What We're Reading ~ Analytical Links 4/3/13

A sweet spot for equities: opportunity and dangers [Aswath Damodaran]

How much of stock market's growth is caused by its shrinking? [Dealbreaker]

Rally on fumes [Capital Observer]

Greed + confirmation bias = disaster [Kid Dynamite]

A little perspective on the markets [Market Anthropology]

How to find high quality stocks [Greenbackd]

Use Benjamin Graham's investing checklist to invest like him [Old School Value]

Presentation on student debt [NewYorkFed]

Cummins (CMI): should you chase it? [CFA Institute]

Dell (DELL) outlines the death of the PC [Forbes]

The next big catalysts for Blackberry (BBRY) [Yahoo Finance]

Apple (AAPL): is it different this time? [Fusion Investing]

eBay (EBAY): estimates rising on upbeat analyst day [Barrons]

A.H. Belo (AHC): hidden value or value trap? [Seeking Alpha]

Altisource Residential (RESI): spin-off with growth ahead [Seeking Alpha]

Insider buying of gold stocks surges to multi-year highs [Globe and Mail]

How to make a stock pitch [Business Insider]

Grey Owl Capital on Investing in a Low-Return Environment: Q1 Letter

Jeff Erber and Grey Owl Capital are out with their Q1 letter to investors and in it they highlight how they're approaching investing in a low-return environment.  They're employing a three-pronged attack as follows:


1. Look for undervalued securities:  They've been "high-grading" their portfolio by buying cheaper, high quality US names.  This is a concept long echoed in commentary from Oaktree's Howard Marks as well as GMO's Jeremy Grantham for the past few years as rates have remained low for a prolonged period.

Here's what individual names Grey Owl's been trading in:

New stakes: Pepsico (PEP), Blackrock (BLK), BMC Software (BMC), and Excelon (EXC)
Added to existing stakes: eBay (EBAY)
Exited: Apollo Residential Mortgage (AMTG) and Western Union (WU)
Trimmed: Apollo Group (APOL), Bridge Point Education (BPI), Market Vectors Gold Miners (GDX), Lexmark (LXK), and Transocean (RIG).


2. Invest in short dated high-yield fixed income:  Given that the Fed has in the past signaled potentially raising rates in 2013, this short-dated approach makes sense.  They've purchased the following bonds (with full write-ups on each stake in the below letter):

MGM Resorts 6.75% 9/2012 - purchased in December 2011
CSC 5.5% 3/2013 - purchased in January
Western Alliance Bancorp 10% 9/2015 - purchased in early April


3. Hold plenty of dry powder anticipating better opportunities: This might look counterintuitive at first glance given that holding cash earns you practically nothing, especially in a low yield environment.  However, consider that many hedge fund managers often hold cash as a hedge and as a utility to deploy when better investment opportunities arise. That's exactly what Grey Owl has done as they've deemed the current set of opportunities less desirable and they think better prices to buy at lie ahead.


Embedded below is Grey Owl Capital Managment's Q1 letter & you can download a .pdf here:




For more investor letters we've posted up Dan Loeb's Third Point Q1 letter as well as Passport Capital's letter.

David Einhorn Buys CBS, General Motors & Marvell Technology: Q3 Letter

David Einhorn's hedge fund Greenlight Capital just sent out its third quarter letter to investors and in it they reveal some of their latest portfolio activity. Einhorn's firm initiated brand new positions in CBS Corp (CBS), General Motors (GM), and Marvell Technology (MRVL) in the third quarter.

CBS Corp (CBS)

Greenlight likes CBS due to its growing retransmission fees, monetization of their content library, as well as the potential for increased advertising spending by clients. The hedge fund bought CBS at $20.79 per share (less than 10x their estimate of 2012 earnings) and it now trades just north of $25.

General Motors (GM)

The hedge fund writes on their new position in the largest automaker in the US that IPO'd last year: "GM is being priced by the market as a cyclical company trading at less than 6x this year's earnings. While some may see it as normal to value cyclicals at low multiples of peak earnings, we believe that 2011 is not a peak and, in fact, is below mid-cycle." They bought shares at $25.78 and GM currently trades around $24.

Marvell Technology (MRVL)

Einhorn's firm believes that hard disk drives won't become extinct anytime soon (the major bear case). They think the company will buy back 12% of its float and Greenlight bought at $14.35 per share (currently trades around $14.40).

The letter also follows up on Einhorn's short case on Green Mountain Coffee Roasters (GMCR) from the Value Investing Congress. Lastly, Greenlight mentions that they've sold out of their long positions in Pfizer (PFE) and BP (BP) during the quarter and covered their short of Amedisys (AMED).

