What We're Reading ~ Analytical Links 5/7/14

Charlie Munger's essay on wisdom as it relates to investment management [Ycombinator]

A pitch on Altisource Portfolio Solutions [Value Venture]

Is Barnes & Noble the next Gamestop? [MicroFundy]

Notes on the Outsider CEOs [Student of Value]

Alibaba files to go public in the US [Yahoo Finance]

All the western companies you'd have to combine to get something like Alibaba [Quartz]

US home ownership rate falls to lowest since 1995 [Bloomberg]

The financial vulnerability of Americans [House of Debt]

Why has student debt increased so much? [Vox]

Tax avoidance: the Irish inversion [FT]

Pay TV field could shrink with AT&T interest in DirecTV [LA Times]

As Netflix resists, most firms try to befriend Comcast [NYTimes]

On online video ads [NYTimes]

On the world of peer to peer lending [NYTimes]

Warren Buffett didn't belch at Coke pay plan [Bloomberg]

What We're Reading ~ Analytical Links 8/22/13

Rising markets batter short sellers [WSJ]

What has QE actually accomplished? [Mauldin Economics]

Cash is a drug for investors, redux [Abnormal Returns]

The best value investing quotes [Old School Value]

ESPN holds talks for web-based TV [Bloomberg]

Chinese search for infant formula goes global [NYTimes]

Barnes & Noble (BKS) reverses strategy in train wreck of a call [GigaOm]

8 pivotal acquisitions made by Google (GOOG) [Hongkiat]

In-depth reports on for-profit educators [Senate.gov]

Is the new Gmail killing email marketing? [BusinessWeek]

Life after Siri: Nuance's (NUAN) climb to being your digital assistant [Forbes]

On gold losing its shine [Telegraph]

Overseas investors spend $50 billion on Florida real estate [BizJournals]

JPMorgan's latest guide to markets [JPMorgan]

Newly revealed 1975 letter from Warren Buffett [Fortune]

Phone companies are winning new TV watchers, cable & satellite not so much [GigaOm]

What We're Reading ~ Analytical Links 6/26/13

10 risks we face right now [TheStreet]

On the Sharpe ratio [Research Puzzle]

Value badly lagging glamour: value premium is now a discount [Greenbackd]

Taking a deeper look at Rosetta Stone (RST) [Investing 501]

On the Fed and interest rates [Aswath Damodaran]

Interview with Liberty Media's (LMCA) John Malone [Denver Business Journal]

If cable is dying, why is it still making so much money? [TheAtlantic]

Nook sales tumble 34%, Barnes & Noble rethinks strategy [CNN Money]

Owens Illinois (OI): Glass bottles lend pop to soda makers [WSJ]

Barron's midyear 2013 roundtable [Barrons]

Why boring stocks beat exciting ones [WSJ]

On the IRS' study of REITs [FT]

Government Accountability Office says airline merger reduces competition (duh) [NYTimes]

On art as an investment [NPR]

Inside story of fraud at Ranbaxy, Indian drug company [Fortune]

What We're Reading ~ Analytical Links 6/19/13

Timeless investing wisdom from great hedge fund managers [The Art of Value Investing]

Oakmark's Bill Nygren on Google (GOOG) [Reformed Broker]

Are higher mortgage rates bad for the economy? [ValuePlays]

Overcoming your negativity bias [Dealbook]

James Montier: doing nothing not a bad idea in this market [InvestmentNews]

Pairs trading: performance of a relative-value arbitrage rule [Turnkey Analyst]

A framework to analyze utility stocks [Graham Disciple]

3 things Bill Gates has learned from Warren Buffett [Bill Gates]

Time Warner (TWX) looks fully priced now [Barrons]

On a potential Kabel Deutschland/Liberty Global connection [FT]

On behavioral portfolio management [CFA]

Why Netflix (NFLX) is producing original content [Felix Salmon]

As interest rates rise, banks face new stress tests [Fortune]

US regulator says Deutsche Bank (DB) horribly undercapitalized [Reuters]

Barnes & Noble (BKS) keeps slashing Nook tablet prices [CNNMoney]

