Glenn Tongue's Presentation on AIG & Iridium: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of Glenn Tongue of Deerhaven Capital.  His talk was entitled 'Time Arbitrage.'

Tongue used to be Whitney Tilson's investment partner at T2 Partners, but they've separated their funds but still share the same office.  Here are his two ideas:

Long AIG (AIG)

"Even better investment today."  Trading at 50% of book value, multiple catalysts to get them there in the next 12-18 months.  Opportunity because of the lingering taint from the crisis. Book value up by 11% since May, stock up only 5%.

$33.26 stock, $52B market cap, $104B book value.  1.4% short interest.  In Jan 2011 90% owned by US Govt.  June 2011 down to 82%, down to 65% in 2012. Then in Sept 2012, Treasury sold $21B, now only 16% owner today.  $8.5B stake owned by US government now. AIA sale is $5B cash inflow, ILFC $6-8B, and CFO of about $5B.  They can use half of that to buy in the US government stake, which would add 10% to book value.  An accretive exercise.

Of the $21B sold by the treasury, AIG bought $5B back. A while back the problem/bear case was "it's too complicated, hard to understand." 

Now, 2 segments are 90% of the business:
- P&C insurance Chartis.  45M clients, diversified across geographies and products.  Comps are ALL, CB, CNA, Travelers.

- US Life and Retirement SunAmerica.  19M clients, annuities and life insurance products.  Comps are LNC, MET, PRU, UNM. Typically trade at 0.7x book.  

Sum of the Parts Valuation

SOTP analysis gets $49 to $77 per share for AIG, 50-130% premium to market price.

Chartis: $48 book value, value $43 to $62
SunAmerica $36 book, value $25 to $40
United Guaranty   value $1.73 to $2.48
ILFC  value $7 to $10
AIA stake value $5
Other value minus $5 to plus $1 Total $49 to $77 value for all.

Risks: Highest scrutiny of any company, no incentives to overstate book value. Derivative risk, the old AIGFP, was $1.8 trillion of exposure, now down by 97%.  Some Europe business, CEO may leave soon, Super Cat risk, some derivatives

Catalysts: Treasury sales overhang Sale of non-core assets Use some leverage to boost returns Shift to offense from defense: AIG can focus on growing the business fading of institutional taint 

Another way to play it: 75M warrants.  Strike $45; expire 1/19/2021 Also subject to anti-dilution adjustments for various events, including adjustment if cash dividends exceed $0.67 per year.

We've highlighted how numerous prominent investment managers own AIG in size (most notably Bruce Berkowitz's Fairholme Capital) and recently disclosed how it's one of Dan Loeb's top holdings.

For more on AIG, head to the latest issue of our Hedge Fund Wisdom newsletter for further equity analysis on this name.


Long Iridium (IRDM)

Listed at $9.00 through a SPAC transaction, stock fell to $8, but business value may have doubled. Deeply misunderstood, attractive business, competitive advantage, new optionality through Aireon, compelling valuation, recent financing removes uncertainty. 87M shares, $730M market cap, $500M net debt, EV $1.24B, EV/EBITDA 5.9x, while comps trade at 8-9x Rev $384 in 2011, op EBITDA of $190, in 2012 Rev/EBITDA $393M/$210m. 

Owns 66 in-orbit satellites.  Serves 576k customers.  DoD is 23% of revenue.  This is only a niche product, for maritime, aviation, and government markets. Cover 100% of the earth's surface.  Other player is Inmarsat, twice their size.  Iridium stronger in handset, Inmarsat is more on the land-based.

Rev growing 15-24% over last 5 years. MSS market is $1.4B market.  Different competition: Thuraya GEO no polar or hemisphere coverage. LEO technology, lower earth orbit, so the satellites spin around the earth, smaller, faster communications with the handsets.  M2M (Machine to machine) is fastest growing area.  Strong leverage in model, key is to drive service revenues and subs. 

Must replace current satellite which will cost $3B! Tongue says "they'll never have $3B of debt, they are generating cash flow."  He says debt level peaks at 4-5x EBITDA in 2015.  At that point, company can drop a multiple point per year in leverage. Is the $3B investment worth it?  Should grow about $10-19B of EBITDA through 2030.  

Aireon: new business opportunity; a global air traffic control system. Possible $4 per share for Iridium on this alone. 

Stock recently collapsed from $9 to $7.  Due to a filing in which the company said in a 10q that they would have to raise $100M in amount equal to the unexercised portion of the warrants.  This was a short-sellers dream, but they fixed it last week with a $9.43 strike $100M convertibles. Swapped out the old warrants.  Convert arb players are causing short-term pressure on the stock. 

Price targets? If trading at 8x EBITDA, $12.50, up 60% from today's price. By 2016, or 2017, on those multiples, $17.50 to $22.50.


Embedded below is Tongue's slideshow presentation from the Value Investing Congress:





Check out the rest of the hedge fund presentations from the Value Investing Congress.

Whitney Tilson Becomes Sole Manager of T2 Partners, Glenn Tongue Starts Deerhaven Capital

Whitney Tilson recently sent out a letter detailing that his hedge fund T2 Partners will be losing its dual-portfolio manager structure.  Tilson will continue to manage the fund as its sole manager.  Glenn Tongue, the former co-manager, will takeover the former T2 SPAC Fund and rename it Deerhaven Fund, to be managed by his new firm, Deerhaven Capital Management.

As we tweeted out earlier today, in the letter Tilson says "I will adopt a much lower public profile and let my investment returns speak for themselves."  He will also be adopting a much more concentrated portfolio approach, targeting 15 longs and 25 (smaller) shorts.

