Seth Klarman & Baupost Group's 2010 Letter Excerpt

Thanks for MyInvestingNotebook for highlighting that legendary investor Seth Klarman and his firm, Baupost Group, are out with their 2010 year-end letter. Courtesy of VII, below is an excerpt from their letter. We're going to warn you that it is very long, but a must-read:

*removed per the request of representatives from Baupost*


For more from this value investing guru, see Klarman's lessons from the financial crisis as well as some of his recent activity in commercial real estate.

To read additional insight from top hedge fund managers/investors, we've posted up a ton of great investor letters including:

- John Paulson
- Lee Ainslie's Maverick Capital
- Third Point's Dan Loeb
- Perry Capital
- Barry Rosenstein's JANA Partners
- Warren Buffett's annual letter

What We're Reading ~ 3/4/11

Latest letter from Paul Tudor Jones [Dealbreaker]

Transcript of David Einhorn's FCIC interview [Santangel's Review]

The StockTwits blog network is up and running [StockTwits]

On the critical task of risk management [GregSpeicher]

Rumor: Hedgie makes big Ocado loss? [CityAM]

Falcone allows direct investment in LightSquared [Reuters]

Taconic Capital takes $250m stake in BSkyB [Reuters]

Court rejects hedge fund's challenge to 13F disclosure [FoleyHoag]

iPad2 vs Xoom vs HP TouchPad vs BlackBerry PlayBook: A comparison [Engadget]

ValueAct Capital Sells Gartner (IT) & KAR Auction Services (KAR) Shares

Jeffrey Ubben's activist hedge fund ValueAct Capital recently sold shares in two positions: Gartner (IT) and KAR Auction Services (KAR). ValueAct manages $5 billion and has earned a net annualized return of 13.5% over the last ten years.


Gartner (IT)

First, ValueAct sold 9,700,000 shares of Gartner (IT) at $34.44 per share. After this transaction, they still own 7,090,513 shares. This marks almost a 58% reduction in their position size (shares currently trade around $37.36).

At the end of 2010, IT was their third largest position behind only Valeant Pharmaceuticals (VRX) and Sara Lee (SLE). But now with the sale, the position sits in the middle of their portfolio. This is the second time in six months they've sold shares of IT as they previously reduced their position in September.

KAR Auction Services (KAR)

Second, Ubben's hedge fund sold 1,350,000 shares of KAR Auction Services (KAR) with the bulk of the sale coming at $14.21 per share. After their sales, ValueAct was left with 908,828 shares. All told, it looks like they sold almost 60% of their position. The stock currently trades around $14.25.

ValueAct typically focuses on undervalued companies in the healthcare, technology, and information services sectors.

Companies' Background

Per Google Finance, Gartner is "an information technology (IT) research and advisory company. The Company is a partner to 60,000 clients in 10,000 distinct organizations in over 80 countries. The Company’s principal products and services are delivered through its Research, Consulting and Events segments."

KAR Auction Services is "a holding company. The Company is a provider of vehicle auction services in North America. It facilitates auction services for sellers of used, or whole car, vehicles and salvage vehicles, through its 214 physical auction locations and Internet venues."

Mark Rachesky's MHR Fund Management Goes Activist on Seahawk Drilling (HAWK)

Mark Rachesky's MHR Fund Management has filed an activist 13D with the SEC regarding shares of Seahawk Drilling (HAWKQ). The filing, reflecting portfolio activity on February 16th, indicates MHR has disclosed a 9.8% ownership stake in HAWKQ with 1,173,513 shares. This is not a new position as MHR held the same amount of shares at 2010 year-end.

HAWKQ Selling Assets to Hercules Offshore (HERO)

Rachesky's firm seems to take issue with the debtors of HAWKQ who have fast-tracked a proposed sale transaction with Hercules Offshore (HERO). The proposed sale would result in the debtors receiving $25 million in cash and 22.3 million shares of Hercules common stock in exchange for the sale of substantially all of its assets.

Going Activist: Formation of Equity Committee

MHR has filed in conjunction with Andalusian Capital Partners, FISBC Global Asset Management, and Mercer Park. We'd also point out that Kyle Bass' Hayman Capital disclosed a 8.4% stake in HAWK in a separate and unrelated filing.

Per various exhibits filed with MHR's 13D, we see that they've been granted appointment of an equity committee to secure independent representation for public shareholders "at this crucial stage of these Chapter 11 proceedings, while the Debtors are attempting to fast-track a DIP motion and prearranged sale that equity has not had adequate time to review."

Fund Manager Background

So, we'll have to see what Rachesky has up his sleeve in this regard since his committee formation was granted. Rachesky, prior to founding MHR was a senior investment officer and managing director for Carl Icahn. Needless to say, he's got plenty of experience in the activist realm.

Rachesky earned his B.S. in molecular aspects of cancer from the University of Pennsylvania and an M.D. from Stanford University School of Medicine. Additionally, he earned an MBA from the Stanford Graduate School of Business; the man is a degree-earning machine.

Per Google Finance, Seahawk Drilling was spun-off from Pride International and "operates a jackup rig business that provides contract drilling services to the oil and natural gas exploration and production industry in the Gulf of Mexico."

Be sure to stay up to date with the latest hedge fund filings with our free daily site updates via email or also via RSS reader.

Soros Fund Management Starts Adira Energy (ADENF) Position

George Soros' firm, Soros Fund Management, has filed a 13G with the SEC regarding shares of Adira Energy (ADENF). Per portfolio activity on February 16th, Soros has disclosed a 10.42% ownership stake in ADENF with 10,483,871 shares.

This is a brand new position for the hedge fund and is a result of a non-brokered private placement. Soros acquired shares at $0.62 per share in its Quantum Partners LP investment vehicle. Shares now trade at $0.88. The company also recently announced management changes, inserting Yael Reznik Cramer as interim CEO.

We've detailed other recent portfolio activity from Soros including an addition to their Harvest Natural Resources (HNR) stake, as well as starting a stake in San Leon Energy. For a complete look at Soros' portfolio, head to the newly released issue of Hedge Fund Wisdom.

Per Google Finance, Adira Energy "formerly AMG Oil Ltd., is an early-stage oil and gas exploration company. The wholly owned subsidiaries of the Company include Adira Energy Holdings Corp., Adira Israel Ltd and Adira Energy Services Ltd."

Baupost Group Provides $300 Million in Commercial Real Estate Project

According to the Atlanta Business Chronicle, Seth Klarman's Baupost Group will provide $300 million in equity to restart the "Streets of Buckhead" commercial real estate project in Atlanta, Georgia. Oliver McMillian Inc has purchased the luxury project and plans to start building this year.

