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.

Gil Simon Long New York Times: Sohn San Francisco Conference 2018

We're posting up notes from the Sohn San Francisco 2018 investment conference.  Next up is Gil Simon of SoMa Equity Partners who pitched a long of New York Times (NYT).


Gil Simon's Sohn San Francisco Presentation: Long New York Times (NYT)

•    Conventional views: news is a commodity, consumers won't pay for news, advertising only way to scale
•    SoMa's view: consumers aware of 'fake news,' will pay up for trustworthy, differentiated content, most info still free but quality journalism worth paying for, direct subscription model better aligns publishers with consumers. Analogous to music industry streaming shift
•    At the very early innings of the evolution of the new business
•    Company with legacy, credibility and scale and has been around 170 years
•    Believes internet will go from headwind to tailwind for high quality journalism
•    2011 – implemented their first paywall (with 20 stories a month for free)
•    Shifting business model to creating journalism worth paying for
•    Broadening content to deep research, more multimedia content (The Daily by NYT is one of the top podcasts in the country
•    Very few publishers have crossed the chasm to monetizing print newspaper content – only FT, WSJ, Washington Post, and the New York Times
•    Recently tighter paywall to 5 free articles per month driving conversion to paid subs
•    70%+ subs are digital subs
•    80% of print subs have a digital login
•    See more revenue going towards subscription
•    Opportunity for margin expansion from ~12% today to 20% by 2022
•    Can’t be viewed as a legacy print media company; Underestimating future earnings leverage based on fixed costs of the newsroom
•    Believes that it is a double to $40-$50 in 2 years


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

Next Wave Sohn San Francisco Conference Notes 2017

We're posting up notes from the Sohn San Francisco Investment Conference 2017.  First up is the Next Wave Sohn event which features emerging managers sharing their investment ideas to benefit the Excellence In Investing For Children's Causes Foundation.


Next Wave Sohn San Francisco Conference Notes 2017

Vineer Bhansali, LongTail Alpha

- Investing with Multiple Unknown Equilibria

- Volatility indices are at all time lows as are correlations across assets classes, but fear is at an all-time high – 2 potential ways to play this:

Idea/Theme 1: Offensive - Position for rising rates with central bank put still in place

- Sectors: Banks and Financials: XLF

- Outright: Index Call Options (SPX, Nasdaq)

- Structured: Levered Risk Reversals

Idea/Theme 2: Defensive - Position: Geo political volatility that raises risk premiums

Sectors: GLD, OIL

Derivatives (Outright: Put spreads on equity indices, HYG, Structures: Dispersion (Rising Correlations)



Marcelo Desio, Lucha Capital Management

Idea: GoDaddy (GDDY): Misunderstood growth stock, dominant market position, large TAM and low CAC

Business: A lot more than a domain company; domain is an onboarding strategy to sell a range of other services (hosting, business applications); 17mm customers; compete very effectively in the SMB space

Thesis:

1) Incumbency and scale - 80% of SMBs aware of GoDaddy (Share: 19% of the 335mm domains under management)

2)  Efficient customer acquisition at ~$67

3) Very attractive unit economics; top of the range versus other SAAS companies

4) Highly sustainable growth runway: Large $23bn+ TAM and ARPU continuing to grow (International is growing high teens based on secular dynamics of internet penetration.  Demonstrated ability to take share in new markets like India - Entered 5 years ago and now has #1 domain share)

5)  ARPU growth -> incremental margins.  High operating leverage that should drive margin expansion from 64% to 68%.

6)  Incremental margins drive strong FCF

7)  FCF will drive beneficial capital allocation

8)  Strong valuation support: undervalued relative to similar companies in the tech space

Valuation: attractive return profile: $76 stock, +75%, 28% IRR through year end 2019

Risks:  PE overhang, international growth stalls, DIY becomes a viable competitor (mobile web use drives "appification"), larger well capitalized tech players compete more effectively



Gil Simon, SoMa Equity Partners

Idea: Coupa (COUP)

SAAS category killer you've never heard of.  Underfollowed company with significant upside.  IPO'd last October, <$2bn market cap.  Spend management not a sexy category - helps companies manage their business spending; ~600 customers

Business model: Cloud platform for managing spending (procurement, invoicing, expenses) that all companies do.  $159mm in TTM revenue.  Allows businesses to consolidate all spending under one platform.  Helps customers save money -3-4% on average (Coupa provides visibility which enables cost cutting and negotiating leverage with suppliers.  Case Study: Sanofi targeting 10bn euro of annual spend through Copua; replaced patchwork of 22 disparate procurement systems.  Big competitor is SAP Ariba.  Ease of use is the key competitive advantage versus legacy systems; Also flexibility, free to suppliers and ability to integrate with all ERP systems

Thesis:  Partner ecosystem rapidly expanding from 500 two years ago to 2,000 which is a leading bullish indicator.  Spend under management is rapidly expanding and expected to reach $350bn by FY18.  Expect sustained revenue growth well above consensus.  Valuation: Think it's a potential double.  Takeout optionality to boot: SAP and Oracle have been aggressive in this space.



Seth Wunder, black-and-white capital 

Idea: Lending Club (LC)

Business: marketplace for consumer lending that benefits from diversifed sources of capital including banks, insurance, companies, asset managers and retail investors.  Make money from origination fees and servicing fees.  Reduced spread versus banks: lenders get more yield and borrowers pay lower rates.  Can be very scalable but won't take over consumer lending.

Thesis:  Advantages for all market participants including borrowers and lenders (platform investors).

Borrowers: Get lower cost of borrowing, better application experience, NPS score of 78 versus credit card companies in low single digits.

Lenders: Access to short term, unsecured consumer credit, attractive risk adjusted returns, several purchase options (whole loans, fractional loans, securitizations), loan servicing handled by LC

Capital-lite model enables unconstrained growth.  Large TAM $1.1T unsecured consumer credit and $1.2T auto loans.  Harnessing technology and big data to originate loans.  Expect high incremental margins going forward as operational investment needs moderate.  EBITDA margins eventually >35%.  Management team changed out with seasonal veterans from "fin" and "tech" due to some past marketing issues.

Misconceptions:  High leverage - not true; net cash.  High credit risk - risk is borne by platform investors.  Dependent on Credit HFs to buy loans - not true; traditional banks like Citi provided 44% of funding for loans.  Cost of capital disadvantage:  Capital comes from investors, not balance sheet

Valuation:  LC shares are worth $17, 175% upside.  2.8x EV/2018 revenues - significant discount to peers.  15.0x EBITDA on $468mm gets you to $17 implied share price.


We've also posted up notes from the main event, so be sure to check out those pitches as well: notes from the Sohn San Francisco Investment Conference 2017.