Ricky Sandler Long GMCR & ZNGA, Short WAB (Invest For Kids Chicago Presentation)

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Eminence Capital's Ricky Sandler who pitched a long of Keurig Green Mountain Coffee (GMCR).


Ricky Sandler's Invest For Kids Chicago Presentation

•    At 25 launched his own business Fusion Partners. In '98 started Eminence
•    Long idea: GMCR/Keurig Green Mountain.
•    Controversial there is a credible short story. Thinks it’s already priced in and an incredible long opportunity.
•    Two businesses, hot biz (kcups) and Kold with sodas, brand new.
•    Hot platform sell 9MM to 10mm brewers/year and sell 10B to 11B kcups per year.
•    Razor/razorblade model.
•    Significant room for increased household penetration. Current penetration at 21M to 22M households compared to 70MM homes. With a coffeemaker.
•    Think market goes single serve.
•    Industry kcup should grow in the LDD range.
•    $4 of EPS from the hot business in FY15 estimated.
•    Think hot EPS can reach $5 over the next couple years driven by volume growth, $300MM restructuring, normalizing brewer losses form the last holiday season, normalized coffee costs, share buybacks and offsetting some headwinds.
•    Kold launched in September with Coca-Cola. Addressable market thinks its 5x – 10x hot.
•    Reviews are high on quality but negative on price/value.
•    $375 asp per machine and pods more expensive than a can of coke.
•    Not so much price of pod, but thinks the range of pods/products.
•    Think its convenience/choice. Negatives looking at just price.
•    Kold loss 50 cents per share.
•    Trades at 15.5x FY15E sept EPS and 13.5x EPS ex kold.
•    EPS estimates under pressure – poor 2.0 brewer launch execution and K-cup profitability impacted by mix shift. Finally negative reaction to kold.
•    Hot value = 17x -20x hot EPS ($5) or 85-100 plus option value for kold.
•    KO owns 17% at $92. Insiders bought at $90.


•    Loves Baidu (BIDU), and a top five position.


•    Zynga (ZNGA) – mobile gaming. Franchises include Farmville, words with friends.
•    Some think games are obsolete, ZNGA has 75MM active users.
•    Zynga was late to the consumer shift from desktop to mobile making the last two years rough. •    Mobile games for the last year =70% of bookings vs 30% a year ago.
•    Expect new titles over the next 12 months.
•    Trading at 1x sales when backing out SF real estate ($500MM value). $687MM EV.
•    Launch 6 new games, $300MM incremental bookings bringing total bookings to $900MM.
•    KING sold for 2.6x sales, using that valuation = $5.
•    At a 35% margin, ZNGA generate $315MM EBITDA or trading for 2x.
•    Has big infrastructure to support bigger biz. Downside protection by cash and real estate.
•    Top hit potential = $1B rev potential.
•    Mobile gaming is $20B biz. New categories such as esports and real money gaming growing.


•    Wabtec (WAB) – Short.
•    Leading supplier of brakes, electronics and other railroad components to the global rail industry.
•    55% - 60% of EBIT comes from NA freight segment.
•    LT rail is GDPish industry and cyclical.
•    Track record is fantastic – only US listed co whose stock price increased every year for 14 straight years, 19% EPS CAGR form 06 to 15E and hadn’t missed earnings since 09 and 3Q15.
•    Bull thesis – not cyclical, high ROIC/ high market share high after market mix/quality biz.
•    Product mix is opaque due to acquisition strategy.
•    Bulls think EPS will grow double digits for ever.
•    WAB is cyclical and currently at the peak of rail equipment super cycle driven by NA O&G activity.
•    Demand driven by trail traffic, production of new locomotives and freight cars.
•    Rail traffic is weak – CNI talking about laying off employees.
•    Locomotives – NSC storing locomotives, expect it to be up to 200. GE orders dropped significantly, only sold compared 3 the last quarter.
•    Freightcar peak – industry backlog driven by tank cars oil and covered hoppers i.e. frack sand. 40% downside to deliveries.
•    Trading at 20x EPS, 13x EBITDA. Could be peak earnings in FY15. Mid cycle earnings $3.5 - $4. At 16x = $60 or 30% downside.
•    Low short interest, favorable sell side ratings.
•    Consensus calls for positive organic growth.


Check out the rest of the presentations from Invest For Kids Chicago 2015.

What We're Reading ~ Analytical Links 2/12/14

The single best metric: EV/EBITDA [Crossing Wall Street]

Why margin debt matters [Seeking Alpha]

What I learned at the mall about investing [Institutional Investor]

Half of Americans can't raise $2k in 30 days [Time]

Get ready for a long proxy fight over Time Warner Cable [Dealbook]

John Maynard Keynes' own portfolio not too dismal [NYTimes]

Don't believe the tech bubble hype [Andreessen Horowitz]

US switching from credit card signatures to PINs, but banks need to get on board [Verge]

Investor group targets Ocwen's mortgage servicing practices [FT]

Microsoft's mobile muddle [Stratechery]

Two notable mutual fund trends [AAII]

Why ADT is appalling [Herb Greenberg]

How Mulberry got squashed in fashion's squeezed middle [The Guardian]

Coca Cola: glass less than half full [FT]

On an upturn in capital spending [FT]

David Einhorn on Green Mountain Coffee, Vodafone & More: Interview

Greenlight Capital's David Einhorn appeared on Bloomberg Television today and talked about his short of Green Mountain Coffee Roasters (GMCR) and his long of Vodafone (VOD), two longstanding positions.  Here are some of the highlights and the video interview is below:


On whether he is still short Green Mountain Coffee:  “Yes. We are still short Green Mountain.  It has been on the toughest things going on in our portfolio this year. The books are over caffeinated, if you would.  The company says that they sell a lot of coffee, there is no doubt they sell a lot of coffee. We do not think they sell anywhere near as much as they say and there are real discrepancies in the accounts. They had an analyst day a few weeks ago and they were asked to explain the numbers, and the CEO’s cavalier response was they do not do straight math and they are not going to get into this now. If you do not get into this on an investor call, when are you going to?” 

“There is a lot of ways for Green Mountain to pan out for us. This year, so far it has not been panning out for us. The competition has been increasing; they are losing market shares in their stores. Their platform has been commoditized. Anybody can make a cakeup. The Supply is now out there. The prices are falling. I think they will miss on the business side form an earnings perspective sometime over the next year. Ultimately they will be commoditized away. In addition, you have the regulatory risk when someone wakes up one day and says these numbers are not what they are represented to be.”


On being big on Vodafone the last three years:  “When we bought it you were getting no credit for their stake in Verizon Wireless now we see that was a very valuable stake. I think $130 billion. I think Vodafone remains pretty attractive because one you strip out the consideration for Verizon, the rest of the European business is at a pretty cheap value.”    