Google (GOOG) takes home half of worldwide mobile internet ad revenues [eMarketer]

The Physics of Wall Street: A brief history of predicting the unpredictable [Seeking Alpha]

What We're Reading ~ Analytical Links 3/27/13

Doug Kass' basic investing tenets [TheStreet]

Cannibals: finding companies doing 'good' buybacks [ValueInvestingLetter]

Four villains of decision making [Farnam Street]

Student loan write-offs hit $3 billion in first 2 months of year [Yahoo News]

America's new railroad age [WSJ]

Examining Cupid PLC [Bronte Capital]

Relative value in credit risk [Bigger Capital]

Technicals: keeping an eye on Dr. Copper [Kimble Charting]

Soda consumption declines to lowest level since 1996 [CNBC]

Value investing in India is dead [Atyant Capital]

Investors face a shrinking stock supply [USAToday]

Market psychology money and investing personality tests [MarketPsych]

Hewlett Packard (HPQ) shares soar, but is it a real turnaround? [Barrons]

Dell (DELL) board continue talks with Icahn and Blackstone [Dealbook]

Google (GOOG): How YouTube is casually beating other social networks [PandoDaily]

Don't blame Barnes & Noble (BKS) [Digital Book World]

10 influential blogs financial advisors should be following [Financial-Planning]

What We're Reading ~ Analytical Links 2/27/13

2013 comprehensive review of the best online brokerages [StockBrokers]

Vodafone's (VOD) European troubles: bad news = good news? [MicroFundy]

Investing: rules of the game [Dasan]

On buying near 52-week lows or 52-week highs [World Beta]

You're not as good an investor as you think you are [WSJ]

What Barnes & Noble (BKS) retail arm might be worth [NYTimes]

Mastercard (MA) aims at mobile payment market [Yahoo Finance]

Best Buy (BBY) takeover attempt by founder in jeopardy [Reuters]

Leveraged loan market on fire [SoberLook]

USA Mobility (USMO): Cheap, but for how long? [Barel Karsan]

The new MLP landscape [Barrons]

How to find the next Michael Kors (KORS) [The Street]

Loyalty programs, share buybacks drive Safeway (SWY) [Bizjournals]

Reed Hastings on the future of Netflix (NFLX) [GQ]

3-D printing is on the fast track [NYTimes]

Why medical bills are killing us [Time]

JANA Partners Dumps Barnes & Noble Stake

Barry Rosenstein's hedge fund JANA Partners has completely exited its position in Barnes & Noble (BKS).  Per an amended 13G filed with the SEC this morning, JANA now shows a 0% stake due to trading on August 31st.

JANA originally took an 11.6% stake in Barnes & Noble back in April of this year and shares spiked 18% on the news at the time as investors hoped the activist firm would save the struggling bookseller.  We also posted up their JANA's thesis on BKS.

The value here is in the company's Nook e-reader platform and that's what JANA's thesis centered on.  John Malone's Liberty Media had also made a past investment in the company.  Then shares spiked as high as $26 on news of a BKS strategic partnership with Microsoft.

Since then, shares have continually drifted down and now trade at less than half that recent peak at $11.xx.  Back in April, JANA owned 7 million shares.  In their most recent 13F filing which disclosed positions as of June 30th, they only owned 4.1 million shares.  And now they've disclosed that they own 0 shares.

Perhaps JANA exited to focus on their new activist position in Agrium (AGU).  After all, Rosenstein in May said this is the best environment for activist investing he's seen.

Or maybe JANA saw a more compelling use of the capital than BKS and decided to shift it there.  Rosenstein will be presenting investment ideas at the Value Investing Congress in just over two weeks in New York City so we'll see what he pitches.  You can register to hear Rosenstein's ideas (along with David Einhorn, Bill Ackman & more) via this link.

JANA's Investment Thesis on Barnes & Noble (BKS)

We originally flagged when Barry Rosenstein's hedge fund JANA Partners took a stake in Barnes & Noble (BKS).  So today we want to take a look at their rationale for buying.


JANA's Position in BKS

While they are activist investors, this was not an activist stake.  They instead filed a passive 13G with the SEC disclosing an 11.6% ownership stake in the company. 

