Sohn San Francisco Notes 2019: Kacher, Yusko, Kawaja & More

The Sohn San Francisco Investment Conference just concluded and featured hedge fund managers sharing their latest investment ideas to benefit charity.  The event benefits the Excellence in Investing for Children's Causes Foundation and a portion of the proceeds also go to The Sohn Conference Foundation.

We've already posted up notes from Next Wave Sohn San Francisco which featured emerging managers.  Now below are notes from the main event.


Sohn San Francisco 2019 Notes


Kevin Oram, Praesidium Investment Management Company, LLC

Idea: Instructure (INST)

•    Hidden value that can be unlocked
•    2 key products:
o    Canvas is a leader in education learning software which is ~90% of revenue
o    Bridge is corporate learning software
•    Canvas is student and educator collaboration software
•    Biggest competitor is Blackboard – which has a legacy on premise software and has had trouble transitioning to a cloud model
• Software is a great business but vertical software is even better as it serves a very specific market
•    Believe there is a significant margin expansion opportunity from 24% in 2019 to 40%+ by 2022
•    Has an opportunity to roll up software in other adjacencies given a lot of fragmentation of players in education software
•    Believe it is worth $2.5bn versus current valuation of $1.5bn
•    Undervalued due to large losses in Bridge – corporate learning
•    Bridge software is good but significant competition in the corporate market with entrenched players
•    Bridge has very little synergy with Canvas given different source code and dedicated sales team
•    Opportunity to unlock value by divesting from Bridge via sale, shutdown and focus on Canvas
•    Engaging actively with management over last several months to present case on value destruction of Bridge
•    Dec 3rd – Will have an analyst day to describe company’s new strategy and operating model – could be the catalyst market has been looking for



Gil Simon, SoMa Equity Partners

Idea: Sailpoint (SAIL)

•    Believe that there is 100% upside to $35-40 per share
•    Best of breed software trading at a reasonable valuation (<3x 2022e="" p="" sales="">•    Identity is central to enterprise security but this is difficult because the modern large enterprise is running hundreds of applications
•    Identity and access management is the #1 priority within security
•    Identity Governance and Administration (IGA): Ensure employees access only what they need to access
•    2 key products: Identity IQ and IdentityNow
•    ~1,300 customers
•    Extending the lead over legacy competition like IBM and Oracle
•    8,500 customers market opportunity from legacy competitors
•    CA and Oracle not likely to focus on this space
•    Buying opportunity on missed execution; have recently strengthened the management team
•    Expect revenue growth to re-accelerate which should drive a snap back in the share price



Adam Fisher, Commonwealth Asset Management

Idea: China Interest Rate Convergence

•    Japanese working population peaked in 1995
•    China is a good analog for Japan – working age population peaked in 2015 – projected to fall by 125 million through 2040
•    China’s 4 megacities are already as rich as the rest of East Asia
•    Ne net: Believes that interest rates in China are coming down and going to zero



Glen Kacher, Light Street Capital

Idea: Talend (TLND)

•    $6.5bn data integration market growing >10%
•    Most robust platform across on-premise and cloud environments
•    $218mm of ARR, growing 29% yoy with mix shift towards cloud
•    87% recurring revenue
•    Founded in 2005 and went public in 2016
•    Focused on ETL products: Extract, Transform, Load
•    Talend is the growth leader in the data integration market
•    Hadoop hit a wall but Talend benefits from the cloud database wave
•    Revenue model is based on seat based subscription software revenue, seat and consumption based saas revenue, 3) project based revenue
•    Cloud mix shift should increase over time
•    Believes value could be +86% in the base case



Debbie McCoy, Blackrock

Pitch on theme of sustainable investing and ESG (environmental, social, government)

•    Increasing sustainable investing adoption across large money managers
•    Built an internal model to evaluate companies rather than using third party ESG scores
o    Look at employee happiness as a factor in the model
o    Incorporate other unique factors that third party scores don’t take into account



Myron Scholes, Janus Henderson Investors

The Advantages of Time Diversification: Risks from Option Prices that Inform Investment Decisions.  Tails are important to investors – if you remove the extreme tail gains, realized return falls to almost zero and take out extreme tail losses, realized return nearly doubles over the very long term



