Alex Roepers' 5 Investment Ideas: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of Alex Roepers of Atlantic Investment Management.  His presentation was entitled 'Corporate Action, Activism & Takeovers: Gaining Momentum.'

Atlantic: $1.8B in AUM, concentrated in 5-7 core positions in US.  Investment grade, mid-sized.  Uses significant minority positions, 2-7% to for shareholder activism.  Strict buy/sell discipline, buy 7x EBIT, sell around 11x.  1-2 year holding period is typical.  Largest fund 5-7 stocks, that’s it!  Averaged 18.5% annually over 20 years vs. 8.5% for the SPX.  

On Investor Activism

Last year he said environment was good for corporate action, activism and takeovers (JANA's Barry Rosenstein agrees).  Today we have:

1. Attractive valuations, because people are VERY gun-shy due to market crashes.
2.  Strong balance sheets now, much better post-2008
3.  Private Equity under pressure to put capital to work
4.  Super low interest rates, easy to make acquisitions
5.  Moderate organic growth due to economy; "Need to buy growth"
6.  Some hostile in M&A, nowhere near record levels of past  

Earnings yield of SPX is 6.8% vs. 1.8% 10 year treasury.  Expect the decade long outperformance of bonds to reverse; stocks will outperform next ten years.  He also showed the same chart of fund flows of investors pulling money from stocks into bonds.  "You will have phenomenal returns in equities if you pick your stocks right."  

PE firms have $400B in dry powder for buyouts. VIX is greatly reduced, which helps create environment more buyouts. Japanese and Chinese are stepping up cross-border M&A.

Atlantic's Approach:

1. Sufficient size and liquidity. >$1B to move the needle, but <$10B or it's too big to get a deal done 2.  Strong strategic franchises with high barriers to entry
3.  Attractive valuations: <8x ebit="ebit" forward="forward" nbsp="nbsp" p="p">4.  Strong balance sheets: EBITDA> 4x interest expense
5.  Predictable and recurring cash flows, high MRO content
6.  Low insider ownership <10 blocking="blocking" by="by" family="family" held="held" management="management" nbsp="nbsp" or="or" p="p" shareholders="shareholders">7. Noticeable activity in a sector; e.g. chemicals, mining equipment
8.  Liquidity.  Take 2-7% ownership stakes, no board seats, so proxy battles
9.  Write detailed shareholder engagement letters and have active discussions with management  

Recap of last year's investment ideas: ENR up 5%, ASH up 59%, FLS up 63% (sold it), MTX GY up 22% (sold it), and ATO FP up 53%.


Roepers' 5 Investment Ideas

Energizer (ENR).  $75.43, $4.9B market cap.  47% of business is batteries; the other 53% is personal care products: Schick shaving, Hawaiian tropic skin care.  Margins should be higher; eps should be $7.50 up from $6.00.  Target price is about $100 in 6-12 months.  

Rockwood Holdings (ROC).  $49.  $3.9B market cap. Specialty chemical company.  Lithium, Advanced Ceramics, TiO2, Surface treatment, Performance additives.  Stock trades on the TiO2 business, but they should IPO or spin this segment.  Real bull case here is Lithium, 8% organic growth without the electric car.  #2 lithium producer in the world.  Sum of the Parts (SOTP) to get valuation.  Catalysts are IPO of TiO2 business. Target price $70/share in 12-18 months based on 10x 2013e EBIT.   

Clariant (CLN VX).  Swiss conglomerate.  Disposal group, pigments, oil and mining services.  Being restructured, de-levering now.  46% capital appreciation potential in a year.  

FLSmidth (FLS DC), Danish mining supply company.  Concerns about China slowing.  Cement, Customer service for mining, and non-ferrous metals.  They help mining companies set up operations.  33% upside at DKK 467/share in 12-18 months.   

Joy Global (JOY).  $59.41.  Coal mining equipment.  Coal is out of favor.  Half surface mining, half underground.  Actually though, a lot of coal buying out of the most green countries, Japan and Germany.  Growth industry, but not in the US as much.  But he says all the switching from coal to gas that could happen, has already.  Stock has dropped in half this year on China slowdown and emergence of natural gas in the US.  Says 2013 is the trough year, but it will grow over time.  Their only competition was bought for 13x by CAT.  Very likely takeover candidate. Price target is $105 in 12-18 months based on 11x FY13E EBIT, 77% upside.


Q&A Session: 

1.  Why did ENR not do well?  Part of it was FX, the Euro. Also they've been slow and shareholders have become disenchanted with management.

2. Still own Owens Illinois?  They own 6.5% of the company, number one glass bottle maker in the world.  40% of business from Europe, demand a bit slow and FX issues, but trades at only 6x next year P/E and they are paying down debt.  Trades at only $18 now.

3.  Will JOY survive the "war on coal?"  It still generates 35-40% of the electricity in the US.  Gas prices coming up. US segment is only 22% for JOY.  He says when being activist "I'll fade out of the stock when you achieve X, Y and Z" which makes people listen to them.

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





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

Lloyd Khaner's Presentation on Jamba Juice: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of Lloyd Khaner of Khaner Capital.  His talk was entitled 'Turnaround Investing - Swinging at Good Pitches.'

Khaner: 21 years, outperformed S&P 500.  Lost 6.5% last year.  Lost 14% in 2008. Made 63 successful turnarounds over the years.  Half large cap. Everything but biotech ("too hard").

Starbucks (SBUX) was his 2009 pick. Update on SBUX: it was midteens in 2009 when they pitched it, now $50 range.  Questions now on their new store growth- China, India.  Says they have a good person turning around Europe.  US store refresh on track.  "Verismo" product is not focused at GMCR K-cups, rather Nespresso. "La Boulange" bought concept to upgrade their food.  New concept of juice "Evolution Fresh."  His thesis is they are not over-expanding like they did last cycle. Deep management bench. Says stock could take a pause here in the 50s for a year or so. 


On Turnaround Investing

Common mistakes in turnaround investing:

1.  Swinging at bad pitches.  Too hard to do.
2.  Swinging too early.  Timing!
3.  Not swinging at all- fear and loathing (airlines, etc.) 

Bad Pitch #1:  Too Much Debt Balance sheet myopia, disadvantaged with customers, suppliers, competition.  Over 70% debt to capital- don't swing at this pitch 

#2: weak/non-turn around management.  Pass on it. 

#3:  weak/impaired industry. Becoming obsolete, irrational pricing, expensive financing.  Talent leaves, and never comes in.  Dying industry: don't do it!   Ted Williams analogy: he knew his exact batting average based on his hitting zones.  They did same thing. Zones to avoid: weak management, excess debt, dying industry.   Even at a good turnaround pitch, timing is everything. 


Investment Pitch on Jamba Juice (JMBA)

Only $208M market cap, sells about 1M shares/day 1990 IPO as SPAC, then March 2006 merged with Jamba Juice Company. 790 stores, 60% franchised, half in CA.  90 Jamba Go Stations, 40 international locations.  Building a CPG brand in 35k stores. Stores are small, 1200-1400 sq. ft., $700k average unit volume.  Lunch and afternoon is 50% of business.  Business spread evenly all day. Store only operating margin 20-23% and rising. Attachment rate (non-core products) is 20% Stores cost $265k-400k to build.

JambaGo is a self-serve unit for schools, institutions.  400-500 of these will be in public schools by the end of this year. No debt.  29M cash, management has turnaround experience, industry is growing.

The Whys?

Why did private equity save this company with cash in 2008? Why still improving comps despite competition from MCD? Why are they able to install JambaGo into public schools?