At the same time, other investors like G Asset Management were leading the activist charge by filing a 13D a month prior pushing for a spin-off of the Nook e-reader business.  Then, news recently broke that Microsoft had invested in BKS' Nook e-reader business and shares rocketed higher.

JANA just filed a Form 4 with the SEC revealing that they sold 1 million shares at a price of $24.42 on April 30th.  They now own 5.9 million shares as it appears they've taken some profits from the big jump.


JANA's Investment Thesis on BKS

The hedge fund's investment thesis on Barnes & Noble was posted on ValueInvestorsClub.com on April 22nd.

LONG Barnes & Noble (BKS)
Price: $11
Market Cap (fd): $800mm
Enterprise Value: $1.3b
Average Daily Volume: $17mm


Thesis

BKS is a long because it has an under-appreciated asset in the Nook eReader platform, whose value will be illuminated through a partial sale of that business segment in 2012. We believe a conservative sum of the parts valuation for BKS is $11/share for the existing Retail and College bookstores and $26/share for the Nook resulting in a $37 sum of the parts valuation or 230% upside.


Business Description

BKS is 3 distinct businesses: 1) the 700 Retail bookstores that carry the Barnes & Noble brand name 2) the college bookstore business which operates campus bookstores at 640 different colleges and 3) the Nook eReader platform which sells the devices and digital content and will generate $1.5 b in platform sales in FY12 (FY ending in April).

The Retail bookstore is a dying business as we shift from physical to digital online purchasing of physical. We estimate underlying SSS are declining ~7% annually. However, due to the liquidation of Borders and downsizing of selling square feet for physical books at WalMart and Target, actual SSS will be positive 1$ in FY12 and flat in FY13. EBITDA in FY12 will be $325 mm (or ~$294 mm excluding the Nook EBITDA that is accounted for in the Retail segment) and flat in FY13. Importantly, we believe there is significant value in the retail bookstores because their leases are increasingly becoming more short term (average duration of the portfolio is ~2-3 years) allowing for significant flexibility (and minimal friction costs) in downsizing the store base as 4-wall profit contribution turns negative. BKS is closing 20-30 stores annually or 3-4% of their store base.

The College bookstore is a much better business than Retail. The majority of what is sold in a campus bookstore is not trade books, but rather textbooks and college paraphernalia. SSS and EBITDA are stable ($124 mm of EBITDA in FY12). BKS operates the store on behalf of the school; BKS pays a % of revenues as rent so if sales decline the rent payments decline as well. In addition, there is flexibility to adjust the rent payment % or terminate a management contract on 60 days’ notice should a store become unprofitable.

The Nook eReader is the hidden asset of BKS. Nook is the #2 player in the eBook market with 25% market share behind Amazon at 65% markets share (iPad, Kobo, and others share the remaining 10%). Nook went from a standing start in 2009 to 25% market share by leveraging their 700 physical retail stores to sell the Nook to a predominantly women audience who value the in-store customer support. Nook has grown from nothing in FY10 to $900 mm of platform sales in FY 11 to an expected $1.5 b in FY 12 (ending 4/12). While Nook currently loses money (~$250 mm in FY12) given the large R&D and marketing budget, we believe this platform has real value due to a rapidly growing market (50% expected CAGR for the next 3 years) and customer stickiness that should result in Nook maintaining its market share. We expect a positive inflection point in profitability by CY14.


Short Thesis & Our Variant View

There are 17 mm shares sold short which is 29% of the shares outstanding. Many smart investors do not agree with our bullish view on BKS. Below we lay out the short thesis and our variant view.

Short Thesis: Bookstores are a dying business.  Variant View:  We agree! However, that does not mean that the bookstore business is worthless. First, 1/3rd of the EBITDA of the bookstores comes from the College Bookstore business which is NOT dying but rather is a stable business that does not face the same secular headwinds the Retail bookstores have. We value College at 4.5x EBITDA for a $500 mm valuation. For the Retail bookstores, because of the short lease length, there is minimal friction costs as they wind down the business. We run a DCF of the Retail bookstores that assumes a hard run-down of the business and come to a valuation of $780 mm which is 3.0x EBITDA. As a reference point, BBY, another secularly challenged retailer, trades at 3.0x EBITDA.