We're highlighting this news because it ties directly into what Klarman said last year: he's finding opportunity in commercial real estate. The caveat with that statement, of course, is that he's been focused on private real estate.

In a time when Baupost sees less opportunity in the markets and has even returned some investor capital, this is an example of where Klarman is putting money to work. It's not very often you hear updates on what Baupost is doing, so we wanted to highlight it for those interested. For more from this great investor, check out Seth Klarman's recommended reading list.

Dan Loeb's Third Point Buys El Paso (EP)

Dan Loeb's Third Point Offshore Fund is out with its monthly update on positioning and exposures. The key takeaway here is that Third Point has initiated a position in gas producer El Paso (EP) since the fourth quarter.

The second most notable takeaway is that Potash (POT) is no longer among their top holdings. The stock sold-off hard recently, so that could be the culprit. Or, perhaps they sold shares, other holdings appreciated in value, or they ramped up their stakes in other names; it's tough to discern.

Third Point's Top Positions

1. Gold
2. Delphi (both equity & debt)
3. Chrysler (multiple securities owned)
4. El Paso (EP)
5. LyondellBasell (LYB)


Some of the fund's top winners were gold, NXP Semiconductors (NXPI), El Paso (EP), Technicolor (multiple securities owned), and Williams Companies (WMB). Per their latest disclosure, Third Point also now owns multiple securities in NXPI after previously owning just the equity.

El Paso is the second gas related entity they've invested in recently. Third Point bought WMB in the fourth quarter, as did many other hedge funds. You can read about the investment thesis on WMB in the equity analysis section of our new issue of Hedge Fund Wisdom.

The top losers last month in Third Point's portfolio included Wells Fargo (WFC), BioFuel Energy (BIOF), CIT Group (CIT), Accuride (ACW), and Rentokil Initial PLC (RTO in London, RTOKY on the pink sheets). Wells Fargo also appears to be a new equity position for the hedge fund, unless it is a debt stake that has previously been undisclosed; the disclosure is unclear.

Overall, Loeb favors post-reorganization equities. In particular, he's been active in Smurfit-Stone Container (SSCC), opposing the takeover. LyondellBasell (LYB), another post-reorg equity, continues to be one of Loeb's largest positions.

For the month of February, Third Point was up 3.6% and is up 7.6% for 2011 thus far. Its Offshore Fund has now seen an impressive 19% annualized return since inception in December 1996.


Exposure Levels

Regarding their latest exposure levels, Third Point is 56.2% net long equities with its largest net long exposure in basic materials at 12.1% and consumer at 11.5%. Over the past month or so, Third Point has reduced net long equity exposure by almost 5%.

In credit, the hedge fund is 11.5% net long distressed, 16.5% net long asset backed securities (ABS) which include residential mortgage backed securities (RMBS) and commercial mortgage backed securities (CMBS). They are also net short -5.4% government securities, cutting their short exposure to this asset class almost in half.

For a full assessment of Loeb's portfolio and the investment thesis behind some of his picks, head to the brand new issue of Hedge Fund Wisdom that was just released.

Dan Arbess' Xerion Fund Likes Chemical Stocks

Per Bloomberg's Hedge Fund Brief, Dan Arbess' Xerion Fund (part of Perella Weinberg Partners) is betting on chemical stocks. In particular, he likes those companies that utilize lower-cost natural gas in production, such as LyondellBasell (LYB).

Chemical maker LYB emerged from bankruptcy last year and has been a big favorite amongst investment managers. In fact, LyondellBasell was a consensus buy in the fourth quarter amongst hedge funds we track in our Hedge Fund Wisdom newsletter. In addition to Xerion, Dan Loeb's Third Point LLC holds a large stake in LYB as it is their fifth largest position.

Arbess said that, "There are a lot of companies that can just take higher feedstock costs and pass them right on to their customers. They are being sold off very aggressively right now and can be picked up. We liked them 10-15% higher before the sell-off; we love them down here." In addition to LYB, Arbess fancies Solutia (SOA) and Rockwood Holdings (ROC).

Arbess also reiterated his positions in exploration and production oil companies in Brazil and West Africa. We've posted about these investments in a previous investor letter that detailed Xerion's 2011 investment strategy & outlook.

Free Sample: Full Past Issue of Our Hedge Fund Wisdom Newsletter

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Jeff Saut: Putting Money to Work in Stocks, But Correction Not Over

Market strategist Jeff Saut is out with his latest commentary and begins with a focus on oil. Unrest in the Middle East has caused prices of black gold to surge from $84 to over $100 per barrel and this is worth keeping an eye on. Turning to his latest stance on the stock market, he thinks the correction is not yet over, even after last week's sell-off.

He writes,

"The recent stock 'high' was accompanied by the most bullish stock sentiment since the DJIA's peak in October 2007 (69% 'Bulls' according to Market Vane); as well, the Volatility Index (VIX/19.22) recorded its lowest reading since the summer of 2007 (read: too much complacency). Ladies and gentlemen, it is rare to see those kind of extreme readings worked off in a mere three sessions. So yeah, I believe the correction has more to run, yet I continue to think it is a mistake to become too bearish."

As such, Saut has gradually begin to put money to work in stocks during the pullback. He sees the intermediate trend as up and thinks you should buy stocks on your watch-list during further sell-offs.

He points to his own watch list and highlights some of the stocks that have held up best like Skyworks Solutions (SWKS), Stanley Black & Decker (SWK), Tempur Pedic (TPX), and Williams Companies (WMB). For the investment thesis on WMB and to see why hedge funds have been buying, we featured the stock in the equity analysis section of the new issue of our Hedge Fund Wisdom newsletter that was just released.

Embedded below is the latest investment strategy from Jeff Saut:



You can download a .pdf copy here.

Warren Buffett's Annual Letter 2010: Key Takeaways

Warren Buffett is out with his 2010 annual letter to Berkshire Hathaway (BRK.A / BRK.B) shareholders. The media has quickly pounced on one key sentence in the letter where he writes, "Our elephant gun has been reloaded, and my trigger finger is itchy." This has spurred a tsunami of speculation as to what company he might buy next. While this is notable language, we also wanted to highlight some of the takeaways from Buffett's letter as noted by fund managers:

- Buffett thinks a housing recovery could begin within the next year or so. In addition to unemployment, housing is one of the key pieces to fully solving the economic puzzle.

- Since we track fund manager holdings on the site, readers will be intrigued to know that you can buy shares at the same level (or even below) what Buffett paid for them in Conoco Phillips (COP), Kraft (KFT), Sanofi Aventis (SNY), and Munich RE. You can view the rest of Buffett's investments in our newsletter.