Their food is great, healthy, fairly affordable, for all ages, mom friendly, kid friendly, CPG brand in 35k locations, will be 50k by EOY2012. 

Risks: spike in food costs.  Speed of Service is slow, takes 5-10 minutes, limited seating in stores. 

What went wrong? Past management team was weak.  Too many employees 10k in stores, 250 in overhead, grew too quickly- in 2009 opened 99 on base of 600. Stores got run-down, dirty.  SSS dropped 8.1%.  Margins declined.  EPS and FCF negative in 2006, 7, 8.  Used short-term debt to fund the company. 

James White brought in Dec 2008 to turn it around.  Was SVP at SWY, and SVP at Gillete, worked for Jim Kilts, who turned G around. Three year plan:  hire new execs, retain talent, eliminate debt, reduced headcount at stores, refranchise company owned stores, forgo revenue at first to improve margins, improve food quality, clean the stores, expand the menu, extend the brand. He did all of this in 3 years.  Eliminated debt (converts) Closed 67 underperforming stores, refranchised 174 stores.

New goals: 4-6% SSS OM 20-23% SG&A flat. 40-50 new US locations JambaGO in 400-500 institutions Thesis:  eps positive $0.05, ROIC positive for first time in 5 years. 

New plan is about growth. Worldwide 3700 units, 400% growth, 1000 international.  Pipeline of 320 units already. 40 units now.  Double each year for a few years. JambaGO: 1500 by EOY2013. CPG royalties up to 10M from 3M this year. 

Valuation: Three year turnaround.  "Turnaround valuation" makes it look expensive. ROIC positive in 2012, 5-10%, up 2.5%/ year He predicts: eps .05 this year, 2013 22cents, 2015 50 cents If 15x eps, for 50 cents in 2015, $7.50 stock.   Timing is right, stock up from $1 to $2 already, but turnaround has progressed a lot already and potential to $5-6.

Question & Answer Session: 

1. Threat of competition of people making smoothies at home?  There is competition, that's why they are opening more stores.

2.  How do they source investments?  Usually they see the company first, other times CEO first.

3.  JCP?  He doesn't own it now.  Says it will be at least a 3 year turnaround.  Says they may have to go back to couponing; "that's retail."  Whitney Tilson mentions that before Johnson came in, 99.8% of items they sold were at some sort of discount.

4.  SHLD?  He doesn't own it, no turnaround CEO, over 10 years since they've taken care of it.  Asset value is a different question, but their segment of retail is very competitive.  Not a turnaround for a lot of reasons.

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




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

Bill Ackman on General Growth Properties, J.C. Penney, Procter & Gamble at Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Bill Ackman of Pershing Square Capital Management.  His talk was about General Growth Properties (GGP) and the need to stop Brookfield Asset Management (BAM) from acquiring it.


General Growth Properties (GGP)

$19.48 stock, 5% cap rate.  Long-term contracts.  85% recurring revenue, 3% rent escalators per year.  Even during Great Recession, and GGP's bankruptcy, NOI only dropped 10%. Up from $15 to $20 out of bankruptcy, spun off HHC. Stock fell later in 2011, collapsed to $12.50 last summer.

Very interesting saga about how Simon Property Group (SPG) and Brookfield Asset Management (BAM) and Pershing all tried to do a deal with the company (we posted Ackman's letter to GGP).

This summer, Pershing filed a13D requesting a financial advisor to look a selling the company.  Board rejects the idea.   Ackman contends that director Patterson isn't independent, so 5 of 9 board members are conflicted.  He says if status quo continues, BAM will get control of the company without paying a premium. Says GGP will always have a "Brookfield Discount."

Says SPG may still be interested in buying GGP even though he says he won't do a deal.  Ackman says shareholders benefit from a merger with SPG, it's less risk, and has synergies.  He details the synergies of a deal with SPG:

Incremental NOI, etc.  Saves overhead costs of almost $110M per year.  Says $350-590M in incremental cash flow, with a multiple, several billion of value.  Says 86% stock/14% cash deal makes sense, pay 29% premium.  Accretion of 5.4% from day one.  Deal is $29 equivalent price by end of the year, up from about $20 today.  Dividend also goes up, 51% increase to shareholders.  Lower leverage, more liquid.  He assumes SPG stock will also go up.

Ackman claims BAM was filing prospectus in the meantime, to buy the company themselves.     His solution:  the board of GGP should form a independent committee, hire independent financial advisors, to salvage the control premium.

Q&A:  How do you expect the board to do this, since they've already dismissed it outright? He says they didn't understand what they were being presented.  "Properly informed" he says they will respond correctly.


J.C. Penney (JCP)

Updates on JCP?  Says very few people followed them in GGP, because is was unconventional.  Same with JCP, it there is enormous skepticism. Says JCP is building "a mall within a mall" and 85% of their stores are in malls with $300/sq ft and above, B+ malls.  SSS down 20% in 1H12 and will be in 2H12 as well.  The shops are working, but it takes time. Also, easier comps next year.  You have to think more than 3 months ahead, it's interesting.  Also, killed the dividend, which was unpopular.

What if the JCP strategy doesn't work?  Issue is how do you get them in the store?  A free haircut is better than a coupon of 50% off an inflated price. 


Procter & Gamble (PG)

He's long PG - why does he like it?  Says company has bloated cost structure, organization gotten more complex.  Company instead of cutting costs, raised prices to protect profits, and started to lose market shares.  He has attributed these issues to senior management failings.  If CEO doesn't turn things around soon, they will have to look outside to find a new CEO.  


Shorts?

Best short idea?  waiting to put on more, will share it publicly after they fill their position.  (As you'll see in our past profile of Pershing Square, shorting is less common for them to begin with).

For more on Ackman, we've posted an excerpt from his Q2 letter on why he sold Citigroup.


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





Be sure to check out the rest of the presentations from the Value Investing Congress.

John Mauldin on Value Investing in Age of Uncertainty: VIC Presentation

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of John Mauldin of Millennium Wave Advisors.  His talk was entitled 'How Will the Elections Affect the Endgame?  Finding Value in an Upside Down World.'

He's not a stock picker, but a macroeconomic thinker and writer (author  of "Thoughts from the frontline" a newsletter.

Differences between uncertainty and risk: Uncertainty is the "unknown unknowns" the term used by Rumsfield.  The things we don't even know we don't know.   Investors are obsessed with risk.  We can model it, it makes us feel like scientists.  We have more ways to quantify risk, yet me walked into 2008 missing the obvious.  We think we can model risk. Surprises aren't only the bad things, but the good things (like the invention of the iPhone? or the steam engine)

In 1850 the number one job in the USA was a farm worker, in 1900, it was personal servant.  The cheapest thing was to hire a laborer to do the hand labor.  Uncertainty comes in all forms.  The problem with uncertainty is you can't model it.

For example, the island dispute between Japan and China. It's tough to model because it's based on human nature, and we are irrational.

Lenin: "There are decades when nothing happens and there are weeks when decades happen."  "It's not the lion that you can see that's the problem.  It's the lion in the grass..."

Frederic Bastiat:  A law produces not only one immediate, seen effect, but the other effects which emerge only subsequently, they are not seen. It almost always happens that when the immediate consequence is favorable, the later consequences are disastrous and vice versa.


Mauldin's Macro Thoughts

Europe:  the trade imbalances will force a wage readjustment SOMEHOW.  The wages in Germany must go up, or the wages in Spain, Greece must drop.  "Europe is a disaster!!! there is no way they can get out of their present malaise, they are going to have a depression, the adjustment will be painful."  The problem is the policy mistake of forming the Eurozone 14 years ago.  It's just basic accounting, Spain can't balance it's budget until it balances its trade.