Connor Browne, Thornburg Investment Management

Idea: Alkermes plc

•    Biopharma company focused on patient inspired solutions
•    A unique focus on hard to treat patients  - 2 key drugs for opioids addiction and schizophrenia
•    Vivitrol – treatment for opioid misuse disorder; blocks the opioid receptor in the brain
o    Competes with methadone and suboxone and aimed on getting you off the drug
•    Aristada
o    Long acting injectable for schizophrenia
o    Strong revenue growth
o    Expect market share to grow from 5.8% to 9.9%
•    Some optionality in other drugs under development
o    Vumerity – novel oral fumerate for the treatment of multiple sclerosis
o    ALKS 3831- efficacy of olanzapine (Zyprexa) without the associate weight gain
o    ALKS 4230 – novel selective IL-2 fusion protein; more early stage
•    Valuation
o     4 different scenarios of value: currently approved drugs, +Vumerity, +3831, +Vumerity and 3831



Mike Wilkins, Kingsford Capital Management (short-only firm)

Idea: Shorts and frauds

•    Focused on shorting pump and dump schemes
•    Large flows into passive investing creates opportunity
•    Russell 2000 inclusion is very rules based and rebalances in May– if you can get to $150million market cap, index will include you with no regard to if it is a legitimate company
•    Russell 2000 stock promotions – get into index in May and then get ETFs to buy in June and then dump the stock after
•    Several fraudsters have taken advantage of the Russell 2000 fraud including Jason Galanis, Benjamin Wey, Howard Appel
•    Class of 2019 potential frauds – gained admission to Russell 2000 in June but have not gone to zero yet
o    YCBD – merged with Level Branding to get listed on NYSE
o    Pareteum: telecom
o    Wrap Technologies: next gen solution for non lethal law enforcement



Mark Yusko, Morgan Creek Capital Management

Macro Idea: Don’t Cry, It’s Me Argentina

•    Argentina – very low % of their GDP is equitized versus the US which is very high; bullish on long term prospects for Argentina
•    Investors fled Argentina when they should have been buying
•    Argentina Stock Picks
o    Pampa Energy is top stock pick to play this thesis
o    Argentinian banks
o    YPF is a double play on Argentinian shale



Carl Kawaja, Capital World Investors

Idea: D. R. Horton (DHI)

•    Largest homebuilder by volume in the US with over 55k homes sold in 2018
•    Housing market has room for growth
•    Best in class operator
•    Changing their business model that will make it more valuable
•    Limits on credit have driven slower but steady growth in housing
•    Home ownership will continue to become more attractive as mortgage rates fall alongside interest rate
•    Much better deal to buy versus rent in many of DR Horton’s markets
•    Industry leading ROE
•    DR Horton wants to be more like NVR
•    DHI made a strategic shift to focus on lower priced homes with Express Homes and tilts more to the lower end of the market versus competition
•    Trying to transition to a business model that is less capital intensive by using land options
•    Asset light model yields much higher NPV and IRR
•    Should trade closer to other asset light home builders like NVR


Be sure to also check out notes from Next Wave Sohn San Francisco featuring emerging managers and their ideas.

Notes From Sohn San Francisco Investment Conference 2017: Okada, McGuire & More

We've already posted up notes from the Next Wave Sohn San Francisco Conference which featured emerging managers.  Now it's time for the main event presentations which featured top hedge fund managers sharing investment ideas to benefit the Excellence In Investing For Children's Causes Foundation.


Notes From Sohn San Francisco Investment Conference 2017

Mark Okada, Highland Capital Management

Idea: Vistra (VST)

Business: Integrated IPP.  Thesis:  Strong market position in bottoming cyclical industry.  An attractive valuation, balance sheet optionality / M&A opportunity.  Lower leverage than peers.  Texas is a power island (barrier to entry) and a rapidly growing state.  Imminent supply rationalization.  Optimal capital structure of 3.5x leverage could drive 13% FCF yield.  M&A potential - lot of interest in the space from 'smart money.'

Valuation: Current share price $19, multiple ways to win and drive a higher share price



Mick McGuire, Marcato Capital Management

Idea: Deckers Brands (DECK)

Activist position that they haven't spoken about publicly before.  Own ~6% of the company, 2nd largest position in their fund.