- While Buffett has been optimistic about the US for a while now, his enthusiasm is as strong as ever.

- Buffett stood by his mantra of 'buying when there's blood in the streets' during the financial crisis and the results showcase why this is a prudent strategy. He spent around $15 billion after Lehman Brothers failed and those investments are now paying off.

Turning back to Buffett's mention of potential acquisitions, you'll recall that Berkshire bought Burlington Northern Santa Fe as it acquired the entire railroad operator after owning a partial stake. He has made it clear that Berkshire needs more major acquisitions like this.

Some investors have argued that Buffett will have to look at private companies for acquisitions due to Berkshire's behemoth size. Will he pursue a public company he already owns a stake in? A public company he has yet to purchase shares of? A private company? Let us know your thoughts in the comments. For Warren Buffett's 2010 annual letter, you can download a .pdf copy here.

For more great resources on one of the greatest investors of our time, check out:

- Warren Buffett's recommended reading list
- Great investing advice via the top 25 Warren Buffett quotes
- Buffett's worst trade
- Compilation of Buffett's partnership letters
- A multi-decade look at Buffett's career

Lone Pine Capital Buys Ctrip.com, Sells Ashmore

Stephen Mandel's Lone Pine Capital recently purchased more of one security and sold some of another. First, due to a 13G filed with the SEC regarding portfolio activity on February 14th, Lone Pine now shows a 5.8% ownership stake in Ctrip.com (CTRP). The hedge fund currently owns 7,893,233 American depositary shares.

This is a 83% increase in their position size as they owned 4,312,650 shares at the end of 2010. The company's shares recently sold-off after its first quarter revenue missed estimates. Lone Pine most likely utilized this drop to add to their position.

Second, the hedge fund firm also sold some Ashmore (LON:ASHM). After owning 6.21% of the company in January of 2009, Lone Pine has slowly reduced its stake to now under 3% of shares outstanding. Ashmore recently agreed to buy 63% of Emerging Markets Management for around $96 million in cash and $29.9 million in new stock.

Since this now falls below the regulatory threshold for reporting, we won't know if Mandel's hedge fund firm sold completely out of the name, or if they still hold a small position. One thing is clear though, they've steadily reduced exposure over the past two years. To see the rest of their positions, we recently updated Lone Pine's portfolio in the new issue of our newsletter.


Per Google Finance Ctrip.com is "a travel service provider for hotel accommodations, airline tickets and packaged tours in China. It also sells packaged tours that include transportation and accommodations, as well as guided tours in some instances. The Company aggregates information on hotels and flights and enable its customers to make hotel and flight bookings."

"Ashmore Group plc (Ashmore) is engaged in providing investment management services. The Company is a fund manager across six core investment themes, such as external debt, local currency, special situations, equity, corporate high yield and multi-strategy."

Whitney Tilson Goes Activist on LECG Corp (XPRT)

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

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

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

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

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

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

Kyle Bass Buys Seahawk Drilling (HAWK)

Kyle Bass' hedge fund firm Hayman Capital has disclosed an 8.4% ownership stake in Seahawk Drilling (HAWK) with 1,000,000 shares. Hayman filed this information via a 13G with the SEC per portfolio activity on February 15th, 2011. This is a new equity position as they did not own equity as of December 31st, 2010.

We've covered Bass on the site before, but if you're unfamiliar with him, he has gained notoriety over the years due to his prediction of not one, but two 'bubbles.' First, he predicted and profited from the subprime crisis. Second, he was one of the first to call for sovereign defaults and that thesis has gained steam over the past year. For our prior coverage on this hedge fund manager, check out Bass' presentation at the Value Investing Congress.

His position in HAWK is intriguing because the company just agreed to an asset purchase with Hercules Offshore (HERO). HERO is buying 20 jackup rigs and related assets from HAWK for $25 million and 22.3 million shares of HERO. This cash infusion will be used to pay HAWK's debtor-in-possession (DIP) loan which the company secured in connection with its bankruptcy. You can head to the Special Situations Monitor for an analytical look at the situation here.

Also, Hercules Offshore is up big today after receiving an upgrade from Credit Suisse. They highlight that HERO is just around the corner from covenant relief.

Per Google Finance, Seahawk Drilling "operates a jackup rig business that provides contract drilling services to the oil and natural gas exploration and production industry in the Gulf of Mexico."

Ken Griffin's Citadel to Sell E*Trade Financial (ETFC)

Ken Griffin's hedge fund Citadel Investment Group plans to sell a ton of its shares in E*Trade Financial (ETFC), a company it had aided in the past. As the company's largest shareholder, Citadel is planning to sell over 27 million shares.

Keep in mind that even after Citadel divests its almost 9% equity stake, they still own a sizable chunk of convertible debt. If converted, this would ratchet their stake to almost 30% ownership. But this is not the first time Griffin's firm has sold shares, as Citadel sold ETFC back in late 2009 when shares traded around $1.20 per share. Since then, the shares have undergone a 1:10 reverse split and shares trade around $15.85 today.

The company underwent turbulent times during the financial crisis as it strayed from its stock brokerage roots and into the mortgage market right at the peak. After slowly but surely returning solely to its core business, the company still sits in limbo as shares are only up around 2% over the past year.

Hedge fund legend Leon Cooperman and his Omega Advisors are long E*Trade and see it as a potential takeover target. (To see the rest of Omega Advisors' portfolio, head to our new issue of Hedge Fund Wisdom). This seems to be the common investment thesis on ETFC as many investors argue it could be a prime asset to bigger houses like TD Ameritrade (AMTD) or Charles Schwab (SCHW). This thesis has not played out over the past few years (obviously). Perhaps activity in this regard would be spurred once interest rates start to rise, as this would help improve brokerage profitability.

Per Google Finance, E*Trade Financial is "a financial services company, which provides online brokerage and related products and services to the individual retail investors, under the brand E*TRADE Financial. It also provides investor-focused banking products, sweep deposits and savings products, to retail investors."