"Japan is a bug in search of a windshield.  They will have their issue in the next couple of years."

China: Can't keep investing 50% of GDP at 8% growth.    Pay attention to the macro but also look at secular trends, and still expect some positive surprises.  

America: In the US, we have to solve the deficit.  You have to raise taxes and cut spending.  No matter who's elected, it will take a compromise.  You can't run on this policy, yet they will do it after the election.

You can't model this economy.  But you can say, you can't spend more than you collect forever. He claims bond market will take over. (But now we have the worst budget situation, with record low interest rates- so everything economists say isn't happening)

He believes in the march of technology.  Biotech, robotics, telecommunications will all make progress.

He likes Monsanto (MON), says they have an edge, people will be eating in 20 years.    The value you can find is when you look "over" the current situation.   Europe mess will not change the march of technology, Asia growing, etc.


Long Term Trends

A few long term trends:

1.  End of the debt super cycle
2.  End of the secular bear market
3.  The millennium wave
4.  Demographic destiny.  Boomers will live a lot longer than expected.
5.  The rise of Asia and Decline of Europe (not just a China story). 


Question & Answer:

Since money velocity is dropping rapidly like it has been, you can increase the quantity without inflation.  Fed is trying to cause some inflation.  We can do this today, because we're deleveraging.  It's working today, only because the velocity hasn't turned yet, but it will.

What is the catalyst for Japan to unwind?  It's when japanese savings goes negative.  It's come down from 16% to 1%.  He says short the Yen, and long the japanese technology companies.  He says they'll print a massive amount of yen.

He's still bearish, thinks we will see new stock market lows, the secular bear market isn't over yet.  We WILL have another recession.


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




Be sure to check out the rest of the presentations from the Value Investing Congress.

Mick McGuire's 3 Ideas With Hidden Value: VIC Presentation

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Mick McGuire of Marcato Capital Management.  His talk was entitled 'Perspectives on Book Value.'

McGuire was named a rising star in 2012 by Institutional Investor and he was previously an analyst at Bill Ackman's Pershing Square before launching his own fund and now manages around $750 million.

He sees a theme of companies owning significant assets which exceed the carrying value on the balance sheet. "Land,"  especially very old land.  Accounting rules, under GAAP, record land at cost, and it is valued at the lower of cost or fair value. It is only adjusted to mark it down, if value drops.  So it is almost never marked up on balance sheets.  So businesses with old holdings have land worth a lot more than they carry them for.

Here are his pitches that are all real-estate themed to some degree:


3 Ideas With Hidden Value

Alexander & Baldwin (ALEX):  One of Hawaii's oldest companies.  Owns commercial real estate in HI and CA.  $30/share, Market Cap $1.3B, EV $1.5B.  Revenue isn't the way to value it. Owns 7.9M sq ft of commercial real estate, and a pipeline of resorts/residential, 75,000 acres of land on Maui and Kauai.  Shows total assets of $1.43 on balance sheet, but only $832M in real estate value.

How to value their properties: Look at comps, or rental cash flow, commercial real estate worth about $442M.  mainland, similarly, get about $500M. So about $900M for real estate, about $22/share, but reduce for corp expense, so net $13.50/share, about 50% of current market value.

Active development projects are in Wailea, Kauai, still owns 100 acres in Wailea, worth about $1M/acre.  Kahului property, and highrise in Honolulu.  Total worth about $294M.   1000 acre master planned community on Kauai, up to 1500 units, selling for $1-4M each.  So JV interests another $400M,  means total, $30.00 of value, same as the share price.

You get the land "free."  What is it worth? They have 20% of Maui, and 15% of Kauai. It's mostly ag land, selling for $27k/acre. They have leased out some of the land, imply value of around $7k/acre. Will take many years to monetize the land, they use 100 years. Low value: $13.72/share to as high as $17.32 per share. Company strategy is to farm the land, waiting for  Total valuation: $43.70 to $47.30, up from $30.00 stock price today.

Q&A:  how about their corporate expenses?  They don't have a good handle on where it should be relative to where it is. "it's not an agenda item with me."  He says they've provided a lot of information to investors. 


Gencorp (GY):  Missile and rocket supply maker. $600M market cap. 11.5% FCF yield to the equity. Non core real estate holdings: carries it at $64.4M.   They said they are the largest shareholder.

Q&A:  What is the catalyst?  Says new CEO, attacked cost structure and capital structure complexity.  One questioner said they had about $300M in environmental claims.


Brookfield Residential Properties (BRP):Trading at $14.39, like ALEX, its value depends on how fast they monetize their land holdings.  62% of their balance sheet is raw land.  Yet they are considered a homebuilder.

"Positive carry call option on inevitable US housing recovery." Concerns about Toronto and Vancouver, which are priced at 6.5x and 8.9x median HH income, like the US was before the collapse.

When they value all the assets, they get approximately $2.2B of TBV, 58% increase in value, or stock move of around $44-55 per share, around 3x current share price!  No analysts covering the stock.

Q&A: Catalyst?  Analyst coverage would help.


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




Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

Zack Buckley Shorts Splunk: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Zack Buckley of Buckley Capital Partners.  His talk was entitled 'Is it 1999 Again?' alluding to the year when tech company valuations were sky high with bad business models

Buckley made a head-turning statement when he said he was long China frauds and visited 50 Chinese companies.  "When I went to China, I was long, when I came back, I was short."  He argued that shorting all the various Chinese frauds is "played out."


Short Splunk (SPLK)

The company monitors web traffic.  Revenue model: one-time fee for use of the software with a maintenance contract. Annual term fees to license the software, based on indexing capacity. IPO at $17, up 90% first day.  Now $36.72, $4.23B market cap, easy to short, P/TTM sales 27x, Trades at 271x street 2015 EBITDA.

Not just a valuation short, it has a business model problem: switching costs are very low for customers, very little patent protection. Not really a Software-as-a-Service (SaaS) business, since they sell a package.

Only 35% of revenue is recurring, still Salesforce.com (CRM) trades at 8x sales, SPLK at 20x.  Lots of competition: SAP, EMC, ORCL. Squeezed by both huge listed competition, and small new VC-backed firms.

Potential price war, competition charges $34k for what they charge $120k for. 90% gross margin business with negative 10% operating margins. Also insiders are selling aggressively, filing a secondary right after they went public. 65 employees, directors, VC funds, CEO, CFO, CTO.  Lock-up ends in 2 weeks, 31M shares, Oct 15th.

Look at what happened at Groupon (GRPN), Zynga (ZNGA). Trades at 27x TTM, unprofitable.  Buyout unlikely, as comps were around 7-8x price/sales.  68% over-valued, could be a $12 stock.

Assumptions for bull case to work: 40% 5 year growth, 29% FCF margins, and 45x multiple.  FCF margins are 1/6 that level now.

Question & Answer

But revenue is doubling every year?  Yes, but the rate of growth is slowing. shorts have been wrong on CRM for a long time, is it the same?  He says if it does grow like that, maybe, but it has very little recurring revenue, whereas CRM has 90% recurring revenue with high switching costs.


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





Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

Whitney Tilson's 3 Favorite Stocks: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Whitney Tilson of T2 Partners.  His talk was entitled 'My Favorite Ideas.'


Tilson's 3 Favorite Stocks

1. Netflix (NFLX) - He was originally short, but now he's long.  He says the company reminds him of Amazon.com (AMZN) back around 2001.  He also feels it could be a takeover target.

"The most controversial, risky thing in my portfolio." Rallied 80% in first 6 weeks of this year.