On whether there are opportunities in the U.S. for Vodafone:  “No, I think Vodafone exits from the U.S. if anything it could ultimately be a target for someone like AT&T that wants to get exposure into Europe”    


On whether Vodafone could have held on to Verizon Wireless longer:  “I would give Vodafone an A or an A plus on this negotiation. Verizon took a very aggressive tact with them for a lot of years saying, you are a minority; we are not going to pay you dividends and eventually Verizon needed a dividend so they started paying it but sporadically. They really tried to squeak these guys out. They finally came in the spring. It turned out they could not bridge the great act. Vodafone held out. Verizon came back to the table. They paid a higher price than I think they even would have paid in the spring… Vodafone is not mostly a wireline business. They are mostly cellular in Europe. So you have that wireless component there. When you strip out the Verizon Wireless valuation, you are buying it at two turns of EBITA less than comparable companies. I think it has better prospects better growth and better network than many of its peers.”


Embedded below is the video of David Einhorn's interview with Bloomberg Television:



For more on this manager, we've posted some of Greenlight's recent portfolio activity here.

What We're Reading ~ Analytical Links 9/25/13

Notes from the Bloomberg Markets 50 summit [Reformed Broker]

Investing around Obamacare [The Big Picture]

The Buffett formula: how to get smarter [Farnam Street]

Charlie Munger: lessons from an investing giant [WSJ]

Thoughts on Blackberry endgame and Microsoft as a value trap [Aswath Damodaran]

Iron ore seen sliding as new supplies hit [FT]

The benefits of negative feedback [Harvard Business Review]

Mexico's 'Aztec tiger' economy struggles to earn its stripes [FT]

Alibaba said to move toward IPO in the US [Dealbook]

Seeking answers from Green Mountain Coffee [Dealbook]

Apple's Chiefs discuss strategy, market share & new iPhones [BusinessWeek]

7 reasons why Africa's time is now [Harvard Business Review]

Once voracious Zell puts less on real estate plate [WSJ]

The 7 deadly sins of investing [WSJ]

40 maps that explain the world [Washington Post]

Lessons from the Dell deal [Dealbook]

Free SEC filings online master class [Business Journalism]

Wharton offers free online courses copying 1st year MBA study [Bloomberg]

David Einhorn's Presentation on General Motors, Cigna, Chipotle & GMCR: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of David Einhorn of Greenlight Capital.  His talk was entitled 'Kicking the Tires' where he covered a range of topics, but mainly pitched General Motors (GM) and Cigna (CI) as longs and Chipotle (CMG) as a short.

"Do your homework and kick the tires." It's not the answers that make you good in this business, it's the questions you ask. Talked about how Green Mountain Coffee Roasters (GMCR) was down 6% as he spoke during his presentation last year, but the point is it dropped right away, before people listened to the slides.  So he says you must do your own work.

Einhorn also mentions Herbalife (HLF), talks about him asking questions on the conference call. Because he said people were worried about the quarter.  Says he was quite surprised by the reaction.  Caris actually downgraded the stock based on the probability he was short. 

He mocks investors for not doing the work, but just trying to blindly follow him.    DO YOUR OWN WORK!  This is something we try to emphasize on MarketFolly.  Tracking hedge funds is a great way to find ideas, but only use it as a starting point.  Due diligence is key.


Einhorn's 4 Ideas This Year

1.  Long General Motors (GM): Remains an "ugly duckling" due to long investor memories, government ownership overhang and weak Europe division.

Bull case: Fixed cost structure improved. Pension risks overblown, unfunded liability may have narrowed by several billion, rising interest rates would help, too.  No required pension contributions until at least 2019.  Balance sheet cleaned up, brand quality improving across the board, improving pricing. $23.09, $42B, cash is 3/4 of the market cap.  $70B in tax shields; no taxes in US for a decade. EV is actually only $6B when you take these things out. $6.6B in EBIT this year, P/E depressed due to cash hoard earning nothing.  Consensus is too low, SAAR may be higher than street.

GM is #1 in China and growing faster than industry.  Europe is a problem and should restructure to at least break even by 2015. Government stake is an opportunity, not an overhang. US demand is 16M units:  Scrap is 13.2M units/year in a normal year. Ave age is now 11 years, up from 9 a decade ago.  5.5% scrap rate implies 19 year average life. Population growth alone is 2M units of annual demand. Recessions cause less vehicles per driver, but it rebounds as economy does.  This is 500k units/year. His SAAR is 16M units, not peak, but midcycle. Implies 315k incremental units for GM, $1.00 per share eps. 60% of units new in 2013/14 vs. 23% in the last 2 years. 2013 Cadillac ATS- "Esquire Car of the Year"

Does not believe European losses will persist indefinitely. $42B market cap, $32B cash, and $6B revolver.  So $38B total liquidity.  What should it do with its cash?  Government has 50M shares.  Repurchase of these is accretive, even at $30 per share, costs $15B.  $53 is break-even, so no sale will occur before election.  If Obama is re-elected, he may be willing to sell at a loss. Otherwise, they could still do a large open market buyback instead. 2014 "taxed" earnings could be $6 in 2014, $8 cash earnings.  This is midcycle, not peak result, so deserves a better multiple.


2.  Long Cigna (CI):  Lots of work. Have to understand HMOs, then Obamacare, then how it influences CI.  Then you have to understand their non-HMO businesses. Investors don't like HMOs now.  Earnings are hard to predict from Q to Q.  Obamacare scares investors.

Scary things: Humana (HUM), Wellpoint (WLP), Healthnet (HNET) all missed this year.  Obamacare: capped profits, risk of financial penalties 

Bull case: Secular growth, high barriers to entry, big players have scale already.  Still, ROE has been strong over time. CI is the best performer in the group.

Things that won't affect HMOs: Greek debt, Europe, China slowing, etc. They reprice annually so they always make money.  Obamacare is just "a homework problem" that can be analyzed. Also has Group Disability/Life and International business. 82% is non-risk bearing ASO business.  PBM is a potential high multiple sale GDL segment is consistent source of earnings despite weak employment trends. International is for multinational corporations' employees living overseas.

Trades at 7.7x 2013E, at a discount to sector which is cheap already.  You can see further comments from Einhorn on Cigna in Greenlight's Q2 letter.


3.  Short Chipotle (CMG):  Trades at 35x, nosebleed valuation. Average sector multiple is 22x. Compares to PF Chang, Boston Market.

Restaurant business:  low barriers to entry, Obamacare brings additional costs since they don't currently provide health care for employees, summer drought affects costs in coming periods.

The biggest near-term challenge: A resurgent Taco Bell (part of Yum Brands ~ YUM).  Most analysts think Taco Bell is low-end quick service restaurant, and CMG competes with higher end Panera.