What We're Reading ~ 2/25/2011

What top hedge funds have been buying [Hedge Fund Wisdom]

Free e-book on Texas HoldEm Investing [Texas Hold Em Investing]

Latest letter from Greenstone Value Opportunity Fund [Distressed Debt Investing]

Citigroup (C) offers attractive risk-reward [Greg Speicher]

Video: How Berkowitz got comfortable with Citi [Morningstar]

Summary of a recent talk with SAC Capital's Steven Cohen [Dealbook]

How Stevie Cohen changed my life [James Altucher]

Hedge funds buying more municipal bonds [CNBC]

Sum of the parts valuation of Yahoo (YHOO) [Minyanville]

Buffett says pricing power more important than good management [Bloomberg]

Passport Capital sees oil prices holding up [WSJ]

Bank loan funds drawing interest [InvestmentNews]

For more great links, scroll through this linkfest [AbnormalReturns]

New Issue of Our Hedge Fund Wisdom Newsletter Just Released

The new issue of MarketFolly.com's Hedge Fund Wisdom newsletter has just been released! Created in collaboration with other hedge fund analysts, our 90 page issue is your complete guide to what top hedge funds have been buying, selling and why. It is published four times a year (February, May, August, November). Included in this issue:

- Portfolios of 25 top hedge funds (2 new funds added this quarter)
- Expert commentary on each fund's new portfolio
- Equity analysis of 5 stocks hedge funds bought in the quarter
- Consensus buy/sell list

Hedge fund manager portfolios in this issue include:

Seth Klarman (Baupost Group)
Warren Buffett (Berkshire Hathaway)
David Einhorn (Greenlight Capital)
Stephen Mandel (Lone Pine Capital)
David Tepper (Appaloosa Management)
Bill Ackman (Pershing Square Capital Management)
Bruce Berkowitz (Fairholme Capital)
Chase Coleman (Tiger Global Management)
John Burbank (Passport Capital)
Leon Cooperman (Omega Advisors)
Dan Loeb (Third Point)
John Griffin (Blue Ridge Capital)
John Paulson (Paulson & Co)
Lee Ainslie (Maverick Capital)
Julian Robertson (Tiger Management)
George Soros (Soros Fund Management)
Roberto Mignone (Bridger Management)
Chris Shumway (Shumway Capital Partners)
Richard Perry (Perry Capital)
Larry Robbins (Glenview Capital)
Andreas Halvorsen (Viking Global)
Carl Icahn (Icahn Capital)
Thomas Steyer (Farallon Capital)

... and we added 2 new funds this quarter: Barry Rosenstein's JANA Partners & Alan Fournier's Pennant Capital.

Take advantage of our introductory pricing! Click the 'subscribe' button and then on the next page look for the "Pay using your credit or debit card" link at the bottom. You can also pay via PayPal. If you would like to pay via check, please email us: info@hedgefundwisdom.com.

1-Year Subscription (Save 17% with this option!): $199 per year

Quarterly Subscription: $60 per quarter

Jeffrey Ubben To Speak at the Value Investing Congress: 35% Discount

The Value Investing Congress will take place on May 3rd & 4th in Pasadena, California. Activist investor and CEO of ValueAct Capital Jeffrey Ubben will be speaking at the event (along with many other hedge fund managers). Market Folly readers receive 35% off admission.

Ubben's firm manages $5 billion and has earned a net annualized return of 13.5% over the last ten years. He typically focuses on undervalued companies in the healthcare, technology, and information services sectors.

Speakers confirmed for the event thus far include:

- Jeffrey Ubben (Value Act Capital)
- David Nierenberg (D3 Funds)
- Rahual Saraogi (Atyant Capital India)
- Whitney Tilson & Glenn Tongue (T2 Partners)
- Michael Kao (Akanthos Capital)
- Kian Ghazi (Hawkshaw Capital)

...and other speakers will be added as well.

Hurry because the discount expires in 7 days! To receive a 35% off the event, click here and use code: W11MF6.

Corsair Capital Management's Letter: Q4 2010

Jay Petschek's Corsair Capital Management is out with its fourth quarter letter. In it, we see that Corsair finished 2010 up 15.4% which ironically is the exact same number as their compound net annual return since inception.

Highlighting their overall market view, Petschek writes, "as we believe post-recession equity markets are generally driven by the direction of earnings, which in turn is driven by economic growth, the markets seem to have room to move higher."

Portfolio Positions

Corsair singles out their position in LyondellBasell (LYB) in the letter as they believe the stock still trades at a discount to its peers. You'll recall that Dan Loeb's Third Point owns LYB in size as well. The company announced a dividend policy and plans to optimize its capital structure.

Petschek also highlights their stake in CapitalSource (CSE) as the company continues its transition from an over-leveraged REIT into a bank. Corsair believes shares are still undervalued and likes the company's debt repurchases and share repurchase plan.

Their letter also focuses on their position in Aon (AON). The hedge fund notes that the integration of Hewitt will create shareholder value and further entrench the company's dominant position in human capital solutions. We penned an in-depth analysis of AON in our last issue of our Hedge Fund Wisdom newsletter as many hedge funds had accumulated shares in past quarters. Click here for a free sample issue.

Corsair Capital Management's full letter and their investment write-up on Neo Material Technologies (NEM) is embedded below:



You can download a .pdf copy here

If you missed them, we've posted up a plethora of hedge fund letters recently, including:

- Maverick Capital's letter
- John Paulson's year-end letter
- Dan Loeb & Third Point's Q4 letter
- JANA Partners' letter
- Greenlight Capital's commentary
- Summary of Perry Capital's letter
- Xerion Fund's 2011 strategy
- Summary of Kleinheinz Capital's letter

Why Whitney Tilson Covered Netflix Short Position (NFLX)

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners has covered its short of Netflix (NFLX). Last week we detailed that T2 had cut short exposure and was re-examining how they executed their short book. At the end of the day, they decided not to short stocks purely on valuation and to shift their focus back to buying cheap stocks.

Three Reasons For Covering Netflix

Tilson says that they're no longer confident in their short thesis on NFLX and he lays out three primary reasons as to why they've covered:

1. The company's latest earnings "weakened key pillars of our investment thesis, especially as it relates to margins."

2. Their channel checks and survey of NFLX subscribers indicated higher usage of NFLX's streaming service.

3. The Netflix CEO's letter to short-sellers made them re-examine their assumptions


The full letter detailing Tilson's rationale for covering his short position in Netflix is embedded below:



You can download a .pdf copy here.

Some contrarians will look at this event and exclaim that the 'last of the short-sellers has capitulated' so it's finally time to short NFLX. Just keep in mind that a sizable portion of NFLX's float is still shorted. While Tilson has been a public short, he is by no means the last short to cover his position. For a contrast of his 'before and after,' here's why Tilson was short Netflix in the first place.

