What We're Reading ~ 11/25/16

The problem of rational capital allocation [RationalWalk]

Buyside versus sellside [A Wealth of Common Sense]

The long road of proving yourself as an investor [Morgan Housel]

Health equals wealth [Joe Terranova]

How demographics rule the global economy [WSJ]

Tokenization and the collapse of the credit card [Forbes]

Here comes Masayoshi Son [Economist]

On regret minimization [A Wealth of Common Sense]

Why TripAdvisor excels at product [Tnooz]

Marcato Capital Exercises Calls on LPL Financial; Owns 6.4% of the Company

Mick McGuire's activist firm Marcato Capital Management filed an amended 13D with the SEC recently regarding its position in LPL Financial (LPLA).  Per the filing, Marcato now owns 6.4% of the company with over 6 million shares.

This is up from the 550,000 shares Marcato owned at the end of the third quarter and is mainly due to Marcato exercising call options on November 20th at a unit cost of 20 each.

Per Google Finance, LPL Financial is "an independent broker-dealer, a custodian for registered investment advisors (RIAs) and an independent consultant to retirement plans. The Company provides a platform of brokerage and investment advisory services to independent financial advisors, including financial advisors at around 700 financial institutions, enabling them to provide their retail investors with objective financial advice. It also supports approximately 4,400 financial advisors who are affiliated and licensed with insurance companies through customized clearing services, advisory platforms, and technology solutions. It provides its advisors with the front-office, middle-office, and back-office support. The Company provides its technology and service to advisors through a technology platform that is server-based and Web-accessible. Its subsidiaries include LPL Financial LLC, The Private Trust Company, N.A., Independent Advisers Group Corporation and LPL Insurance Associates, Inc."

Sohn London Conference 2015: Burbank, Singh, Karsch, Lastra & More

Launched four years ago, the Sohn London Investment Conference is here again.  Hedge fund managers will share their latest investment ideas to benefit the research and treatment of pediatric cancer on December 3.

With the support of the UK investment community, the Sohn Investment Conference has raised more than £53.5 million to date to support pediatric cancer research and treatment. You can learn more about the event and cause here.


Sohn London 2015 Conference Details

When: December 3, 2015 at 12:00 PM - 6:00 PM (GMT)
Where: Marriott Hotel in Grosvenor Square, London
Website:  http://www.sohnconference.org/london/


2015 Speakers List

- John Burbank, Passport Capital
- Dinakar Singh, TPG-Axon Capital
- Michael Karsch, Hunter Peak Investments
- Beltran Lastra, Bestinver
- Guillaume Rambourg, Verrazzano Capital
- Carson Block, Muddy Waters
- Mike Wilkins, Kingsford Capital
- Bo Börtemark, Carve Capital AB
- Elif Aktug, Pictet Asset Management
- Bram Cornelisse, Farringdon Capital
- Franck Falézan, PrimeStone Capital
- Robert Harteveldt, Trishield Capital
- Per Johansson, Bodenholm Capital
- Vikram Kumar, TT Long Short Focus Fund
- Selvan Masil, Westray Capital

If you're based in the UK or Europe, this is sure to be a great event benefiting a great cause.

You can register for the conference by clicking here.

Lone Pine Capital Increases Dollar Tree Stake

Steve Mandel's hedge fund firm Lone Pine Capital has filed a 13G with the SEC regarding its position in Dollar Tree (DLTR).  Per the filing, Lone Pine now owns 5.6% of the company with over 13.19 million shares. 

This is up from the 5.13 million shares they owned at the end of the third quarter when they originated the new position.  This latest filing is due to activity on November 13th, 2015.

You can view other recent portfolio activity from Lone Pine here.

Per Google Finance, Dollar Tree is "an operator of discount variety stores offering merchandise at the fixed price of $ 1.00. The Company offers a selection of everyday basic products and also supplements these basic, everyday items with seasonal, closeout and promotional merchandise."

Bill Ackman Boosts Valeant Pharmaceuticals Stake

Bill Ackman's Pershing Square has filed an amended 13D with the SEC regarding its position in Valeant Pharmaceuticals (VRX).  Per the filing, Pershing now owns 9.9% of the company with exposure to 34.11 million shares.

This is up from his previous exposure of 19.4 million at the end of the third quarter.  Ackman bought VRX common stock on October 1st at $178.38 and again on October 21st at $108.13.

He was also active in the options market and this is where the bulk of the increased exposure comes from.  He bought January 2017 $95 calls, sold January '17 $165 calls and also sold January '17 $60 puts.  He also bought and sold at other strike prices and you can view all the transactions here.  Prior to these purchases, Ackman's cost basis on VRX was somewhere around $190.

Shares of VRX have fallen from a high of $260 in August down to as low as $69 recently, before rebounding to $86 currently. 

The company first came under attack as Hillary Clinton and various Democrats publicly voiced concern over pharmaceutical pricing practices.  Secondly, investigative journalists and short sellers questioned the company's relationship with specialty pharmacies, in particular one called Philidor.

VRX has been the definition of a hedge fund hotel for many quarters now.  Another interesting facet here is just how many of these funds held/hold such highly concentrated positions.  Managers such as Sequoia Fund, ValueAct Capital, Pershing Square, Hound Partners and many others have allocated huge chunks of their portfolio to VRX.  While many of these funds' large positions were due to share price appreciation, Ackman's was mainly built via buying earlier this year.

For more on Pershing Square, head to Bill Ackman's comments at the Berkshire Hathaway 50th Anniversary Symposium.

Carl Icahn Starts Xerox Position, Files 13D

Per a 13D filed with the SEC, activist investor Carl Icahn has disclosed a new stake in Xerox (XRX).  Per the filing, Icahn now owns 7.13% of the company with over 72.21 million shares.

The filing contains the standard activist boilerplate that he intends to have discussions with management.

Icahn purchased shares throughout October and November via a forward contract with expiry of July 20th, 2017 at prices between $9.63 and $10.66. 

Those prices contain a footnote that explains: "Represents a forward price of $8.00 per Share, plus the amount per Share the Reporting Person paid the counterparty to the forward contract or minus the amount per Share the Reporting Person received from the counterparty to the forward contract, as applicable, in each case upon entering into such forward contract.  The forward price is subject to adjustment to account for any dividends or other distributions declared by the Issuer. In addition, the Reporting Person will pay a financing charge to the counterparty to such forward contract."

For more on this investor, head to Carl Icahn's recent interview.

Per Google Finance, Xerox is "engaged in offering business process and document management solutions. The Company operates through the following segments: Services, Document Technology and Other. The Company's customers include small and midsize businesses (SMBs), graphic communications companies, Governmental entities, educational institutions and Fortune 1000 corporate accounts. The Company's Services segment provides two types of service offerings: Business Process Outsourcing (BPO) and Document Outsourcing (DO)."

ValueAct Capital Doubles Rolls Royce Stake

Jeff Ubben's activist firm ValueAct Capital now owns 10% of Rolls Royce (RR.L / RYCEY), according to a regulatory filing with the company.  The investment firm crossed the required threshold on November 18th.

We highlighted when ValueAct initially took a Rolls Royce stake earlier this year.  Back then, they owned 5.44% of the company and since that disclosure shares have fallen around 21% and they've utilized the dip to increase their stake.

The company's new CEO Warren East recently issued another profit warning and is laying out his plans to turnaround the airplane engine maker.