He did a survey of CMG customers, and they actually visit Taco Bell almost as much.  Taco Bell SSS up 12% last year, while CMG missed. Taco Bell has more locations and cheaper menus. Taco Bell has decided to compete directly with CMG with their "Cantina Bell" menu which is almost exactly the same, but with 35% lower prices. 2/3 of CMG customers that tried Cantina Bell thought it was good; almost 1/2 liked it as much or more. Makes sense, Taco Bell has more money, locations, and can just add the Cantina Bell menu items to blunt CMG competition. Lots of insider selling as well.


4.  Short Green Mountain Coffee Roasters (GMCR):  He believes there is still accounting fraud. CEO said they had an investigation, but only took 23 days. Cites the SBUX "Verismo" system. Agreement for K-cups with SBUX is vague- how long?  CAPEX/sales is very high, 9-11-13% of sales, vs. industry average of 3.3% He also says a price war is coming, and GMCR generated no FCF during it's years as a monopolist.  Thinks the stock has further downside.  You can view Einhorn's presentation on GMCR from last year if you haven't seen it.


Question & Answer Session:

Does he like Yum Brands (YUM)?  Likes Taco Bell, but KFC in China may hurt too much. Not long.

Future price for CMG?  He says "we don't have to worry about that, we just think risk-reward favors the downside." GM, is government stake affecting sales?  He says they will sell sooner rather than later, and they are a passive role.  Chevy Volt obviously not going well and it's a tiny part of GM's business.

Anything on Moody's (MCO)?  Still thinks it’s a short, lawsuits are very persistent.

What about Apple (AAPL)?  His opinion unchanged

He's short steel, which he says is a hedge in a way, and lower steel prices are good for autos.

On Cigna (CI)?  "Less than 1% of the business is individuals"

Comments on St. Joe (JOE)?  Says they finally had a conference call, sales are zero, says you should listen to it.  Management, other than CFO, were too busy to take questions.


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

(.PDF coming soon)

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

David Einhorn on Apple, Green Mountain Coffee & Amazon (Interview)

Fresh off taking third place in a World Series of Poker tournament with a $1 million dollar buy-in (and donating winnings to charity), David Einhorn of hedge fund Greenlight Capital gave a rare appearance on CNBC this morning talking about a myriad of topics.

Here are the major takeaways from his talk with the full video below:

- Einhorn thinks near-zero interest rates are depriving savers and raising prices on food and other necessary items.  He'd tell Bernanke to raise rates.

- It would appear that he's still short Green Mountain Coffee Roasters (GMCR) as he said "Yeah, the Keurig is on the way out."  Einhorn talked about some of his other short positions in his Ira Sohn Conference presentation.

- Thinks he'll be in the Apple (AAPL) investment for "a good while longer" and he thinks it's "substantially undervalued ... it's the best big growth company we have ... and it trades at a multiple below the average of the S&P 500."  He's already been in the investment for 2-3 years.

- On Amazon, Einhorn is not long or short.  He made comments about Amazon in his Ira Sohn presentation that caused confusion a few months ago.  Today he said that "AMZN is very tough on its competitors... it doesn't feel compelled to make a profit ... it's very hard to compete against someone who doesn't want to make a profit."  He clarified that he was mainly talking about how AMZN is negatively affecting other companies.

- On Herbalife (HLF):  Commentators pressed Einhorn on whether or not he was invested in Herbalife.  Einhorn showed up on one of the company's recent earnings calls and asked some questions.  The stock sold off heavily as many assumed Einhorn was short or was planning to short HLF.  Today, Einhorn declined to talk about whether he had a position in the name long or short.  But he did so with a big smile, so all you poker players out there can try to read into his body language to see if he might be giving a "tell."


Embedded below is the video of David Einhorn's video interview:



For more on this manager, we've highlighted how Einhorn recently added to his Seagate stake and you can also check out Greenlight Capital's Q1 letter.

Greenlight Capital's Q1 Letter: David Einhorn Defends Apple, Still Short St. Joe

David Einhorn's hedge fund Greenlight Capital is out with its first quarter letter to investors.  In it, the hedge fund details why they're long Apple (AAPL), why they're still short St. Joe (JOE), as well as updates on Seagate Technology (STX) and the Japanese Yen.


Net Exposure & Top Positions

Greenlight's average net exposure during the quarter was 36% net long (95% long & 62% short).  Their top five largest disclosed long positions were (in alphabetical order): Apple, Arkema, General Motors, gold, and Seagate Technology.  The hedge fund opened up to new money for the first time since 2008 which is also worth pointing out.


Refuting Apple Concerns

Greenlight presents the 'bear case' concerns often highlighted by investors and then refutes them.  They write,

"1. Too many hedge funds own AAPL.  It's not clear what the objection is here.  We suppose the worry is that there is a herd mentality among hedge funds, and that when one fund sells, there could be a cascade of hedge funds selling shares and the stock price will collapse.  Moreover, if everyone already owns AAPL, who is left to buy it?  Collectively, hedge funds currently hold less than 5% of AAPL's outstanding shares, and no hedge fund ranks among the top 40 holders of the stock.  The average hedge fund has less than 2% of its equity assets in AAPL versus AAPL's 4% weighting in the S&P500, which means hedge funds are actually underweight AAPL."


Einhorn's fund also points out that while many detractors view Apple as a hardware company potentially subject to decline, Apple is actually a software company that has repeated sales of high margin hardware. 

This is a perfect characterization that many seem to miss.  After all, many users bought Mac computers to get away from various viruses and "blue screens of death" often associated with Microsoft Windows.  In order to get the software, though, consumers have to buy the expensive hardware.

For more from this hedgie, head to David Einhorn's presentation at Ira Sohn as well as his slideshow on preferreds.

Embedded below is David Einhorn & Greenlight Capital's Q1 letter to investors:




Einhorn will be presenting his latest stock pick at the Value Investing Congress in NYC in October.  Market Folly readers can receive a discount to the event by clicking here and using code: N12MF3

Long/Short Equity Investing Panel: Whitney Tilson (CIMA Conference)

Continuing the series of notes from the CIMA Conference (Columbia Investment Management Association), we turn to the long/short equity investing panel with Whitney Tilson of T2 Partners.

Whitney Tilson On Various Longs/Shorts & Lessons Learned

On His Netflix (NFLX) Trade: over 2 years, they’ve broken even. Shorted at 100, covered at 200, felt smart as it went to 300. Wanted to kill themselves as their short thesis played out, got back long on the day in blew up going from 120 to 77 in a day.

Lessons: what they missed on the short side: very dangerous shorting an open-ended situation with a lot of momentum. Both stock and business had momentum, and they didn’t fully appreciate the quality of the business or the momentum the stock has.