What We're Reading ~ 2/11/11

Hedge fund Level Global shutting down, conversation with COO [Dealbreaker]

Hedge funds gain 0.29% in January [AbsoluteReturnAlpha]

Tablet comparison: PlayBook vs Streak vs iPad vs Xoom [ReformedBroker]

Is the high yield bond market looking frothy? [Pragmatic Capitalism]

Taking a look at muni-bonds & MUB [ResearchPuzzle-Pix]

The hedgies charged with insider trading [BusinessInsider]

Harbinger dumps last Inmarsat shares [FINalternatives]

Great old interview with RenTec's Jim Simons [AbsoluteReturnAlpha]

Oaktree's Howard Marks calls for prudence [Dealbook]

Berkowitz throws the gauntlet in battle over St. Joe [Fortune]

Get ready for rising rates, falling bonds [Barron's]

Bond market lessons [Contrahour]

Hedge funds appeal dismissed Porsche lawsuit [Reuters]

Tough times for the Tiger Cubs [Institutional Investor]

Can we trust TIPS? [The Economist]

Bond trading 101 [BondSquawk]

Brutally honest letter from Nokia's (NOK) CEO [Engadget]

Maverick Capital's Lee Ainslie on Impact of Fund Size on Returns

Maverick Capital's founder and manager Lee Ainslie recently sent out his year-end 2010 letter to investors. In it, we learn that Maverick's main fund returned 11.2% for 2010, while its Levered Fund returned 30.1%. You can see how they stack up against others in our post on 2010 hedge fund returns.

Since inception in 1995, the Maverick Fund has seen 14% annualized returns and Maverick Levered has returned 22.7% annualized. Be sure to check out what Maverick has been investing in via our newsletter (new issue coming out very soon).

Impact of Fund Size

In his letter, Ainslie highlights that "maintaining a significant critical mass is very advantageous to our ability to generate returns on a sustainable basis. Of course, this is also contrary to conventional wisdom which holds that size is the enemy of performance." He then lays out the common concerns with fund size and addresses them one by one.

Concern: Decreasing Investment Universe
Rebuttal: Their investable universe is defined as stocks with a market cap of at least $1 billion that trade at least $10 million per day. This universe has grown more than five-fold since 1995.

Concern: Loss of Agility
Rebuttal: "The average daily volume of the largest stocks in the world has grown almost ten-fold since 1995." Maverick's median position has averaged anywhere between one and two days of trading volume over the last 12 years.

Concern: Sizing of Investments Determined by Liquidity
Rebuttal: Ainslie argues that, "Maverick has always had, and always will have, positions whose position sizes are constrained by liquidity concerns. However ... such positions have never comprised a substantial portion of our portfolio, and growth in market liquidity has actually led to a reduction in Maverick's exposure to such less liquid positions."

Overall, he claims that these 'concerns' are less relevant considering that equity markets are not static. In John Paulson's year-end letter, the fund manager also extolled the benefits of running a hedge fund of size as well.

To wrap up his argument, Ainslie brings out a study done by Roger Ibbotson of Yale back in 2006. The conclusions drawn in the study summarized by Ainslie are that "the largest 20% of hedge funds have slight advantages over 80% of funds of lesser size. Secondly, the largest 1% of funds have substantial advantages over smaller funds."

Here's a breakdown of annualized performance of hedge funds by size from 1995-2009:

Largest 1% of hedge funds: 10.1% annualized return
Largest 5%: 8.6%
Largest 10%: 8.7%
Largest 20%: 8.9%
Largest 50%: 8.0%
Smallest 50%: 7.5%

Embedded below is Maverick Capital's fourth quarter 2010 letter to investors which also talks about generating short alpha:



You can download a .pdf copy here.

To see Maverick's latest investments, subscribe to our Hedge Fund Wisdom newsletter as the new issue comes out in a little over a week.

Dan Loeb Concerned About Consensus Bullish View: Third Point's Year-End Letter

Dan Loeb's hedge fund Third Point is out with its 2010 year-end letter to investors and the most notable aspect of it is that Dan Loeb will no longer be authoring the letter going forward. He is doing so "in order to keep our views proprietary and maximize time spent on investing."

2011 Outlook

Third Point expects a continued global recovery, high commodity prices, and an increase in mergers and acquisitions activity (M&A). However, Loeb is cautious about one thing, writing, "Our greatest concern is the growing consensus around the bullish view we have held since April 2009. Therefore, we welcome sharp corrections like the two we had last month."

Focus on Paper Companies

We've highlighted how Third Point likes post-reorganization equities. While they own chemical company Lyondell Basel (LYB), the hedge fund also has exposure to various paper industry plays. Third Point's letter reveals that they initiated a new position in NewPage in the fourth quarter ("a performing credit under distressed pressure").

Loeb also reveals that he owns a position in Bowater, otherwise known as AbitibiBowater (ABH), a company that just emerged from bankruptcy and will soon also be classified as a post-reorganization equity.

Third Point also details their position in Smurfit-Stone Container (SSCC) and we've highlighted how hedge funds are active in SSCC and oppose the proposed takeover. Further rationale behind Third Point's interest in the paper industry is outlined in their 2010 year-end letter to investors, embedded below:



You can download a .pdf copy here.

For more on Loeb's hedge fund, we also just detailed Third Point's latest positioning & exposure levels.

Dan Loeb & Third Point's Latest Positioning & Exposure

Dan Loeb's Third Point Offshore Fund recently released its January performance and the fund was up 3.9% for the month compared to a 2.4% return in the S&P 500. To date, Third Point has seen 18.9% annualized returns with a low correlation to the market (0.42).

Equity Exposure

In equities, Loeb's hedge fund has its highest net long exposure in basic materials at 16.4% net long. Their second highest exposure comes with a 12.9% net long position in the consumer sector. In total, Third Point is 68.9% long and -7.9% short, leaving the fund 61% net long.

Credit Exposure

Loeb is 31.1% net long credit with his largest exposure in mortgage backed securities (MBS) at 19.3% net long. He is also 12.3% net long distressed and -10.1% short Government bonds.


Top Positions

As of the end of January, Third Point's top positions remain unchanged from previous months:

1. Gold (physical)
2. Delphi (multiple securities held)
3. Chrysler (multiple securities held)
4. Potash (POT)
5. Lyondell Basell (LYB)


Top Winners & Losers

Third Point's portfolio attributed positive performance in the month to shares of Potash (POT), Smurfit-Stone Container (SSCC), Massey Energy (MEE), NXP Semiconductor (NXPI), and Aveta. We recently highlighted how Third Point opposes SSCC's takeover and other hedge funds have been active in the name as well. SSCC is one of the many post-reorganization equities found in Loeb's portfolio. Last year we cited how Third Point likes post-reorg equities and just recently we noted that John Paulson likes them too.

Regarding his position in NXP Semiconductor, Loeb highlighted NXPI in a recent letter. The company is involved in near field communications and is seen as a prime play on mobile payments. Third Point also saw solid performance from its position in Massey Energy as the company received a takeover offer from Alpha Natural Resources (ANR).