Rolls has been hit in the near-term with its exposure to the oil and gas industry via some of its other business lines.  Additionally, the company has seen some dips in their aerospace segment (especially with its Trent 700 engine) as customers wait for newer, more efficient engines and airplanes to be delivered.

It seems as though ValueAct likes the company's duopoly position in the widebody aircraft engine industry.  However, they're probably looking for the company to improve margins and rationalize their production lines. They've also been pushing for a seat on the board at Rolls, but thus far haven't been granted access.

ValueAct, as a long term investor, probably sees this as an ideal turnaround story and are willing to take the near-term pain as East begins to dig in at the company.  Rolls sells its engines at a loss or break-even but then earns money on service contracts over the lifetime of the engine. 

As RR delivers more and more of their newest engines (on planes such as the Airbus A350) their installed base of service contracts is set to expand dramatically.  The company just has to get through the rough patch until then.

You can view additional portfolio activity from ValueAct here.

Per Google Finance, Rolls Royce is "a United Kingdom-based company that designs, develops, manufactures and services power systems for use in the air, on land and at sea. The Company operates through two divisions: Aerospace and Land & Sea. The Aerospace Division produces aero engines for large civil aircraft and corporate jets and provides defense aero engines and services. The Land & Sea Division comprises power systems, marine and nuclear businesses. The power systems business is involved in the development, manufacture, marketing and sales of diesel engines and power systems. The marine business is engaged in the development, manufacture, marketing and sales of marine power propulsion systems and aftermarket services. The nuclear business is involved in the development, manufacture, marketing and sales of nuclear systems for civil power generation and naval propulsion systems."

Holiday Sale: 50% Off Hedge Fund Wisdom Newsletter (New Issue Just Released)

The brand new Q3 issue of our Hedge Fund Wisdom newsletter was just released!

As a thank you to our loyal readers, we're offering a huge holiday sale: 50% off our Hedge Fund Wisdom newsletter.   To see what you're missing, check out a full past issue here.

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- Consensus buy/sell lists of the most popular hedge fund stocks
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- Equity analysis of 2 stocks that have seen a lot of hedge fund activity lately

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Notes From Berkshire Hathaway 50th Anniversary Symposium: Klarman, Ackman & More

The Berkshire Hathaway 50th Anniversary symposium just took place and featured conversations with the likes of Seth Klarman, Bill Ackman, Tom Gayner, Byron Trott, Carol Loomis, Roger Lowenstein, Tom Russo, John Phelan, and Whitney Tilson.  The notes were compiled by Jacques Romano, MD.


Notes From Berkshire Hathaway 50th Anniversary Symposium

Carol Loomis (CL) and Byron Trott's (BT) Conversation

Warren Buffett (WB) was invited but he graciously declined explaining his presence would change the nature of the discussions. BT met WB because the GS partner that had handled his account, Tom Murphy, Jr., had retired.  Hank Paulsen told Warren that BT was the only guy for him.  Initial one hour meeting lasted about three hours.  This was in early 2002.

WB created through GS a negative coupon convertible bond of about $300 million called SQUARZ in April 2002, whereby he was paid to borrow money and the institutional holder of the security was able to purchase Berkshire Hathaway (BRK) stock in the future at a higher price.  Charlie didn’t like the idea.

BT represented Pritzker in the Marmon deal and was involved with MacLeans and Pampered Chef transactions.  BT also involved in Wrigley and Mars deal.

BT describes WB as a perfect ten times two.  He has an incredible mind and able to do math in his head and his discipline is incredible.  On the human side, he is humble and has the best sense of humor.  He is someone you want to be with and is always positive about anyone.

Regarding discipline, he cited some KKR transaction that WB could have done for 10-15% more in price while having a cheaper cost of capital but WB felt he could use that cash more effectively at another time.  He waits for his pitch.  “You should see the stuff he turns down over the years”.

WB looks at cash on cash returns and doesn’t factor in leverage.  He looks for durable long lasting cash flow stream businesses.  He realizes that sometimes to get great businesses you have to reach but he is incredibly disciplined and completely unemotional.

WB told BT that CL started as a reporter but is great in accounting and finance and is a stickler for details.  She’s from Missouri.  CL expanded on a vignette about her dating Ty Cobb.  She had come to NYC in 1950s and was on the quiz show Tic Tac Dough where she did well and was subsequently contacted by Ty’s nephew for an invite by Ty to the 21 Club.  “How could a baseball fan turn that down?”  She was his subsequent “date” to Yankee Stadium during an Old Timer’s Game where she was presented with a Mantle, Maris, Whitey Ford autographed baseball.  That’s about where it went.  She was in her late 20s and he was in his late 60s.

In 2008, Goldman Sachs was experiencing a small but daily run on the bank and wanted to raise capital.  BT said it was about a 20 minute negotiation with WB.  In addition to making his BRK investment, WB wanted to make a big statement about being confident in that investing climate.  He subsequently made his GE investment and wrote his Oct. 2008 NY Times op-ed.  One of his points was that markets go up first and that there is reasonable cause to regain confidence.

WB is an American icon.  The world doesn’t understand how important WB was to the solutions during the financial crisis of 2008.  I would describe him as a “pragmatic optimist grounded in reality”.  

Hank Paulson told BT that during a late night phone call, it was Warren’s idea to make TARP capital attractive to banks and for it not to be stigmatized so all the banks should receive it and none look particularly weak or strong.  But he also wanted to make it more expensive for the banks if they kept this capital for a longer period.  

WB was doing this to help the country.  Some may be cynical about this because he owned Wells but Hank knew and everyone else who knows WB knew that he was creatively playing a constructive role.

Warren is disciplined, opportunistic and long term.   Charlie is not my number two; he is my equal and has kept us on the straight and narrow. Warren doesn’t want to do small deals but will do minority deals as long as it is big.

Warren’s the greatest, nicest and most accessible person.  He’s a great teacher and a great student of investing and business.  He provides a safe home for business owners that want liquidity and still passionately want to run their businesses. Warren is one of a kind and will be the best investor of all time and his record will not be beaten. 

He thinks very long term and Berkshire will still be intact a century from now. “Warren, you can’t control things from below the ground.” “Maybe not, but I can try.” The term “investor” is not quite expansive enough to describe Warren.  He’s also a great acquirer, manager and owner of businesses. Matt Rose of Burlington Northern told me that Warren knows more about the railroad now than I do.  And he can interconnect it to everything else.  He makes the complex seem simple.  When I talk to Warren, I feel like I’m 2 steps behind him.

They discussed how Andrew Carnegie is known more now as a philanthropist than as a businessman and Warren may have similar impact and be known more expansively.


Seth Klarman (SK), Bill Ackman (BA), and Roger Lowenstein's (RL) Conversation

Bill went to Larry Cunningham’s Cardoza symposium in 1996 and fortuitously sat next to Suzzie Buffett who invited him to sit next to Warren at lunch!  When he went to HBS, there were not any classes in investing although there were classes in investment management.  There were no investment clubs at that time either.  He read Graham’s Intelligent Investor and then Warren’s annual reports.

Seth Klarman took a job at Mutual Shares after college and “Warren” was common parlance once I got into the business.  He thought Warren’s Superinvestor article was very logical.  SK feels that there must be some type of gene that makes people have an affinity for value and value investing.  He told a story about a friend of his whom enthusiastically tried value investing full time but three months later ended up quitting:  “It doesn’t work”.  