Also worth noting is the fact that he sold all of T2's positions and will be re-building the portfolio (but will still buy old holdings like BRK).  Certainly there will be tax consequences for this decision.

Tongue, with his new firm, will be focusing on high quality businesses, special situations (mergers, workouts, SPACs), and mispriced options.  He'll also run a concentrated long book and diversified short book.

Embedded below is the T2 Partners letter detailing the changes:





It remains to be seen whether or not T2 will invest in AIG again, but we'd assume so given that they gave a presentation on AIG only two months ago.

Whitney Tilson's Presentation on AIG: Value Investing Congress

Continuing our coverage, today we're posting up more notes from the Value Investing Congress.  Below are notes and the slideshow presentation from Whitney Tilson & Glenn Tongue of T2 Partners.  They presented their idea of American International Group (AIG).

Spencer Capital aided in the presentation.  Bruce Berkowitz of Fairholme Capital presented AIG last year and T2 now likes it.  We've posted up Berkowitz's presentation on AIG before if you missed it.

Idea: AIG

•    Very much different from before crises
•    Worth at least 1x tangible net book
•    Will get easier to understand in the next year
•    Closed at $31.84 (yesterday) and is trading at 41% discount to book
•    US took ownership form 70% to 60% in today sale.
•    Chartis – 45MM clients
•    Sun America – 19MM clients – life insurance.
•    ILFC – global aircraft leasing business.  Comps are around 1x book.
•    Maiden Lane III – SPV.  Currently at $6.3 billion and on market for sale.
•    Large deferred tax asset position
•    August 2007 $170 billion market cap.  Trading at 1.75x book at that point.
•    Question is now how much will the US government make?
•    Peak of support is $182 billion form US – now about $45 billion investment at 3/31/12.
•    Sum of parts is $49 to $73 per share
•    Normalized earnings are ~$5 per share.
•    T2 thinks AIG will buy back shares
•    Management incentives are to understate book value.
•    Warrants are very attractive.


Question & Answer Session

P&C business?  Very large esoteric investments as well?  Yes AIG is still good at these big investments.  Government wants out - probably won't be out by election but the government is not in the business of holding AIG.


Embedded below is T2's presentation on AIG:




For more from this hedge fund, we posted up T2's recent letter to investors.

Be sure to click here for other presentations from the Value Investing Congress.

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.

T2 Partners January Letter: Portfolio Update

It's been a while since we've checked in on Whitney Tilson and Glenn Tongue's hedge fund T2 Partners so here is their January letter to investors. While they had a horrible year last year (-24.9%), they were up 12.6% in January.

The letter mentions some of their longs: Pep Boys (PBY), Goldman Sachs (GS), Iridium (IRDM), Resource America (REXI), Dell (DELL), Howard Hughes (HHC), Citigroup (C), and Microsoft (MSFT).

Also, they mention they are long SanDisk (SNDK) and bought more after the company provided weak guidance.

T2 Partners also revealed some more of their shorts: Lululemon (LULU), Interoil (IOC), ReachLocal (RLOC), First Solar (FSLR), Green Mountain Coffee Roasters (GMCR), ITT Educational (ESI), and Salesforce.com (CRM).

Their letter also provides more in-depth updates on their positions in Netflix (NFLX) and J.C. Penney (JCP) which you can read below: T2 Partners January letter



For more from this hedge fund, you can view T2's presentation on Berkshire Hathaway and JCP.

And then for presentations from other funds, we posted up Bill Ackman on Canadian Pacific today too.

Whitney Tilson's Value Investing Congress Presentation on Berkshire Hathaway & J.C. Penney

At day two of the Value Investing Congress, Whitney Tilson & Glenn Tongue of hedge fund T2 Partners gave the case for going long Berkshire Hathaway (BRK.A) and J.C. Penney (JCP) in a presentation entitled "Many Ways to Win."

Be sure to check out all our notes from the Value Investing Congress.


Whitney Tilson & Glenn Tongue (T2 Partners)

Embedded below is their full slideshow presentation:




The hedge fund pitched J.C. Penney (JCP) and they have a $71 price target (stock $31 now). “Decent” business. Followed Ackman, but got a lot more interested with new CEO on board. Story well known, same as Bill Ackman’s JCP thesis a few months ago. Persistent question about how the real estate value can be realized.

Other new stocks they have added in size: Goldman Sachs (GS), Citigroup (C), and Sandisk (SNDK). GS, C: Ackman also has these positions. Says trading at discount to book value. Says everyone ignores a fabulous business at C’s “good bank” and only looks at the bad bank portion.

SNDK: they own disk drive makers, says 90% storage on spin platters, the other 10% will be in Flash memory. Memory capacity constrained, explosive demand via tablets, smartphones. NAND has historically been commodity product, but being spec’d into a smartphone is different, enormous operating leverage, SNDK has IP on MLC.

You must overcome your initial knee-jerk reaction that “this is a terrible business.” The industry has changed- consolidated, and demand is exploding. Every iPad, iPhone needs it, yet analysts all expect pricing to fall as technology falls. They think pricing will improve. SNDK is trading so cheap, at a 6x P/E, and it could grow and trade at 20x P/E. Says a massive portion of the margin in iPhones is the incremental NAND. SNDK in the 4S.

As indicated in our September hedge fund performance numbers post, T2 was -9.5% in September and -29.6% for the year at that time.


Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.

T2 Partners Goes Activist on Iridium Communications (IRDM)

Whitney Tilson and Glenn Tongue's hedge fund firm T2 Partners has filed an activist 13D with the SEC regarding shares of Iridium Communications (IRDM).