Greenlight's Top Holdings at the end of Q3 in alphabetical order:

Apple (AAPL)
Gold
Market Vectors Gold Miners (GDX)
Microsoft (MSFT)
Vodafone Group (VOD)


Embedded below is Greenlight Capital's Q3 letter:



For more from Greenlight Capital, we detailed last week how Einhorn was buying gold miners.

David Einhorn Buys Gold Miners, Sells Some Physical Gold

David Einhorn of hedge fund Greenlight Capital recently spoke on the conference call for the reinsurance company he's associated with, Greenlight Capital Re (GLRE). Einhorn manages the reinvestment portfolio and gave some comments on his latest portfolio positioning:

Greenlight Buys Gold Miners

The most notable change was a shift in his gold related investments. Back in 2009 we highlighted Einhorn's physical gold position. This time around, Einhorn has been re-allocating some of his physical gold stake into gold miners. He's been buying miners via GDX the exchange traded fund.

The rationale for such an adjustment: "Throughout the course of this year, a substantial disconnect has developed between the price of gold and the mining companies. With gold at today’s price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk adjusted returns even if gold does not advance further. Of course, since we believe gold will continue to rise, we expect gold stocks to do even better."


Greenlight Increases Equity Exposure

Einhorn also mentioned that he boosted net long exposure to 35%. On the markets in general, the hedge fund manager still sees pockets of opportunity, saying, "Many equities, especially in large capitalization companies appear quite attractive. This is balanced by the continuing impact of dangerous macro policies. Most of our portfolio is assembled from the bottom up and we continue to see reasonable opportunities on both sides of the portfolio."


Einhorn Sells Pfizer (PFE), Adds to Other Longs

Another notable move from Greenlight in the past quarter was the sale of their longstanding position in Pfizer (PFE) due to better investment opportunities elsewhere. During the volatility and market dip, Einhorn was covering some shorts, adding to existing long positions, and starting new stakes in the technology and auto sectors.

We also detailed Einhorn's presentation on shorting Green Mountain Coffee Roasters (GMCR) from the Value Investing Congress as he outlined the company's accounting gimmicks.

For all aspiring fund managers out there, be sure to check out David Einhorn's recommended reading list.

Gold Is Good, But Gold Mining Is Better

Prominent hedge fund manager John Paulson started a gold fund as a bet against the US dollar. While he invests in some gold derivatives, he is mainly placing his bet by taking stakes in various gold miners. Conversely, we've covered how John Burbank's hedge fund Passport Capital owns physical gold. So while many hedge funds agree that precious metals deserve some allocation of capital, the dispute comes down to whether you buy the actual metal or those who mine it.

The following is a contribution from Vedant 'VK' Mimani, founder of Atyant Capital, a macro fund focused on precious metals. The below article focuses on why tomorrow's fortunes will be made investing in companies that excavate the yellow metal. Here is Mimani's rationale which originally appeared on Absolute Return + Alpha:

With gold currently trading around $1200 per ounce - an increase of almost five fold from 2001 - it is only natural to wonder how much gas is left in this tank. The fact is, we don't know and we sort of don't care. We've said it before and we'll say it again: the real opportunity for wealth creation in the years ahead lies in the business of gold mining.

The world is in the midst of a credit contraction, of the kind that always follows credit expansions. We have found from historical study that these contractions in credit tend to run about twenty years. During every single prior credit contraction, the real price of gold, as measured against all commodities and assets, had increased. This increase in the real price of gold represents expansion in profit margin for the gold mining industry.

The last major credit contraction occurred during what we now refer to as the Great Depression. During that time, gold miners such as Homestake Mining were among the few companies to reward its shareholders. The Financial Crisis of 2008 stayed true to form. Starting September 2008, gold once again has started to outperform all commodities and assets.

It may seem counterintuitive that gold mining represents the best wealth creation opportunity over the next several years. After all, in 1971, the price of gold was $35 per ounce. An investor could have bought gold bullion in 1971, buried it in the backyard, and have a thirty-five fold return and counting as of today. Yet despite the price of gold increasing thirty-five fold over the last four decades, gold mining itself has been mostly a crummy enterprise in terms of all basic business metrics during that period. This is simply because the input costs increased faster than the price of gold, resulting in little to no profit margin for the industry as a whole.

That all changed in September 2008 when private credit growth peaked. Since then, the price of gold has increased steadily, while the costs of mining gold have decreased significantly; the real price of gold, as measured against all commodities and assets, has increased. Today large cap miners have robust 40%+ operating margins as they are benefiting from the increase in gold prices relative to the costs to mine gold. A quick glance at the last two quarters of operating results for the major miners shows that the increase in the real price of gold is resulting in strong financial performance. As far as we are concerned, we are only two years into a twenty year trend. It's not late; it's early early early.