Short Thesis: BKS is losing money ... there is no margin of safety to make a valuation case on.  Variant View: You cannot look at BKS on a consolidated basis. The bookstores are quite profitable, but the cash flow is being reinvested into growing Nook market share while the eBook industry is still in its infancy and sticky customer relationships are being formed. If for whatever reason the Nook failed and was shut down you would still have the profitable bookstores. If you shut down the Nook, BKS would be trading at 3.5x EBITDA.

Short Thesis: Nook is not worth much because it is losing money and has deep-pocketed competitors.  Variant View: The argument that there is fierce competition in the eBook space is as true today as it was in 2010 when AMZN had ~100% market share. This did not prevent Nook from going from 0% market share to 25% in 2 years. The physical retail store presence is a large competitive advantage for the Nook that BKS has been able to leverage to grab share in this fast growing market. You do not need to assume further share gains in this fast growing market for the Nook to be worth a lot of money as a separate company or as a partner to a strategic investor.

Short Thesis: The recent anti-trust lawsuit and partial settlement over eBook price-fixing means that AMZN will be able to sell eBooks at a loss and drive out the competition (mainly the Nook). 

Variant View: the anti-trust settlement is clearly not a positive and introduces uncertainty over the next 6 months in terms of how the eBook pricing regime will evolve. 3 of the big 5 publishers which represent ~30% of trade books have agreed to it, while Apple and the other publishers are going to fight it out However, the conclusion that AMZN will pursue a scorched earth pricing strategy and successfully destroy the competition is misguided. A key industry dynamic that is critical to understand is that the publishers despise AMZN because of their attempt to cause eBook price deflation while also trying to dis-intermediate the publishers with their own in-house publishing effort. Read Jeff Bezos’ annual letter where he spent half of the entire letter talking about their publishing business, then think about what your reaction would be if you are a publisher. Because of this antagonistic relationship, the publishers are hell-bent on ensuring that there are several healthy customers, primarily BKS as the last physical bookstore of scale as well as the biggest competitor to AMZN in eBooks. This was the entire reason for forcing agency pricing scheme in the first place; to level the playing field for new entrants. The publishers will be doing everything possible to ensure that BKS is a healthy competitor that can serve as a governor on AMZN’s potential to destroy the traditional publishing business. In what form this support for BKS and other competitors is still uncertain, but as an example, there is a specific clause in the anti-trust settlement agreement that expressly allows a publisher to support bricks and mortar stores (ie BKS) with promotional and marketing dollars.


Financials & Valuation

We arrive at a $37 sum of the parts valuation for BKS by using our CY12 estimates and putting 3.0x EBITDA on Retail, 4.5x EBITDA on College, and 1.0x platform sales on Nook. From this $3.3 b EV we subtract net debt and pension of $240 mm, deferred rent of $160 mm, and our estimate of Nook losses until breakeven after-tax of $200 mm. This arrives at an equity value of $2.7 b or $37/share after fully-diluting the shares outstanding to 72 mm due to the Liberty Media convertible preferred.

Obviously the most contentious part of this valuation is what the Nook is worth. It’s not worth zero just because they are currently spending through the opex line to grab market share in a rapidly growing space. We think 1.0x sales is conservative if it were to trade to a strategic or be IPO’d. There are no great comps but we found several data points that we think are relevant: 1) Kobo is a smaller ($100 mm of sales) eReader platform that was sold to Rakuten in Japan for 3.0x sales 2) NFLX traded as low as 1.0x sales when it was at $70 and the world thought the company was unprofitable and in a death spiral 3) LXK is priced to go out of business at 7x EPS and 0.5x sales. Additionally our conversations with bankers and cap markets suggest 1.0x would be conservative; rather, 2-3x sales could be on the table if properly marketed. Every 1⁄2 turn of sales is worth $13/share. 

Another way to frame the valuation is to think about what you are currently paying for the Nook at the current BKS price of $11/share. We think the core business ex-Nook is worth $11/share which means you are paying nothing for the Nook today. That strikes us as a particularly asymmetric risk/reward.