Business:  Multi-branded footwear and apparel company.  Known primarily for the Ugg shoe brand but also own Hoka One One (cult running brand), Sanuk and Teva brands.

Activist agenda:  Focus on core Ugg brand; pursue sale or spin off of non-core brands.  Reduce costs (best in class consultants think that the cost savings opportunity is $150mm-$200mm.  Recapitalize balance sheet to 1x net debt/EBITDA.  Use proceeds of recapitalization and sale of brands to repurchase shares.  Align management comp with margin, return and TSR improvement.  Ugg has been cast as a fad but has continued to grow.  Retail expansion has hurt margins and revenue per store has continued to decline.  Margins can double from 9% to 19% with recommended strategy.

Valuation:  Opportunity to unlock value from non-core brands - $464 million with very modest topline expectations. $66 share price today - can get to $135 to $158 based on a multiple of 7.0x to 8.0x



Christopher Lord, Criterion Capital Management

Idea: MercadoLibre (MELI)

Business: largest eCommerce and payments platform in Latin America (based in Argentina).  Operates across 18 countries in largest markets in Brazil, Argentina, and Mexico.

Thesis:  Large TAM: $1.2T with long growth runway with more e-commerce adoption.  Adoption should be supported by increasing broadband penetration and smartphone penetration.  Created their own logistics marketplace to help with deliveries.  LatAm has a large emerging middle class.

Growth rates have begun to inflect.  Mobile is expanding the addressable market.  Payments is becoming important to the business - developed a proprietary payments platform similar to PayPal; increases the TAM to $1.8T; provides option value.  Have 27% share of ecommerce in LatAm - expected to increase by 2020.  Revenue growth estimates are significantly higher than consensus for 2018, 19, and 20.

Valuation:  looks conservative relative to TAM opportunity versus analogs like Alibaba.

Bonus short idea: iRobot (IRBT).  Very high share of robot vacuums but Shark will introduce its own robotic vacuum at a very competitive price.  Consensus estimates are too high given the competitive launch.



Nancy Davis, Quadratic Capital Management

Idea: shorting leveraged credit (equity tranche of CLOs)

Thesis: CLOs are popular investments among insurance companies.  Levered credit market will be the first place that will feel the brunt of monetary tightening.

Ways to play it: Short BDCs: TICC Capital (TICC) and Prospect Capital Corp (PSEC).  Valuations are way too high given where LIBOR rates are.



Glen Kacher, Light Street Capital

Idea: Delivery Hero (DHER)

Business: consists of consumer platform, tech stack to transmit orders to restaurants and delivery operations.  #1 player in 35/43 countries; several top markets: Germany, South Korea, Turkey, Saudi Arabia, Kuwait; by far the dominant player in long tail markets

Online food ordering marketplace that operates in Europe.  Marketplace model is ~90% of orders and delivery model is ~10% of orders.  Little to no capex required.  Dark kitchen model where players operate food operations in competitors like SpoonRocket, Sprig, and Munchery has struggled; better business is the delivery and platform for existing restaurants.

Thesis: TAM of 72bn Euros across all markets where online delivery is underpenetrated.  Pricing power to raise prices because they provide value ot restaurant customers.  Expect EBITDA margins to scale significantly.  Multiple ways to win (increase in food delivery TAM, increase in online penetration, increase in market share, delivery hero take rate, LT EBITDA margin.

Valuation: Implied share price of 76 Euros based on the 20x EV/EBITDA multiple, 127% upside to current



Carl Kawaja, Capital Group

Idea: Sony (SNE)

Return of the Daikaiju

Thesis: New management is changing the culture.  Content is king - Sony's presence is underappreciated and the business is under earning.  Gaming, image sensors, music are the businesses that are very valuable; they comprise 2/3 of operating income and 1/3 of revenue.

Gaming: business is large and is evolving to a recurring revenue stream model where you pay a monthly subscription fees supplemented by in-game purchases.  Additionally, they have had some success in mobile games, have the #2 selling mobile game.  Transition to digital game downloads should lift margins.

Sensors:  Photo and video is the future of social interaction so images will continue to be an important business.  Sony's image sensors are critical for digital camera option.  Hal of all CMOS image sensors are Sony; 100% share of iPhone 7 and 8.  Profitability has been deperessed.