Why was he short? Because P/E was 75x, also NFLX needed to invest heavily in streaming content to grow, which would have compressed margins. It happened, should have been more patient before entering the short. Now, balance sheet has tripled in a year, CEO has given up on core business, has bet entire company on the streaming business, with 3B of deals, which is senior to the debt. Stock could be 1000 in 5 years, or zero in 5 years. Each incremental sub is almost pure profit. Good news is they learned the company VERY well and could act very quickly when the stock collapsed. “We didn’t change, the stock price changed.” Every stock in the universe is a long at one price and a short at another price.


On Berkshire Hathaway (BRK.A / BRK.B): 15% position, held continuously for 13 years. Upside, worth 170k, up from 117k. Based on investments 100k per share, then 10x multiple on operating businesses, add it together. Any method you value it, worth at least 150k. Buffett buys it back at book. 8% downside, 50% upside stock. Railroads, housing sensitive business are doing great, insurance business is getting better. What is the bear case? No catalysts. No activists, can’t break it up, no dividend. Cheapness is the only catalyst, and the valuation gap will close. Single biggest area of cheap stocks, they are cheap on risk-adjusted basis.


Tilson on His Short Positions: Says to size your shorts small. Has there ever been a $10B market cap that traded at 10x REV that didn’t collapse?

Lululemon (LULU), Salesforce.com (CRM): good businesses at ridiculous prices

Green Mountain Coffee Roasters (GMCR): OK business, may be chance of fraud of channel stuffing. See David Einhorn's short thesis on GMCR here.

Interoil (IOC): interoil, claims to have found world’s largest natural oil field in Papua New Guinea, they think the value is zero.

Nokia (NOK), Barnes & Noble (BKS): terminal value zero, thinking of adding Research in Motion (RIMM) to the list, waiting for a bounce. Tricky with a lot of cash, doesn’t expect NOK and RIMM to survive in Android business. Bigger, better player can go under- Borders Books failed, BKS will be next. Any time you’ve seen a stock that has moved a lot, and you say, “I missed it.” Instead, stop and do your work, pretend like it never was at a price before. Only thing that matters is where the stock is today and where it’s likely to be in the future.

Two types of shorts: both very tough. Where is it on the life cycle? Broken momentum shorts. Value traps. Best Buy (BBY): value trap, or say it’s trading at 8x FCF?


Q&A Session:

On Hedge Fund Management Fees & Investor Expectations: If you’re having a ballet in an auditorium, that’s fine, as long as you say that outside. If it’s a rock concert, that’s fine too, as long as you’ve labeled it as such. The problem is when you say it’s a ballet and it’s a rock concert. Make investors aware of exactly what your style is. He’s more volatile than the average hedge fund, so they communicate with their clients frequently. Had only single digit redemptions last year, up 12% so far this year. Manages ~$150 million: if he thought cutting fees would get him to $1B, he would do it. The money chases performance regardless of fees anyway. No clever fee arrangement works anyway.


For the rest of the notes from the CIMA Conference, head to these posts:

- Dan Loeb: Lessons He's Learned as an Investor

- David Einhorn Question & Answer Session

- Bruce Berkowitz's Basic Checklist for Investing & What He's Learned

- Distressed Investing Panel (Dan Loeb & Daniel Krueger)

- Bill Miller on What Stocks He Likes Now

- Michael Karsch on Risk Management

- Bruce Greenwald's Market Comments

David Einhorn's Extensive Q&A Session from the CIMA Conference

Continuing the series of notes from the CIMA conference (Columbia Investment Management Association), we move on to the portion with Greenlight Capital's David Einhorn. He did his entire session in question and answer format.

David Einhorn's Q&A Session (CIMA Conference)

1. How do you look for ideas on a day-to-day basis? No method for doing it. We are looking for situations where we think something is mispriced. We start with a story, a thesis of why it’s misvalued. There is no systematic way to do this; it’s like going to a bookstore to browse for books. We don’t start with “is it cheap?” That’s easy to find on the computer, but we view cheap as secondary situation. Our goal is weed out as many things as fast as we can.

Example? Process is lack of a process. Sometimes an analyst generates the idea, sometimes other fund managers, a conference, or an idea dinner. Market Folly note: you can also get a good look at Einhorn in action in his book: Fooling Some of the People All of the Time. Be sure to also check out Einhorn's recommended reading list.


2. Once you have an idea, what is your edge? We want to find out what the misunderstanding is. Sometimes it’s a conspiracy to misinform people. Wall Street has this agenda. We like to identify something in which the public has been misinformed. How do you know you’re right? That’s what the work is. We find out what everyone thinks, and then what we think, and then we test it. What we need to know to convince ourselves that we understand it. Fairly informal process, not a firm checklist.


3. Where do you see the most promise today- an example? Long first: large position in AAPL. What could we possibly figure out that not every other person on the planet could figure out? Come to the view that large cap stocks have the same efficiencies as small cap stocks if you take a step back. Compare to KO a decade ago, selling bottlers to make earnings, and it was a high multiple stock. We didn’t short it because, we thought, “What could we possibly know about coke?” KO then declined like crazy- we realized we were making a big mistake by ignoring large companies with large inefficiencies.

What is the inefficiency at AAPL? It trades at a low multiple because people have seen the history of hardware companies, such as the Motorola RAZR, which has been learned. Issue with AAPL is it started with the iPod, got all your music. Now you have the music on your iPhone. TV, iPad, photos. Once you have an Apple device, you buy a second. You become an “Apple customer.” You’re not going to choose your next phone by it being 5% better than the iPhone5. Most people will just go buy the new iPhone5. It’s not a one-time hardware sale; you need a new one every 2 years. They simply wear out, it’s not just to get better phone. Market thinks it’s a hardware company that could lose its edge. Instead, it’s a growth, recurring revenue business that the market has refused to award it. The majority of market practitioners misunderstand it. Bought at 60, sold at 80. Watched, watched, and bought back at 240.


4. More on AAPL: TVs with low margins. Answer: (Note that AAPL shares have jumped 25% since he made these comments) At this valuation, you are not paying for TV at all. You’re not even paying for the current business. $390 per share for business ex cash, earn $45, getting it at 8x p/e. Grew rev at 70% last year, still penetrating the world on early stage iPads, geographically still penetrating for iPhone, especially in China. Even on a bad day, that multiple should be more than a premium of the market. Best company on the market, and trading for half the market premium. Room for value destruction at this price. Never done big acquisitions, R&D expenditure is tight, CAPEX is smart. On TVs: they’ll have to revolutionize the TV like they have the iPhone. Otherwise, they won’t do it. The cable companies might even subsidize the TV. But you don’t have to be right about the TV to make money on the stock.


5. Risk/position sizing? He doesn’t believe in any of the quantitative measures of risk- instead the common sense of risk- how much can you lose? How quickly can you get out of a position? Never bet the whole firm on one position. Large long position is small double digits. Short position smaller, because of upside risk.