Management & Board

Management and the board are an important element of the story to BKS.

Len Riggio is the founder of BKS and owns 30% of the shares out. He has created a lot of shareholder value over time through the success of the Barnes & Noble concept, the acquisition and growth followed by a spin-off of Game Stop, the IPO of B&N.com during the tech bubble followed by its buy-in post the bubble, and now the successful ramp of the #2 eReader platform which will be partially monetized this year. He made what must have been an excruciatingly hard decision to take all the cash flow the bookstores generated for the last 2 years and invest it in the Nook start-up which will speed up the disintermediation of his core bookstore business. Not many management teams can destroy a sacred cow like this (ie Borders).

John Malone via Liberty Media has a $200 mm convertible preferred that they completed in the Fall of 2011 that converts to 16% of the fully diluted shares at $17/share. Note that this preferred investment followed a terminated sale process where Liberty bid $17 for the entire company in May 2011. We believe the sale process was not terminated because Liberty found something they didn’t like but rather that the financing package that was offered to Liberty was pulled in the market melt-down in the summer. Liberty has 2 board seats (Greg Maffei & Mark Carleton). Malone has one of the best track records in the media business and we take his involvement in BKS seriously. We do not think it was a coincidence that only 4 months after the Liberty investment the company announced their intention to monetize a portion of the Nook business. Trackers, spins, and financial engineering that create shareholder value is vintage Liberty Media.

Mike Huseby was recently hired as the CFO of BKS which we think is another confirmatory data point to the Nook monetization thesis. Huseby was previously the CFO of Cablevision where he had extensive experience with trackers, spin-offs, leverage, share shrink, and MBO’s.


Risks

The biggest risk to our investment thesis is the future of the Nook and the execution of the Nook monetization. We could be wrong on the industry dynamics and Nook’s competitive positioning vs. AMZN. The market doesn’t give BKS credit for the Nook value today and without an event to illuminate the perceived value it is unlikely that the market will change its mind for the foreseeable future.

The Retail bookstores could decline faster than we expect and our DCF value could be optimistic.

The College bookstores could be less stable than we believe, most likely due to incremental pressure from digital textbook substitution. We think digital textbook disintermediation for college-level students is still several years out and even then will have a slow adoption curve.

Len Riggio has a mixed track record on corporate governance. Many investors believe the sale of College bookstores to BKS was not done on an arms-length basis. BKS also adopted a poison pill to fend off Ron Burkle in 2010. We are not concerned about this risk given Liberty’s involvement on the board.


Catalyst

The key catalyst is the monetization of the Nook. BKS announced strategic alternatives for the Nook in January and we believe there is a parallel process being run now to investigate potential strategic interest as well as prepare for a partial IPO of the Nook.

A secondary catalyst is separate segment financial reporting for the Nook which we expect in June on the Q4 earnings release. This will allow the market to more clearly understand the cash flows from the Bookstores vs. the Nook, which currently is jumbled into both the Retail segment as well as the B&N.com segment. We expect to see more SoP analysis from the sell side following this disclosure.

While we aren’t expecting it, we could see a potential bid for BKS from Liberty Media & Len Riggio again. They made an offer to buy BKS at $17 in May 2011 that we believe was pulled due to the credit markets falling apart that summer. Given the credit markets have now recovered to frothy levels we believe the original financing plan is now viable again (4x debt/EBITDA).

T2 Partners' Portfolio Update From Latest Letter: NFLX, SNDK, BKS & More

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners recently sent out their latest letter to investors providing an update on many of their portfolio positions.  T2 is up 25.8% for the year versus the S&P at 11.9%.

T2's Longs

Disclosed longs in this letter include: Netflix (NFLX), SanDisk (SNDK), Grupo Prisa (B shares), Goldman Sachs (GS), Citigroup (C), Barnes & Noble (BKS), dELiA*s (DLIA) and AIG (AIG).

T2's Shorts

Nokia (NOK), First Solar (FSLR), Tesla (TSLA) and Interoil (IOC) are mentioned as shorts.

