Michael Karsch's Sohn London Presentation: Long Houghton Harcourt

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Michael Karsch of Hunter Peak Investments.  He pitched a long of Houghton Harcourt.


Michael Karsch's Sohn London Presentation 2015

Long Houghton Harcourt (NAS: HMHC) 

Houghton Harcourt is primarily a school text book publisher. It dominates in books for reading, maths and science. Houghton is the largest developer of text book content from Kindergarten to 12th grade in the US. It has 40% market share of the overall spend in the US. The school publishing market is an oligopoly. HMHC is a well-established company that has been trading for over 100 years. HMHC stock currently trades with a beta < 1.

HMHC went through bankruptcy in 2007 after an LBO and a second private equity owner encouraged it to take on too much leverage.  Houghton re-emerged from bankruptcy about a year ago and has been significantly de-levered.

Text books are a good business as revenues are fairly stable. There is a never ending stream of children entering the education system that need to be educated. It costs about $10,000 to educate a student in the US - approximately $100 per year comes from text books.

Houghton is not vulnerable to digital disruption – 40% of their orders are already for digital products. The text book market should not be compared with newspapers in this respect. Houghton has not lost margins from the move to digital. News Corp tried to break into the school digital market by giving away tablets but failed and had to write off the costs. There may actually be benefits from the digital revolution.  For example, print cost savings.

Houghton has complex accounting partly because revenues from textbooks are spread over 7 years even though the fee for the books is received up front. It’s a lumpy business that is hard to predict quarter by quarter. In the last two quarters Houghton has missed earnings expectations. Only 4 analysts following the stock. The earnings disappointments’ have provided a good entry point. Expect the company to buyback 20% of the shares in the next 12 months.

Be sure to check out the rest of the Sohn London Conference presentations.

SALT Conference Best Ideas Panel: Chanos, Bass, Burbank, Cooperman, Karsch

At the Skybridge Alternatives (SALT) Conference in Las Vegas, the best ideas panel featured top hedge fund managers giving their top stock picks.  Here's a summary:


SALT Conference Best Ideas Panel: Chanos, Bass, Burbank, Cooperman, Karsch

Jim Chanos (Kynikos Associates):  Short oil integrators.  Specifically, short Royal Dutch Shell (RDS), doesn't like the merger with BG.  Short Chevron (CVX) as well due to their liquefied natural gas (LNG) challenges.  He also summed up Brazil's Petrobras (PBR) by saying they're "lying, cheating and stealing."  Also check out Chanos' SALT interview we posted earlier.


Kyle Bass (Hayman Capita): Long Perrigo (PRGO).  Doesn't think they get bought out by Mylan, but thinks someone else acquires them.  "We're short enough pharma."  Bass' separate new fund has been challenging pharma patents and says the industry is ridiculous as prices of drugs have spiraled out of control.  He gave the example of Mylan's (MYL) epipen drug specifically.  Says 13% of the company's revenue comes from this drug (which came off patent back in the 1950's).


John Burbank (Passport Capital): Long NCB AB, a Saudi Arabian banking play.  "The banking giant you've never heard of in the country you're too scared to invest in."  He says the vast majority of deposits don't pay interest due to Sharia Law so they'll be in a good position when rates rise.  Harps on the fact that outsiders are going to be able to invest in Saudi and by 2017 90% of investors will own some part.  "All the risks are already known in Saudi."  This isn't a new theme from him as Burbank has pitched Saudi investments in recent years.


Lee Cooperman (Omega Advisors): As he has been for a while now, he again advised reducing fixed income exposure.  He also said to go short on any rally if you're adventurous. His stock picks were the same as his Sohn Conference picks: ACT, AER, C, DOW, GM, GOOGL, PCLN.


Michael Karsch (Hunter Peak Capital): Long NOS SGPS, a Portuguese cable/wireless provider.  Biggest cable play and #3 wireless provider in the country, a hidden gem.


For more from the SALT conference, check out Dan Loeb's talk.

Interviews With Sam Zell, William Von Mueffling & Michael Karsch: Columbia Business School Newsletter

Columbia Business School is out with the latest installment of its investment newsletter: Graham & Doddsville. Edited by MBA students, the issue features interviews with Sam Zell (Chairman of Equity Group Investments), William von Mueffling (President of Cantillon Capital), and Michael Karsch (founder of Karsch Capital Management).

Below are some excerpts we found insightful:

Sam Zell on key tenets of his investing philosophy: "I philosophically believe that if you can't delineate your idea in one or two sentences, it's not worth doing ... simplicity is critical."


Sam Zell on what has allowed him to be successful: "The definition of a great investor is someone who starts by understanding the downside. You must make the judgment in advance as to how much downside risk you are willing to take. I knew that I could always survive the good days, but the critical element is to be able to survive when the market isn't doing well or the investment isn't performing. I always focus on how much exposure I am taking."


William Von Mueffling on Cantillon's investment style: "One can broadly divide value investing into two camps. The first camp is the Graham & Dodd style which is buying assets at a discount or cash at a discount. The second camp is the Buffett style, which I characterize as buying financial productivity at a discount. We fall into the second camp. We believe that there are many different types of moats to be found, and that a moat around a business should allow it to produce outsized margins and wonderful returns on capital. The trick is being able to buy this stream of cash flows at a discount. Unlike Graham & Dodd investing where you might look at low price-to-book value companies or net-net companies, we are trying to buy high financial productivity at a discount to its intrinsic value."


Michael Karsch on the lifecycle of investing approach: "(It) is a framework that states that markets, industries, companies and stocks typically move through 5 stages over time. These stages are: 1) distressed, discarded and/or undiscovered, 2) value, 3) growth at a reasonable price (GARP), 4) growth, and 5) momentum. The lifecycle analysis and an appreciation for a company‘s evolution through the cycle often lead us to ask whether a company will be perceived as better (up the cycle) or worse (down the cycle) over a reasonable investment horizon."


Embedded below is the Graham & Doddsville issue:




For more from these three investors, we've posted:

- Michael Karsch on risk management

- Sam Zell on Brazil's investment opportunity

- Cantillon converts from hedge fund to long-only

Michael Karsch on Risk Management: CIMA Conference

Continuing the series of notes from the CIMA Conference (Columbia Investment Management Association), we present Karsch Capital's Michael Karsch talking about risk.

Michael Karsch on Risk Management

Gross exposure is more important than net exposure. When you’re not exposed enough, cut your least conviction shorts. When you’re too long, instead of shorting more, cut your least conviction longs.

Sometimes it’s dangerous to be near other hedge funds. Manage your gross carefully, not just your net. Hedge fund stocks did a lot worse than the market in 2008, so you got hurt both long and short. Just by shorting, more gross, less net, was actually higher risk. He did 100% over last ten years vs. SPX 12% over same time.


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)

- Long/Short Equity Investing Panel (Whitney Tilson)

- Bill Miller on What Stocks He Likes Now

- Bruce Greenwald's Market Comments