Invest For Kids Chicago Conference Notes 2018: Griffin, Zell & More

The Invest For Kids Chicago 2018 conference recently took place.  It featured investment managers sharing their latest ideas to benefit underprivileged children in the Chicago area.  Here's notes/summary of the event:


Notes From Invest For Kids Chicago 2018

Ken Griffin (Citadel Investment Group):  Took down risk in August.  Hasn't felt comfortable with lots of risk in about a decade.  Says there's lots to worry about and October has obviously thus far been volatile, but this is where portfolio managers can shine.  Sees lots of opportunity for Citadel in commodities.  Says to hire great people then delegate.


Sam Zell (Equity Group Investments):  Macro commentary, lots of uncertainty about next month's elections.  Long cash, maybe gold?  He thought we were in the 8th inning a few years ago, elections have since taken us into extra innings.


Christopher James (Partner Fund Management):  Long Intuit (INTU).  Known for its TurboTax and QuickBooks products, proprietary datasets are where the real value is.  Big Data + Workfroce 2.0.  New "One Intuit" ecosystem driving value as well.  People trust the company, are opting into data sharing.  INTU has underappreciated upside and is partnering well with a range of other fintech companies.


Mark Lampert (BVF Partners):  Long Idorsia (IDIA-CH), spin-off from Actelion done in conjunction with Actelion's sale to Johnson & Johnson.  Founders/owners of co are exemplary scientists and business operators.  Invested $525 million into Idorsia, more open market purchases recently.  Insider purchases stand out as among biggest in industry.  Thesis is to co-invest with the Clozels, the founders.


Vivian Lau (One Tusk Investment Partners):  Long Bombardier.  Prior management made a ton of mistakes.  Co has a strong backlog and good long-term demand.


Daniel O'Keefe (Artisan Partners):  Long Dentsply (XRAY).  Depressed earnings/multiple.  Co is growing, has good margins and ROIC.  Says dental spending is seeing secular, long-term growth.  180 million Americans are missing at least one tooth.  XRAY historically trades low-to-mid 20's P/E but has recently been mid-to-low teens.  They overpaid for Sirona, failed merger integration, and have had 4 CEO's in 3 years.  Thinks margins should revert, sees FY19 op margin at 17-21%, EPS at $2.30 to $2.80, stock worth $41-71, currently trades $35.


John W. Rogers Jr. (Ariel Investments):  Long Stericycle (SRCL), long Madison Square Garden (MSG), MSG Networks (MSGN).  People will probably still want to watch live sports, they own very valuable sports rights in a world class city.


Vivien Azer (Cowen & Co):  Long Canopy Growth (CGC/Weed).  Says it's a once-in-a-career disruption and only a matter of time.  Consumer packaged goods companies are getting into the sector.  Target price: C$82.00, 30x sales in three years.


Jeremy Schiffman (Palestra Capital):  Long Airbus.  In the good part of the cycle, about to get even better.  Higher margins to follow: op margins going to mid-teens in next three years.  Worth 180 Euros per share in three years.  Stock buyback is possible next year.  40,000 new aircraft deliveries worldwide in the next decade.  FCF heading from under 3bn Euros to 8bn Euros.  Short U.S. Trucking: (Wener, Knight-Swift, Heartland): good part of cycle right now but about to get a lot worse.  60 PMI likely to mean-revert to 50 or lower; if 40, short makes a lot of money.


Philip C. Ordway (Anabatic Investment Partners): Long Alaska Airlines (ALK).  Advantages from cost structure, customer loyalty, and markets/routes.  Attractive margins and returns on capital.  Current valuation = very low expectations. Secret sauce is Alaska's credit cards: loyalty program generated ~$1 billion of CFFO in '17. Operating margins ~40-50% with zero capital required, membership growing 10-12% per year. Bank of America pays Alaska every month based on members' credit card usage.  Co's integration of Virgin America almost complete, sees FCF >$2 bn in next 3 years. ALK 10% FCF yield, 9x P/E.


Constance Freedman (Moderne Ventures):  Long Fujifilm.  Venture capitalist looking to invest in old industries undergoing technological transformation.  3d printing, augmented reality, digital transactions are technologies applicable to many markets.  Document solutions, healthcare, imagine segments all use disruptive technologies.  Undervalued today relative to peers.  Revenue and profit growth from healthcare and imaging.  Sees 15x E 2018 EPS, 6% ROE


For more recent investment conference coverage, head to our summary of the Great Investors Best Ideas (GIBI) Dallas Conference. 

Dmitry Balyasny Long Hertz: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is
Dmitry Balyasny of Balyasny Asset Management who pitched a long of Hertz (HTZ).


Dmitry Balyasny's Invest For Kids Chicago Presentation: Long Hertz

First time back at the conference in eight years…when he pitched short Japanese government bonds because the 1.5% yield couldn’t go much lower.

Long Hertz (HTZ) – prior management mishandled the company; investors are overly worried about Uber/Lyft.  44% short interest creates big opportunity to be long if things are inflecting.  >5x leverage, previously losing money – many people scared off.