On Their Position in Netflix (NFLX)

In the letter, he updates the latest activity on this volatile stock, writing:

"We’re comfortable with a 5-6% position size – but the stock price has been extremely volatile, ranging from $62 to $129 in the six months we’ve owned it, so we’ve done much more trading than we normally do, first trimming aggressively and banking a lot of profits as the stock skyrocketed earlier this year, and then adding to our position recently after it fell sharply.

The company reported very strong Q1 earnings a week ago: revenues grew 21%, domestic streaming subscribers jumped by 1.7 million to 23.4 million, international subscribers grew by 1.2 million to 3.1 million (up 282% year over year), and total unique subscribers grew by 2.9 million to 29.1 million (including the DVD-by-mail business).

So why was the stock down so much? Netflix’s guidance for Q2 was weaker than expected: a projected gain of only 190,000-790,000 domestic subscribers and 385,000-935,000 international subscribers. Bears see this as the beginning of the end of Netflix’s subscriber growth, but we see it as typical second quarter seasonal weakness combined with the company being very conservative in its guidance, setting a bar that should be easy to clear. We believe what the company wrote in its earnings release – “We see nothing new or particularly concerning this quarter to date in our member viewing, acquisition and retention. All are healthy.” – and have no reason to doubt Netflix’s guidance of “about 7 million...domestic streaming net adds” for all of 2012."


Embedded below is T2's letter where they also provide updates on their positions in SanDisk, Barnes & Noble, as well as Grupo Prisa:




For more from this fund, we've also posted up Tilson's presentation at Stern's Hedge Fund Association Summit as well as his talk at a long/short investing panel.

Bill Ackman on Burger King and Barnes & Noble

The founder of hedge fund Pershing Square, Bill Ackman, guest hosted CNBC's Squawk Box yesterday morning and we wanted to highlight his comments for those who might have missed them.  His first segment talked about Barnes & Noble (due to the Microsoft investment news) as well as his position in Burger King.

On Barnes & Noble: He joked that he gives them credit for "existing."  Obviously, the brick and mortar business has come under fire given the proliferation of e-books.  Ackman thinks Microsoft's deal with BKS is a good deal.  We previously highlighted JANA Partners' stake in BKS.


On Burger King:  Ackman loves the new management team and says it's a great business.  They talked about how 3G Capital bought out Burger King just eighteen months ago and have already put in place a turnaround plan that they'll continue to pursue as they'll retain a large stake in the company.

Ackman says there's a lot of upside in the company as they've overhauled the menu and addressed quality.  He invested in Burger King essentially by owning a specialty purpose acquisition company (SPAC) a.k.a. a blank check company.  He and his partners have used it as a vehicle to take Burger King public so that management doesn't have to worry about an initial public offering (IPO).

We've of course previously posted Ackman's presentation on Burger King if you want to see the full investment thesis.

Embedded below is the clip from Ackman's interview:



Be sure to also view more from his appearance, including:

Bill Ackman on Canadian Pacific (his activist investment) as well as his talk on running a better railroad.  He also sat down and talked about his Hong Kong Dollar trade (a trade some people probably forgot he had on).

JANA Partners Discloses Barnes & Noble (BKS) Stake

Barry Rosenstein's event-driven hedge fund JANA Partners filed a Form 3 with the SEC regarding shares of Barnes & Noble (BKS). Per the filing, the hedge fund has revealed almost a 7 million share position in BKS.

This is a brand new position for JANA as they did not own shares at 2011 year-end. BKS was up over 18% today as investors speculated the activist investor would push the company to split up. After all, JANA recently pushed for McGraw-Hill to split up.

However, the hedge fund has only filed a passive 13G with the SEC at this time, disclosing their 11.6% ownership stake in the company. If they were pursuing activism, they would have filed a 13D.

In the Form 3, JANA also disclosed "put options (obligation to buy)" representing 250,000 shares with an exercise date of May 18th, 2012 and a strike price of $13. We've quoted the above from the filing because it's caused a bit of confusion.

In the traditional definition of buying options, puts are the right, but not obligation, to sell shares. They've written "obligation to buy" instead on the Form 3. So, this could mean 1 of 2 things: they either sold the puts or they meant to write "calls (obligation to buy)."