BA says some of the things he tries to emulate are Buffett’s focus on quality, durability and concentration.  Although given “my” experience in Valeant, perhaps I should change one of his aphorisms to “be fearful when others are fearful”.  

Making good investments is not about performing discounted cash flow analyses or reading footnotes but more about assessing the moat in our dynamic world. Many of Buffett’s investments in the 1970s like encyclopedias and newspapers did not hold their advantages.  You can’t “just buy and hold”.  The world has changed rapidly.

The difficulty is the qualitative assessment and the implementation. Railroads now seem to pass the 100 year test but how many businesses can pass that test? Lowenstein made the point that Wall Street loves those 99:1 bets but not WB.

SK said that the maxim of “don’t lose money” does not mean at every time and in every instance but to the extent that it puts you out of business.  Sometimes you can bet or invest in favorable expected value situations where you lose the bet.  This is similar to an insurance operation.  Some investments in a portfolio will lose but you don’t put the operation at risk.  

SK: In the 1980s you could actually buy quality inexpensively; you didn’t have to pay up.  I remember Nabisco selling for 7 times after tax earnings.   You can’t just kneel at the temple of Graham and Dodd, you and the world will change.  We will evolve and ought to evolve because the world requires us to.  WB teaches us how to make our own map.

I don’t know WB well enough to know how he feels, but I suspect that he feels that him being held as an investing demigod is a bit silly.  WB isn’t about that. WB is not about giving you a formula.  “Business is hard.  Everything is overlaid with judgment”. WB has been fortuitous to invest at a time when you could get quality inexpensively.  He has built on certain advantages.  No one else gets the calls that he gets. Some people are overly focused on him as opposed to understanding how he thinks.

BA: Buffett has made more people rich than anyone else in history.  And he gives it all away.  He’s one of the great educators. I believe in response to a questioner, BA went into a diatribe about Coca Cola (KO).  It does enormous damage to society and people consume too much sugar contributing to obesity and diabetes.  He wouldn’t be against supermarkets that sell coke.  And he owns Mondelez: all things in moderation.  But Coke doesn’t seem to have had a bad effect on Buffett.  I believe he has said WB hasn’t had water since the 1950s!  He thinks Coke has great distribution and marketing but it is not good for children to get too much sugar water.

There was some discussion that the BRK model with insurance, concentrated positions and possible illiquidity may have problems in future.  You need to be a fortress and inspire confidence and trust with regulators.  Will that survive Buffett? Conglomerates do not have a great history.

Buffett is a fabulous communicator.  He has stayed on the right side of politics and has avoided becoming a target of Washington.  It is not automatic that the next CEO will be able to tell the story of the company as well. SK said he stole the idea of writing meaningful partner letters from WB.  And he feels that the overall quality of fund letters in general has improved because of Buffett’s lead.  Consistency, reassurance, and transparency give shareholders comfort.

BRK can be a Warren centric model.  He is uninvolved in the management of the businesses and there may be an opportunity for “optimization”.  With 3G he is “outsourcing” the less attractive aspects of the business. Catastrophic risks can destroy enormous amounts of value.

SK: excessively raising prices on drugs may not be illegal but there are social costs.  Capitalism may face a more constrained environment as a result of bad behavior. WB has conducted himself generally beyond reproach.  He has not become a target.  The next CEO may not get a pass so easily. Value investing is nuanced but we will always have it.  “Human nature will not yield”.  Greed, fear and lack of intellectual honesty will result in bargains from time to time. There is always going to be a share of the investment business that is following the crowd.  There are those watching over their shoulder and who have misalignment of goals.  They may be forced to do things they may not want to do for human reasons.

Someone asked SK if he wanted to be an investment manager at BRK or if he had any discussions about this with WB.  He said he was never a candidate and loves his job. He said he was surprised on the upside with WB’s decisions about investment managers.  It was hard to do and it has gone incredibly well.  


Berkshire Shareholder Panel: Tom Russo, Paul Lountzis, Whitney Tilson

“Only WB can fill a room without even being in it”.

Whitney Tilson has been adding to his BRK position.  It is safe, cheap and with decent growth.  He puts fair value about $267,000 give or take 10%.  You can find his slide presentation on the Internet (there were no slides at this conference).

Tom Russo said there are no agency costs and an extraordinary alignment of interests.  WB owns 30% of the stock and makes $100,000 for managing. The corporate form allows for tax efficiency with respect to capital allocation.   He has the willingness to do anything if it makes sense and the capacity to do absolutely nothing if conditions warrant.  Great businesses can find a home at BRK where they will be protected.

Paul Lountzis tries to understand BRK broadly and deeply.  There is embedded optionality in BRK.  Regarding Berkshire, he is reminded of the Ralph Waldo Emerson quote: “Every institution is the length and shadow of one man.”  We try to understand it now and in the future. He mentioned that Geico is on the books for $2-3B but is worth 10-15 times that.

WT told WB that he is his role model in Jan. 1999 and he tries to emulate how he runs the business.  Given how WB communicates, BRK is the opposite of a black box.  He has incredible humility and even looks for ways to self-flagellate.

PL:  WB is a wonderful human being and exemplifies consistency and loyalty to a high degree.  He focuses on permanence over the long term and looks out 10-20 years. His example impacts everything you do both personally and professionally.  BRK values permeate seamlessly and consistently throughout its business. Despite the fact that BRK has gone down by 50% several times it has still been extraordinarily rewarding.

Few businesses have great reinvestment opportunities.  If you can defer taxes on unrealized gains, this is a great advantage. The problem with many public companies is their inability to take advantage of some of their potential opportunities, unlike family controlled companies.  Public companies may need to make earnings estimates as opposed to investing in opportunities that may penalize current earnings.  They may worry about activists.

BRK is a unique public marriage between private and public investments.  BRK gets $1.5B month in free cash.  It is effectively a source of permanent capital and a robust re-investment engine. During times of stunning market drops, WB was never forced to sell. Permanent capital is very valuable. The ability to do nothing is valuable in the investment business. Operationally, they can turn down the noise of Wall St. Buffett has the flexibility to do nothing.  He is unique and special and combines analytical strengths with strong people skills to a degree that is very rare. He has unique qualitative insights. You don’t see the 99% of opportunities he says “no” to.  

Buffett plays a very important cheerleading role.  Many company CEOs are rich and old and feel personally loyal to Buffett.  Are they going to be as loyal to the next CEO? There is somewhat limited corporate governance but Buffett holds it all together.  

What is the next BRK? The best BRK is BRK. One interesting point that was made: investors that held the S&P 500 going into the financial crisis more than likely sold when everyone was running for the hills.  But given their understanding of and loyalty toward BRK, shareholders were much more likely to garner the full return of the company and not otherwise sell low and buy high.  This is a point that can be missed when one compares BRK returns to the index.  The index’s returns are more likely illusory and less likely realized. Other companies “wave people in at the peak”. 


Partnership Session With Markel's Tom Gayner and John Phelan

John Phelan.  We don’t take 1% or more positions without visiting the company. Should you locate far from Wall St?  Mindset trumps location.   We think we have semi-permanent capital.  There is always a balance between the short term and long term. Our benchmark is not the S&P 500.  Our benchmark is to make money.  The risk free rate is your benchmark. We have the luxury of not being invested all the time. Simplicity is a virtue and we have fewer problems that way. If you hire someone that is not from a top school, they are less likely to think, “You’re lucky to get me”.  Some of our best hires are from the military.  They know how to get things done. We currently have 18% cash which is on the high side. We are company focused and not market focused.