Music:  ~92 million paid music subscriptions globally.  #1 music publisher globally with 30% share and #2 record label.  Streaming is now 60% of digital revenues.  Digital music is more profitable than physical music.

Valuation:  Expect 50% upside based on sum of the parts valuation



Oleg Nodelman, EcoR1 Capital

Idea: Ironwood Pharmaceuticals (IRWD)

Business: Biotech company whose primary drug is Linzess - drug for Irritable Bowel Syndrome Constipation (IBSC); marketed by Allergan.

Thesis: Addressable market of 40mm Americans.  Linzess has safety and efficacy superior to competitive drugs.  Management with a long term focus.  Option value with another 7 drugs in the pipeline - current price gives no value to these R&D efforts.

Valuation: $16 per share price but intrinsic value is as high as $43 per share.  Adding in total pipeline value could increase value of $200/share.  Trades at a discount to peers in the space at 9.6x EV/Revenue.




Dan Morehead, Pantera Capital

Idea: Cryptocurrency

Bitcoin is a digital currency protocol similar to TCP/IP for the internet.  Blockchain is a serial killer (better than a category killer).  Fiat currencies are poor stores of value - even the dollar has still lost over 90% of its purchasing power since 1950.

Huge addressable market of the industries that Bitcoin could disrupt.  The protocol layer (Bitcoin) captures most of the value in crypto currency versus the internet where the application that is built on the protocol layer captures most of the value.

Two potential ideas: Kik will be the first major company to tokenize their entire cap table.  Funfair is a fast, fair secular online casino; Funfair aims to cut out the middleman.



Be sure to also check out the pitches from emerging managers via our notes from the Next Wave Sohn San Francisco Conference 2017 as well.

Notes From Excellence in Investing San Francisco 2013: Burbank, McGuire, Billick & More

The 4th annual Excellence in Investing: San Francisco conference took place this week and MarketFolly was there to cover the event.  Excellence SF partners with the Sohn Conference Foundation and is dedicated to the support of education and other children's causes.

It's not too late to make donations and here's a link to do so,  The success of the event has grown over time and this year marked record attendance.  Since inception, more than $1 million has now been raised in support of these causes.


Notes From Excellence in Investing: San Francisco 2013


John Burbank III -  Passport Capital

Idea: Long Digital Garage (TYO:4819) 

Thesis:  Things seem frothy now.  Like plays linked to innovation.  The QE fueled rally is likely coming to an end.  Stay away from growth coming from and derived from QE.  Tech is less sensitive to GDP.  Innovation is not EM activity, it is DM activity.  In Japan Abe says follow Abenomics.  Likes Digital Garage.  It has around a 20% stake in Kakaku (TYO:2371).  Owns small stake in Twitter (possibly $100M).  CEO owns 14% of the company.  Stock just split.  Thinks it has a 22% upside to current value PLUS optionality on the future.  Can hedge out Kakaku if you want given that company's high valuation.   Burbank also recently had a macro discussion with Kyle Bass that we've posted as well.


Kurt Billick -  Bocage Capital

Idea: Long Domestic Oil Refineries (specifically Tesoro (TSO) & Marathon Petroleum (MPC))

Thesis:  Likes Malcolm's presentation on CF (below) as his idea has a similar theme, but with refineries.  North American oil business was thought of as mature and in structural decline.  Gulf coast's ability to refine oil will be overwhelmed with supply.  Discount in price of oil for US refineries is less than that of all of the margin for many refineries in rest of globe.  Other advantages are processing costs lower due to cheaper natural gas and financial arbitrage.  Likes all refineries (ALJ, DK, HFC, MPC, PBF, TSO, VLO and WNR).  His favorites are Tesoro (TSO) and Marathon Petroleum (MPC).  TSO is still in early stages of getting discounted crude.  Dan Loeb's Third Point has also written their thesis on TSO in a past letter.  MPC is a recent spinoff with management just now getting in tune with running as a standalone refiner.   Billick also recently appeared on a best ideas panel at another conference that you can read about at that link.