Both are essentially bullish bets so it's just technicalities. We've sent an inquiry to JANA.

If they sold puts, that means they're more than likely willing to buy more shares at the $13 pricepoint. This would be the first time we've ever seen a fund disclose the sale of options, as usually they only disclose when they purchase calls or puts.

And if they actually bought calls, they most likely bought them when they were out of the money (due to the $13 strike). On the big surge today due to the news of JANA's stake, these calls (if that's what they meant) are now in the money. We hope to get clarification from them about this, but either way it seems to be a bullish wager.


BKS Top Holders

This is an interesting shake-up in terms of ownership stakes. Billionaire Ron Burkle owns a sizable stake in BKS, as does John Malone's Liberty Media (LMCA). (Interestingly, JANA also owned a chunk of LMCA shares as of the end of 2011).

Almost a year ago, Liberty made an offer to acquire BKS for $17 per share in cash, but the two eventually settled on BKS selling Liberty $204 million in convertible preferred bonds.

Other top hedge fund holders of BKS on record as of December 31st, 2011 include Balyasney Asset Management and Citadel.

Conversely, Mick McGuire's Marcato Capital had previously disclosed a sizable put position in Barnes & Noble. Whitney Tilson's T2 Partners has also been short BKS.


Bulls Versus Bears

The bulls point to Barnes & Noble's Nook e-reader segment as attractive. Some analysts believed that's what John Malone's company targeted in the first place and others have postured that JANA might push for a split up of the company.

Bears obviously point to the fact that it's no secret physical booksellers are facing heat in the form of a) competition from cheaper prices from Amazon.com (AMZN) and b) the digitilization of the publishing industry as books convert into e-books.

Barnes & Noble's primary brick and mortar competitor in this arena, Border's, filed for bankruptcy. BKS is looking to avoid the same fate and it looks like some investors are eying the e-book segment.

It will be interesting to see what happens given that BKS has been a favorite short of various hedge funds, but you also have potential activists involved (JANA) and potential buyers that have demonstrated their interest (Liberty) on the long side.

For more of our coverage of this hedge fund, head to JANA's presentation on MHP.

Long/Short Equity Investing Panel: Whitney Tilson (CIMA Conference)

Continuing the series of notes from the CIMA Conference (Columbia Investment Management Association), we turn to the long/short equity investing panel with Whitney Tilson of T2 Partners.

Whitney Tilson On Various Longs/Shorts & Lessons Learned

On His Netflix (NFLX) Trade: over 2 years, they’ve broken even. Shorted at 100, covered at 200, felt smart as it went to 300. Wanted to kill themselves as their short thesis played out, got back long on the day in blew up going from 120 to 77 in a day.

Lessons: what they missed on the short side: very dangerous shorting an open-ended situation with a lot of momentum. Both stock and business had momentum, and they didn’t fully appreciate the quality of the business or the momentum the stock has.

Why was he short? Because P/E was 75x, also NFLX needed to invest heavily in streaming content to grow, which would have compressed margins. It happened, should have been more patient before entering the short. Now, balance sheet has tripled in a year, CEO has given up on core business, has bet entire company on the streaming business, with 3B of deals, which is senior to the debt. Stock could be 1000 in 5 years, or zero in 5 years. Each incremental sub is almost pure profit. Good news is they learned the company VERY well and could act very quickly when the stock collapsed. “We didn’t change, the stock price changed.” Every stock in the universe is a long at one price and a short at another price.


On Berkshire Hathaway (BRK.A / BRK.B): 15% position, held continuously for 13 years. Upside, worth 170k, up from 117k. Based on investments 100k per share, then 10x multiple on operating businesses, add it together. Any method you value it, worth at least 150k. Buffett buys it back at book. 8% downside, 50% upside stock. Railroads, housing sensitive business are doing great, insurance business is getting better. What is the bear case? No catalysts. No activists, can’t break it up, no dividend. Cheapness is the only catalyst, and the valuation gap will close. Single biggest area of cheap stocks, they are cheap on risk-adjusted basis.


Tilson on His Short Positions: Says to size your shorts small. Has there ever been a $10B market cap that traded at 10x REV that didn’t collapse?