Per trading on June 20th, 2011, T2 has disclosed a 9.3% ownership stake in IRDM with 6,529,338 shares. In actuality, they own 862,576 shares of common stock and 5,666,762 warrants (IRDMW) which are exercisable into shares of common.

They've increased their position size by about 16%. At the end of the first quarter (March 31st), they owned 1,292,460 shares of common stock as well as two sets of warrants (collectively representing 4,340,678 shares). Since then, they've sold some common stock and added to their warrant positions.

Seeking Talks With Management

In the "purpose of transaction" section of the SEC filing, T2 outlines that they believe shares are an attractive investment and they intend to pursue conversations with management about the company's capital structure.

Additionally, the filing outlines T2's "current intentions to purchase up to 100% of the outstanding shares of certain warrants (trading as IRDMW)."

T2's Thesis on Iridium

We've posted up before how the hedge fund thinks IRDM is a triple in the next 3-5 years but they have to stomach the near-term volatility in the mean time. They believe the stock is largely undervalued and like the fact that the large overhang of a big seller (Syndicated Communications, a private equity fund) has now disappeared.

The hedge fund sees IRDM as attractive due to its positioning as one of only two major players in the global satellite communications industry. You can view T2's presentation on Iridium here.

Per Google Finance, Iridium is "a provider of mobile voice and data communications services via satellite. The Company offers voice and data communications services to businesses, the United States and foreign governments, non-governmental organizations and consumers via its constellation of 66 in-orbit satellites, in-orbit spares and related ground infrastructure, including a primary commercial gateway."

For analysis of their other investments, check out T2's presentation on JOE & HHC here.

Whitney Tilson's Presentation on St. Joe (JOE) & Howard Hughes (HHC)

Yesterday at the Value Investing Congress, T2 Partners founder Whitney Tilson presented a short of St. Joe (JOE) and a long of Howard Hughes (HHC). You can view a summary of the Value Investing Congress here, but we also wanted to post up Tilson's actual presentation.

St. Joe (JOE) is currently his hedge fund's largest short position. They've elaborated on David Einhorn's presentation on JOE by evaluating the company's WindMark assets and argue they're overvalued. T2 says, "in summary, WindMark (like many of St. Joe's developments is a ghost town. The only restaurant has closed, as have all but one retail shop. Virtually no construction is going on, sales of lots are few and far between, and there is huge shadow inventory."

T2 is also long Howard Hughes (HHC), a spin-off from General Growth Properties (GGP) that contains the developmental real estate assets. Tilson argues the company has attractive risk/reward, a solid management team (with Pershing Square's Bill Ackman as Chairman), and a strong balance sheet that provides protection. He thinks the company is worth anywhere from $77-141 per share on the low and high ends, respectively.

Embedded below is T2's full presentation on JOE and HHC (email readers come to the site to view it):



Be sure to also check out a summary of the Value Investing Congress.

T2 Partners Attributes Poor Performance to Contrarianism

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners sent out a monthly update to investors and they reveal performance of -4.3% in March and -3.1% for the year. This trails the S&P 500, which is up 5.9% in 2011. More interesting than the performance figures, though, is the the notion of deviating from the herd and its subsequent effect on that performance.

T2 writes that, "a bigger reason for our underperformance, especially last month, is our investment strategy, which is rooted in deviating from the crowd with contrarian bets. It's the only way to outperform the market over the long term, but it also carries with it the risk - indeed, the certainty - that there will be periods during which one underperforms the market."

Obsession With Short-Term Performance

This is worth pointing out because Wall Street and investors are seemingly always fixated on short-term performance. In part, this is one of the reasons that Shumway Capital Partners returned outside investor capital (among many other reasons). In his letter, Chris Shumway noted that returning outsider money would allow him to focus on long-term positioning that he has been so successful with.

When investors place monthly expectations on a manager, rather than yearly ones, the manager is pressured to attain short-term performance and it compromises their core investment strategy.

Value Versus Global Macro Managers

To illustrate this point, we turn to a comparison between value-based investors and global macro traders. If a macro manager sees a mountain top (gains from a potential trade), he will go after it. However, if he encounters a valley (temporary loss of capital) on the way to the mountain top, he will pivot and trade around that position to eliminate near-term risk or even profit from the decline by temporarily shorting.

A value-based manager, on the other hand, will continue to hold their long position and ride out the valley (decline) in order to get to the mountain top (gain). Their deeply rooted stance makes them more prone to near-term underperformance.

T2's Letter

In the recent past, T2 Partners has blamed poor performance on their short positions. Yet despite covering their short of Netflix (NFLX), they puzzlingly held onto other valuation shorts like Opentable (OPEN) and Lululemon (LULU), but that's a whole 'nother conversation.

Now they are attributing poor performance to contrarianism. Some will undoubtedly say this is just excuse after excuse and wonder what the fund will blame next. Putting that aside, T2 does underline a prescient point worth extracting: sometimes it's painful to be contrarian.

In the letter, T2 goes on to highlight that, "it's easy to deviate from the crowd, of course, but it's much harder to be right - and even harder to be right on the timing."

If a value investor can stomach the near-term anguish (and assuming their thesis is proven correct), they'll make it to that mountain top eventually. T2 gives an example of this with their investment in Iridium (IRDM). While they think the stock is a triple in 3-5 years, they have to hang on through the bumpy ride in the near-term as last month the stock was down 15.1% and the warrants dropped 24.1%.