Tom Gayner: “Good meat priced right is better than poor meat priced cheap”. JP worries about the credit markets.  Now a $250M 10 year Treasury trade moves the market whereas before $1B wouldn’t make it blink. We are defensively positioned but not bearish on the US economy.  We are seeing wage pressure in our companies.   The best hedge is a great attractively priced business. Paying up for a business is counter-intuitive.  It costs more but may be worth a lot more.

Lawrence Cunningham: Buffett’s presence here would steal the stage and by electing not to come, he is letting us have the conversation. LC organized a conference at Cardoza Law School in 1996.  One questioner asked what happens to the shareholders when Buffett dies.  Buffett said, “it won’t be as bad for you as it will for me!” BRK looks a lot different today than it did then but the core values have stayed the same.  He has created an institution that goes beyond him in the quality of the people, businesses and values and that is the best succession plan possible.

BRK gets funds from internal generation and insurance float versus the cost of borrowing to make acquisitions.  The float is currently $85B with no due dates, covenants or banker negotiations.

The Board is not there to monitor management but to partner with it.  They have no options, liability insurance and bought stock with their own cash. Company CEOs have clear and simple mandates.  Called out Bruce Whitman, CEO of Flight Safety who was at the conference. He has never sold a subsidiary and sometimes business sellers accept a discount compared with offers from other business buyers. We would rather bear the visible costs of a few bad decisions than suffer under stifling bureaucracy.

GenRe would have gone bankrupt after 9/11 without BRK! Dexter Shoe was another “mistake”. BRK sometimes is a juicy target for journalists-recently Clayton Homes and National Indemnity.

He spoke about a recent acquisition called Detlev Louis from Germany that sells motorcycle gear.  Similar to See’s being a small deal but defining the future of the company, he sees this company as a possible harbinger of future deals in Europe.  He points out that it only has about $40M in earnings which is less than WB’s minimum size but he made an exception to get a toehold in Germany and Europe.

He made mention that Pampered Chef’s sales have considerably decreased and that there is some turmoil in the capital intensive business of NetJets.

Don’t focus on beating the market but in finding the greatest discrepancy between price and value.

What We're Reading ~ 11/11/15

Dream Big: How the Brazilian Trio behind 3G Capital acquired AB Inbev, BK & Heinz [Correa]

10 questions to help define your investment philosophy [A Wealth of Common Sense]

A way to detect bias [Paul Graham]

What the Marines taught me about investing [WSJ]

The peril and opportunity of China [Mauldin]

Burbank's Passport says no place safe in China-led decline [Bloomberg]

Kyle Bass on China's looming banking crisis and the US economy [Fortune]

Platform Specialty Products could rebound [Barrons]

On Warren Buffett's stake in IBM [Medium]

On the focus of short-term profits [NYTimes]

How FICO became outdated [Pymnts]

Why the next sports empire will be built on eSports [Redef]

America's exurbs are booming [New Geography]

ValueAct Capital Trims MSCI Stake

Jeff Ubben's activist investment firm ValueAct Capital has filed a Form 4 and 13D with the SEC regarding their stake in MSCI (MSCI).  Per the Form 4, ValueAct sold 255,000 shares on November 5th at $68.83, another 762,000 shares on November 6th at $68.11, and another 815,000 shares on November 9th at $66.45.

After these sales, ValueAct still owns over 7.47 million shares of MSCI, or 7.3% of the company.  The firm's 13D filing also noted this about their sale:

"(ValueAct has) sold the securities of the Issuer reported in Item 5 herein as part of their standard ongoing process of portfolio management.  D. Robert Hale, a partner of ValueAct Holdings and ValueAct Holdings GP, will continue to serve on the board of directors of the Issuer and currently intends to stand for reelection at the Issuer's 2016 annual meeting."

We've posted previous portfolio activity from ValueAct Capital here.


Per Google Finance, MSCI is "together with its wholly owned subsidiaries, is a provider of investment decision support tools, including indexes, portfolio risk and performance analytics and multi-asset class market risk analytics products and services. The Company’s products include global equity indexes and environmental, social and governance (ESG) products marketed under the MSCI and MSCI ESG Research brands, its private real estate benchmarks marketed under the IPD brand, its portfolio risk and performance analytics covering global equity markets marketed under the Barra brand, its multi-asset class, market and credit risk analytics marketed under the RiskMetrics and Barra brands and its performance reporting products and services offered to the investment consultant community marketed under the InvestorForce brand."

Baupost Group Exits Alliance One Position

Seth Klarman's investment firm Baupost Group has filed a 13G with the SEC regarding shares of Alliance One International (AOI).  Per the filing, Baupost no longer owns an equity position in the company.

This is down from the 638,364 shares they owned back at the end of the second quarter. The latest filing was made due to activity on October 31st.

For more from this manager, be sure to check out the collected wisdom of Seth Klarman.

Per Google Finance, Alliance One is "a leaf tobacco merchant. The Company is engaged in purchasing, processing, packing, storing and shipping tobacco to manufacturers of cigarettes and other consumer tobacco products globally. The Company deals primarily in flue-cured, burley, and oriental tobaccos that is used in international brand cigarettes. The Company’s revenues are primarily comprised of sales of processed tobacco and fees charged for processing and related services to these manufacturers of tobacco products. The Company does not manufacture cigarettes or other consumer tobacco products. The Company has classified its business into three segments for reporting purposes: South America segment, Value Added Services segment and Other Regions segment. Value Added Services is comprised of the Company's crushed rolled expanded stem (CRES), cut rag, toasted burley and other specialty products and services."

Viking Global Files 13G on Broadcom

Andreas Halvorsen's hedge fund firm Viking Global has filed a 13G with the SEC regarding its position in Broadcom (BRCM).  Per the filing, Viking now owns 5.3% of the company with over 29.71 million shares.

Viking previously disclosed a small stake in BRCM in the first quarter of this year.  However, their most recent 13F filing shows they exited that position in the second quarter.  So now it appears that they've re-entered the name in a big way.  The filing was made due to activity on October 29th.

Broadcom received a bid from Avago Technologies (AVGO) earlier this year and it would be the biggest merger in the chip sector.

Last week we also highlighted other recent portfolio activity from Viking Global.

Per Google Finance, Broadcom is "provides semiconductor solutions for wired and wireless communications. The Company offers a portfolio of system-on-a-chip solutions (SoCs) that deliver voice, video, data and multimedia connectivity in the home, office and mobile environments. The Company's solutions are used globally by manufacturers and are embedded in an array of communications products. The Company operates in two segments: Broadband and Connectivity, and Infrastructure and Networking. Broadcom's solutions in Broadband and Connectivity segment include set-top box solutions, broadband modem solutions, connectivity solutions and a range of other technologies. Its solutions in Infrastructure and Networking segment include Ethernet switches and PHYs, which includes switches and fabrics; copper and optical transceivers; backplane and optical front-end physical layer devices; processors, and other Infrastructure and Networking technologies."