Are gold miners cheap right now? Examination of gold miners on traditional metrics such as price to net asset value or price to book value, reveals that the miners as a whole are not underpriced on an as-is basis. This is not a "buy $1 for $0.80" type story. Gold mining today is a value creation play in which the macro variables, increased real price for gold and decreased input costs, have aligned and the sector is now experiencing a tailwind instead of a headwind. When the real price of gold increases linearly, mining profits are likely to increase exponentially. (MarketFolly sidenote: This is the main question at hand in the precious metals complex. Can mining stocks outperform the actual price of gold over time? Investing in individual miners entails taking on company specific risk. But of course some of that risk can be mitigated by taking stakes in a basket of miners.)

From March 2009 through mid-April 2010, gold and gold miners have underperformed most other asset classes. In the second half of April 2010, we witnessed a turn from relative weakness to relative strength in gold and gold mining shares. Gold miners are the new leaders and have once again started to outperform all asset classes. In May alone, gold miners outperformed the S&P 500 by 9.5% (as measured by the Gold Miners ETF, GDX, versus S&P 500 SPDRs, SPY). The real price of gold is now never looking back; but from a technical perspective, in the short term, gold's relative strength is overbought and may need some time to work this off. (MarketFolly sidenote: Their highlight of gold miners' performance in May is relevant since it shows outperformance in a period of market volatility. But then again, aren't precious metals seen as an asset class that moves independently of equities, sort of acting as a volatility dampener or hedge in the first place? To play devil's advocate, we'd point out that the gold miners ETF, GDX, underperformed the S&P 500 throughout much of 2010 up until May.)

In conclusion, whether we have deflation, inflation, or pick your favorite 'flation, we ought to remember history's record that in a credit contraction, the real price of gold increases relative to all commodities and assets. This increase in the real price of gold results in margin and profit expansion for gold miners as the spread expands between the price of gold and the cost to mine gold. Gold mining will be one of the few, if not only, sectors to enjoy this type of tailwind in the years ahead.

The last cycle's mega fortunes were made mostly in real estate, computer technology and finance. Tomorrow's mega fortunes will be made mostly in gold mining. Of course, the road from here to there will continue to be volatile and laden with pitfalls, but the trend remains our friend.

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So, interesting thoughts from Mimani and Atyant Capital. Their thoughts continue to highlight the debate between owning gold versus gold miners. We've long detailed this debate through copious amounts of hedge fund resources. As we touched on in the introduction, we've taken an in-depth look at John Paulson's gold fund. Additionally, we've covered how prominent investor David Einhorn favors physical gold and John Burbank likes physical gold as well. Lastly, Eric Sprott launched a gold trust but has also taken stakes in various gold miners as well. So while many fund managers disagree on the particular investment vessel, they all seem to agree in principle that capital should be allocated to the precious metals complex.

The above article was a contribution from Vedant 'VK' Mimani, founder of Atyant Capital. If you or other investment managers you know would be interested in contributing an article or latest investor letter to MarketFolly.com, please send us an email.

David Einhorn's Greenlight Capital Likes Health Plays: 13F Filing

This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.

Next up in our series is David Einhorn's hedge fund Greenlight Capital. Around the end of October, Einhorn's fund was up 30% year-to-date and had recouped all losses from last year. Greenlight is a $6 billion hedge fund that focuses on value investing with a focus on spin-offs. They have seen solid annual returns of over 20% and are a great fund to track. To get a better idea as to how Greenlight constructs and researches their investment themes, we highly recommend checking out Einhorn's book Fooling Some of the People All of the Time: A Long Short Story. Greenlight typically approaches things by identifying mispricings in the markets and then proceeding from there. We cover Einhorn's hedge fund extensively on the blog and have detailed their recent movements, so make sure you also check out Einhorn's presentation at the Value Investing Congress, as well as his insight from the Great Investors Best Ideas conference.

Keep in mind that the positions listed below were Greenlight's long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated last quarter):
Listed with their largest new stakes first and descending down
Carefusion (CFN)
Travelers (TRV)
Automatic Data Processing (ADP)
Validus Holdings (VR)
Barrick Gold (ABX)
Novatel Wireless (NVTL)


Some Increased Positions (Stakes they already owned but added shares to)
HealthNet (HNT): Increased stake by 433%
Microsoft (MSFT): Increased by 240%
Cardinal Health (CAH): Increased by 67.5%
Everest Re Group (RE): Increased by 51.3%
URS Corp (URS): Increased by 7.8%