T2's run of poor performance continues and you can read their take on the situation embedded below in their investor letter (email readers need to come to the site to view it):



For more on that particular stock, head to T2's analysis of Iridium.

Whitney Tilson Explains LECG Position (XPRT)

Back in late February, we highlighted that Whitney Tilson's hedge fund T2 Partners had gone activist on LECG Corp (XPRT). Since then, shares have fallen dramatically and they sold their entire position. In his February letter to investors, Tilson explains their thought process behind the investment and lessons learned:

"It was a historic day for us on the last day of February – but not in the way we like: one of our positions declined by 80% in a single day. You might think that such a decline is, ipso facto, proof of a mistake, but we’re not so sure (and that’s not just because we had a good day and month). Allow us to explain…

LECG is a specialized consulting firm that “conducts economic and financial analyses to provide objective opinions and advice that help resolve complex disputes and inform legislative, judicial, regulatory and business decision makers.” Our investment was based on the belief that LECG could successfully integrate recent acquisitions into a profitable business structure. Given the company's market capitalization of approximately $40 million, we felt that we had a reasonable margin of safety imbedded in the company's $109 million in Accounts Receivable, offset by $26 million of net debt.

The company's distressed stock price, under $1, was due to a default on the existing debt. Given the quantity and quality of the receivables, we believed that the default was a short-term issue and that LECG would be able to refinance debt on a secured basis, supported by the Accounts Receivable, in which case the stock could easily be a multi-bagger.

Much to our surprise and dismay, however, LECG instead announced what is effectively a plan of liquidation. We don’t know why the company pursued this path, though it is possible that this route preserved compensation agreements for employees at the expense of existing shareholders. Given the rapid execution of the liquidation, we believe the equity will end up being worthless so we sold our entire position.

In light of this permanent loss of capital, why aren’t we certain that this was a mistake, as Netflix clearly was? Because it’s possible that we made a high-expected-value bet, but just got unlucky. Investing is a probabilistic business so it does not necessarily follow that every time you lose money, you made a mistake (and, conversely, every time you make money, you made a good investment). This is very simple and, to us, obvious, but is very poorly understood.

Mispriced Options

LECG was a classic mispriced option, a type of investment that violates the rules of classic value investing, but with which we’ve had extraordinary success over time.

Warren Buffett is reported to have said that there are two fundamental rules of value investing: 1) Don’t lose money; 2) See Rule #1. We disagree. While it’s certainly true that investors should focus primarily on avoiding losses, we happily make investments in which we know there’s a decent chance – even a likelihood – that we’ll lose most or all of our money, as long as the upside is great enough to offset this risk. For example, if you could invest $100 in something that had a 70% chance of being worthless, but a 30% chance of being worth $1,000, would you invest? Of course, because the expected value is $300, or a 3x return.

But how much of your portfolio would you invest in this type of mispriced option, given that there’s a 70% of losing all of your money and looking (and feeling) like a fool? There’s no easy answer, but for us, in this situation, the answer is maybe 1% of our capital – and we’d look hard to find other similar investments so we could have a portfolio approach.

This is what we did, for instance, when we invested in the warrants of a handful of SPACs in late 2008 and early 2009 (and even created a side fund called the T2 SPAC Fund). By carefully selecting only a handful of the SPACs with the best sponsors and structure, we thought that each SPAC had a 50/50 chance of getting a deal done, in which case the warrants were almost certain to rise 5-10x. As it turns out, all but one SPAC got a deal done and we profited handsomely.

Outside of SPACs, other mispriced options that have worked out very well for us include our biggest winner ever, General Growth Properties shortly after it filed for bankruptcy, when the stock was around $1, TravelCenters of America, which rose 96.2% last month, Border’s bouncing from $1 to $3 in each of the past two years, and (many years ago) Denny’s.

But some percentage of these investments will be wipeouts like LECG, the Trian SPAC, and Sirva. That’s okay – it comes with the territory."


So, it's interesting to see one fund manager's approach to position sizing with these types of investments. Risk management is obviously a prime tenet of investing and this is a great case study. In other recent posts on this hedge fund, we detailed how T2 covered their Netflix (NFLX) short position. Be sure to also check out other hedge fund letters we've posted up.

Whitney Tilson Goes Activist on LECG Corp (XPRT)

Whitney Tilson and Glenn Tongue's hedge fund, T2 Partners, has filed an activist 13D with the SEC regarding shares of LECG Corporation (XPRT). Due to portfolio activity on February 14th, T2 now shows a 5.24% ownership stake in the company with 2,001,148 shares.

This is a substantial increase in their position as they only owned 614,816 shares at the end of 2010. All told, this marks a 225% boost in their stake. Their activist filing contains the normal boilerplate that they believe the company is undervalued and represent an attractive investment opportunity. The hedge fund currently does not have a present plan or proposal.

A press release from LECG could explain why T2 has become active:

"On February 7, 2011, the Company announced that it had received a non-binding indication of interest from an undisclosed company with a view toward entering into a definitive acquisition transaction for the entire firm. The Company is disclosing today that FTI Consulting, Inc. provided the non-binding indication of interest. The negotiations with this party are now focused on the possible acquisition of several specific practice groups within LECG and not an acquisition of the entire firm. LECG believes this alternative, whether with the identified party or one or more other parties, may be the most viable path for the Company to raise capital to address current liquidity concerns."

In other T2 Partners portfolio activity, we detailed how Tilson covered his Netflix (NFLX) short position. Some investors have always opined that a short-seller capitulation could possibly mark a top in a stock. While NFLX shares are down ever since Tilson covered, the market as a whole has seen weakness as of late. You can read why T2 cut short exposure as well.