Lululemon (LULU), Salesforce.com (CRM): good businesses at ridiculous prices

Green Mountain Coffee Roasters (GMCR): OK business, may be chance of fraud of channel stuffing. See David Einhorn's short thesis on GMCR here.

Interoil (IOC): interoil, claims to have found world’s largest natural oil field in Papua New Guinea, they think the value is zero.

Nokia (NOK), Barnes & Noble (BKS): terminal value zero, thinking of adding Research in Motion (RIMM) to the list, waiting for a bounce. Tricky with a lot of cash, doesn’t expect NOK and RIMM to survive in Android business. Bigger, better player can go under- Borders Books failed, BKS will be next. Any time you’ve seen a stock that has moved a lot, and you say, “I missed it.” Instead, stop and do your work, pretend like it never was at a price before. Only thing that matters is where the stock is today and where it’s likely to be in the future.

Two types of shorts: both very tough. Where is it on the life cycle? Broken momentum shorts. Value traps. Best Buy (BBY): value trap, or say it’s trading at 8x FCF?


Q&A Session:

On Hedge Fund Management Fees & Investor Expectations: If you’re having a ballet in an auditorium, that’s fine, as long as you say that outside. If it’s a rock concert, that’s fine too, as long as you’ve labeled it as such. The problem is when you say it’s a ballet and it’s a rock concert. Make investors aware of exactly what your style is. He’s more volatile than the average hedge fund, so they communicate with their clients frequently. Had only single digit redemptions last year, up 12% so far this year. Manages ~$150 million: if he thought cutting fees would get him to $1B, he would do it. The money chases performance regardless of fees anyway. No clever fee arrangement works anyway.


For the rest of the notes from the CIMA Conference, head to these posts:

- Dan Loeb: Lessons He's Learned as an Investor

- David Einhorn Question & Answer Session

- Bruce Berkowitz's Basic Checklist for Investing & What He's Learned

- Distressed Investing Panel (Dan Loeb & Daniel Krueger)

- Bill Miller on What Stocks He Likes Now

- Michael Karsch on Risk Management

- Bruce Greenwald's Market Comments

Activist Investing: Barnes & Noble (BKS) Analysis

Today we want to present you with some interesting analysis of the activist investing situation over at Barnes & Noble (BKS). If you've been following the developments via 13D filing, you know that there seems to be a battle going on now regarding large ownership stakes and control of the company.

The Reformed Broker started a new web show recently on Stocktwits aimed at analyzing activist investing situations. Without further ado, below is the video of his introduction to the series and his analysis of the Barnes & Noble situation (RSS & Email readers come to the site in order to see it):

Bill Ackman's Pershing Square Files 13G on Barnes & Noble (BKS)

Pershing Square Capital Management, the hedge fund ran by Bill Ackman, has filed an amended 13G with the SEC and has disclosed a 0% ownership stake in Barnes & Noble (BKS). The 13G was filed due to their activity on December 22nd, 2008 and they completely sold out of their position in BKS. This is a pretty substantial change to their portfolio, considering that as of last 13F filing (which shows positions as of September 30th, 2008), 4.4% of their portfolio was allocated to BKS. Now, they hold 0 shares. You can also view the rest of Pershing Square's holdings here.

Pershing Square Capital Management is a well known value/activist based hedge fund. The fund started in 2003 after Gotham Partners broke up. The past few years, they have had notable short positions in the bond insurers such as MBIA (MBI) and Ambac (ABK). Some of his activist positions include Target (TGT) and Borders (BGP). Simply put, Ackman is a smart man. We wrote about Mr. Ackman's recent speech at the Value Investing Congress as well as Ackman's lengthy interview with Charlie Rose. Furthermore, you can view one of Pershing Square's investor letters here.

Taken from Google Finance, Barnes & Noble is "primarily engaged in the sale of books. The Company's principal business is the sale of trade books (generally hardcover and paperback consumer titles, excluding educational textbooks and specialized religious titles), mass-market paperbacks (such as mystery, romance, science fiction and other fiction), children's books, bargain books, magazines, gift, music and movies direct to customers."