Quick overview: only $3B market cap, 400M net cash, $3.5B TTM revenues, EV/rev trading at less than 1x sales, FCF TTM collapsed only $61M because company is reinvesting all of its profits back into the company.  28.3M subs, each EV/sub about $99.  28.7% short interest.

Bull case:  market leader, in a global business that is growing 30-40% per year.  Lots of talk about competitors, but no actual market share losses.  Investing in better content, and international expansion which is losing money.

Using hulu as a comp, a $2B valuation on 2M subs, values it at $1000 per sub. Says downside protection due to "bite sized" acquisition for a half dozen companies that would find it attractive. "Mother of all bidding wars would erupt." 


2. Berkshire Hathaway (BRK.A) - "Total opposite."  Brief update: trading above the 110% of book level. Core operating businesses "are going gangbusters."  Insurance up 65% this year, because last year had some super cat events.

How to value it? $106,700 investments per share, $8600 eps ex investments x 8 (12 p/e) multiple, get $175,500 intrinsic value, which is 32% up from today's price.  Intrinsic value calculations have typically led the stock price a bit, but quite correlated.


3. Howard Hughes Corp (HHC) - His third largest position, after BRKA, and AIG.  HHC owns 34 commercial, residential and mixed-use real estate properties in 18 states.  It was a spin-off of the harder-to-value assets from General Growth Properties (GGP).

Real estate company with no income or dividend, so no natural investors for it.  $2.7B market cap, $3.1B EV. Bill Ackman is chairman, insiders own 50% of stock, CEO bought $15M of warrants with his own money, not an option grant.

Owns: Summerlin residential in Las Vegas.  40,000 homes in the area, 5880 acres remaining to be sold.   Woodlands in Houston. 3669 lots left.  Not as bad as overall, they had their bubble much earlier.  Ward Center in Honolulu.  60 acres, 1M sq ft of leasable space.  "Unbelievably hot market in Honolulu."  Could do 5-8 residential towers with ocean views.  At peak, $18M/acre, they have 60 acres. South St. Seaport.  #5 visited site in NYC, 11 acres, major development, worth about $200-300M now. They will tear down Pier 17 and replace it with a glass enclosed building, with panels that can open in the summer. Great views from the roof, they will build it.

Very hard to value, have to use a variety of methods based on the specific property.  Low end, gets $67 (where it is now) and high end gets you $125 per share, almost a double.  Also inflation hedge, hard assets. Risk is real estate market declines again.  Need good execution. 

For more from this manager, we've also posted up Tilson's presentation on AIG from the last conference. 


Question & Answer

NFLX- will Apple stream?  He says they seem perfectly content to just sell content, not at the unlimited fixed price.  AMZN is a bigger threat, with their Prime offering.  He says use the hulu example, which has gotten very little traction despite massive investment.

How are his funds ytd?  "about flat"  Strong 1st Q, especially with NFLX, but in hindsight, should have taken more money off the table.  "Kicked the market's butt for 12 years, but gotten it kicked for last 2 years."


Macro Thoughts

Great Recession was worse than thought- for Q408, estimates were -3.8%GP, it has been revised to -8.9%!  Consumer confidence still well below pre-crisis levels.

Job growth anemic, barely over the 150k needed to keep up with population growth. Unemployment fell from 10% to 8.1%, but still way above 2000 4% level. Job losses have been more severe than any downturn since the Great Depression, and the recovery has been weak.  Lost 8 million jobs, 6% of all jobs, still 3.5% below late 2007 number of jobs.

Each recession has taken longer to recover, 1981, 1990, 2001 and now 2007 which hasn't recovered yet. Govt running biggest deficits since WW2. Over last ten years, median household income has declined slightly to $50.876.   Reason the recovery is so slow?  no residential investment, like we usually get.  Private sector jobs strong, but government jobs are in decline.  The story is tremendous weakness in housing spending and loss of government jobs.

Big picture summary:  US has tepid recovery, little market upside unless the economy gets much better.  Factors that could derail the recovery: Europe gets worse, US housing market turns down, China hard landing, sovereign debt crisis in Japan.  Much more concerned about these 4 than the US.

In his talk, he pointed out that it's absurd to own 10 year Treasuries at 1.65% when you can own high quality companies like Exxon Mobil (XOM), Microsoft (MSFT), ADP (ADP), and Johnson & Johnson (JNJ).  Fidelity, the behemoth fund manager, now has more money in bonds than stocks. Massive mistake by investors by doing rear-view mirror investing.


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




Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

Kian Ghazi's Presentation on Layne Christensen: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Kian Ghazi of Hawkshaw Capital.  His talk was entitled 'Quenching the Thirst For Value.'

Ghazi noted that he's decided to wind down his hedge fund after nine years after his "worst year in 2011" where they were down 11%.  Their only other loss was in 2008, down only 3%.  Prior to that, 7 year net return of 58% versus 30%.  They were focused on underfollowed, unloved, misunderstood small-midcap companies.


Layne Christensen (LAYN)

Ghazi argues there's limited downside here given that the company rarely trades below tangible book value.

$20.16 stock, $399M market cap, $36M cash, $120M debt, $483M EV.  LTM sales $1.1B.  Trades at 18x 2012 eps. #1 in water-well drilling in US.  #2 in sewer construction, repair, #2 in trenchless pipeline rehabilitation.

Two segments: Mineral Exploration. 24% of revenue.  Margins up to 18%, from 1.7% in 2009.  There are signs of weakness; major mining companies are cutting CAPEX. Two comps have guided down already.  Could hedge this segment by shorting Boart Longyear (BLY), or Major Drilling (MDI). 

Water infrastructure 76% of revenue, but only 25% of profit due to margin pressures. Only problem is 62% of revenue is from government.  Margins crushed down to 1.4%, last management team bid too aggressively, just to keep backlog up, so some mispriced projects that are causing losses.  CEO has replaced management in the region that had them.

Bull case is they get back to 4% margins; peers are at 6-8%.

Bears say mineral exploration business currently producing unsustainably high margins, miners already cutting back.  Margins in water segment are also getting worse, only 1% from 4-6% range.  Heavy exposure to municipalities; fiscal cliffs, budget pressures.

Variant view:  Can hedge mineral division with a pure play. Water segment problems are isolated to just 1 of 4 units.  There is a powerful margin recovery drivers in water segment; new CEO.  Spending on wastewater and drinking water are protected at the municipal level.

Downside support with attractive upside.  Trades at 1x tangible book, a good support level. Mineral division alone could be valued at $19/share.  Water could bet $10-15 share if they can turn it around.  Overall upside 60-90% if the story works.  Underfollowed.  CEO and insiders buying stock.

Price target:  basic bull scenario $32.  In best case, if everything works, and if margins return to 4% in troubled portion of water business, so can even get to $59 stock.


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


 


Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

Guy Gottfried Presentation on ClubLink Enterprises & Canam Group: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Guy Gottfried of Rational Investment Group.  His talk was entitled 'Underfollowed and Undervalued: More Small Cap Bargains.

Over the last 3 meetings, his 4 ideas on average have been up 55% in the 8 months after the conference (we've posted up Gottfried's presentation from the last conference as well).

His Checklist:
1.  Do I understand the business?
2.  Is the balance sheet sound?
3. Am I partnering with the right people?
4. Am I getting a great deal?

Two Small Cap Ideas

ClubLink Enterprises (TSE:CLK) - Gottfried pitched a company that operates 51 golf clubs in Canada and the US (in addition to a tourism business in Alaska with port and docks for tour ships). Owns white pass and Yukon route tourist excursion railway in Alaska.

