests in entities in China who operate similar to franchisees of KFC and a non-controlling interest in Little Sheep, a Hot Pot concept."

For more background on Bill Ackman's hedge fund, check out our profile of Pershing Square.