Positions that negatively affected Third Point's portfolio last month include Gold, Brenntag AG (ETR:BNR), Mead Johnson Nutrition (MJN), African Barrick Gold (LON: ABG), and Accuride (ACW).

To learn to invest like this hedge fund manager, check out Dan Loeb's recommended reading list.

Bill Ackman's Investment Thesis on J.C. Penney (JCP)

Bill Ackman's hedge fund Pershing Square Capital Management held its annual investor dinner recently and went through a slideshow of their investments. In particular, they highlighted their activist position in retailer J.C. Penney (JCP). In the past, we'd posted up Ackman's potential JCP real estate thesis. This time around, we've got rationale direct from Pershing Square.

Ackman began purchasing JCP shares at $20.01 in late August, 2010. Pershing filed their activist 13D on JCP in October and then J.C. Penney promptly proceeded to hire bankers. The hedge fund's cost basis on JCP is $25.28, but that excludes options (we've broken down Pershing's JCP stake here). Shares of JCP today trade north of $35 per share. Below we'll take a glance at Pershing's slides on JCP.

Investment Thesis

According to their annual investor dinner slideshow, Pershing Square "recognized in JCP an opportunity to invest in a cyclically depressed national retailer at a significant discount to fair value." While shares of J.C. Penney are up almost 10% from Ackman's cost basis, he still sees shares as inexpensive when you consider the company's asset base and earnings power.

Ackman's thesis on JCP can be summed up in the points below:

- "Cheap relative to trailing earnings (adjusted for year end cash and non-store real estate portfolio): The stock currently trades at only 4.9x 2010 EBITDAP."

- "Sales productivity and margins remain depressed creating material leverage to a recovery. Sales per square foot are at 2002 levels. 2006 EBITDAP was ~50% higher than 2010 level."

- "Company's reported pension expense masks true cash flow."

- "JCP owns substantial core and non-core fee and long-term leasehold real estate interests."

- "Vornado brings relevant experience in retail and real estate and is a party we've worked well with in the past." If you're not familiar, Vornado Realty Trust (VNO) also bought a large stake in JCP.

And today in an interview on CNBC, Andrew Ross Sorkin asked Ackman what he thought J.C. Penney was worth. Ackman's response? "Somewhere meaningfully higher than where it trades." He also said that the company's margins and revenues are lower than where they could be.


Shareholder Activism

And in recent developments, Ackman joined J.C. Penney's board. When he first took the stake, it appeared as though JCP was going to push back against Ackman's activist advances. The hedge fund manager notes that activism often requires patience and that was the case here. Pershing Square has been involved with a long list of companies on the activist front and have built up credibility as an agent of enacting change. To see Ackman's latest portfolio, sign-up for our newsletter as a new issue will be out in a little over a week.


Below you'll find a slide of Pershing's typical sources of opportunities for activism:

(click to enlarge)

For more on their investment style, head to our profile of Pershing Square.

David Einhorn Acquires BioFuel Energy Shares (BIOF)

Greenlight Capital hedge fund manager David Einhorn just filed an amended 13D and Form 4 with the SEC regarding his position in BioFuel Energy (BIOF). Per the amended 13D filing, Einhorn now shows a 40.8% ownership stake in BIOF with 42,818,004 shares. We've also recently posted other Greenlight portfolio activity for those interested.

David Einhorn's various investment entities (Greenlight Capital funds) have purchased an aggregate of 19,626,775 shares of common stock and 11,307,729 shares of Class B common stock. These shares were purchased via rights offering and the net investment made in the private placement was $17,323,322.24.

It appears as though BioFuel used the proceeds from the rights offering and private placement to repay a subordinated loan and bridge loan. Readers will recall that both David Einhorn and Dan Loeb's Third Point provided BIOF the bridge loan.

Here is a full breakdown of how the BIOF shares are allocated among various Einhorn entities:

(click to enlarge)

Per Google Finance, BioFuel Energy "produces and sells ethanol and its co-products (primarily distillers grain), through its two ethanol production facilities located in Wood River, Nebraska and Fairmont, Minnesota."

For more from this hedge fund manager, be sure to check out David Einhorn's recommended reading list.

Lansdowne Partners Increase Gartmore Stake

Paul Ruddock and Stephen Heinz's hedge fund Lansdowne Partners recently filed a disclosure in UK markets regarding portfolio activity. Due to trading on February 1st, Lansdowne now hold 10.05% of Gartmore's (LON: GRT) voting rights or equivalents via a combination of shares and contract for difference (CFDs ~ we've penned a primer on CFDs here).

Back in November 2010, we highlighted that the hedge fund had built up a 6% holding just days after one of Gartmore's star fund managers, Roger Guy, had resigned. Lansdowne has added to their position in sizable fashion in recent months. For other activity from this prominent hedge fund, we posted about how Lansdowne reduced a short position.

Per Google finance "Gartmore Group Limited is a United Kingdom-based company engaged in the provision of fund management services. The Company is a traditional equity and alternative asset management firm, whose mutual funds, alternative funds and segregated mandates are distributed to clients in the United Kingdom, Continental Europe, North America, Japan and South America."

Stay tuned as we'll be posting up the latest letter from Lansdowne later this week on MarketFolly.com.

David Einhorn's Recommended Reading List

David Einhorn is the manager of hedge fund firm Greenlight Capital. He has returned 21.5% annualized and is well-respected in investing circles. At a recent event, Einhorn interestingly admitted that he did not read books all that often, but he did have a few suggestions for investors. Here is David Einhorn's recommended reading list:

- You Can Be a Stock Market Genius by Joel Greenblatt: Einhorn joins the copious amount of other hedge fund managers that have recommended this book. It takes a look at catalyst-based investing including spin-offs, mergers, risk arbitrage, and more.

- Margin of Safety by Seth Klarman: This hard-to-find and out-of-print book is a must for aspiring investment aficionados. It is written by one of the most successful hedge fund managers of our time and so it's no surprise that Einhorn recommended it.

- Liar's Poker by Michael Lewis: This is an insider's account of what really happens on Wall Street and is one of the most popular financial books out there.

- Fooling Some of the People All of the Time by David Einhorn: While Einhorn did not recommend his own book, we wanted to include it as it details his short selling battle with Allied Capital and features a foreword by Joel Greenblatt. After all, there's only a handful of books out there penned by prominent hedge fund managers.