6. On poker: skills are somewhat related, you have some information you can see for sure, and some you can deduce, and then you have the future which is a range of possible outcomes. You try to optimize it based on all these factors. In the past, we've highlighted the growing number of hedge fund managers that play poker.


7. Japan- still in trouble, out of the money options are mispriced because people pricing them are using VAR, which is fundamentally flawed.


8. Gold: how do you value it? He is long a lot of gold, has been for a few years, since the financial crisis. Moved all the problems from the private sector to the public sector, which will have an effect on the currency. Gold is money; you don’t value it for its use as a productive commodity. This money only grows at 1-2% per year and the other kind of money changes whenever the central banks decide they need to lend the banks a trillion euros. Policies being pursued now are fraught with risk. Makes sense to have a fraction of your assets that is not exposed to the consequences of their decisions.

Einhorn originally bought physical gold in 2009. Since then, he's also bought gold miners.


9. Emerging Markets? Don’t invest in emerging markets; not comfortable with accounting, risks.


10. Walgreens? Thought about being long WAG, due to fight with ESRX. Idea is they will make up eventually and the stock will pop higher. First, figured out they can’t get any edge on whether they work it out or not. Now they think that since WAG customers can’t use ESRX, it is already a permanent loss for WAG because they may change already. Compromise will still be a lower price per prescription, so everyone else will want the same deal as ESRX gets with WAG. Caremark could demand the same deal since ESRX did. Believe it will be a more sustained, permanent impairment of earnings.


11. Why doesn’t Android win? AAPL has high switching costs. They don’t have a lifetime guaranteed annuity, what they have is a happy, loyal customer. Most of the time these types of franchises have 20-30x multiples, but it’s being priced as a deteriorating business, which it’s not.


12. Fed Balance Sheet: He can’t figure out what the implications of the increased fed balance sheet means, and he doesn’t need to for holding his longs. We’re not going to know what could go wrong, it’s almost certain to be something we don’t think it will be. The fed chairman is a “fanatic” who is living out his academic thesis. We could have a real problem on the way out.


13. New York Mets: of all of his investments, he thought for sure this was the most certain to be negative risk-adjusted return, which made it so irritating that he couldn’t do it.


14. Research in Motion (RIMM): has problems, but could be an interesting long (Einhorn established a new long position in RIMM in Q4 2011). Critical mass for app developers, and they may have missed it. Has a good B/S, trades at a low multiple, and has some IP that a lot of tech companies would want. Trades on a run-off basis, it’s a reasonable speculation that it won’t melt. Not a fantastic investment, but the price has come down so far, that it makes no sense to short it.


15. Shorting GMCR and being public about it - do you have confidence in the SEC? He has no confidence in the SEC. There are about 20 or 30 ways he can win on the GMCR short, but SEC is not on the top of the list. Accounting practices are rather blatant and obvious that the SEC should do something about it, but they don’t look likely to do anything.

If you haven't seen it yet, you can view Einhorn's short case on Green Mountain Coffee Roasters (GMCR).


16. Time arbitrage: he thinks their time horizons of 1-3 years is longer than most market active participants. Most hedge funds under 6 months, long only 6-12 months. Don’t want to hold things that could be in half before it works. But don’t say “dead money” because it could move when you least expect it.

MF note: Blue Ridge Capital's John Griffin has often classified investments as time arbitrage or catalyst driven. Joel Greenblatt's Gotham Capital also utilizes time arbitrage as part of its investment strategy.


17. Long DELL: AAPL is much better than DELL, but DELL has been a great business innovator. They were lousy capital allocators, bought back stock at 40-50x earnings. Then once the stock collapsed, they bought businesses at high multiples instead. In the middle of 2011, they woke up and started buying back stock cheap. They haven’t made any bad acquisitions lately either. $15 stock, $7 per share, $2 EPS, getting stock at 4x P/E even if they’re not growing fast. If they use part of the $7 to buy back stock, you could win. Misunderstanding is at least half of their business is not PCs or notebooks. If you put 8x p/e on other stuff, you get the PC business for free. You can see further thoughts on DELL in Einhorn's investor letter.


18. Industries he won’t touch? He learned to never say never. Six months before he bought gold, he said never to buy gold. His mind can change at times. Betting on outcome of clinical trials is very challenging, and he has no expertise. But he still won’t rule it out. He never would have a large allocation in technology 11 years ago. Time and place for everything just recognize which areas are harder for you.


19. Economics is not a science, it’s an art. He’s very critical of it, people make some very bad conclusions that have had awful consequences for our society. Winning Nobel prizes, but enacting their views as if their science instead of art, have had huge negative consequences.


20. Online gaming? He has no idea how it will sort out. If it opens up, it will be very competitive.


21. St. Joe (JOE): concept stock runs into a math problem. You know exactly what the values are today, because you have transactions and you know what the value is. They can’t create value through actively managing. All they can do is reduce the amount of value that’s being destroyed every day. Land worth $7, stock worth $14. not levered, but it’s also good that it can’t rocket up either. Only way it works is if they discover oil, and his diligence says they’ve already looked.

If you haven't seen it, check out Einhorn's short thesis on JOE.


22. Commodities business? Very hard- need to figure out the normal price of the company, and see if the business is value added or subtractive, and then see if the business is cheap. So when the prices swing quick, you can get hurt badly. You need to have an insight on which way the commodity price will go.


For the rest of the notes from the CIMA Conference, head to these posts:

- Dan Loeb: Lessons He's Learned as an Investor

- Distressed Investing Panel (Dan Loeb & Daniel Krueger)

- Bruce Berkowitz's Basic Checklist for Investing & What He's Learned

- Long/Short Equity Investing Panel: Whitney Tilson

- Bill Miller on What Stocks He Likes Now

- Michael Karsch on Risk Management

- Bruce Greenwald's Market Comments

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 Short Green Mountain Coffee Roasters (GMCR): Value Investing Congress Presentation

At the Value Investing Congress in New York today, David Einhorn of hedge fund Greenlight Capital revealed he is short Green Mountain Coffee Roasters (GMCR) in a presentation called "GAAP-uccino".

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


David Einhorn (Greenlight Capital): Short GMCR

Einhorn famously gave a presentation on shorting Lehman Brothers a few years ago and shorting St. Joe (JOE) last year at the same conference. This year he's back with a short of GMCR. Whitney Tilson of T2 Partners has been short GMCR for a while as well.

Embedded below is his full slideshow presentation:



Einhorn began with company background and the well-known bull case. Green Mountain Coffee is a K-cup company with a razor-razor blade model; 95% of business is at-home use.


Bull case: 64 million households drink coffee, 1/3 buy K-cup machines, 2 cups per day, 15.5B k-cups, 0.15 profit per cup, get $1.4B profit, on 160M shares is $8 eps. Recognized brands like Starbucks, Dunkin Donuts will grow installed base, and bring higher margins. Management calls itself the “iPod of coffee.” Great income statement growth in last few years, aided by acquisitions. And the stock has done very well: 57x P/E, 35.6x next year estimated eps. Up 185% this year, best stock in SPX 1500.

