Dan Morehead on Cryptocurrency & Blockchain: Sohn San Francisco Conference 2018

We're posting up notes from the Sohn San Francisco 2018 investment conference.  Next up is Dan Morehead of Pantera Capital who talked about cryptocurrency and blockchain.


Dan Morehead's Sohn San Francisco Presentation: Cryptocurrency & Blockchain

Bullish on crypto-currencies and blockchain technology.  Believes that blockchain is going to do to finance what VOIP did to telephone monopolies.  It’s not only about blockchain and payments but decentralized applications will disrupt many different industries.

Discussed newer stable coins, which are low volatility cryptocurrencies (pegged to USD or similar) that are important for the use of applications requiring consistent and stable value exchange.

Recommends buying a basket of currencies – some will be losers and some will be winners- but asymmetric upside will help the winners outperform the losers.


Be sure to check out the rest of the Sohn San Francisco 2018 presentations.

Bill Miller Has 50% of Hedge Fund in Bitcoin: Wealthtrack Interview

Bill Miller of Miller Value Partners recently appeared on Consuelo Mack's Wealthtrack.  His hedge fund, MVP1, invested in bitcoin in 2014 and 2015 and he said it now comprises 50% of his fund.  Here's a summary of the conversation:

His average cost is around $350 and he was buying between $200 and $500.  Bitcoin recently traded around $20,000.  He likened his purchase of bitcoin early to his purchase of Amazon (AMZN) way back in the day.

"One of the things we try to do is to have an open mind, especially about new technologies.  Most of them don't work, so you have to believe you have a high probability of being wrong, and if you have confidence in it, it's likely not going to work.  So it's really a question of assessing risk and reward on a case by case basis."

He says he was aware of it before he bought it but didn't take it too seriously... likened it to an experiment.  He read a book called Digital Gold and he also found it interesting that people he had a high regard for in the venture capital world took an extreme interest in it (Marc Andreessen, etc).

He was convinced bitcoin had a future because it had already passed its biggest stage of risk in the early days.  "There really hasn't been any technological innovation in money... ever.  There's been stages... rocks, to jewels, to gold and silver ... by and large money was a tangible thing.  Governments began issuing fiat currency that was also backed by something tangible."

Miller says bitcoin is uncorrelated as a potential asset to anything else.  It doesn't matter what's going on in central banks or geopolitics.  Another book Miller mentioned was The Construction of Social Reality.  Miller said that the founder of Bitcoin likened the cryptocurrency to 'digital gold.'

Given the risk/reward, he mentioned advice he heard that you could put 1% of your net worth in it and that way if it goes to zero, your downside is limited but if it skyrockets, you've got exposure.

Miller says the problem with bitcoin is you have to store it, and if you store it on an exchange and that exchange gets hacked, then you lose it forever (there was a hack of a major exchange a few years ago).  He says the emergence of futures contracts for bitcoin is a big move and the next step will be exchange traded funds (ETFs).

He pointed out that right now there's about $7.5 trillion worth of gold while bitcoin's market cap is around $290 billion dollars.

If you consider it a currency, he says bitcoin would be the 17th largest in the world right now.  While it won't supplant the major currencies, there's a chance other volatile currencies could see people seek a store of value elsewhere.  The problem, however, is of course bitcoin itself has had wild fluctuations in value.  So it can't really be viewed as a major currency replacement at the moment.

While he has 50% of his hedge fund in bitcoin, he's never run that concentrated before... citing previous top holdings at around 20%.  That said, he's looking at hedging the exposure but isn't ready to disclose how he's going to do that, but he's not selling the long.  He started it as a 5% position and it's grown so much.

He also has some bitcoin cash, which is an offshoot, but he doesn't own any other crypto currencies.  He likened bitcoin to VHS tapes or Bluray, etc were one format became the defacto choice, so the others won't be as relevant.

When asked about risk, Miller quoted someone saying "I wouldn't have anymore money in bitcoin than I was willing to lose 100% of." He thinks the chance of it becoming worthless are far, far less than they were in the early days though.

Embedded below is the video of Bill Miller's appearance on Wealthtrack talking bitcoin:



For more on cryptocurrency, we've highlighted Bart Stephens' presentation on bitcoin from the Invest For Kids Chicago conference a few months back.  Back in 2013 we also posted the Winklevoss twins' presentation on bitcoin from the Value Investing Congress.

Bart Stephens Bullish on Bitcoin, Blockchain: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Bart Stephens of Blockchain Capital who is bullish on bitcoin, ethereum, and all things blockchain.


Bart Stephens' Invest For Kids Chicago Presentation: Bitcoin, Blockchain

$150 billion of value created in digital assets this year alone.  Silicon Valley and Wall Street have been totally absent so far in this rally.

Is bitcoin a bubble? Look at historical bubbles – they all involve levered financial speculators. Not here.

Bitcoin is driven by young people. Establishment hates it. Scale also matters in bubbles, and bitcoin is still very small.

Bitcoin is “gold 2.0”.  Blockchain technology is the world’s largest, most decentralized database – 1,000x larger than the sum of all of Google’s servers.  Blockchain has never had a hack of its protocol.  ICOs -- $2.5 billion raised YTD October; more ICOs this year than Nasdaq IPOs; some ICOs are good, some are bad.

Regulation – not illegal; taxable by the IRS; was a criminal conduit at first but gaining legitimacy; regulators have given us the rules of the road.


For more from this event, check out the rest of the presentations from Invest For Kids Chicago 2017.

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.