Market Strategist Jeff Saut on Being Wrong and Still Making Money

Raymond James market strategist Jeff Saut is out with his latest commentary entitled, "Being Wrong and Still Making Money."  It's been a while since we checked in with Saut, so here's what he's saying these days.

He has been cautious over the past month or so and admits his stance has been 'too cautious.'  Saut then dove into the concept of being wrong and still making money.  He quotes Peter Bernstein, who wrote:

"The trick is to survive!  Performing that trick requires a strong stomach for being wrong because we are all going to be wrong more often then we expect. The future is not ours to know. But it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future (maybe the real trick is persuading clients of that inexorable truth)."

Saut then goes on to reference a piece that divides investors into three categories: Rabbits, Hunters, and Assassins, based on how they act in the market.  Written by Lee Freeman-Shor, it states:

"My findings suggest the odds are that an investor's great ideas will lose money. As such, before you invest a cent into an investment idea, it is imperative to have a plan of action as to what you will do if you find yourself in a losing position. When losing, the successful investors I worked with planned to become either Assassins or Hunters. Assassins sold losing investments that fell by a certain percentage or that declined by any amount and showed no signs of recovery after a certain period of time. Hunters invested a lesser amount at the outset and with a plan of buying significantly more shares if the price fell. Hunters were also unafraid to sell if it became clear that they had made a mistake. The bad investors didn't have a plan and consequently turned into Rabbits. When losing money, Rabbits neither bought more shares nor sold their holdings. Once forming an initial perception, Rabbits were achingly slow to change their opinion of a stock. Which tribe will you become a member of?"

As to where Saut is looking to put any money to work on pullbacks, he recommended Hilton (HLT), Flexion Therapeutics (FLXN), Nvidia (NVDA), Iridium (IRDM), and Texas Capital Bancshares (TCBI). 

Embedded below is Jeff Saut's latest market commentary: Being Wrong and Still Making Money



You can download a .pdf copy here.

Whitney Tilson's Kase Capital Q1 Letter: Pitch on Deckers, Sears Hometown & Outlet Stores

The hedge fund duo of Whitney Tilson and Glenn Tongue split up last year and now Tilson is managing his Kase Capital solo.  He just sent out his first quarter letter to investors where he outlines two of his new investments: Deckers (DECK) and Sears Hometown & Outlet Stores (SHOS), which you can read in the letter below.

Kase Capital's Top Holdings

In Kase Capital's letter, Tilson also lists his largest positions:

1. AIG (AIG)
2. Berkshire Hathaway (BRK.A)
3. Howard Hughes (HHC)
4. Deckers (DECK)
5. Citigroup (C)
6. Goldman Sachs (GS)
7. Netflix (NFLX)
8. Canadian Pacific (CP)
9. dELiA*s (DLIA)
10. Iridium (IRDM)
11. Grupo Prisa (B Shares)
12. Sears Hometown & Outlet (SHOS)
13. Spark Networks (LOV)


Tilson's Shorts & Exposure Levels

Tilson also reiterated a few stocks that he's short: InterOil (IOC), K-12 (LRN), and Nokia (NOK).  He's also holding a large cash balance, waiting for better opportunities to deploy capital.  His equity exposure comes in at 66% long and 22% short currently.


Embedded below is Whitney Tilson's Kase Capital first quarter letter to investors for 2013:

Market Strategist Jeff Saut: Best Stock Ideas For Next 3-5 Years

Given that markets have been ripping higher, we thought it a prudent time to check in with market strategist Jeff Saut.  His latest investment outlook is entitled "For All the Sad Words of Tongue and Pen" where he looks at how market rallies can last longer than one would think.

He highlights how at around the 18th day of a typical 17-25 day buying stampede, certain investors will start to question whether or not they've missed "the bottom."  This then leads to a new round of buying from people who don't want to miss the big move, and thus the rally extends.

So when might this rally cease?  Saut mentions rallies can typically last up to 30 sessions while today is session 18.  He points out some of the cautious signals he is seeing:

"The S&P 500 (SPX/1502.96) remains overbought with 92.6% of its stocks above their respective 50-day moving averages (DMAs), as  well the NYSE McClellan Oscillator is still overbought in the short-term.  However, the stock markets can remain overbought for longer than most think in a bull move.  Further, the Volatility Index (VIX/12.89) is not confirming the renewed stock strength and  some of the hitherto leading stocks are not acting well."