Einhorn then moved onto criticizing the company: Poor transparency. Doesn’t even report lbs shipped, k-cup units, or precise Keurig brewers units. GMCR has cut their amount disclosure over time, which is what companies usually do when metrics are deteriorating.


Bear case: The opportunity is smaller than bulls believe. Attachment rate is smaller than bulls believe and is declining. They already have widespread distribution and brand awareness. Machines are expensive, $250 vs. $80 Mr. Coffee, or cheap $20 brewers. K-cups are much more expensive compared to buying the bags of coffee yourself, 60 cents per serving vs. as cheap as 5 cent per serving. This limits the actual available market to about 20M households, not 64M. Growth in retailers selling Keurig is slowing.

Attachment rate is declining or flat, only about 1.3 per brewer per day. GMCR doesn't disclose the attach rate!

Starbucks deal: non-exclusive and multi-year, in stores and at SBUX. Deal does not apply to next generation brewer - SBUX keeping its options open? About $0.22 estimated profit per K-cup. How will they split it? Using Smucker’s deal, can estimate that GMCR only got .06 of .17 total profit, to make the k-cups. Therefore, SBUX should get 2/3 of the 22 cents, leaving GMCR only 7 cents. In fact, SBUX deal could cannibalize their other K-cup sales.

GMCR hasn't generated much FCF. In fact, it's been negative for 4 years. Due to acquisitions and CAPEX, they are burning cash and expect to continue. ROIC only 16.3%, yet high multiple, doesn’t justify current stock price.

Competition/Patents: Bulls say patent expiration unimportant due to large market share. However, patents that keep others from making k-cups for the existing brewers may be expiring in 2012. Competitors will be able to produce k-cups!

GMCR has been buying out licensees and paying too much. Usually allocates 95-104% of the purchase prices to good will when buying them. Goal may have been to avoid competing with licensees when patents expire. Big deals with SBUX, Dunkin are to mitigate competition when patents expire. Only advantage they have is contract manufacturing, which is a lousy business. GMCR may instead create a totally new system to stop others.


Bear Case Summary: GMCR will no longer have monopoly on making the K-cups next September. Others will gear up to enter the market with much cheaper alternatives- they already have the equipment to do it (Crystal Lite maker example). There is lots of branded competition: Kraft, Nestle, and Maxwell House.

Bear case, vs. the bulls $9 eps estimate. Cut attach rate to 1.25 K-cups per brewer, add 20% private label penetration, cut profit per cut to 0.12 from 0.15, gets you $3.50 eps, not $9.00.


CAPEX: Spending a lot on CAPEX that is “unexplained.” As much as $186M in 2011- where is this money going? Next year it looks even worse, $431M in unexplained CAPEX based on their guidance. CAPEX growing faster than the business, when the opposite should be happening.

Recent summer quarter revenue was $717M, 100M higher than Street, all upside on K-cup sales. Historically, they’ve been very predictable. What happened? Implies attach rate soared by 11%, no good answers on the conference call.


SEC inquiry: Revenue recognition practices. Internal investigation exonerated the company. “We believe there may be a material issue.” Something fishy with MBlock, the third-party fulfillment company that handles their distribution and inventory. 51% of accounts receivable were to them. Einhorn’s people have interviewed witnesses who spoke of phony transactions that had revenue recognition issues. Former workers may have been fired for asking too many questions! The company uses excel instead of stronger ERP software; open to abuse and mistakes. Keurig was shipping stuff to themselves according to an interview. Believes this may explain the excess K-cups sold in the quarter. Significant problems with expired coffee. His interviews with ex-employees showed astounding levels of inventory discrepancies- shipping to themselves, expiring coffee, sales that never happened.

He says there's been a lot of surprises with recent accounting and he accused management of "shenanigans" (SuperTrooper anyone?) After his presentation, GMCR stock was down as much as 12%.


Conclusion: Market is smaller and more penetrated than bulls believe. Attachment rates matter and they are falling. $3.50 eps is more likely than $9.00. The patent expiration is a real problem. The March quarter was such a surprise that it was suspicious, especially in light of conversations with workers. GMCR did a big stock deal, where insiders sold, right after the 19% jump in the stock after the quarter. The accounting is aggressive, transparency is limited, and controls seem to have material weaknesses. GMCR is a serial issuer of stock for acquisitions, while insiders have sold in droves. Limited FCF, large number of warning flags here.

It should be noted that GMCR has largely been labeled a "momentum stock" and some of the top holders include hedge funds like Philippe Laffont's Coatue Management, Steve Cohen's SAC Capital, and John Thaler's JAT Capital.


Q&A Session:

1. MBlock owners or relationship? Unclear.

2. NPD data shows evidence of good growth - how do you reconcile this with what you find? "No doubt they are selling a lot of coffee. We have seen an increase in expired or nearly expired coffee."

3. Will the SEC do anything here? They've been here for a year, there is some hope.

4. Vodafone? Says the thesis is playing itself out.

5. Sprint, any change in outlook? They're trying to do a lot of things at once. Still like the stock, despite high amount of debt, company still has access to funding without diluting shareholders. Strategic asset to a number of large players. What they are doing now makes a lot of sense, if we are sufficiently patient, if anything goes right, we have a chance at an asymmetrical return.

6. Japanese bonds, surprised they've rallied? Yes, but Japan is in a tough spot due to so much debt and budget deficit, bad demographics (Kyle Bass of Hayman Advisors has been short Japanese JGBs).



In our September hedge fund performance numbers post, we highlighted that Greenlight was -0.76% in September and -6.16% for the year at that time.


About David Einhorn: He manages the $7 billion hedge fund Greenlight Capital. He is the author of Fooling Some of the People All of the Time which is a great read. We've also posted up David Einhorn's recommended reading list for all aspiring fund managers.

Earlier this year we also posted up Einhorn's presentation on Microsoft (MSFT).



You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

John Thaler's JAT Capital Boosts Green Mountain Coffee Roasters (GMCR) Stake

John Thaler's hedge fund JAT Capital just filed a 13G with the SEC regarding Green Mountain Coffee Roasters (GMCR) due to portfolio activity on December 6th. JAT disclosed a 5% ownership stake in GMCR with 6,602,008 shares. This is an increase of 128% in their position size as they held 2,890,042 shares at the end of the third quarter. Drilling down the specifics of JAT's current position, the hedge fund firm owns 4,102,008 common shares and then their additional 2,500,000 shares are represented by call options.