Notes From Invest For Kids Chicago 2015: Burbank, Sandler, Tananbaum & More

The seventh annual Invest For Kids Chicago conference recently took place benefiting underprivileged children in Chicago.  Many prominent investors shared their latest ideas and you can click below to read about each presentation.


Invest For Kids Chicago 2015 Notes

- John Burbank (Passport Capital): Long CF Industries

- Steve Tananbaum (GoldenTree Asset Management): Calpine equity

- Ricky Sandler (Eminence Capital): 2 longs & 1 short idea

- Andy Hall (Astenbeck Capital): Outlook for oil

- James Flynn (Deerfield Management): Horizon Pharma & Valeant Pharmaceuticals

- Soren Aandahl (Glaucus Research): Short EROS

- David Samra (Artisan Partners): Pitch on RBS

- Rupal Bhansali (Ariel Investments): 2 long ideas

- David Heller (Cloud Gate Capital): Long Berry Plastics

- Andy Greenberg (Saker Management): Long NXRT

- Michael Sacks (GCM Grosvenor) & Barry Sternlicht's (Starwood) conversation

- Sam Zell & Andrew Litt on real estate

John Burbank Long CF Industries: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is John Burbank of Passport Capital.  He pitched a long of CF Industries (CF).


John Burbank's Invest For Kids Chicago Presentation

•    Pitching CF Industries (CF).
•    Biggest position for two years.
•    One of the few commodity equities he wanted to be long.
•    Remains bearish on commodities.
•    Located for 30 minutes from Chicago for just for another quarter, did a merger.
•    Stock traded down 30% off the deals.
•    First was a purchase of OCI. 60% of nitrogen fertilizer capacity in USA/5% global market share.
•    USA is the Saudi Arabia of Natural Gas.
•    $2 gas margins over 50%.
•    Went to $70 in early July, ended at $45 by September.
•    CF to exchange $7.4B of stock and assumed debt and cash for OCI NA and European nitrogen/methanol facilities. 2016 close data. Enables a tax inversion.
•    Over-levered copper companies which are going to zero rising 50%, yet stuff like CF dropping doesn’t make sense.
•    HSR approved yesterday and the stock dropped, not understood by the market.
•    By February should be closed.
•    CHS Co-Op – sold a minority stake at a premium. CHS canceled a 3.1BB nitrogen plant. Instead will invest 2.8B in CF for 9% of CF’s pre OCI deal production.
•    Deal values CF equity at ~$107.
•    Combined market cap of $17B. 3-5B of EBITDA post deal.
•    Cash flow from ops after mcapex of $1.8 to 3.2B.
•    Product capacity of 25.1MM short tons.
•    Will use FCF to return to shareholders.
•    Take five years to build capacity so nothing to do with money.
•    CF is not a mining company.
•    Short Mosaic (MOS), Potash (POT), Agrium (AGU), K&S as a hedge. Negative on markets and commodities.
•    Also is long USD.
•    CF is 8th best performing stock over the past ten years behind apple.
•    EPS 5.5-6 dependent upon corn yields.
•    Street doesn’t understand this industry or the OCI deal.
•    Passport has an analyst with a Dow/GE background tracking this. Good edge.
•    CF has returned 11% of its market cap annually to shareholders, bouht back 35% of company since FY12. 2.3% div yield. Will probably buy abck more stock.
•    Sold phosphate biz (not great) to Mosaic.
•    Executives are buyers.
•    Will return $12Bn to shareholders over next four years. Mcap is 17B.
•    Can’t buyback stock now until deal closes.
•    Buybacks based upon flat prices.
•    Thinks commodity prices going down, USA might go into something that feels like a recession. Shouldn’t own most stocks. Want something confident in liquidity and management.
•    Trade long CF / short 2/3 MOS and 1/3 POT as a pair.


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Steve Tananbaum on Calpine Equity: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is GoldenTree Asset Management's Steve Tananbaum who talked about Calpine equity.


Steve Tananbaum's Invest For Kids Chicago Presentation

•    $24B AUM – credit manager formed in 2000.
•    Credit market discussion – HY defaults increasing, many leading indicators.
•    High transaction multiples and leverage increasing – debt to ebitda around 5.2x. Increase in default rates, just about to begin over the next 12-24 months.
•    Would get 1000 bps, think were halfway there at 500 bps spread.
•    Is HY cheap now? Now its ok, closer to fair value.
•    2/3 bonds trading below par. 90% of loans trading below PAR
•    Now a bond/loan picker market.
•    June 14 – 90% of bonds above par
•    In bonds – 2/3 of what is trading below 95 isn’t energy. Loans its 80%.
•    Looking at triple C credits, many funds who owned them did great in FY09-13, and then 14/15 something went wrong. What occurred is the lowest part of the market had a significant reversal (i.e. CCC) underperforming by almost a 1000 bps. Expect it to continue.
•     Triple C headwind.
•    Oil futures $52 for dec 15, hy market/stock market pricing in a $65 price. Performance in energy/commodity function where oil is.
•    Problematic sector? Technology. Leverage is around 7x currently for Tech LBOs. What enters LBO tech market is slow to no growth tech companies (i.e. Compuware although no mentioned by name). Went from 4x to 8x. Technology is 8% of CCC issuance.
•    Illiquidity in HY market? More where it is in the 90s, 05 was an anomaly.
•    Finding some value in structured products. Greater issuance versus corp bonds a decade ago. 2x1 structure vs corporate. Now it is 20% of issuance. Less eyes on structured products.
•    Adjustable rate feature in structured rate products aren’t being priced in.


•    Idea is Calpine equity (CPN) –an independent power producer trading at low multiple, trough earnings and strong cash flow.
•    Half of cash flow is locked in for 3 years. Stable earnings outlook even in a low commodity price environment.
•    Young reliable efficient gas and geothermal fleet.
•    Texas – currently at trough earnings/depressed margin (25% of cash flow)
•    Buying back stock aggressively – 20% over last two years.
•    Significant NOL to shield free cash.
•    Will buy back another 15% of stock.
•    $22.3 by FY17 or a 20% FCF yield today.
•    Create gas assets at $477kw less than half of replacement costs.
•    Risk is increasing renewable supply such as wind/solar, potential new gas supply if prices recover and high leverage at 5.4x or 6.4x including major maintenance.
•    Bonds trade above par at spread basis, credit markets benign view.
•    FCF conversion currently 33%. 
•    Trades for ~8.25x EBITDA.
•    Price target includes 298 shares, $3.16 per share of FCF and implies a 12% fcf yield.
•    Down 32% YTD – market thinks price will be priced off $2 gas. Half of cash flows already locked in.


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Ricky Sandler Long GMCR & ZNGA, Short WAB (Invest For Kids Chicago Presentation)

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Eminence Capital's Ricky Sandler who pitched a long of Keurig Green Mountain Coffee (GMCR).