$7.55, 26.7M shares, $201M market cap, 0.30 dividend, 4% yield.

Illiquid.  Financials in Canadian dollars.  Trades at 5.5x FCF.

Each segment, golf and tourism, worth more than stock price.  No sell-side coverage, illiquid, no need to raise capital. High insider ownership.   Gottfried says EBIT has been stable even through the recession.

CEO Rai Sahi is a control investor, outstanding capital allocator, aggressive buyer of stock.  Has issued options only once in 8 years, owns a majority of outstanding shares.  Company has bought back 19% of shares in past 12 years.

Since 2010, has acquired 11 clubs at fraction of replacement costs.  Spent $25M on gulf clubs with replacement value of $100M. Debt: ave maturity 2022, most of it is fully amortizing mortgages.

Valuation: FCF $26.5M, $0.99/share, 7.6x Catalysts: FL results get better, and incremental acquisitions in FL. Tourism grows at the port, expected to grow 10% next year.  Continued stock repurchases.



Canam Group (TSE:CAM) - His second idea was a maker of steel joints and decks, structural steel, steel bridges that he argues is undervalued and very well-run.

$5.05/share, 42.1M shares, 213M market cap, 476M EV. (lots of debt)

Largest producer in Canada, 75% market share, #3 in US with 15% share (top 3 control 90%)  20 plants in Canada and US. Trading at 3.8x normalized FCF, 2.7x FCF excluding non-core assets being actively monetized.

Trades at 69% of understated book value. Why cheap? 1.  US operations (2/3 of revenue) mired in severe cyclical downturn 2. Recent acquisitions during industry slump haven't paid off yet. 3.  Multiple non-core investments Run and 16% owned by Dutil family.

From 2008 to 2011, made $200M of acquisitions. 2 US steel fabs.  $263M in debt, only 27% subject to covenants, has $527M of net WC, land and buildings at cost.  Owns all of its plants and real estate, 2097000 sq ft, average year acquired 1989.   Valuation: average EBITDA last cycle $63M, adjusts to get to $56M FF, $1.32/share, or 3.8x P/FCF.  (He admits that the numbers he used as "normalized" were during the boom years, but says it's justified because they've bought more fabs since then.)

Catalysts:  Rebound in US operations, continued monetization of non-core assets, debt repayment, eventual resumption of dividends.


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





Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

50% Off Las Vegas Value Investing Congress ~ Expires Tomorrow!

The Value Investing Congress just informed us that next Spring's event will be at Wynn's Encore hotel & casino in Las Vegas on May 6th & 7th.  And today & tomorrow only, they're offering a 50% off sale!

To register, click this link and use discount code: S13MF.  This sale expires tomorrow night and is the absolute lowest price you will see.


New Location: Las Vegas

The Value Investing Congress will be in Vegas next May and Encore is an awesome hotel/casino.  We'll be at the event and would recommend getting to Vegas that weekend for some fun before going to the conference on Monday and Tuesday.

Turn it into a quick vacation to catch some shows, do some fine dining, and of course Steve Wynn would love for you to gamble at his tables.


Speakers Thus Far

Hear new investment ideas from the following managers:

- Steven Romick, First Pacific Advisors
- Carlo Cannell, Cannell Capital
- Zeke Ashton, Centaur Capital Partners
- John Hempton, Bronte Capital
- David Nierenberg, D3 Family Funds
- Albert Yong, Petra Capital
- Cara Jacobsen, D3 Family Funds
- Chris Mittleman, Mittleman Brothers
- Chan Lee, Petra Capital

More speakers will be added in the coming months.


50% Off Sale Expires Tomorrow

The event normally costs $4,695 but this two-day sale has a special offer price of only $2,350.  You can register here by using discount code: S13MF.  Don't delay because the offer expires tomorrow night!

JANA's Barry Rosenstein: Presentation on Agrium (Value Investing Congress)

Today and tomorrow we're posting up in-depth notes from the Value Investing Congress.  Here's the presentation from Barry Rosenstein of JANA Partners.  His talk was entitled 'JANA Partners' Activist Approach and a Current Idea.'

JANA Pushes For Agrium (AGU) Split

At the SALT Conference earlier this year, Rosenstein said that today is the best environment for activism he's seen.  His activist investment firm has targeted AGU and they're pushing for the company to split up its fertilizer and retail units (50% upside if they do so).  JANA's main complaint is that the company has excess overhead and costs.

They've posted an analysis of the company at JANAAGUAnalysis.com and we've embedded the presentation below entitled 'Unlocking Agrium's True Value Potential.'

On the website, JANA writes,

"JANA believes that for years Agrium’s full value creation potential has been buried by the company’s conglomerate structure and burdened by operational missteps in its retail distribution business.  As a result, Agrium trades at a significant discount to its true value and has consistently underperformed the weighted average of its peers in total shareholder return over the long term. Agrium has also underperformed its true earnings potential due to factors including a failure to manage costs, poor capital allocation and poor disclosure. In our analysis, we have outlined concrete steps Agrium can take to address this underperformance for shareholders.  We have shared this analysis with Agrium’s board of directors and management."


Embedded below is JANA's presentation on AGU:




Additionally, here's a list of frequently asked questions that JANA's answered in a prepared document answering questions on AGU operations, valuation, and more:




Question & Answer

What is motivating management?  "I'd be out of a job if every company was doing what they were supposed to be doing."

For other activity from this hedge fund, we recently detailed how JANA sold its Barnes & Noble stake.


Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

Warren Buffett's Berkshire Buys More DaVita (DVA)

In Forms 3 and 4 filed with the SEC today, Warren Buffett's Berkshire Hathaway has disclosed an increased position in DaVita (DVA).

Per the filing, Berkshire now owns over a $1 billion stake with 10,197,569 shares (or over 10% of the company).  The filings disclose Berkshire purchased 282,403 shares at weighted average prices ranging from $100.96 to $103.7272 between September 26th and 28th.

In the most recent issue of our Hedge Fund Wisdom newsletter, we highlighted how Berkshire had boosted its stake in DVA by 55% during the second quarter and noted that it is portfolio activity most likely attributed to new portfolio manager Ted Weschler.  DVA was one of Weschler's big holdings at his previous hedge fund.

Additionally, our premium newsletter flagged that DVA was a consensus buy among hedge funds in Q2.  Other top holders at the end of Q2 included Viking Global, Lone Pine Capital, Pennant Capital and more.

Per Google Finance, DaVita is "a provider of dialysis services in the United States for patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD)."

For more from Warren Buffett's Berkshire, we've posted up their activity in Phillips 66.

What We're Reading ~ 9/26/12

Michael Mauboussin on improving investment decision making [Fool]

Interesting viewpoint: the biggest myth in the stock market today [Business Insider]

How this market is a castle on a cloud [Reformed Broker]

Latest longs and shorts from Karsch Capital [ValueWalk]

Ray Dalio on Bridgewater's competitiveness index [CNBC]

Good read: On how Warren Buffett views cash [Globe & Mail]

The 9 stocks Tiger Cubs love [Benzinga]

How good an investment were the bailouts? [Big Picture]

The limits of direct experience in an investor's education [Abnormal Returns]

Jim Chanos on shorting [Santangel's Review]

Regulatory and advertising concerns take center stage [FINalternatives]

John Paulson thinks SEC filings are a waste of time [AR+Alpha]

Appaloosa said to hold USAirways equity, AMR debt [Bloomberg]

Hedge fund redemption requests hit 2012 high in September [HedgeWorld]

Playing a game of economic survivor [Institutional Investor]

Hedge funds play catch up after missing rally [Reuters]

Psychological biases in decision making [HBR]

Notes From Mohnish Pabrai's Annual Meeting

A reader sent in notes from Mohnish Pabrai's annual meeting that recently took place.  He runs Pabrai Investment Funds and tries to emulate Warren Buffett with his value approach.