Uber/Lyft threat is overstated – only about 4% overlap.  Now an oligopoly industry – HTZ was the bad actor that over-expanded, dumping excess fleet inventory into the market at low prices; the fleet has now been restructured.  Used car prices may also be turning up.  Credit card data shows positive numbers in recent months.

HTZ is ½ leisure, ½ business – both doing well.  This was the last sloppy quarter, and we want to be long the most levered player as the cycle turns.  HTZ should be able to refi its high-cost debt.  Avis repurchases ~10% of its shares each year and HTZ should get there too.  The majority of their analysts create alpha within the first 3-6 months, and that could be the case here as shorts capitulate and real investors step up to buy the stock.



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

Sam Zell on Retail Real Estate: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Sam Zell of Equity Group Investments who gave his thoughts on the retail real estate industry.


Sam Zell's Invest For Kids Chicago Presentation: Retail Real Estate

There have been “bearish overtones” to each of the past five annual gifts that Sam gives to his friends/partners.

Retail real estate – most people agree about a decline here, but online is still only 8.5% of total retail; it is very early in tech’s impact; everyone is trying to catch a falling knife; where’s the bottom and what’s an appropriate cap rate – open questions; best malls are OK because they’re mini downtowns, and on the other side the strip-center convenience-driven stores are OK – everything in between is an oxymoron; USA has 5 square feet per capita more retail real estate than any other nation; a lot of retail could go away and nobody would notice; Sears, Penney created malls as anchors, but now they are the “anchor” dragging everyone down; free rent is still too expensive if there is no traffic; might be 1-2 years left on a lot of bad leases – big changes coming; we’ll always have some retail, but unclear as to what the right price is.

Taubman is selling at a 6.3% (?) cap rate, but look at some of their peers and look at some of the tenants – who will fill empty stores/leases?  The growth of passive investing and indexations and ETFs is very, very dangerous; many real estate companies now have heavy ownership from entities who aren’t real owners; something will precipitate a regulatory change; ISIS = ISIS; ETFs are untested in a downturn; markets should be about capital formation and price discovery, neither of which apply to ETFs

With low rates, the burden of carrying cash is as low as ever – a great option to hold.  Things don’t grow to the sky – we’ll have a correction eventually.  There is a reasonable chance of tax reform getting done.


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

Amos Meron Long Seritage: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Amos Meron of Empyrean Capital Partners who pitched long Seritage (SRG).


Amos Meron's Invest For Kids Chicago Presentation: Long Seritage

Looking for dramatic life-cycle changes that create opportunities in the market.  There is an ongoing misunderstanding of the Seritage (SRG) - Sears (SHLD) relationship.

SRG was created as a way to carve out (siphon) some of a SHLD’s best real estate – deal was structured as a giant sale-leaseback,  235 properties, 37 million square feet.  SRG can “claw back” certain properties from SHLD over time and redevelop them.

“I’m not dead yet” – all mall-based or retail real estate is pressured, but it’s not all the same. SRG has a national portfolio of really good assets with solid demographics.  SRG is nearing its goal of having 50% of its rent from non-SHLD tenants by FYE 2017; could be 2/3 by FYE 2018.  SHLD pays <$5 per square foot, while the average for new tenants is $19.

SRG trades at $80 per square foot versus $128 for “C” space companies.  SHLD chapter 11 would have a fleeting impact on SRG.  At a 6% cap rate on FY18 NOI, SRG has 40% upside to $60.

Risk is a further fall in retail, so short retail REITS against SRG long.



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

Jimmy Levin Long Chinese Banks: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Jimmy Levin of Oz Management who is bullish on Chinese banks (CCB, ICBC, BOC, ABC).


Jimmy Levin's Invest For Kids Chicago Presentation: Long Chinese Banks

Late in the cycle prefer to look for off-the- run ideas, not classic value investing, but that idea is now the consensus.  Chinese banks are one idea not at an all-time high, and they’re out of favor due to pessimism abroad.

Long-standing local presence yields insights.  Risks here are over-stated or misunderstood.  China is likely to keep doing well – growth, but how much?  At 0.85x BV on a 14% ROE the Chinese big four banks are too cheap – historically they’ve traded above book.   Compared to U.S. and European peers the Chinese banks look cheap.

Worries about a property bubble bursting but inventory is down.  Worries about industrial excesses and overcapacity, but there have been reforms and prices are up.  Worries about restraining credit, but GDP still growing.  Worries about shadow banking, but loans in wealth management products are falling.

The Big Four have safer balance sheets than other banks in China.  At a 15% ROE, at least 10% capital build. 30-60% potential return as the banks re-rate.  Downside case is 65% of BV, down 10% from here – good risk/reward.



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

Rajiv Jain Long Sberbank: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Rajiv Jain of GQG Partners who pitched long Sberbank (SBER.RU).