Mick McGuire -  Marcato Capital Management

Idea: Long Sotheby's (BID) 

Thesis:  Owns 7% of the stock.  These are their first public comments regarding the investment.  Capital has not been allocated well.  Core business is good.  Lots of opportunity to unlock value of real estate.  There are under-utilized assets.  Thinks stock is worth $68 which is more than 30% above current price.  One of two major auction houses with Christie's.  Has been falling behind Christie's in some areas.  Opportunity for improvement there with the income statement.  Regarding the balance sheet, opportunity to unlock value with the real estate holdings.  They've been growing the lending business with after tax profits from the auction business.  Instead they should be funding this with other facilities like securitization or receivables.  Dealer segment not big, but performance there is symbolic of poor capital allocation.  $1.3B in trapped equity with poor opportunities for reinvestment.  This money should be returned to shareholders through buybacks, etc.  You can view McGuire's slideshow presentation on Sotheby's here.  


Mason Morfit -  ValueAct Capital

Idea: Incentive Based Investing

Thesis:  Many companies have perverse incentives in place right now.  He prefers to reward to performers, not caretakers.  One of the problems with financial metric based performance is that management sets targets.  They have implemented changes at Valeant Pharmaceuticals (VRX) and Adobe with significant increases in price after the changes.  Note that ValueAct recently trimmed their ADBE stake.


Christopher James -  Partner Fund Management

Idea: Long Adobe (ADBE) 

Thesis:  Mobility is impacting marketing and advertising.  Spending is migrating to mobile, social and online marketing.  Emergence of "Marketing Cloud".  Closed Loop Marketing... key players are becoming SalesForce (CRM) and Adobe.  Both are focusing on this trend and building platforms and making acquisitions to establish dominant platforms.  Adobe has been moving from traditional software model to SAAS.  Better economics with this newer model as acquisition costs are low and renewals are high.  Thinks they can do $3 in FCF in 2015 and $4 in FCF in 2016. 


David Herro - Harris Associates

Idea: Long Select European Equities (Credit Suisse, BMW Group, Diageo) 

Thesis:  Looks for opportunities from Mr. Market where price is significantly below intrinsic value.  Use a discounted cash flow model to calculate intrinsic value.  Likes European equities.  Fixed exchange rates caused distortions.  Very different micro-economic policies by country in EU create bottlenecks to adjustment.  Unit labor costs in Europe declining.  Debt yields are dropping.  Competitiveness is increasing.  Europe trades at a discount.  Consider European companies based there, but with global or US reach.  Europe is good at luxury.  Likes Credit Suisse as it is trading at less than 10 times normalized earnings.  BMW Group has over 20% of profit from China.  EV to EBITDA is less than 6.  Weathered the recession very well.  Diageo (DEO) is the world's largest premium spirits and beverage company.  Yield is over 3%.  Great business for the long, long term.  


Malcolm Fairbairn -  Ascend Capital

Idea: Long CF Industries (CF)  

Thesis:  Based largely on dynamics relating to natural gas and nitrogen.  China is the largest producer and user of NatGas.  Nitrogen demand growing 2% a year.  Futures suggest price doesn't break $5 until 2020.  CF benefits from low prices.  CF has leading margins but trades at discount to peers.  Recently increased dividend.  Thinks price could be $250 based on the peer group's 3.8% yield with a 50% earnings payout.   We've also posted Third Point's thesis on CF from their past letter.


Christopher Lord -  Criterion Capital Management

Idea: Long Tower Companies (American Tower (AMT), Crown Castle (CCI) and SBA Communications (SBAC)) 

Thesis:  Last years pick was Google.  Things look frothy now.  Likes "Towers".  Seen a 35x increase in mobile traffic the last six years.  Estimates the increase will have been 430x for ten year period ending 2017.  Towers are winners.  The US is going from 2 top cell carriers to 3 or 4.  Tower companies build towers and cell carriers pay most of the other costs.  These businesses can't be replaced.  Best real estate is already taken.  There are also restrictions on new towers.  Contracts also have automatic price escalators.   Given that models have high operating leverage, much of the price increases go straight to bottom line of the towers.  Picks are AMT with a target of $110, CCI with a target of $100, and SBAC with a target of $110.  Right now these companies are trading at lower multiples to other types of REITs, but they have higher growth rates.  Bonus thoughts: likes shorting 3D printers, Cree (CREE), SAAS Cloud Companies trading at greater than 20x Revenues, Cisco (CSCO), EMC (EMC), VM Ware (VMW).