Pabrai currently has around $540 million under management and detailed a post mortem on some of his past holdings, revealing his mistakes were: 1) permanent loss of capital, 2) mistakes of omission and 3) selling something to buy something else and the exited business does better.  Pabrai has seen 13.3% annualized returns since inception.


Question & Answer Session

Q: You don't use explicit leverage but you have lots of leveraged investments in the portfolio?

A: Munger says 4 stocks is diversified.  If you owned the best apartment building in town, the highest quality business, Ford dealership, and other, you will do pretty well.  Bet in financials is around 25% of fund.  Munger says you can't invest in financial services companies without understanding ethos of management.


Q: Sectors to avoid?

A: Avoid what you can't understand and he doesn't like industries with rapid change (like technology or biotech).


Q: Life's 3 most important decisions?

A: Person he married, father started and bk'ed 15 companies in 15 industries.  Father identified gap but then he was eternal optimist.  Mohnish went from engineering to marketing.  Then his father pushed him out to start an information company.  Read Buffett by Lowenstein in 1994 and a light went on.  Leverage time using investing in businesses and let other guys run the business.


Q: Other idea generation tools besides 13F filings?

A: Cloning is a powerful concept.  Reverse engineer trades.  Third Avenue, Long Leaf Partners, Leucadia, Fairfax, Manual of Ideas are all places to look.


Q: Number of portfolio positions expanded after 2008 and now back to concentrated, why?

A: His natural tendency is to be concentrated.  He was shell shocked and there were a ton of big ideas available back then.  Good ideas are now scarce so better off making a good sized bet rather than 1% or 2% positions.  He holds cash now - any money put to work in late 2008 could have been a 4x.


Q: If things are cheap, why hold so much cash?

A: Not a flood of great ideas.  If he finds more he'll put it to work.  He's looking for 4x or 5x return to get interested with muted risk.


Q: QE3 how does it change what you do?

A: Bernanke doesn't need to announce QE4... it is 500 billion per year.  Not a macro guy but fairly in favor of what Bernanke has done.  Fed good at breaking ability but better than fixing things.  Don't see inflation currently but do see signs of significant unemployment.


Q: Do you model businesses, such as discounted cashflow?

A: Entrepreneurs don't use spreadsheets.  3 or 4 factors are important to each business: just focus on those factors.  Spreadsheets give you an imprecise guess of precision.



For more on this investor, we've posted up Pabrai's thoughts on investment checklists as well as his take on how you can invest like Warren Buffett.

Mick McGuire's Marcato Capital Management Files 13D on Syms, Now Trinity Place Holdings

Mick McGuire's hedge fund firm Marcato Capital Management just filed a 13D with the SEC regarding the former Syms entity, now known as Trinity Place Holdings (TPHS).  Per the filing, Marcato has disclosed a 27.9% ownership stake in TPHS with 4,645,287 shares.


Syms Chapter 11

Retailer Syms Corp (SYMSQ) recently emerged from Chapter 11 as Trinity Place Holdings.  Per the 10-month bankruptcy, the company closed its retail stores (including Filene's Basement), liquidated inventories and redeemed all stock owned by Marcy Syms.

The funds needed to exit bankruptcy were supplied via the sale of $25 million worth of new common stock.  Marcato took part along with DS Advisors, and Esopus Creek Value Fund.

Trinity Place now emerges with commercial real estate and intellectual property.  Shares still trade over the counter, but now with a new symbol TPHS.

At present, the fine print of the 13D says that Marcato does not have any plans or proposals.  The filing also notes that Mark Ettenger (a consultant of Marcato) is on the board of directors.

In a separate Form 3 filed with the SEC, Marcato also discloses that they own 71,184 participating interests whose return is tied to the value of TPHS common stock. 


About Marcato

Readers should be familiar with Marcato as we've covered how McGuire previously worked at Bill Ackman's Pershing Square before starting his own fund.  Like Pershing, Marcato focuses on fundamental research and often employs activist investing.  While Pershing often focuses on large caps, Marcato's focuses seems to be on midcaps.

McGuire was named one of Institutional Investor's "Rising Stars" this year.  And we've covered how Marcato has been involved in CXW, pushing for a REIT conversion.

Next week, McGuire will be presenting investment ideas at the Value Investing Congress in New York along with David Einhorn, Bill Ackman and many more hedge fund managers.  Perhaps he'll talk about TPHS, but we'll have to wait and see.  There's still time to register for the event here.


About Trinity Place (Formerly Syms)

Per the company's press release, Trinity Place Holdings' "current business plan includes the monetization of 16 commercial real estate properties and the development of 28-42 Trinity Place in Lower Manhattan. The company also plans to explore the licensing of its intellectual property, including its rights to the Filene’s Basement trademark, the Stanley Blacker and Maine Bay brands, the intellectual property associated with the well-known Running of the Brides event, and An Educated Consumer is Our Best Customer slogan."

SAC Capital Boosts Stakes in Magellan Health Services and Bill Barrett Corp

Steve Cohen's hedge fund firm SAC Capital just filed two 13G's with the SEC:

Magellan Health Services

SAC filed a 13G regarding its stake in Magellan Health Services (MGLN) and per the filing, SAC has revealed a 5% ownership stake with 1,380,530 shares.

They've substantially increased their holdings in MGLN since the end of the second quarter as they only held 16,300 shares then.  Trading activity on September 21st took them over the regulatory threshold required to file.

Per Google Finance, Magellan Health Services is "engaged in the specialty managed healthcare business. The Company provides services to health plans, insurance companies, employers, labor unions and various governmental agencies. It provides managed behavioral healthcare services, radiology benefit management services, and drug benefits management services."


Bill Barrett Corp

Second, the hedge fund firm also ratcheted up its position in Bill Barrett Corp (BBG).  They now show a 5.5% ownership stake in the company with 2,659,491 shares. 

This is an increase of around 827% in their position size since the end of the second quarter as they only owned a small position back then.  The SEC filing was required due to portfolio activity on September 20th.

Per Google Finance, Bill Barrett "explores for and develops oil and natural gas in the Rocky Mountain region of the United States."

We've posted up other portfolio activity from SAC Capital here.

Highfields Capital Discloses Liberty Ventures Stake

Jonathon Jacobson's hedge fund firm Highfields Capital just filed a 13G with the SEC regarding shares of Liberty Ventures (LVNTA).  Per the filing, Highfields now owns a 5.8% ownership stake in LVNTA with 1,482,738 shares.

This is a brand new position for the hedge fund and the filing was made due to portfolio activity on September 12th.  Liberty Ventures is a tracking stock that was created in August to track certain assets of Liberty Interactive (LINTA).

LVNTA shares track Liberty's ownership interests in various entities such Expedia, TripAdvisor, and many more companies.  Shares of LINTA, on the other hand, track the businesses of Liberty such as home shopping network QVC.  Shareholders of LINTA received LVNTA shares in the tracking stock separation.

Liberty Rights Offering

It's unclear if Highfields acquired some of their LVNTA shares via the LINTA spin or not.  Highfields did not disclose a LINTA stake at the end of Q2 in their most recent 13F filing, but they could have easily purchased shares before the split. 