Ricky Sandler's Invest For Kids Chicago Presentation

•    At 25 launched his own business Fusion Partners. In '98 started Eminence
•    Long idea: GMCR/Keurig Green Mountain.
•    Controversial there is a credible short story. Thinks it’s already priced in and an incredible long opportunity.
•    Two businesses, hot biz (kcups) and Kold with sodas, brand new.
•    Hot platform sell 9MM to 10mm brewers/year and sell 10B to 11B kcups per year.
•    Razor/razorblade model.
•    Significant room for increased household penetration. Current penetration at 21M to 22M households compared to 70MM homes. With a coffeemaker.
•    Think market goes single serve.
•    Industry kcup should grow in the LDD range.
•    $4 of EPS from the hot business in FY15 estimated.
•    Think hot EPS can reach $5 over the next couple years driven by volume growth, $300MM restructuring, normalizing brewer losses form the last holiday season, normalized coffee costs, share buybacks and offsetting some headwinds.
•    Kold launched in September with Coca-Cola. Addressable market thinks its 5x – 10x hot.
•    Reviews are high on quality but negative on price/value.
•    $375 asp per machine and pods more expensive than a can of coke.
•    Not so much price of pod, but thinks the range of pods/products.
•    Think its convenience/choice. Negatives looking at just price.
•    Kold loss 50 cents per share.
•    Trades at 15.5x FY15E sept EPS and 13.5x EPS ex kold.
•    EPS estimates under pressure – poor 2.0 brewer launch execution and K-cup profitability impacted by mix shift. Finally negative reaction to kold.
•    Hot value = 17x -20x hot EPS ($5) or 85-100 plus option value for kold.
•    KO owns 17% at $92. Insiders bought at $90.


•    Loves Baidu (BIDU), and a top five position.


•    Zynga (ZNGA) – mobile gaming. Franchises include Farmville, words with friends.
•    Some think games are obsolete, ZNGA has 75MM active users.
•    Zynga was late to the consumer shift from desktop to mobile making the last two years rough. •    Mobile games for the last year =70% of bookings vs 30% a year ago.
•    Expect new titles over the next 12 months.
•    Trading at 1x sales when backing out SF real estate ($500MM value). $687MM EV.
•    Launch 6 new games, $300MM incremental bookings bringing total bookings to $900MM.
•    KING sold for 2.6x sales, using that valuation = $5.
•    At a 35% margin, ZNGA generate $315MM EBITDA or trading for 2x.
•    Has big infrastructure to support bigger biz. Downside protection by cash and real estate.
•    Top hit potential = $1B rev potential.
•    Mobile gaming is $20B biz. New categories such as esports and real money gaming growing.


•    Wabtec (WAB) – Short.
•    Leading supplier of brakes, electronics and other railroad components to the global rail industry.
•    55% - 60% of EBIT comes from NA freight segment.
•    LT rail is GDPish industry and cyclical.
•    Track record is fantastic – only US listed co whose stock price increased every year for 14 straight years, 19% EPS CAGR form 06 to 15E and hadn’t missed earnings since 09 and 3Q15.
•    Bull thesis – not cyclical, high ROIC/ high market share high after market mix/quality biz.
•    Product mix is opaque due to acquisition strategy.
•    Bulls think EPS will grow double digits for ever.
•    WAB is cyclical and currently at the peak of rail equipment super cycle driven by NA O&G activity.
•    Demand driven by trail traffic, production of new locomotives and freight cars.
•    Rail traffic is weak – CNI talking about laying off employees.
•    Locomotives – NSC storing locomotives, expect it to be up to 200. GE orders dropped significantly, only sold compared 3 the last quarter.
•    Freightcar peak – industry backlog driven by tank cars oil and covered hoppers i.e. frack sand. 40% downside to deliveries.
•    Trading at 20x EPS, 13x EBITDA. Could be peak earnings in FY15. Mid cycle earnings $3.5 - $4. At 16x = $60 or 30% downside.
•    Low short interest, favorable sell side ratings.
•    Consensus calls for positive organic growth.


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Andy Hall's Outlook For Oil: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Andy Hall of Astenbeck Capital who talked about his outlook for oil.


Andy Hall's Invest For Kids Chicago Presentation

•    Presentation is the outlook for oil.
•    Rarely consensus view for oil has been this pessimistic.
•    Saudi Arabia/Worries over China – murky long term outlook for oil and fossil fuels. Running out of storage perhaps. Cash costs production avg $20 per barrel.
•    Perception is worse than reality. Q3 stock build at 500K BPD vs estimate of 1.6MM BPD.
•    Q2 estimated surplus revised lower by 900 KBPD.
•    No super contango means no distressed surplus of oil in contrast to 09 and 86.
•    Global oil demand growing at 2MM BPD so far in FY15, double the rate predicted at beginning of the year.
 •    Chinese demand growing at 7% YoY, led by gasoline and jet fuel.
•    Demand response to lower prices has already reduced surplus. Current oversupply is not just crude oil but also NGLs.
•    Overall surplus will continue to shrink and become a growing deficit in h2 2016.
•    In 1986 OPEC spare capacity was almost 20% of global product, today OPEC spare capacity is less than 2%.
•    Cuts in industry capex will prove excessive – industry cut capex by 25% in FY15. Further cuts expected in fy16, only second time in 30 years capex cut in consecutive years. Believes capex reductions will prove excessive – not 1986.
•    Significant lag between laying down rigs and production rolling over. Production peaked in June and has since dropped by 500 kbpd. USA shale/tight oil production overs over first.
•    Us production to continue to fall – EIA has reduced USA oil production forecast for FY16 from growth of 200 kbpd to a decline of 400 kbpd.
•    Rig productivity has plateaued.
•    Iran will add 300k to 400k barrels per day. Iraq will decline due to budgetary constraints.
•    Nigeria, Venezuela and Algeria at risk.
•    High geopolitical risks throughout oil producing regions.
•    Stop growth – supply declines by 8.6% per annum at existing production. 1.3MM bpd per annum has been the average or 1.4% growth in demand.
•    Thinks $70 per barrel is where it needs to be. Shale co’s said $40 break even yet they haven’t been able to generate FCF since FY10. Their supplier costs will likely rise as well particularly after consolidation.
•    2/3 E&P have negative cash flow and may be heading to bankruptcy. PXD says they need $70, EOG needs $80.

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James Flynn on Horizon & Valeant Pharma: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is James Flynn of Deerfield Management who talked about Horizon Pharma (HZNP) and Valeant Pharma (VRX).


James Flynn's Invest For Kids Chicago Presentation

•    Deerfield is a healthcare firm and biotech across private and public markets.
•    Everyday something new in headlines on distribution of drugs and pricing. All of the pharma stocks he lists are down, in some cases in excess of 50%.
•    Issues to consider – use of specialized forms of distribution to combat managed care barriers pricing, offshoring of drug profits, leverage and sustainability of biz models.
•    Distribution – thinks people are spending too much time on it. Managed care makes it hard for physician to prescribe high priced drugs, while pharma cos want the drug to have easy access. 10-20 years all types of back and forth. It’s an appropriate game for each biz model and nothing nefarious about it.


•    Valeant (VRX) pushes everything to the financial limit and got caught speeding. Thinks it’s more about Valeant vs specialty pharma.
•    Pricing – thinks this is more important. Started in 1993 as a debate, where pharma companies would raise prices 3x inflation. 1993 ultimately led to a decrease in price expansion and drug companies agreed to price with inflation.
•     In 1993 five drugs singled out such as Tenex (15%), Azmacort (15.6%), etc all in the 15% price increase range.
•    Valeant- 85 drugs at 36% price increases, net increased in 24% so contextual this is historic, outrageous and not in industry standard. Also an annual occurrence, happening for many years. Actual price increases in the 100%.
•    This won’t be going away (investigations on these actions).
•    Argument that saved pharma in 93 was that developing drugs was risky and expensive. When in market the drugs cut costs for system.
•    Valeant acquires drugs and spends very little on development or discovery. Argument on their end is weak.
•    Taxes – VRX rate is 5%, by merging with Biovail assumed the Barbados 5% tax status.
•    Tax dollars coming in help the government purchase of those drugs. Increasing costs to the system while decreasing revenue.
•    Will this go away or stay in headlines? Think it's staying.
•    The worst for Valeant. Acquire old tiered products in steep decline and raise prices. Some have no or limited patent life. Products eroding dependent upon price.
•    Margins can only go one way – invests no r&d, very little spend. Forced out of the acquire/raise biz, hard to own.
•    Leverage is a issue - $30B of debt and makes them vulnerable to interest rates.
•    Bull case – VRX pays down debt in 4 years and is trading at 4-5 earnings. Sounds attractive but can think of just as many variable that can make it bankrupt. 