Per Google Finance, LECG "provides services through its experts and professional staff whose skills and qualifications provide the Company the opportunity to address unstructured business and public policy problems. LECG delivers independent expert testimony and original authoritative studies in both adversarial and non-adversarial environments."

Whitney Tilson Reduces Short Exposure, Refocuses on Buying Cheap Stocks

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners have had some rough sledding the past few months, mainly due to their large short exposure. Over the last five months, they are down 4.3% net while the S&P 500 has rallied 23.5%. As such, they've re-examined their portfolio construction and have concluded to reduce short exposure and get back to basics: buying cheap stocks.

Rationale for Reducing Short Exposure

Tilson cites the fund's maintenance of a large short book after the crisis as the primary mistake. Additionally he writes,

"Over time we've been quite successful shorting fads, frauds, promotions, declining businesses, and bad balance sheets. Where have had much less success, however, especially in recent months, is shorting good businesses that are growing rapidly, even when their valuations appear extreme. Such open-ended situations, regardless of valuation, are very dangerous, so going forward we will avoid them entirely unless we have a high degree of conviction about a specific, near-term catalyst."

The immediate thing that comes to mind is their well-documented short position in Netflix (NFLX). This short is obviously classified as a 'valuation short' but T2 notes that they are still digesting the company's recent earnings as well as other channel checks and it is unclear as to whether or not they've adjusted their position in anyway.

Buying Microsoft (MSFT) & Berkshire Hathaway (BRK.A)

Sticking to T2's 'back to basics' mantra, they've recently been adding to their positions in MSFT and BRK.A. You can see their analysis of Microsoft here and a summary of their other positions in their year-end letter.

Embedded below is T2 Partners' January 2011 letter to investors:



Be sure to also check out a ton of other hedge fund letters we've posted recently:

- John Paulson's year-end letter to investors
- David Einhorn's Greenlight Capital letter
- Summary of Kleinheinz Capital's letter
- Dan Arbess & Xerion Fund's 2011 strategy

T2 Partners Year-End Letter: Discussing Longs & Shorts

Whitney Tilson and Glenn Tongue's hedge fund firm T2 Partners released their year-end letter to investors. The letter is one of the most thorough we've seen as it is 27 pages long and includes assessment of both their long and short positions. If you want transparency in the hedge fund industry, here's your barometer.

For 2010, T2 finished up 10.3% net compared to an S&P 500 return of 15.1%. So while they trailed the indices last year, T2 has outperformed since inception, returning 9.1% annualized net versus 2.0% for the S&P. This past year, their pain came from various short positions and essentially 'missing' the quantitative easing round 2 rally.

T2 Partners' top 12 long positions at the end of 2010 were:

1. Grupo Prisa (PRIS & PRIS.B)
2. Microsoft (MSFT) ~ see their thoughts on MSFT here
3. Berkshire Hathaway (BRK.A/B)
4. BP (BP) ~ their thoughts on BP here
5. General Growth Properties (GGP)
6. CIT Group (CIT)
7. Kraft (KFT) and warrants
8. Seagate Technology (STX)
9. Iridium (IRDM) and warrants
10. Automatic Data Processing (ADP) ~ see their presentation on ADP
11. Resource America (REXI)
12. Anheuser Busch InBev (BUD)

While we've presented analysis on T2's longs before, we want to single out Seagate Technology (STX) and CIT Group (CIT) as we haven't seen Tilson talk about these before. He likes STX mainly because it is trading at an absurdly cheap valuation and he thinks fears over the hard drive (HDD) market (versus the solid state drive market) are overblown.

Tilson and Tongue fancy CIT due to the company's potential to capture financing-cost savings. Additionally Tilson writes, "Even more intriguing is the possibility that a healthy bank might acquire CIT, attracted by the enormous earnings leverage available in applying the acquiring bank's much lower borrowing costs to CIT's business model."


T2's top 10 short positions (in alphabetical order):

1. AIG (AIG)
2. Homebuilders (various individual companies plus XHB the ETF)
3. InterOil (IOC) ~ analysis of their short position here
4. ITT Educational (ESI), as well as other for-profit education plays
5. Lender Processing Services (LPS)
6. Lululemon Athletica (LULU)
7. MBIA (MBI)
8. Netflix (NFLX)
9. Salesforce.com (CRM)
10. St. Joe (JOE)

Tilson and Tongue highlight that their short book caused them much pain last year. Accordingly, they set aside a portion of their letter to address how they manage short positions that move against them. In short (no pun intended), they re-evaluate their analysis to determine whether to add to the position, do nothing, or trim/exit.

Specifically, they trimmed their position in Netflix (NFLX) and replaced part of it with put positions. (We posted why Tilson is short Netflix here). They've also done this with other short positions in order to better manage risk. After all, remember that these stakes are merely hedges to their long book as T2 is always net long (they are currently 40% net long).

Embedded below is T2 Partners annual letter to investors for 2010:



You can download a .pdf copy here.

It's great to see a manager with such transparency in an otherwise secretive and guarded industry. T2's portfolio overlaps with positions many other hedge fund managers own that we've highlighted as well.

T2 is short JOE and so is Greenlight Capital (see David Einhorn's short thesis on JOE). While T2 is short ESI, hedge fund Blum Capital is long ESI. And while Tilson and Tongue are short AIG, Bruce Berkowitz's Fairholme Capital is long AIG. It's fun to see hedge funds take different stances on various stocks because that's what makes a market.