This is important mainly because Highfields' trading activity date on their SEC filing matches the date of Liberty Ventures' rights offering commencement.  Yahoo Finance has an explanation of this:

"On August 9, 2012, in connection with the creation of its new Liberty Ventures tracking stock, Liberty Interactive distributed subscription rights to purchase share of Series A Liberty Ventures common stock (each, a Series A Right). Each whole Series A Right entitles its holder to subscribe, at a per share subscription price of $35.99, for one share of Series A Liberty Ventures common stock pursuant to a basic subscription privilege, and also entitles the holder to subscribe for additional shares of Series A Liberty Ventures common stock pursuant to an oversubscription privilege.  The rights offering will commence on Wednesday, September 12, 2012, and will expire at 5:00 p.m., New York City time, on Tuesday, October 9, 2012, unless extended by Liberty Interactive Corporation"

The rights offering commenced on September 12th and trades under symbol "LVNAR."  It will expire at 5pm EST on October 9th (unless extended by Liberty). 

We've previously covered other portfolio activity from Highfields here.

Ray Dalio on QE3, Gold, China, Europe, Economy & More (Interview)

Bridgewater Associates founder Ray Dalio appeared on CNBC this morning for a rare interview.  Bridgewater manages $130 billion and is listed as the top hedge fund by net gains since inception.  Here's a summary of Dalio's thoughts from this morning as well as the videos:

On QE3 and the US Dollar

Dalio said that QE3 was a good plan.  When you ease interest rates,  it stimulates private sector credit growth.  And then after that you utilize quantitative easing.  He feels the US dollar is squeezed due to lots of dollar denominated debt, but after this squeeze he says it's going to decline in the near-term.




On China

The hedge fund titan points out that China can have 6% growth and still think that's depressing all while the US has 2% growth.

Just yesterday we posted about how Jim Chanos is still short China.  And of course we've also highlighted the China hedge fund bear thesis.



On Gold

He says "it should be part of everyone's portfolio to some degree because it diversifies the portfolio."  He likens gold to an alternative version of cash and over the long term he says it's better than cash.  "Money can be produced, but gold is somewhat limited."



On Europe

Bridgewater's founder says there's going to be a "managed depression" in southern Europe in the next few years, and thinks we'll see both a combination of monetary policy (money printing) and a deleveraging and restructuring of debt over there.  He says the euro is "likely" to stay together and it is controlled by southern Europeans, though there's more risk for the currency in later years.



On His Biggest Worry

He worries about social distortion and another leg down in various economies causing them.  He notes that deleveragings can be painful and we've posted up Dalio's in-depth look at deleveragings before.


On a Possible Downturn in the US Economy

The Bridgewater founder said that the odds of an unmanaged downturn are "comparatively low."  He likens it to flying on a plane where you could hit an air pocket and that's when problems could arise. 


Dalio's Rules of Investing

He says, "I don't get caught up in the moment.  I think so many people are reactive and they see things in a very short-term way."  He goes on to say that, "almost all important events never happened in your life."  He looks at what's happened in the past and uses that as a template for rules for each scenario essentially saying 'if this happens, do that.'



Dalio is profiled in the new book The Alpha Masters which we recommend reading.  For even more thoughts from Bridgewater's leading man, check out this recent in-depth interview with Dalio from a few days ago.

Kyle Bass' Hayman Capital Discloses Sealy Stake

Kyle Bass' Hayman Capital Management this morning filed a 13G on shares of Sealy (ZZ).  Per the filing, Hayman has disclosed a 5.9% ownership stake in ZZ with 5,644,245 shares.

This appears to be an increase in Hayman's stake in the company.  In their most recent 13F filing detailing portfolio activity as of June 30th, Hayman disclosed ownership of Sealy 8% senior secured third lien convertible notes due July 2016 (ZZC) worth almost $8 million at that time.

Back then, they did not report an equity stake at the time.  The filing today was required due to portfolio activity on September 10th.

Per Google Finance, Sealy is "engaged in the consumer products business and manufacture, distribute and sell conventional bedding products, including mattresses and box springs, as well as specialty bedding products, which include latex and visco-elastic mattresses."

For more from Hayman's manager, we've posted up thoughts from Bass at the SALT conference earlier this year.

Jim Chanos Still Short China, Talks Other Positions (Interview)

Jim Chanos appeared on CNBC this morning to share his latest thoughts on the market and his positioning.  The Kynikos Associates hedge fund founder said that 20% of his global short fund is China.  We've posted up the hedge fund China bear thesis before as Chanos notes it's a credit boom over there.

Why He's Short China

He's been quite patient with his China short and it's paid off.  He noted that "we get criticized that China's not in smoking ruins ... we've done just fine."  Chanos says that corporate profits are imploding in the country.

He points out that while China's exports are important, their imports are also very relevant to watch.  While the trade export balance has been decreasing (not a new phenomenon), capital is also leaving and that's a new development Chanos drew attention to.

Lastly, he notes that he wouldn't trust any accounting in China and he could spend an hour talking about that issue alone as corporate accounting is that bad over there.

Chanos' Other Shorts

In regards to what else he's been shorting, he continues to dislike Hewlett Packard (HPQ).  He's long Microsoft (MSFT) and Oracle (ORCL) as hedges to that stake.

Chanos again addressed the notion of global value traps (his presentation via that link).  He says you want to be short printers and ink.  The cloud is fundamentally changing the tech landscape.

On the financial side, he likes to use the term "deleveraging credit python,"  noting that China, Europe, and the US are the three to watch.  In banking, they're long JPMorgan (JPM) and Citi (C).  For the other side of the coin, we recently detailed why Bill Ackman sold Citi.  Kynikos has also been short Chinese and Spanish banks.

Back in 2007 and 2009, Chanos was short healthcare but he no longer is short.  Though he says that longer term, healthcare is a huge issue.

Embedded below are the videos from Chanos' TV appearance this morning.  Video 1 on China:



Video 2 on tech companies & banks:




For more from the well known short seller, check out:

- Chanos on the psychology of short selling

- Chanos on the power of negative thinking

The Investor Sentiment Wheel

This is a classic for all investors.  The investor sentiment wheel illustrates the various emotions investors experiences during an investment cycle.  Of course, most investors panic at the bottom and sell low and then turn around and buy high.

Back in 2008 and then again in 2009, we posted up this picture of investor psychology illustrated.  

A new rendition has been created by Trustable Gold who sent us this new graphic on the roller coaster that is investor sentiment, embedded below:




What's your take on where we're at currently in the cycle? Obviously Ben Bernanke and QE3 throw another wrench into the equation encouraging "risk on."

What We're Reading ~ 9/19/12

Starboard Value takes activist stake in Office Depot [Dealbreaker]

The JOBS act will have minimal impact on hedge funds [ValueWalk]

Active management and personal responsibility [Abnormal Returns]

Hedge funds have been punished for being too defensive [PragCap]

Throwback: the hedge fund fantasy football league [Reformed Broker]

A family is not a portfolio [All About Alpha]

The David Einhorn effect [WSJ]

A pitch on AIG [Alpha Vulture]

Profile on Magnetar Capital's Alec Litowitz [AR+Alpha]

Vodafone's crown jewel [MicroFundy]

You'll get crushed shorting FairPoint Communications [AR+Alpha]

Hedge fund association asks for clear rules on verifying investor accreditation [Herald]

Q&A with Wilbur Ross [The Deal]

Investors turn to hedge funds for larger advice role [ManagedFunds]

How Jeff Boyd took Priceline from dot-bomb to highflier [Fortune]

A review of the new Richard Gere movie Arbitrage [Detroit Free Press]

Glenview Capital Adds to Tenet Healthcare Position: Why They Like THC

Larry Robbins' hedge fund Glenview Capital just filed an amended 13G with the SEC regarding their position in Tenet Healthcare (THC).  Per the filing, Glenview has now disclosed a 12.68% ownership stake in THC with 52,823,831 shares.