•    Lot of other companies fell – what about those?
•    Likes Horizon Pharma (HZNP). Shares some similarities with VRX. Difference is that targeted products into pharma-physician sales, all growing and some synergies and good growth products. Low leverage/growing product base.
•    Horizon – without heroic price or acquisitions can pay back debt in one year and buy itself back in 5 years. Compelling given business model/products (long patent life/growing).


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Soren Aandahl Short ERSO: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Soren Aandahl of Glaucus Research who pitched short EROS.


Soren Aandahl's Invest For Kids Chicago Presentation

•    “Activist” short sellers.
•    Emerging markets focus.
•    Short EROS. The Company is a distributor of Bollywood movies.
•    Price has come down significantly (from $30), but thinks no one addressed core short thesis.
•    $0 price target for equity and debt.
•    Bull case/growth thesis is that they will leverage content library to be Netflix of India. 2015 – Said they could sell EROS Now at a $800MM valuation (10% stake). 
•    “30MM” new registered users supposedly. Higher than Savan and Hotstar, as well as YuppTV and Spuul with a couple million subs.
•    Think EROS actually has lower subs around a couple mm versus 30mm or higher. App annie, GT data, etc. point to smaller traffic as well as Google play. App activity is 90% lower than Savan and Hotstar.
•    Hotstar added 10MM users first 40 days and 43.7 app reviews. Erros claimed 13MM new subs in same time with only 203 app annie reviews.
•    Tried to back out and say the company has never claimed to be Netflix. Chairman says opposite in a CNBC review. Clip has been taken down.
•    Primary biz is to acquire and distribute Bollywood movies – and then amortized.
•    80% - 90% of Bollywood movie earned in the first few months, more aggressive than Hollywood. Only in theaters for 2/3 weeks, and then have already monetized other items due to piracy concerns.
•    Amortize movies year 1 at 40%-50% and then years 2-9 at 5%-7% versus via/other film operations at 80%-90% in year 1. Fails the matching principal.
•    Hides the cost of acquiring over later periods. Overstates operating profits.
•    EBIT margins for FY15 would go from 28% to -4% and gross margins from 45% to 16%.
•    Not a profitable biz. EROS cash flow consistently negative. Spends more money buying film rights versus FCF. Neg ev biz.
•    Will never be FCF positive.
•    Fabricating revenues, particularly overseas. Only 7% in India film industry rev generated outside of India. EROS says 39% is generated by India, 61% overseas, mainly from Dubai/UAE (37%).
•    80% of EROS gross box office movies are earning in India and 5% from Gulf States, yet this doesn’t match its revenues/UAE (37%).
•    Pulled statutory filings in Singapore/UK etc. Overseas subs not profitable.
•    You can back out India and other financials. In order for US financials to be true the biz ex India needs to have 77% gross margins and 56% EBIT margins.
•    Receivables have ballooned, DSOs global from 139 to 277, while India 95 to 135.
•    Suspicious payments to chairman’s family. 93.5MM in film rights from Netgen films owned by chairman’s sister. Only made 8 movies, combined budget 39MM and loss money. Distributor share gross (EROS) 16MM.
•    Chairman’s family are all executives.
•    2 CFO’s resigned last months, low quality auditor and off balance sheet liabilities.
•    Debt is trading at 50 cents, from par over the past 3 weeks. Only assets of value are the rights to some of the content library. Located in India, junior in Indian secured/unsecured creditors.
•    Worth $300 to $360MM.


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David Samra's Pitch on RBS: Invest For Kids Chicago

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is David Samra of Aritsan Partners who pitched RBS.


David Samra's Invest For Kids Chicago Presentation

•    Stock pitch is RBS.
•    Generally don’t like banks. 13 years, first ten didn’t own any banks.
•    Everybody hates banks.
•    Banks are generally difficult investments as money is commodity and banks are inherently leveraged.
•    When economic conditions are good, loan underwriting is sloppy and regulatory oversight is weak. Valuations then trade at a premium to book value.
•    Versus FY08, funding structure has improved. For RBS deposits has since doubled and use of repos has diminished as well as commercial paper issuance.
•    Complexity has decreased overall for banking. Similar trends for the UK.
•    P/BV multiples have went from over 2.0x to in some cases below book.
•    Today banks are better funded, higher quality assets, significant liquidity and trade at lower valuations.
•    Don’t want to be in them forever.
•    Right now 965B in gross assets, 44.5B of tangible equity and 586MM of pretax income. Going forward looking at 480B of assets, 25B of tangible equity and 4.4B of pre-tax.
•    Bailed out twice. UK gov owns 73% of shares outstanding, effectively nationalized. Mgmt has been selling assets and simplifying operations.
•    Sold off a trillion pounds of assets. Equity has increased from 36.4B to 44.5B.
•    16% tier 1 capital ratio. Highest amongst large banks.
•    Continue to sell assets and slim down to a retail/commercial bank. Shrink the investment bank. Wil take 3-5 years.
•    Top 5 banks control most of the market.
•    Thinks the core bank value should trade at 1.7x bv and 13.5x earnings or 43B, plus excess capital no longer required to support non-core assets (RWA of 150Bn) or 18B.
•    Need to deduct fines, write downs, etc. of 13BN
•    Add 16bn of earnings over next five years, estimated mkt value of 64bn versus 36bn  current market cap.
•    Risks government ownership – significant headline risk concerning fines, restricting, diminished asset liquidity and economic recession – time delay.


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Rupal Bhansali Long GSK & Baidu: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Rupal Bhansali of Ariel Investments who pitched longs of GlaxoSmithKline and Baidu (BIDU).


Rupal Bhansali's Invest For Kids Chicago Presentation

•    GSK – UK Pharma company with three pillars to the franchise – (1) respiratory franchise with 50% market share, growth industry. Very hard to enter respiratory biz.
 •    Advair was a victim of its own success. Believes Advair bear case has already played out. •    Competition for blockbuster drug, Advair is priced in.
•    2) Vaccines – market leader in business with high barriers to entry. Margin upside from purchasing Novartis vaccines biz. Vaccines one of the highest barriers to entry biz in the world. Only 4-5 manufacturers of vaccines.
•    Consumer – strong brands such as Flonase, Aquafresh, Theraflu and new mgmt. team with a mandate to double the margins. New mgmt. team from L’Oreal.
•    Internet penetration of 48% vs 75% - 80% in developed mkt.
•    Trades at 16x fwd. EPS and 6% div yield. Margins set to improve to high 20%/30% ROIC.