Some Reduced Positions (Names they sold shares in)
Echostar (SATS): Reduced stake by 97.2%
Ticketmaster (TKTM): Reduced by 75.6%
MEMC Electronics (WFR): Reduced by 71.4%
Health Management Associates (HMA): Reduced by 35%
ATP Oil & Gas (ATPG): Reduced by 23.9%


Removed Positions (Positions they sold out of completely)
Allegheny Energy (AYE) - we saw this in their investor letter already earlier
IPC Holdings (PCR)
Harman (HAR)
Helix Energy (HLX)
Dana (DAN)
Max Capital (MXGL)
Guaranty Financial (GFGFQ)
KKR Financial (KFN)
Energy Partners (EPL)
Liz Claiborne (LIZ)


Top 15 Holdings by percentage of assets reported on their 13F filing

1. Pfizer (PFE): 7.64%
2. CareFusion (CFN): 7.32%
3. Cardinal Health (CAH): 6.86%
4. Teradata (TDC): 6.56%
5. URS (URS): 5.78%
6. Gold Miners ETF (GDX): 5.58%
7. Wyeth (WYE): 5.35%
8. Einstein Noah Restaurant (BAGL): 4.97%
9. EMC (EMC): 4.75%
10. Aspen Insurance (AHL): 4.22%
11. Travelers (TRV): 4.04%
12. Microsoft (MSFT): 3.39%
13. Everest Re (RE): 3.22%
14. McDermott (MDR): 3.17%
15. MI Developments (MIM): 2.93%
    

Please note that the portfolio percentages listed directly above for their 15 largest US equity holdings do not take into consideration their positions in other markets, cash holdings, or short positions. Greenlight is notable for often holding large overseas stakes in addition to their US equities listed above and we just wanted to remind everyone that the longs listed in this article are not representative of their entire hedge fund portfolio. SEC filings only require them to disclose long positions held in American markets.

Turning to the data we just examined, we see that Greenlight Capital actually left a lot of their portfolio positions unchanged as they neither bought nor sold shares in many names. Not to mention, a lot of their portfolio changes were already detailed in their recent investor letter. However, we do have a few changes to touch on based on their latest 13F filing. Firstly, they boosted their stake in Cardinal Health (CAH) to a much higher portfolio allocation. Additionally, they added in size to their HealthNet (HNT) position. This one is interesting because we recently saw hedge fund colleague Dan Loeb and his Third Point add HNT shares to their portfolio as well. Couple all of this with the fact that they started a brand new position in CareFusion (CFN) which was recently spun off from Cardinal Health. Greenlight is playing the healthcare and medicine theme quite heavily here. Not to mention, their largest holding is Pfizer (PFE) which means their top 3 holdings are all related to medicine in one form or another.

Stakes they sold completely out of that were notable include Allegheny Energy, Harman, and Helix Energy. They also took some profits and sold some shares in ATP Oil & Gas (ATPG) as this name has been on a tear, up over 170% year-to-date for 2009. In terms of positions Greenlight already owned but added heavily to, we see that they boosted their stake in Microsoft (MSFT) significantly.

Keep in mind that while Einhorn has disclosed his position in the gold miners via GDX, we cannot see his massive gold position because he moved away from the gold trust ETF ticker GLD a while ago and he is now storing physical gold. Einhorn recently sung the praises of gold in his presentation at the Value Investing Congress as well as in his remarks from the Great Investors' Best Ideas symposium. In addition to his position in the gold miner exchange traded fund, Einhorn also started a brand new stake in specific miner Barrick Gold (ABX). We just want to make sure everyone is still aware that physical gold is by far and away one of Greenlight's largest portfolio positions even though we cannot see it in the filings.

Turning to companies Einhorn is negative on, we got a glimpse at one of his prized short positions when he detailed why he is short the ratings agencies. Additionally, in a recent investor letter we saw that Greenlight's short portfolio contains 'credit-sensitive financial institutions and REITs'. Specifically citing the REITs, Einhorn says that most of their shorts in this space have cap rates of around 6% and have dividend yields under 5%. Time to start taking guesses as to which financials and REITs he's short.

In terms of overseas positions, we know that Einhorn had been selling shares of Punch Taverns (LON: PUB) as well. Assets from the collective holdings reported to the SEC via 13F filing were $2.6 billion this quarter compared to $2.8 billion last quarter, so a slight downtick in assets invested in long US equities. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Realistically, the position percentages are more watered down in their actual hedge fund portfolio.

This is just one of the 40+ prominent funds that we'll be covering in our Q3 2009 hedge fund portfolio series. We've already covered Seth Klarman's Baupost Group Bill Ackman's Pershing Square, Stephen Mandel's Lone Pine Capital, and Dan Loeb's Third Point LLC so check back daily as we'll be posting up a new hedge fund each morning.