Green Mountain Coffee Roasters is an interesting stock because it is essentially a 'battleground' of hedge fund opinion. This name has high short interest but at the same time, some notable funds hold long positions. At the end of the third quarter, some of the big holders were JAT Capital, Stephen Mandel's Lone Pine Capital, Patrick McCormack's Tiger Consumer, Brett Barakett's Tremblant Capital and Steven Cohen's SAC Capital.

Prior to founding JAT Capital, John Thaler worked at Shumway Capital Partners where he covered telecom, media and technology and then managed the internal Omni fund. Thaler earned his BA in Economics at the University of Chicago. JAT employs a long/short equity strategy with an emphasis on proprietary fundamental research. In 2008, the fund returned -5.9% compared to an S&P return of -37%. JAT finished 2009 up 23.2% gross. Thaler brings a private equity-like approach to investing due to his days at Spectrum Equity Investors, a private equity firm focused on technology.

Per Google Finance, Green Mountain Coffee Roasters is "engaged in the specialty coffee and coffee maker businesses. The Company operates in two business segments: the Specialty Coffee business unit (SCBU) and the Keurig business unit (Keurig). SCBU sources, produces and sells more than 200 varieties of coffee, cocoa, teas and other beverages in K-Cup portion packs and coffee in more traditional packaging, including whole bean and ground coffee selections in bags and ground coffee in fractional packs, for use both at-home (AH) and away-from-home (AFH)."

Scroll through the latest hedge fund activity here.

Brett Barakett's Tremblant Capital Bets Big On Research In Motion (RIMM): 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is Brett Barakett's hedge fund Tremblant Capital Group. Before founding his own firm, Brett previously was a portfolio manager for Louis Bacon's global macro hedge fund Moore Capital. Taken from their site, Tremblant Capital Group's objective is "to achieve superior risk adjust returns for our investors through our focused and disciplined investment process." The name Barakett might ring a bell because his brother Timothy used to run fellow hedge fund Atticus Capital (who previously announced they'd be shutting down). So while Timothy may have stepped away from the hedge fund game, Brett is still going at it. And, in his spare time he enjoys ice hockey.

The positions listed below were their long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. All holdings are common stock unless otherwise denoted.


Brand New Positions
Mastercard (MA) Calls
Macys (M) Calls
Chipotle Mexican Grill (CMG)
Macys (M)
Liberty Media Starz (LSTZA)
CVS Caremark (CVS)
Citigroup (C)
The rest of their new stakes were less than 0.5% of reported assets each: Apollo Group (APOL) Calls, Lowe Companies (LOW), AGA Medical (AGAM), DirecTV (DTV), Symmetry Medical (SMA), Union Pacific (UNP) Calls, Greatbatch (GB), Liberty Media (LINTA) Calls, America Movil (AMX), Apollo Group (APOL) Puts, Cypress Semiconductor (CY), Gannett (GCI) Calls, & Liz Claiborne (LIZ)


Increased Positions
Research in Motion (RIMM) Calls: Increased by 312%
Procter & Gamble (PG) Calls: Increased by 107%
Charles Schwab (SCHW): Increased by 37.9%
Hologic (HOLX): Increased by 20.5%
Green Mountain Coffee Roasters (GMCR): Increased by 13.6%
Integra Lifesciences (IART): Increased by 13%


Reduced Positions
Walmart (WMT): Reduced by 33%
Visa (V): Reduced by 32%
Apple (AAPL): Reduced by 26%
Mastercard (MA): Reduced by 25%
Procter & Gamble (PF): Reduced by 20%
Redhat (RHT): Reduced by 11.3%


Removed Positions (Sold out completely):
Qualcomm (QCOM) Calls
Chipotle (CMG-B)
DirecTV (DTV) Calls
Redhat (RHT) Calls
Liberty Media (LMDIA)
CBS (CBS) Puts
Viacom (VIA-B) Puts
Palm (PALM) Puts
The rest of their sold positions were less than 0.5% of assets reported on previous filings each: iShares HongKong (EWH) Puts, Intuitive Surgical (ISRG) Calls, iShares FTSE (FXI) Puts, Werner (WERN) Calls, Baidu (BIDU) Puts, Lamar Advertising (LAMR) Calls, Corporate Executive Board (EXBD) Calls, Burlington Northern (BNI), Peet Coffee (PEET), & China Biotics (CHBT)


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

1. Research in Motion (RIMM) Calls: 28%
   
2. Procter & Gamble (PG) Calls: 8.37%
   
3. Procter & Gamble (PG): 3.34%
   
4. Visa (V): 2.15%
   
5. Mastercard (MA): 2.13%
   
6. Mastercard (MA) Puts: 2.09%
   
7. Research in Motion (RIMM): 1.98%
   
8. Mastercard (MA) Calls: 1.97%
   
9. Green Mountain Coffee Roasters (GMCR): 1.91%
   
10. Hologic (HOLX): 1.91%
    
11. Macys (M) Calls: 1.86%
    
12. Baidu (BIDU): 1.67%
    
13. Walmart (WMT): 1.65%
    
14. Apple (AAPL): 1.64%
    
15. Charles Schwab (SCHW): 1.63%
    

Tremblant Capital uses options to express a lot of their positions so keep in mind that this can get tricky when trying to assess their net exposure to a specific stock. For instance, they own Mastercard (MA) common stock, but also own both calls and puts on the name. Since we don't know the strike prices or expiration dates, it's nearly impossible for us to know what their overall bet is on the name. At the same time though, we know they are bullish on Research in Motion (RIMM) because they own both the common stock and and calls. Not to mention, they added massively to their call position over the past quarter.

In terms of other additions, they doubled their stake in Procter & Gamble (PG) calls and started new call positions in both Macys and Mastercard. Of the positions they completely sold out of, Qualcomm was notable because it had previously been a sizable stake for Barakett's hedge fund. Overall though, their portfolio looks pretty similar to last quarter and they've certainly retained (and even expanded) their large exposure to Research in Motion.

There are also a few transactions we need to clarify. In regards to their Chipotle positions, you'll notice they "sold out" of Chipotle's B shares and added a 'new' stake in Chipotle's A shares. In actuality, Chipotle converted into a single shareclass of common stock in the fourth quarter. As such, Tremblant owns the regular CMG shares. In addition, Barakett's hedge fund 'sold out' of LMDIA and started 'new' stakes in DTV and LSTZA. In reality, this was just a result of a merger transaction.

Assets reported on the 13F filing were $3.8 billion this quarter compared to $3.0 billion last quarter, an increase of 28% in exposure to equities and options. Remember that these filings are not representative of the hedge fund's entire base of AUM.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, Warren Buffett's portfolio, John Paulson's hedge fund Paulson & Co, Lee Ainslie's Maverick Capital, Dan Loeb's Third Point, Eddie Lampert's RBS Partners, David Ott's Viking Global, and Chris Shumway's hedge fund Shumway Capital Partners, Chase Coleman's Tiger Global, Philip Falcone's Harbinger Capital Partners, Roberto Mignone's Bridger Management, Thomas Steyer's Farallon Capital, and John Burbank's Passport Capital. Check back daily for our new updates.