Raymond James' Best Stock Ideas For 3-5 Years

Saut recalls Ray Dalio's recent interview where the legendary manager said that "the shift of that massive amount of cash is what will be a game changer."  If it moves into stocks (from pension funds and other large institutions), he wants to be prepared.

As such, Saut has highlighted his analysts' best stock ideas for a 3-5 year holding period with the following criteria:

- Recurring revenue stream
- High barriers to entry
- Not as dependent on economy/financial markets
- Can grow EBITDA at 5-10% annually
- Competitive edge in its sector
- Strong management

His analysts recommended the following stocks: Altera (ALTR), Conceptus (CPTS), Denbury Resources (DNR), NIC Corp (EGOB), Equinix (EQIX), EV Energy Partners (EVEP), IDEXX Labs (IDXX), Iridium Communications (IRDM), LKQ (LKQ), National Oilwell Varco (NOV), Verisk Analytics (VRSK), and Wabtec (WAB).

Embedded below is Saut's weekly commentary:




For more from this strategist, we've highlighted how Saut has been short-term conflicted and long-term bullish and how he's focused on housing as the key driver.

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's Presentation at Stern's Hedge Fund Association Summit

Whitney Tilson of hedge fund T2 Partners recently presented at the Stern Hedge Fund Association Summit and talked about the US economic overview, what worries his fund, as well as an analysis of his three largest positions: Berkshire Hathaway (BRK.A), Iridium (IRDM & warrants), and Howard Hughes (HHC).

On The Economy: He notes that it appears the recovery has gradually picked up steam and that job creation has been positive for 24 consecutive months. And while unemployment continues to be high, it has fallen some.

What Worries Them: Further downturn in the US housing market, the European banking system entering another crisis, a sharp slowdown in China, and/or a sovereign debt crisis in Japan. On the market, they say that "based on inflation-adjusted 10-year trailing earnings, the S&P 500 at 21.9x is trading at a 13% premium to its 50-year average of 19.4x."

The full presentation is embedded below and details analysis of his 3 top positions BRK.A, IRDM, & HHC:



Tilson will be presenting his latest investing ideas at the Value Investing Congress in Omaha right after the annual Berkshire Hathaway meeting next month. Market Folly readers can receive a discount here.

To see more thoughts from T2 Partners, you can also check out a long/short equity investing panel from the CIMA Conference.

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.

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.

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.

Jeff Saut: Buying on Weakness

Jeff Saut, Chief Investment Strategist over at Raymond James, is out with his latest commentary entitled 'Don't Worry, Be Happy.' In it, he opines that while money does not equate to happiness, the stock market was certainly happy last month as it increased 7.0% after being down 8.2% in May and losing an additional 5.4% in June. Last time around, Saut argued that it might be time to re-balance portfolios and laid out a theoretical businessman's risk portfolio.

Saut pats himself on the back for 'calling the rally' that he expected due to oversold conditions at the beginning of July. Recently, a Dow Theory Buy Signal was registered according to the market strategist as both the Dow Jones Industrial Average and Dow Jones Transportation Average closed above their previous June highs. However, this signal comes after an already powerful rally has taken place and numerous other theorists do not think a signal has been registered in the true sense of the definition. This would require a close above 11,204 on the Dow Jones and above 4,806 on the transports.

That said, Saut is now a buyer on weakness. He issues a caveat with that statement saying he will use fairly close stop loss triggers to manage the risk. As we've detailed recently, Saut has outlined his risk management principles and has also argued that risk adjusted stock selection is the key to success.

So, what stocks to buy on weakness? The Chief Investment Strategist feels that the following stocks are solid choices:

Value Picks:
Microsoft (MSFT)
Intel (INTC)
Wal-Mart (WMT)
Allstate (ALL)
Johnson & Johnson (JNJ)

Growth Plays:
McAfee (MFE)
Iridium (IRDM)
NII Holdings (NIHD)
Nuance (NUAN)
Parexel (PRXL)

As you can see, Saut favors many high quality blue chip names on the value side. This is exactly what we saw this morning as Jeremy Grantham favors high quality US stocks. Additionally, we've detailed hedge fund T2 Partners' bullish presentation on 3 large cap stocks.