For recommended reading lists from other top hedge fund managers, be sure to check out these other resources:

- Seth Klarman's recommended reading list

- Books recommended by Dan Loeb

- Hedge Fund Blue Ridge Capital's recommendations

- Warren Buffett's recommended reading list

Leon Cooperman Optimistic About Equities, Concerned About Employment

Legendary investor Leon Cooperman of Omega Advisors recently appeared on CNBC to give his take on the markets. The hedge fund manager oversees $6 billion and founded his firm after working at Goldman Sachs for 25 years.

Omega Advisors is currently optimistic and argues that the United States is not akin to Japan and won't see a lost decade. Cooperman highlights that while the consensus view is optimistic, many people aren't invested that way. He points to outflows in the equity market and inflows to the bond market as people seek stability after a tumultuous ride through the financial crisis.

Omega Advisors is currently 80% net long. This is much more long-oriented than the average hedge fund exposure levels. Cooperman is now the second subsequent major hedge fund manager to come out and say that he's optimistic on the markets. Appaloosa Management's David Tepper is also optimistic.


Cooperman Sees New Economic Expansion

Cooperman says that, "We're eighteen months into a new economic expansion. The average economic expansion has lasted five years. There's still plenty of runway." Now while he is optimistic regarding the future, he obviously acknowledges that things don't go straight up and he could see a potential market correction in February. However, after that, he is optimistic over the long haul provided we see improvement in unemployment numbers.

Hedge Fund Manager Prefers Equities Over Bonds

Cooperman says that, "stocks, at worst, are the best house in a bad neighborhood and if by some miracle this whole game works and we deal with fiscal issues long-term and stop kicking the can down the road, then I think stocks are the best house in a good neighborhood."

Below is the video of Cooperman's thoughts on equities and email readers will need to come to the site to view it:




Cooperman Likes Energy and Financials

Cooperman rattled off a few energy names he owns including Denbury Resources (DNR), Williams Companies (WMB), and McMoRan Exploration (MMR). Just last week we highlighted that Barry Rosenstein's hedge fund JANA Partners bought WMB as well.

In the financial sector, he likes Sallie Mae (SLM), JP Morgan (JPM), and singles out E*Trade Financial (ETFC) as a potential takeover target. The hedge fund manager also likes Teva Pharmaceutical (TEVA) which has a 20% return on equity and is a growth business trading at 11x earnings. Lastly, he mentions that he's long General Motors (GM) and Ford (F) too, as there's a lot of positive operating leverage there.

Embedded below is the video of Cooperman's thoughts on specific sectors:



And here is the final video with Cooperman's expanded comments:




Omega Buys Energy XXI Shares

Additionally, Omega Advisors just filed a disclosure of recent activity in UK markets regarding their purchase of shares in Energy XXI (LON: EXXS). Per the notification, Omega Advisors has disclosed a 5.9% ownership stake in Energy XXI with 4,062,380 shares. This is due to portfolio activity as of December 31st, 2010.

While Cooperman has purchased the EXXS shares traded in the UK, shares of Energy XXI are also traded on the Nasdaq under ticker symbol EXXI as well. Per Google Finance, Energy XXI "is an independent oil and natural gas exploration and production company with operations focused in the United States Gulf Coast and the Gulf of Mexico."

To view Cooperman's latest investments, subscribe to our Hedge Fund Wisdom newsletter as we'll reveal his portfolio in our new issue that comes out soon.

Hedge Funds Active in Smurfit-Stone Container (SSCC)

Dan Loeb's hedge fund Third Point LLC and Barry Rosenstein's JANA Partners have filed a 13D and 13G respectively on shares of Smurfit-Stone Container (SSCC). Smurfit-Stone recently received a takeover bid from Rock-Tenn (RKT) worth roughly $38 per share in a cash and stock deal. Late last week we detailed that a consortium of hedge funds opposed Smurfit-Stone's takeover.

Third Point

According to SEC filings, Third Point has disclosed a 2.46% ownership stake in SSCC with 2,250,000 shares as of their February 1st portfolio. Loeb's hedge fund has filed in cooperation with Royal Capital Management (who owns 3.04% of SSCC) and Monarch Alternative Capital (who owns 3.47% of SSCC). This consortium of hedge funds collectively oppose the takeover.

While these hedge funds received the majority of their shares in Smurfit-Stone's recent reorganization, they've also been buying shares in recent months. Third Point had purchased shares of SSCC on the open market throughout December 2010 and even bought 250,000 shares as recently as February 1st after the takeover was announced (at prices of $37.5680 and $37.7497).

In their SEC filing, Third Point argues that the $38 per share valuation is inferior. According to an attachment to Third Point's disclosure, "we wonder just what numbers Smurfit’s board was looking at when it approved the Merger? This is the critical question, because if Rock-Tenn had been willing to pay 6.1 times the more appropriate Adjusted EBITDA of $938 million, and if an appropriate value had been ascribed to the NOL, Smurfit’s shareholders would receive nearly $44.00 per share of Common Stock in the Merger."

They also highlight that, "precedent containerboard transactions over the last decade had a median TEV to EBITDA ratio of 7.7x." Such a valuation would make shares of SSCC worth more like $59 per share.

JANA Partners

In a separate 13G filed with the SEC, Barry Rosenstein's hedge fund JANA Partners has disclosed a 5.7% ownership stake in Smurfit-Stone Container (SSCC) with 5,230,591 shares per their portfolio as of January 26th, 2011. Back on September 30th, 2010, the hedge fund only owned 521,479 shares, so this is a whopping 903% increase in their position size. We recently detailed some of JANA's new positions as well for those interested. While JANA is an activist oriented firm, this filing marks a passive SSCC stake.

While it's speculation on our part, it seems that JANA potentially acquired their new shares after the Rock-Tenn (RKT) takeover deal was announced and saw SSCC shares as undervalued. Since JANA did not file an activist 13D, it's unclear if they oppose the current deal. We're inclined to assume they're likely to side with Third Point's consortium. Under this scenario, you'd essentially have 14.67% of SSCC shares owned by hedge funds that oppose the takeover.

For more specifics of this deal, head to the hedge funds' letter of opposition to the deal.

Lee Hobson's Highside Capital Starts MIPS Technologies Position

Lee Hobson's hedge fund firm Highside Capital just filed a 13G with the SEC regarding shares of MIPS Technologies (MIPS). Due to portfolio activity on January 26th, 2011, Highside has disclosed a 6.2% ownership stake in MIPS with 3,100,000 shares. This is a brand new position as the hedge fund did not own shares as of their last portfolio disclosure.

Hobson graduated from Princeton University and earned his MBA at Harvard Business School. He founded his Dallas, TX based hedge fund after working for Lee Ainslie's Maverick Capital. Highside employs a long/short equity strategy and invests in public markets.