This marks a 28% increase in the number of shares they own.  Due to the disclosure dates, they've added these shares between July and September.  The 13G from today was filed due to trading activity on September 14th.

Why Glenview Likes Tenet

On the heels of the Affordable Care Act (ACA) passing, Tenet was one of Glenview's core holdings.  The hedge fund originally started its stake in THC back in March.  Their thesis is essentially that for-profit hospitals are entering a "growth on growth" phase due to expanded health insurance coverage.

In the free sample of our quarterly newsletter, we highlighted the following:

"Robbins laid out his long thesis for hospitals by pointing out that EBITDA has grown every year for them as they offer 9% CAGR, 1% admission growth, and 2% leverage.  He says hospitals benefit from Medicaid eligibility as it reduces bad debt expense ... Robbins points out that it's unlikely that the government could unilaterally take a for profit hospital's profits from reimbursement."

Consensus EPS growth for 2011-13 for THC had been around 28% while Glenview expects 41% from 2011-2014.  Glenview also believes that meaningful share repurchase opportunities and/or tuck-in acquisitions are possible.

As of the end of Q2, the hedge fund also owned other companies in the space, including: HCA (HCA), Health Management Associates (HMA), and LifePoint Hospitals (LPNT).  That said, THC does seem to be their largest position in the segment and shares recently hit 52-week highs.

Per Google Finance, Tenet Healthcare is "an investor-owned health care services company whose subsidiaries and affiliates own and operate acute care hospitals, ambulatory surgery centers, diagnostic imaging centers and related health care facilities. Its core business is focused on providing acute care treatment, including inpatient care, intensive care, cardiac care, radiology services and emergency medical treatment, as well as outpatient services."

To see what other positions this hedge fund owns, check out the latest issue of our premium newsletter.

Peter Lynch's Principles & Golden Rules of Investing

Peter Lynch ran Fidelity's Magellan Fund for 13 years and was regarded as one of the most successful investors during his tenure.  Lynch outlines the broad gist of his investment philosophy with various pearls of basic wisdom in his book, Beating the Street. 

Last week we detailed Lynch on using your edge in investing.  This time we wanted to focus on some more of his advice, taken both from "Peter's Principles" and his "Golden Rules of Investing":


Peter's Principles

- "Never invest in any idea you can't illustrate with a crayon"

-"You can't see the future through a rearview mirror"

- "When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds."

- "The best stock to buy may be the one you already own."


Peter Lynch's Golden Rules of Investing

- "You have to know what you own, and why you own it."

- "Never invest in a company without understanding its finances.  The biggest losses in stocks come from companies with poor balance sheets.  Always look at the balance sheet to see if a company is solvent before you risk your money on it."

- "Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether."

- "Time is on your side when you own shares of superior companies. You can afford to be patient –even if you are missed Wal- Mart in the first 5 years, it was a great stock to own in the next 5 years. Time is against you when you own options."

You can find the rest of Lynch's principles & rules in his book Beating the Street.


And to learn more about this great investor, check out his other book One Up On Wall Street and our recent post: Lynch on using your edge in investing.

Morgan Creek Capital Asks: Is China A Real Estate Bubble?

Michael Hennessy, Managing Director at Morgan Creek Capital Management, has penned an interesting piece entitled, "China: A Real Estate Bubble, Or No Trouble?"

In it, he dives into the hot debate and notes that China's situation is different than the US in that it was fueled by public development whereas the US was fueled by private development.

In the end, Hennessy concludes that, "it is clear that China's economy is slowing; however, this seems to be fully discounted in valuations, and rather severely at that."

Kynikos Associates' Jim Chanos has been an outspoken bear on China (and in particular their property market). We've also posted up the hedge fund bear thesis on China.

Below are Hennessy's thoughts on whether or not China is a real estate bubble:




Hat tip to Zach for digging this up.

Children's Investment Fund: Thesis on New Position in Safran

Yesterday we posted on commentary from Children Investment Fund's Q2 letter.  Today, we're highlighting a write-up from Christopher Cooper-Hohn on one of the fund's newer investments: aerospace equipment provider Safran.

Safran: Sum of the Parts Analysis

"70% of the company’s value is in their civil engine business, which is a 50:50 JV with GE, called CFMI.

The engines that they make power narrow-body aircraft (100-220 passengers). This is an attractive business as competition is limited. If you buy a Boeing 737 you have to buy an engine from CFMI and if you purchase an Airbus A320 you have a choice between CFMI or IAE (a company controlled by Pratt and Whitney).

Once an engine has been sold, Safran benefits from spare parts sales. Margins on engines are very low as they are sold close to cost price, but margins on parts are high (60%+) and engines consume roughly 3x their initial value in parts over their lifetime. This parts business is highly protected as the FAA (and other regulatory bodies) prevent the use of unauthorised parts in engines, so the supply of third party parts is low (about 3% of the total) and will likely decline as leasing companies are against their use (they reduce the resale value of the plane). Another attractive feature of this market is that many of the engine parts (so called LLPs, or Life Limited Parts) have to be changed after a certain number of flights as there are strict rules pertaining to aircraft maintenance.

There is a typical 8-10 years lag between when an engine is sold and when it first requires servicing (it is at service that spares are used). After the first service, engines require regular maintenance for the rest of their 25 year life. Safran have sold 10,300 engines over the last 10 years and of these, only 700 have generated spare parts revenues. The total installed base of engines is approximately 18,000 and fewer than half of these are generating spares revenues for Safran. As the age of the engine fleet matures, spares revenues will increase rapidly.

Although it is easy to see the long term spare parts revenue trend, short term forecasts (3-18 months) are difficult as airlines have some latitude as to what kind of servicing to do. For instance, they can minimally service an engine such that it will fly for another 12 months before coming in again or they can service it so that it will remain on the wing for another 4 years. Airlines can also cannibalise their own spare engines for parts and ground engines which require work rather than servicing them.

As the airline industry has been cash strapped for the last 2 years, spares revenues have not grown since 2009 despite the increasing maturity of the fleet. However, there is a limit as to how much maintenance can be deferred and the pent-up demand for the last two years will have to be addressed at some point.

The future also seems bright. The next generation of narrow-body aircraft is composed of the 737 MAX and the A320neo. The 737 MAX will 100% be powered by CFMI and the A320neo will be powered by CFMI and by Pratt and Whitney. It is important to note though that the engine orders that Safran is booking today will likely be delivered in 2018 and first generate profits for the company in 2028. The strong growth that we expect in profits over the next 12 years is predicated on engine sales which have already happened.

Safran’s valuation is very attractive. The company trades on 9x 2012 EV/EBIT and 13.6x earnings, falling to 11.4x 2013 earnings which is a low absolute valuation compared to peers (aerospace companies typically trade on an average of 15x 2012 earnings) and given the growth in spares revenues.

On a Sum of the parts basis, we value the company at €52 per share with 85% upside. The majority of this value is the engine business (€40 per share) and this values the business at €1.4m per engine which is less than the €2.1m per engine that Pratt and Whitney recently paid Rolls Royce for their stake in IAE (IAE engines are directly comparable to CFMI ones). This difference is probably due to our more conservative assumptions as we discount spares earnings back at 10% pa whereas Pratt and Rolls Royce may have used a lower rate. Using our numbers, there is compelling upside and it is more likely that we are under rather than over-estimating the embedded value of the flying fleet."


For more from this fund, be sure to head to excerpts from Children's Q2 letter.