Why Whitney Tilson is Short Netflix (NFLX)

Whitney Tilson has gotten his ass handed to him in his short of Netflix (NFLX). And, he'll be the first to tell you that. However, that hasn't rattled his conviction as he thinks the company is now trading at ridiculous valuations. In support of his argument, he's recently released an in-depth bear case for NFLX entitled, you guessed it: "Why We're Short Netflix."

We've covered T2 Partners' portfolio in-depth before and Netflix is now one of their main short positions. NFLX is the definition of a momentum stock. It has made the longs copious amounts of money and ripped the collective faces off of short sellers. Given the beating Tilson and his hedge fund T2 Partners have taken, why persist? He writes,

"We acknowledge that the company offers a useful, attractively-priced service to customers, is growing like wildfire, is very well managed, and has a strong balance sheet. So why on earth would we be betting against this stock? In short, because we think the valuation is extreme and that the rapid shift of its customers to streaming content (vs. mailing DVDs to customers) isn’t the beginning of an exciting, highly-profitable new world for Netflix, but rather the beginning of the end of its incredible run. In particular, we think margins will be severely compressed and growth will slow over the next year."

Valuation

Tilson's main short thesis here is valuation. On that subject he argues, "By any measure, Netflix’s valuation is extremely rich. Based on yesterday’s closing price, it trades at 67.4x trailing EPS ($2.65), 63.1x the high end of the company’s EPS guidance for the full year 2010 ($2.83), and 46.7x consensus analysts’ estimates for 2011 ($3.82). It also trades at 4.6x sales. In short, the stock is priced for perfection and any misstep would likely trigger a huge selloff."

Other Reasons for Shorting NFLX

While valuation is often a logical place to start when searching for a short thesis, Tilson also hints at various other reasons to be skeptical of the company. Of these, he points out the company's business model shift, potential new competitors, the sudden resignation of the CFO, and a large potential impact on margins. Regarding the latter, the T2 Partners manager says,

"The biggest impact on margins, we believe, will come from Netflix having to pay increasing amounts for streaming content. Unlike renting DVDs, in which Netflix is protected by the First Sale Doctrine (for now, anyway – see discussion below), the laws around streaming content require that Netflix must have an agreement with the content owner to stream it. This is very bad news for Netflix because content owners are generally very savvy and are seeking to carefully control their content to maximize revenues."

In-Depth Report

Tilson elaborates on his short thesis in the in-depth report embedded below:



You can download a .pdf copy here.

While Tilson has gotten roughed up by this stock, his conviction is unwavering and it is currently T2 Partners' largest bearish bet (via short common stock and owning put options). We'll have to see if he continues to get beat up in this name (and if so, at what point he cries "Uncle") or whether his thesis comes to fruition over time. For more from this hedge fund, we've detailed T2's largest positions as well as their bullish stance on Automatic Data Processing (ADP).

Hedge Fund T2 Partners' Largest Long & Short Positions

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners recently held their quarterly conference call and in it we get some meaningful updates to their portfolio. For the year, they're up over 13% versus a 7.9% return on the S&P 500. Most notably, they reveal their "fairly sizable" short position in Capital One (COF) as they feel the company will see putback risk in their mortgage portfolio from the GreenPoint acquisition a couple years ago.

Here are T2 Partners' largest short positions:

1. Capital One (COF)
2. DineEquity (DIN)
3. GameStop (GME)
4. A basket of for-profit education plays
5. Lululemon Athletica (LULU)
6. Homebuilders via exchange traded fund XHB
7. Moody's (MCO)
8. MBIA (MBI)
9. St. Joe Company (JOE)
10. OpenTable (OPEN)
11. Rosetta Stone (RST)
12. VistaPrint (VPRT)


Of these short positions, we just this morning posted up a potential short thesis on OpenTable (OPEN). David Einhorn's hedge fund Greenlight Capital has also been short two of the same stocks. We've detailed Einhorn's short thesis on Moody's: Curse of the Triple-A and most recently his bearish presentation on St. Joe (JOE) from the Value Investing Congress.

If you've followed T2's short positions on MarketFolly.com, you'll notice that their short positions in Netflix (NFLX) and InterOil (IOC) are not listed as some of T2's largest shorts. However, they do still hold a short position in these names. On NFLX in particular, T2 feels that the company's valuation is extreme at 67x trailing earnings and their transition to a streaming video company is a less desirable business model.


And here are Tilson & Tongue's 10 largest long positions:

1. Automatic Data Processing (ADP)
2. Microsoft (MSFT)
3. CIT Group (CIT)
4. Berkshire Hathaway (unclear which share class, either BRK.A or BRK.B)
5. BP (BP)
6. General Growth Properties (GGP)
7. Iridium (IRDM)
8. Liberty Acquisition (LIA & warrants)
9. Resource America (REXI)
10. Kraft (KFT)

Of these positions, we recently detailed T2's bullish case for Automatic Data Processing (ADP). Additionally, their recent presentation at the Value Investing Congress laid out their stance on BP (BP) and Liberty Acquisition (LIA).

Tilson and Tongue commented on their thesis and relative information regarding their positions in their in-depth conference call. You can hear a replay of the call via the embedded audio player below (email readers will need to come to the site to hear it):

T2 Partners Bullish on Automatic Data Processing (ADP): Latest Investor Letter

In an industry typically shrouded in secrecy, Whitney Tilson's fund bucks the trend. Why? He recently said that, "we choose to share some of our ideas and analyses publicly not for marketing or ego reasons, but because it helps us make money for our investors, in three primary ways: a) when it is widely known that we have a position in a particular stock, we often hear from other investors who share valuable information or analyses; b) invariably, some people have the polar opposite view of a particular stock and, in sharing it with us, they can help us identify things we might have missed in our analysis; and c) when we share our ideas, it creates reciprocity and others share their best ideas with us."