Per Google Finance, MIPS Technologies is "a provider of processor architectures and cores that power some of the home entertainment, communications, networking and portable multimedia products. The Company’s technology is used in markets, such as mobile consumer electronics, digital entertainment, wired and wireless communications and networking, office automation, security, microcontrollers, and automotive. MIPS customers are global semiconductor companies and system original equipment manufacturers (system OEMs)."

Keep up with all of the latest moves from prominent managers with our hedge fund tracking posts.

Bruce Berkowitz & Bill Ackman: Summary of Their Harbor Investment Conference Talk

We're continuing our focus on the recent Harbor Investment Conference that took place late last week and wanted to point out a discussion between Fairholme Capital's Bruce Berkowitz and Pershing Square Capital Management's Bill Ackman. The two interviewed each other on their respective investments.

Below courtesy of our friends at Benzinga.com is a guest post summarizing the managers' talk at the Harbor Investment Conference:

"Berkowitz of Fairholme Capital, was interviewed by Bill Ackman, the conference's Co-Chair, and he discussed why he's been long Berkshire Hathaway (NYSE: BRK-A) and Leucadia National Corp. (NYSE: LUK) for a long time. He bought both of them around 1985, for similar reasons. He liked the company's management, and he specifically liked Berkshire because he said that Warren Buffett was a "smart guy" who ran other people's money. He paid about $2,700 per share for each A share he owns.

Ackman of Pershing Square Capital, asked what Berkowitz's biggest investment error was of his career. Berkowitz responded by saying that his biggest mistake was trusting management, and not verifying them. He said that in order to verify management, you have to try to prove them wrong, and kill their thesis.

He also discussed some of his better investments, like Imperial Metals, which Berkowitz said he has no idea why it's doing well, it just is. He discussed his position in Wells Fargo (NYSE: WFC) in the late 1980's and early 1990's, and said that he really likes the banks now. He believes we are rebuilding now, and a lot of banks are trading below book value, with low valuations, and said that the worse the bank was perceived, the better it will probably wind up being. He owns positions in Goldman Sachs (NYSE: GS), Regions Financial (NYSE: RF), AIG (NYSE: AIG), CIT Group (NYSE: CIT), Bank of America (NYSE: BAC), Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) in the financial sector. Berkowitz said there is a black box risk to owning banks, but after three years, you can get an idea of who's going to do well. Berkowitz said he would own more of Goldman Sachs if he could, but as a mutual fund, he's forbidden by law.

Regarding AIG, he said that AIG is more respected in Asia than it is here, and he sees tremendous value in the company's remaining assets, which it has so many of. Berkowitz said that former AIG CEO Hank Greenberg was a serial acquirer of assets, and there is tremendous value still there. He said that the current AIG is trading below book value, and it's trading at a single digit P/E. A major reason why he likes AIG is the company won't have to pay taxes for quite some time, as the company lost over $100 billion in market cap."

To read about the rest of Ackman and Berkowitz's talk, we highly recommend heading to the full summary at Benzinga here.

Alex Klabin of Senator Investment Group Likes Valspar (VAL): Harbor Investment Conference

Today we're focusing on the latest investment theses from top hedge fund managers that recently presented ideas at the Harbor Investment Conference. Alex Klabin of Senator Investment Group sees value in Valspar (VAL). Instead of focusing on cyclical businesses, Senator is targeting defensive businesses for the foreseeable future. We had covered some of Senator's investment theses at a previous conference as well.

The following is a guest post from our friends over at Benzinga.com summarizing the hedge fund manager's talk:

"Klabin, who has $3 billion dollars under management, said he believes that defensive businesses are trading at a discount of about 20% to where they should be trading, given historical valuations. He specifically mentioned looking at Merck (MRK), after the drug company missed earnings this week. Klabin said the company is probably full of bloat and there is a lot of fat that could probably be cut there.

Klabin said that expectations for defensive companies are very low, with only about 4% earnings growth, barely outpacing inflation.

The specific name he discusses at the conference is the Valspar Corporation (NYSE: VAL), which manufactures and distributes coatings and paints across the world. Klabin described the company as a combination of Sherwin Williams (NYSE: SHW) and a coating application company.

The company is a global leader in coating applications, with a 40% market share. Valspar makes the coatings on the inside of plastic bottles used for Coca-Cola (NYSE: KO) and other manufacturers. Without it, the acidic acid in the Coke would eat away at the bottle.

In the paint segment of the business, Klabin said he sees the quiet ability to raise prices for paint, and no one would notice."

To read the rest of Klabin's thoughts on the company, head to Benzinga for the full post here.

Mick McGuire of Marcato Capital Likes SFN Group (SFN): Harbor Investment Conference

The Harbor Investment Conference took place late last week and featured a bevy of hedge fund managers sharing their latest investment ideas. Mick McGuire of Marcato Capital Management was one of the speakers and his pick was SFN Group (SFN). Before founding Marcato, McGuire previously worked at Bill Ackman's Pershing Square Capital Management.

The following is a guest post from Benzinga.com with a summary of McGuire's bullish case for SFN Group:

"Mick McGuire of Marcato Capital Management spoke at the Harbor Investment Conference yesterday and recommended SFN Group Inc (NYSE: SFN) to the audience.

McGuire, who is a former chairman of Borders (NYSE: BGP) is an activist investor in the midcap space, and he believes there is significant value in SFN Group. McGuire said that the market cap of SFN is equal to the enterprise value of this U.S. based staffing firm.

He likes SFN because its' normalized earnings power should exceed the historic levels, and it's trading at a lower earnings multiple.

The company owns a variety of different staffing firms, including Spherion and Tatum, as well as others. It staffs different types of employees, from the entry level worker, to a seasoned company executive. The company receives higher margins on higher paying jobs.

McGuire believes that a lot of companies could maintain a high percentage of temporary workers, as he believes that many companies will want to maintain employee flexibility, should unforeseen events occur in the economy.

With an enterprise value of only $550 million, and $100 million in expenses from SG&A removed, McGuire believes the company is poised to increase its value over time. The company also has a significant amount of net operating losses at both the federal and state levels, which should allow the company to double EBITDA over the next year. The only major expense the company has is capital expenditures, and the company recently made a major technology purchase for its systems, which should allow Capex spending to drastically slow down over the next few years. The increase in EBITDA goes straight to the company's free cash flow.

McGuire also mentioned that the company is buying back 5% of its stock, thanks in large part to the increase in free cash flow it's seeing.

McGuire said that he believes SFN has an implied stock price of $20.26 by 2012."

Benzinga has covered the Harbor Investment Conference extensively and we highly recommend reading their coverage of the event:

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