Overall, Jeff Saut thinks that the 200-day moving average (overhead resistance) will be taken out. And as of this second, that's exactly what's happening. We'll have to see if the market can hold and close above that level. He ends by quoting Lowry's who writes,

"In summary, as the major price indexes have moved sideways since the May 25th low, market conditions have showed clear signs of strengthening, not weakening. While overbought readings on short-term indicators suggest the potential for a near-term pullback, any decline should act only as a temporary setback in the rally from the July 2nd low and is unlikely to represent the next leg of a more prolonged move lower."

Embedded below is Jeff Saut's latest investment strategy from Raymond James:



You can download a .pdf copy here.

Here's the rest of our 'market-strategist-Monday' pieces if you missed any of them:

- Oaktree Capital's Howard Marks on the greek tragedy
- PIMCO's Bill Gross: latest investment outlook
- GMO's Jeremy Grantham favors high quality US stocks

Jeff Saut: Portfolio Rebalancing May Be In Order

Market strategist Jeff Saut believes that asset allocation is the key to alpha generation. But to be more specific, he is not dogmatic about the approach and instead prefers dynamic asset allocation. This is an extension of normal asset allocation in that it incorporates the use of various indicators to complement the normal analysis, intuition, and common sense that applies to creating portfolios. He uses this diversification as a tool to mitigate risk. Those of you increasingly concerned about the presence of risk in your portfolios can heed Jeff Saut's risk management principles.

The reason he brings this whole notion up in his weekly investment strategy is because he feels we are approaching a point in the markets where rebalancing portfolios might be in order. His proprietary intermediate-term indicator, stochastic indicators, and the 12-month moving average are all warranting caution. However, the Raymond James Chief Investment Strategist has been bullish on equities in the near-term in part due to their massively oversold condition. He recently proclaimed that risk adjusted stock selection is the key to portfolio success.

In particular, Saut has been fond of technology stocks as their weekly forward earnings per share are at a record high. He has mentioned Microsoft (MSFT) numerous times as an attractive play. This morning we posted up a bullish presentation on MSFT from hedge fund T2 Partners as well. Saut's other technology stock favorites include Iridium (IRDM), NII Holdings (NIHD), Nuance (NUAN) and PAREXEL (PRXL).

In the end, Saut feels the signal to rebalance is coming soon. Ultimately, the type of portfolio to rebalance stands to be determined. The type of portfolio to rebalance to is largely reliant upon whether or not the market can re-capture its 200-day moving average. The market is currently trading right around that level, testing resistance to the upside. Saut feels that many technical indicators will soon resolve themselves and will determine just how defensive (or not) a portfolio should be. In a separate post, we'll outline Saut's "Businessman's risk" portfolio and how it is allocated. In the mean time, embedded below is Saut's full market commentary for this week examining the potential upcoming rebalance period:



You can download a .pdf copy here.

More analysis from the market strategist can be found at Jeff Saut's risk management principles as well as his previous commentary outlining keys to portfolio success in 2010.

T2 Partners Presentation: General Growth Properties (GGWPQ), Iridium (IRDM) & Berkshire Hathaway (BRK.A)

Recently, Whitney Tilson and Glenn Tongue's hedge fund T2 Partners gave a presentation at the Boys and Girls Harbor Investment Conference that took place on February 3rd, 2010. Their presentation included a look at the macro situation and three stock picks: Berkshire Hathaway (BRK.A), General Growth Properties (GGWPQ), and Iridium (IRDM). When we covered T2's investor letter, we saw that they had large long positions in all three names.

Embedded below is T2's recent presentation on all three stocks:




You can download the .pdf here.


Additionally, last week we posted Whitney Tilson & T2 Partners' analysis of Berkshire Hathaway (BRK.A / BRK.B). Below you will find their revised slide-deck:




You can download the Berkshire presentation via .pdf here.

In a separate post this morning we'll also be covering Bill Ackman & Pershing Square's presentation on Kraft (KFT) from the same investment event, so stay tuned.