Rajiv Jain's Invest For Kids Chicago Presentation: Long Sberbank

Russia is not well covered, and the scant coverage is one-sided.  Rajiv has been looking at Russia for 20 years but has missed each of the two bear and bull markets.  Investors see a banana republic, politicians see an existential threat – reality is that things have improved quite a bit.  Despite sanctions, oil volatility, no foreign investment, etc. Russia actually has a good balance sheet and runs a tight ship.  Look at car sales, construction activity, etc.

Now has an independent central bank, and rates should decline.  World Bank “ease of doing business” survey now has Russia #35 in the world, better than Brazil, India or China.  MSCI Russia has 8% CAGR past 20 years – better than China.  Sovereign CDS at 5-year low – equity market is skittish, but bond market is sanguine.

Sberbank has > 50% of mortgages, >40% of retail deposits and loans.  20.8% ROE in 2016 at 1.3x TBV and 5.7x estimated FY18 earnings, all amidst a recession; ROA trough was 70-80bps in 2015 during very difficult macro conditions; very hard to find a bank anywhere in the world with an ROA above 1% like Sberbank’s.

25% dividend payout (3% yield) should rise, and yield could ultimately be 7-8%.  Systemically important.  Massive industry consolidation, flight to quality, technology all help Sberbank.  Earnings could grow 7-10% per year; pre-GFC it traded 2.0-2.5x book; at 10x earnings could return 20%compounded.


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

Rick Reider Long Emerging Markets Debt: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Rick Reider of Blackrock who pitched a long of emerging markets debt.


Rick Reider's Invest For Kids Chicago Presentation: Long Emerging Markets Debt

“Getting income the new-fashioned way”.  Huge, extraordinary demand for income; buy emerging markets debt – hard to find it elsewhere.  Aging populations, lower growth will drive more demand for income.  Tens of trillions of supply-demand imbalance for income.  Would growth will follow the demographics.  Rates may stay low for a long time, especially ECB and BoJ (China, India, USA are a little better).  China is the world’s demand growth driver – up to 40% of world growth is China.  26 of the world’s 27 largest economies are growing right now – rare and extraordinary.

A good capital spending cycle is underway and that bodes well for 2018.  There has been no deleveraging – private debt now on public balance sheets.  A rate increase is daunting – central banks can’t let rates rise in the next five years or else the debts become overwhelming.  Technology is deflationary, although wage pressure is slowly building in developed economies (not in EM).

Emerging market valuations are still attractive: real rates + inflation + credit (CDS) framework shows value.  Equilibrium in energy markets has led to very low volatility in inflation – that stability in emerging markets is a new paradigm.


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

Alec Litowitz's Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Alec Litowitz of Magnetar Capital.


Alec Litowitz's Invest For Kids Chicago Presentation

A new age of decomposition in investing is upon us.  "The long-only paradigm shift" - smart beta, ETFs, etc - is an accelerating trend.

Asset classes and asset allocation now factor investing.  Active is not dead, but active will continue to lose share and get to < 50% share.

A more complete alternative return framework - alternative risk premia 3.0.

Looking at monthly data from 602 significant, durable hedge funds: 50% alpha, beta 40.9%, smart beta 1%, alternate risk premia 7.6%.


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

Seth Singerman Long Washington Prime Group: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Seth Singerman of Singerman Real Estate who pitched a long of Washington Prime Group (WPG).


Seth Singerman's Invest For Kids Chicago Presentation: Long Washington Prime Group

“Retail Apocalypse” has arrived.  The $100 billion increase in Amazon’s market cap since January is greater than the combined value of all REIT market caps.

Washington Prime Group (WPG) has a 12% dividend yield that is well covered, a 15% FCF yield, and trades < 7x earnings at a 10% cap rate.  30% upside if sentiment improves.  Only four analysts cover WPG.

Trades like a B-mall company but most of WPG’s value is better than B. CEO of Simon owns $250 mm of WPG stock.  WPG trades below the valuations of its own retail tenants.

Valuation: $10 base case, $7 down, $11.75 up over 3-4 years.  Rouse is a good comp; CBL is not a good comp.  WPG has low debt/EBITDA and no maturities over the next five years.



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

Mathew Klody Short Domino's: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Mathew Klody of MCN Capital who pitched a short of Domino's (DPZ).


Mathew Klody's Invest For Kids Chicago Presentation: Short Domino's

“Disruptors can be disrupted”.  Finding more shorts than longs right now.  The market seems to be a function of momentum, not valuation.   Look at the golden child > fallen angel phenomenon: Under Armour, Michael Kors, etc.

Patience is key – wait for the inflection point.  There is a shift coming for food. Domino’s (DPZ) is seen as a “disruptor” with strong comps/growth.   DPZ now has a demanding valuation and high leverage: >30x earnings, >20x EV/EBITDA, and 5.6x leverage.

Saturation? Management keeps moving the goalposts.  Declining international comps might be a sign.  Overexpansion? Pizza Hut finally turning the corner? Both would be a threat to DPZ.  Management uses high levels of debt to fund equity buybacks at ever higher prices.



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

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

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


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

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

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

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

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

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


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