Tilson and Glenn Tongue's hedge fund, T2 Partners, is out with their September letter to investors. T2 recently started a new position in Automatic Data Processing (ADP), citing high switching costs for customers, 20% operating margins, and solid management. He also points out that it is 4x bigger than its closest competitor. Bill Ackman's hedge fund Pershing Square started a new position in ADP during the second quarter as well, which we highlighted months ago in our newsletter Hedge Fund Wisdom.

Assessing the full situation, Tilson points out that ADP's growth has stalled and the stock isn't necessarily "cheap" as it trades at 17.4x trailing EPS. Tilson believes low interest rates and unemployment are weighing on the stock in the near-term but it is poised to outperform over the long haul. You can read the full thesis in Tilson's letter below.

We also see that T2 Partners remains short a basket of for-profit education stocks even after the recent declines. Tilson feels that these companies will face big challenges from new regulations, continued bad publicity, and a sharp cut in their long-term profit growth.

Over the months, we've detailed how the for-profit education space is a battleground amongst hedge funds. Richard Blum's hedge fund Blum Capital has been buying ITT Educational (ESI). Steve Eisman of FrontPoint Partners led the charge against these companies with his original presentation, "Subprime Goes to College." Tilson continues to share Eisman's view (for the time being at least).

Embedded below is T2 Partners' latest letter to investors where they detail the bull cases for Automatic Data Processing (ADP) and Iridium (IRDM):



You can download a .pdf copy here.

Secondly, we've also included a link to T2 Partners' presentation from the Value Investing Congress, entitled "Our View of the Market, An Update on the Housing Market, and Two Stock Ideas." The two investments they detail include BP (BP) and Liberty Acquisition/Grupo Prisa (LIA). You can download a .pdf copy here.

Finally, we've posted summaries of the various speaker presentations and you can view comprehensive notes from the Value Investing Congress here.

Hedge Fund T2 Partners: Latest Investor Letter

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners is out with their August letter to investors. In it, we see that they're up 12.3% net for the year compared to the S&P -2.1%. Some of their long positions that have performed well include: Osteotech, Resource America, Liberty Acquisition (warrants), and Wesco. On the short side of the portfolio, they found success in homebuilders, for-profit education plays, Ambac, and Lululemon Athletica (LULU).

Tilson's hedge fund has been positioned conservatively as they see an unfavorable economic outlook. Their letter takes a closer look at their position in Liberty Acquisitions warrants which you can read below. Tilson then confirms that they've added to their bearish bet against InterOil (IOC) after the company reported second quarter earnings. He also goes into detail about his rationale behind this short in the embedded letter below:



You can download a .pdf copy here.

Tilson and Tongue will be presenting their latest investment ideas at the upcoming Value Investing Congress in New York City on October 12th & 13th. Market Folly readers can receive a discount to the event here.

Tilson's Hedge Fund Positioned Conservatively, Sees Unfavorable Economic Outlook

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners is faring quite well in 2010, up 13.6% net of fees. They've taken a conservative position with their portfolio based on increasing concerns of a weak economy. As we've detailed in their previous presentation, they currently favor undervalued large-cap stocks. Their July letter to investors reveals that they are currently 100% long, 70% short, leaving them 30% net long. This is below the historical average for hedge funds and T2 Partners has taken such a position for two reasons.

Firstly, they're concerned about macro factors and cite Jeremy Grantham's recent letter. Vaguely speaking, they deduce that there are three possible economic scenarios at hand that can take place over the next 2-7 years.

1. A V-shaped recovery: A scenario where the stock market could compound 7-10%.
2. A 'muddle-through' economy: Stock market could compound at 2-5%.
3. A double-dip (or worse): Somewhat similar to what Japan's gone through, stocks could be anywhere from flat to way down.

Tilson and Tongue have built a conservative portfolio as the odds have shifted unfavorably as of late. They are long high quality large-caps such as Berkshire Hathaway (BRK.A), Anheuser-Busch InBev (BUD), and Microsoft (MSFT). They've also been long BP (in-depth analysis of BP here) and Liberty Acquisition Corp. warrants as special situations plays. Additionally, we've detailed T2's new position in Alloy (ALOY). While they like these names, their economic outlook has caused them to reduce longs and add to shorts.

Secondly, they cite numerous opportunities on the short side of the portfolio. When irrationality rears its head, T2 prefers to exploit the inefficiency. As such, they feel they can enhance their returns on this side of the portfolio. Some examples of current irrationality in their view include:

- VistaPrint (VPRT) still at $33 (it's now at $30 after the release of T2's letter). This is a classic 'growth gone bust' story and they are short.

- InterOil (IOC) at $60. We've detailed in the past how T2 feels that InterOil is a public relations hype machine, releasing news tidbit after news tidbit when fundamentally the company doesn't have a whole lot going on. They've been short for a while now.

- MBIA (MBI) at $8.68. They feel that bond insurers are in a precarious position given their struggles. Bill Ackman had previously been short this name and his investment was detailed in the book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff.

- The for-profit education sector. Like many other hedge funds, T2 has joined in on the negativity parade surrounding these stocks. While they don't disclose which specific companies they are short, it most likely includes a basket of these possible candidates: Apollo Group (APOL), ITT Educational (ESI), and Corinthian Colleges (COCO). For the elaborate thesis behind this play, check out Steve Eisman's short sale of for-profit education.