Brian Zied -  Charter Bridge Capital Management

Idea: Long Brunswick (BC) 

Thesis:  Charter Bridge runs a long/short fund.  Prior to founding the firm, Zied was at Maverick Capital.  He focuses on consumer driven small and mid-size businesses.  Brunswick focused on Marine, Fitness, Bowling and Billiards.  Strong in engine business.  Attractive investment with many ways to win (depressed boat cycle, marine innovation, restructuring opportunity).  There is a 40 year history of boat sales.  For a long time new boat sales were between 300K and 500K boats a year.  Boat cycle was at 120K at the bottom of recession, now at 150K boats a year.  Participation in boating is at an all-time high.  Boats have a 25 to 30 year life.  There are 200K boats being scrapped per year.  Obviously, these trends are going to run in to each other with new boat sales rising.  Revenues still haven't come back from pre-crisis levels.  Innovation in GPS sky hook anchoring and joystick controls.  Precrisis boat revs were greater than $2B, now only at $1B...the recovery is inevitable.  Typically new boat sales are 25% of annual boat sales, right now they are only 16%.  Largest position in their portfolio.  Brunswick is currently at 7.4x EBITDA and 14.9x PE whereas most peers average 10.5x EBITDA and 17.4X PE.  Sees a free call option with 50% to 80% upside.


Carl Kawaja -  Capital Research Company

Idea: Long EADS (EAD) 

Thesis:  Flight is still a modern miracle that many don't appreciate.  Likes companies that solve problems.  Planes are BIG.  This business has a moat that won't get disrupted by three kids in a dorm room (like social media).  Majority of world flies less than once a year.  Air travel won't revert to mean, it will just continue to grow.  The business of airlines is getting better.  Fuel efficiency is driving sales of new planes and will increase profits for manufacturers.  Thoughts on valuation:  1) Earnings will grow... a lot.  Many of the upfront costs already incurred for R&D.  2) They will get more orders...addressable market is more than $1T with a $800B backlog.  Market cap is $51B... PV of future ops alone is worth more than $64B.  Sees stock doubling over time.


Michael Moe -  GSV Capital

Idea: Long Twitter (TWTR)  

Thesis:  From 1991 to 2000, there were 550 IPOs per year.  Following decade has seen an average of 113 IPOs per year.  Before market caps were around $100M at time of IPO, now they are on average over $1B.  This means VC firms must invest longer before firms go public.  In 2013, IPOs are performing very strong.  GSV is a public vehicle for VC stage companies.  Twitter is his idea.  They currently have a position in it.  It is 15% of the fund.  Ad growth of 124%.  There are 620 million shares outstanding.  At $25 a share the market cap is about $15.5B.  Positive cash flow the first half of 2013.  Participating in multiple trends including:  Social, Personal Branding, Mobile, Second Screen Watching TV, Next Gen Devices.  Mobile usage has now surpassed desktop usage.  Vine (Twitter owned) is #1 App.  Thinks it could go as high as $160 a share.  


Christopher Balding -  HSBC Business School  

Idea: Macro Call of Short China 

Thesis:  He's an Associate Professor of Finance and Economics at the HSBC Business School of Peking University Graduate School.  A lot of data from China is manipulated.  China is a huge bubble.  Example of bad reporting is growth numbers.  Growth reported from provinces aggregates to 10.8% growth whereas official GDP from China is 7.8%.  Another example: official CPI housing price inflation up 14% while real estate prices up 111%.  Price in income ratio for real estate in San Francisco is 9.4.  This seems high, but it is 32 in Shenzhen.  The official numbers say that steel companies in China have $500B in debt and only $300M in profits.  Would be very careful before simply taking financial and economic data at face value.  Banks in China are starved for capital right now.  There is risk dispersion.  2/3rds of the stocks in China have been really hurt while 1/3rd are trading at a premium.  Example is BYD trading at a P/E of 1,100.  If you don't want to short China directly, another option is shorting China derivative plays like companies in Australia heavily tied to China. We've also posted up Jim Chanos' short China thesis as well for those interested.


That wraps up notes from Excellence in Investing: San Francisco 2013.  For more coverage on top hedge funds, scroll through the hedge fund letters we've posted up recently.