Stephen Mandel's Lone Pine Capital Buys a Basket Full of Apple (AAPL)

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.

The third hedge fund we're covering is Stephen Mandel's Lone Pine Capital. The hedge fund, named after a historical lone pine tree at Mandel's alma mater Dartmouth College, has an assets under management (AUM) base well in excess of $8 billion. Mandel's fund had returned 25% annually from inception in 1997 up until the crisis. 2008 was a bad year for them and definitely put a chink in their armor, so now they're looking to get back to winning ways. We track Mandel due to his excellent stockpicking skills as he runs a long/short equity fund that is easy to track. They seek out companies trading below intrinsic value and they also like to see good management teams.

We've already covered some of Lone Pine's recent activity when we noted that they had started a new position in MSCI (MXB) and also a new stake in Green Mountain Coffee Roasters (GMCR). While we're covering their holdings in US equities in the following post, we've also covered their UK positions as well.

Keep in mind that the positions listed below were their 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, starting with the largest new position first and working down):
Apple (AAPL)
Green Mountain Coffee Roasters (GMCR)
Cemex (CX)
Walgreen (WAG)
FLIR Systems (FLIR)
Schein Henry (HSCI)
Walter Industries (WLT)
MSCI (MXB)
Goodrich (GR)
Citrix (CTXS)
Huntington Bancshares (HBAN)
Popular (BPOP)
Estee Lauder (EL)
Dr Pepper Snapple (DPS)
Etrade Financial (ETFS)


Some Increased Positions (Positions they already owned but added shares to)
Discovery Communications (DISCA): Increased by a massive 24,581% (they held relatively few shares in the quarter prior)
Sears Holdings (SHLD) Puts: Increased by 207%
Southwestern Energy (SWN): Increased by 197.6%
Mindray Medical (MR): Increased by 96.6% (but still a relatively small portion of their portfolio)
Vistaprint (VPRT): Increased by 40%
JPMorgan Chase (JPM): Increased by 30.4%
Liberty Media (LMDIA): Increased by 28.9%
Hewlett Packard (HPQ): Increased by 16.4%
Pactiv (PTV): Increased by 9.4%
Monsanto (MON): Increased by 7.2%


Some Reduced Positions (Some positions they sold shares in)
Philip Morris International (PM): Reduced by 86.5%
Fomento Economico (FMX): Reduced by 86.5%
Coach (COH): Reduced by 62%
America Movil (AMX): Reduced by 57.4%
Deltek (PROJ): Reduced by 43.8%
Coca Cola (KO): Reduced by 38%
Vivendi (VIV): Reduced by 35%
Smithfield Foods (SFD): Reduced by 26.6%
Qualcomm (QCOM): Reduced by 26.2%
McDonald's (MCD): Reduced by 24.7%
Priceline (PCLN): Reduced by 20.9%



Removed Positions (Positions they sold out of completely)
Nike (NKE)
Google (GOOG)
Ecolab (ECL)
Urban Outfitters (URBN)
Union Pacific (UNP)
XTO Energy (XTO)
MSC Industrial (MSM)
Sandridge Energy (SD)
Mead Johnson (MJN)
Fifth Third Bancorp (FITB)
Suntrust Banks (STI)
Progressive (PGR)


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

1. JPMorgan Chase (JPM): 8.91%
2. Monsanto (MON): 8.07%
3. Apple (AAPL): 7.12%
4. Qualcomm (QCOM): 6.55%
5. Hewlett Packard (HPQ): 5.78%
6. McDonalds (MCD): 4.51%
7. SPDR Gold Trust (GLD) Calls: 4.24%
8. Priceline (PCLN): 3.81%
9. Visa (V): 3.79%
10. Green Mountain Coffee Roasters (GMCR): 3.49%
11. Strayer Education (STRA): 3.47%
12. Mastercard (MA): 3.00%
13. America Movil (AMX): 2.73%
14. Southwestern Energy (SWN): 2.68%
15. Coca Cola (KO): 2.31%
    

The most noticeable thing about Lone Pine's portfolio is the gigantic stake in Apple (AAPL) they started. As of their last 13F filing (Q2), they did not hold a stake. So, in that three month period, they accumulated over 3 million shares and brought it up to their third largest holding in US equities. The second notable new position was the one they initiated in Green Mountain Coffee Roasters (GMCR), but we had already covered that as per their 13G filing on the name. JPM was their largest holding as of Q3 as they boosted their position in it by 30%.

In terms of positions they already held but increased, they definitely boosted their Discovery Communications (DISCA) stake in a big way. This is mainly because they held so few shares in Q2, but it's still worth highlighting. We also want to point out they ramped up their stake in Sears (SHLD) puts by over 200%, as it appears they are bearish on the name.

Their most notable sale was in shares of their longtime favorite America Movil (AMX). As we've detailed in the past, numerous of the 'Tiger Cub' hedge funds had been invested in AMX but suddenly started to sell it off. That is, all except Lone Pine, who was adding to their position in quarters prior. Now this quarter marks the first time in a while we have seen them sell shares of AMX in a big way, cutting 57% of their position. It had previously been their fourth largest long position in US equities and we'll have to keep an eye on this to see what they do with it in the future.

Also worth pointing out is that Lone Pine's portfolio is littered with a bevy of other sales. They sliced their stakes in Philip Morris International (PM) and Fomento Economico (FMX) both by over 85% and they also cut Coach (COH) by over 60%.

*Update: Lone Pine just filed an amended 13F with the SEC and actually disclosed that they still did own 2,499,729 shares of Vistaprint (VPRT) on September 30th, 2009. You can read our full update on the situation here. Originally, VPRT did not appear on their 13F so it looked as if they had sold out of the position entirely just months after boosting their stake back in August. But, in the end, it appears that they did not sell out of VPRT after all. What's interesting to note about this company specifically though, is that VPRT receives around 40% of their net from referral fees that they earn from forwarding customers' credit card information to third parties. The Senate commerce committee recently had a hearing on these practices following a 6 month investigation. So, VPRT's revenue stream could possibly be in jeopardy, but we'll have to wait and see how that plays out. In the end, Lone Pine did still own shares of the company as of September 30th, 2009 and actually increased their position by 40% on a quarter over quarter basis.

Lastly, given all the buzz about gold, it's also worth noting that they still retain their gold position via calls on SPDR Gold Trust (GLD); the position was unchanged and represents a decent chunk of their portfolio.

Assets from the collective holdings reported to the SEC via 13F filing were $8 billion this quarter compared to $7.37 billion last quarter, so a slightly noticeable tick to the upside. 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 and Bill Ackman's Pershing Square, and this is just the beginning of the hedge fund portfolio updates, so check back daily.