Overall, T2 has been adding to short positions and is increasingly focused on large-cap bluechips on the long side of their portfolio. Embedded below is T2 Partners July letter to investors:



You can download a .pdf copy here.

To hear many other hedge funds' latest investment ideas, Tilson will be presenting at the Value Investing Congress (special discount here) along with Bill Ackman, David Einhorn, Lee Ainslie, Kyle Bass, John Burbank, and many more.

Hedge Fund T2 Partners Acquires Alloy (ALOY) Position

Hedge fund T2 Partners just filed a 13D with the SEC regarding Alloy, Inc. (ALOY). The filing discloses portfolio activity on July 21st, 2010 and reveals that Whitney Tilson and Glenn Tongue's firm have taken a 5.2% ownership stake in ALOY with 669,946 shares. This is a brand new position for the hedge fund and you can hear their other latest investment ideas at the upcoming Value Investing Congress (special discount here).

The aggregate purchase cost was $6,271,325 and they actually started buying shares as early as June 18th. While they started purchasing around $7.91 per share, the bulk of their purchases were done in the $9.50 per share range. Interestingly enough, ALOY accepted an offer from a private equity firm valued at $9.80 per share on June 24th. As such, Tilson's stake could merely be a risk arbitrage play. However, it is interesting that he started buying before the takeover. Maybe he has something else in mind because after all he did file a 13D, which signifies an activist stake. Not to mention, T2 is not normally known for going activist.

T2 has been quite busy on the portfolio front and we've detailed their bullish presentation on Microsoft, BP, and Anheuser-Busch InBev. For the rest of their current holdings, head to T2's portfolio.

Taken from Google Finance, Alloy is "a provider of media and marketing programs offering advertisers the ability to reach youth and non-youth targeted consumer segments through a range of assets and marketing programs, including digital, display board, direct mail, content production and educational programming".

You can hear Whitney Tilson and Glenn Tongue's latest investment ideas live and in person along with a ton of prominent hedge fund managers at the Value Investing Congress. The event takes place in October in New York and readers can receive a special discount to the event here.

Hedge Fund T2 Partners Presentation on Microsoft (MSFT), BP (BP) & Anheuser-Busch InBev (BUD)

If there's one overwhelming theme we've seen from hedge funds as of late, it would be the 'long high quality large caps' trade. Whitney Tilson and Glenn Tongue's hedge fund T2 Partners further verify this with their latest bullish presentation on Anheuser-Busch Inbev (BUD), Microsoft (MSFT), and BP (BP). These are some of the largest companies in the world and T2 sees value in their shares. While value is the underlying theme, they are bullish on each respective company for very different reasons.

T2 Partners recently outlined their rationale with this presentation at the annual Value Investing Seminar in Italy. Keep in mind that T2 and many prominent hedge funds will be presenting their latest picks in October at the Value Investing Congress (special discount here). Now, Tilson and Tongue start their most recent presentation with Anheuser-Busch InBev (BUD). They cite that the company is a very high quality business with pricing power and a best of breed management team. A result of the merger between InBev and Anheuser-Busch, the company has density in major markets with high margins and high returns. Additionally, T2 points out valuation, writing, "Pro forma for deleveraging and synergies, (it) trades for 9.3x 2012 free cash flow." The company has beat its 30% EBITDA margin goal handily and has cut costs.

On Anheuser-Busch InBev, T2 Partners says, "you can currently buy BUD with an entry FCF yield of 10% for a business that can probably grow at GDP + inflation for a long time, giving you a long term IRR of at least 15% without any multiple expansion." We've previously covered a separate and specific T2 Partners presentation on BUD worth checking out as well.

Secondly, Tilson and Tongue argue that Microsoft (MSFT) is undervalued. They write, "MSFT's closing price on 7/12/10: $24.83, so assuming $2.40/share of FY 2011 earnings (midpoint of analysts' estimates and our own), plus $4 share in cash, here are possible stock prices and returns (plus there's a 2.1% dividend): 10x multiple = $28 stock = 13% return. 12x multiple = $33 stock = 33% return. 15x multiple = $40 stock = $61% return." They highlight the company has $4.24 cash per share, shareholder friendly capital allocation (buybacks & dividend), as well as a new product cycle in tow (Microsoft Office, Windows 7, etc). T2 Partners says that the rumors of Microsoft's demise are greatly exaggerated.

Lastly, Whitney Tilson and Glenn Tongue shift their views to the oil spill and a potential opportunity with BP (BP). Assuming a worst case scenario where BP owes $70 billion in liability, T2 Partners feels the company can easily earn its way out of these liabilities as its current operating income is estimated to be $34 billion in 2010 (BP has the fourth highest revenues and profits of the Fortune 500). Given the past precedents of oil spills, T2 also cites previous incidents including the Ixtoc blowout in 1979, the Gulf War oil spill in 1991, and the Exxon Valdez spill in 1989 where the negative impact for oil companies involved was less than feared. Overall, T2 feels that BP's balance sheet, cash flow generation, and recent asset sales to Apache (among other strategies) will allow them to weather this storm. You can find hedge fund T2 Partners' in-depth analysis of BP here.

And embedded below is the hedge fund's full presentation on these three large cap companies:



You can download a .pdf copy here.

To hear more investment ideas from T2 Partners and other hedge funds, be sure to check out the upcoming Value Investing Congress (with a special discount here). We've been covering a lot of the latest investment ideas from hedge funds disclosed in their most recent investor letters. For more recent picks, you can see the rest of T2's portfolio here and you can head to Perry Capital's latest letter here.