•    Second idea is Baidu (BIDU).
•    Baidu = Google + Expedia + YouTube + Opentable + Groupon.
 •    Internet penetration of 48% vs 75% - 80% in developed mkt.
•    “Silicon Valley of China”
•    Down 33% over past year due to a profit warning.
•    Back to $200, might have some hiccups and could have better entry point
•    3rd inning in 9 inning game. So still good capital appreciation over lt time view.
•    Not a family ran business, more like a corporate Anglo-Saxon business. CEO went to Stanford.
•    Conservative as they spend through the P&L investments made in core biz versus capitalizing.


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David Heller Long Berry Plastics: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Cloud Gate Capital's David Heller who pitched long Berry Plastics (BERY).


David Heller's Invest For Kids Chicago Presentation

•    Long position in Berry Plastics (BERY).
•    Largest consumer plastic packaging biz in the world. Low oil a tailwind although a pass through.
•    $5B in sales.
•    Acquired Avintiv, global leader in the plastic nonwoven fabrics industry. Paid 8.1x EBITDA pre synergies/6.9x after synergies. Combined sales $7.2B and $1.2B of adj EBITDA.
•    $500MM FCF or 11.7% FCFE yield.
•    Why does the opportunity exist? Doesn’t make strategic sense, desperate move to achieve volume growth.
•    Contrary 9/10 top Avintiv customers overlap, purchasing power in polypropylene, faster growing energy markets.
•    2nd bear case – leverage is high once again to 5.2x. Argument is stable biz, locked in financing, delivering 0.5x per year. Debt markets very comfortable with leverage financing 100% at 4.3%.
•    Third bear case is melting ice cube. Think it grows with wage inflation, food dilation, population growth, etc.
•    Trades at 50% discount on a FCF basis and 10% disc on an EBITDA basis.
•    7%-8% FCF yield, could be worth $51 to $58, using conservative projections which gives you 25.8% - 35% IRRs.
•    Catalysts for growth such as new products, or acceleration of rev growth.


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Andy Greenberg Long NXRT: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Andy Greenberg of Saker Management who pitched NXRT.


Andy Greenberg's Invest For Kids Chicago Presentation

•    Event driven firm.
•    Idea is NXRT.
•    Externally managed REIT spun off from the NHF closed-end fund.
•    Class B rental pricing driven upwards. Class B units negative.
•    Advisors own 16% of stock and can own up to 25%.
•    Focused in Dallas and Atlanta, expanding elsewhere.
•    FFO $1.28 per share. Should be around ~$1.4. 30% of market cap in cash. Reserved for renovations/upgrades.
•    FFO - $1.6 by 2016.
•    6% div yield. Under 10x FFO.
•    Larger comps over 20x and smaller comps low double digits.
•    Valuation challenge – market cap, gross leverage high, variable rate debt and potential rental rate pressures in a recession.
•    Think leverage manageable, shorter holding period dividend covered at higher rates.
•    Think portfolio could be sold, private market transactions at higher prices. Company is frustrated with stock performance.
•    Poorly conceived structure out the great. Better in a private structure.
•    Advisor fee can be cancelled with no fee to the advisor.
•    CEO of Highland owns $45MM of stock.
•    Think this could trade higher than $20 by Fy17.


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Barry Sternlicht & Michael Sacks' Talk at Invest For Kids Chicago

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is a conversation between Barry Sternlicht (Starwood Capital) and Michael Sacks (GCM Grosvenor).


Barry Sternlicht & Michael Sacks at Invest For Kids Chicago 2015

•    Barry started off at JMB working with the Bluhm family and Malkin.
 •    Left JMB in 91 and started Starwood with $21MM.  Today $51B real estate management firm.
•    Chicago as a real estate market? Great place dynamic city, lots to do. Started two hotel – (one hotel which is green), Baccarat hotel chain – sold for the highest price ever for a hotel to a Chinese buyer.
•    Mall management business based out of Chicago.
•    Pretty strong market. Don’t really play as it’s hard to understand and the supply factors.
•    Have been buying in the tax free states.
•    Agnostic to where he invests – looks for best returns but spends most of his time in real estate.
•    Wants to add value no financial engineering.
•    Buy malls and re-tenants them, redesign, etc.
•    Favorite markets/asset classes in real estate? Thinks high rise residential in midtown will be in a free fall, Arabs and Russians are gone, Chinese are fickle. Wants to short it.
•    Thinks the apartments he bought from Zell are good, a single not a home run, double digit cash flow yields.
•    Slow growth is good for them, doesn’t induce new supply and move interest rates.
•    NYC hotels overbuilt.
•    Canadians bigger tourists versus Chinese. CAD decimated.
•    LT NYC great but short term is hard.
•    REITs aren’t trading well due to flow of funds.
•    Rates up, REITs get killed due to dividend chasers.
•    Credit guys tend to be smarter, focused on cash flow versus equity guys focused on the multiple to put on cash flow which is subjective.
•    Thinks Japan is a big Ponzi scheme. ETF volume in Japan driven by government.
•    Real risk in world is central banks printing money. Printing money and buying real assets doesn’t seem kosher to him.
•    Correlations in stock market picking up.
•    Likes natural gas. Will displace coal.
•    Thinks you’ll see incredible crashes in HY market.
•    All bad actors in the world need higher oil prices.
•    Double digit cash yield on the box, bet on the demographics half of it was south Florida. Miami is the Singapore of the USA.
•    Denver as well, young people like Denver and bought Seattle. Americans not buying houses. Ppl marrying later.
•    Trillion dollars of student debt can’t afford houses.
•    Don’t intend to own those apartments purchased from Sam for 30 years just 5. Highest quality apartments in the class.


Check out the rest of the presentations from Invest For Kids Chicago 2015.

Sam Zell & Andrew Litt on Real Estate: Invest For Kids Chicago

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is Sam Zell (Equity Group) and Andrew Litt (Land & Buildings) who talked about real estate.


Sam Zell & Andrew Litt at Invest For Kids Chicago 2015

•    Andrew met Sam 22 years ago while on the road show for Manufactured Home Communities. He was employed on the sell-side at that time.
•    Equity Residential recently sold $5B of real estate/apartments to Barry Sternlicht of Starwood.
•    Is Sam calling a top of the RE market?
•    Always been very disciplined and sold Equity Office before the last downturn as he thought someone offered him more than what they were worth. In case of apartments – different story.
•    Went public in 1993 - $800MM EV garden apartments.
•    Garden apartment – expressway visibility – “selling them shit”
•    Sam thinks the future was in high rise versus low rise, changing the company and upgrading portfolio. Suburbs sold, focus on 7 core markets. Envisioned selling it over 3 years, but had an opportunity to do it all at once at an attractive price and so he did it.
•    “Barry bought well maintained well occupied good assets which should be 75% leveraged versus 30%”.
•    Thinks it’s a win win for both.
•    Zell’s perspective concentrates them on where they want to be and return capital on a pro-rata basis.
•    On Equity Commonwealth – didn’t want to join activist campaign but said if they win, would take it over and finish it the last mile and got an option to purchase third of the activist’s position.
•    Didn’t buy/identify those assets and did analysis of opportunity – unusual situation as they could liquidate huge amounts of the portfolio without generating gains.
•    EQR had to distribute the proceeds, in Commonwealth’s case, liquidate assets pile up cash and keep control.
•    Purchased 10/15 years ago sold with no profits so that’s an indictment of the externally managed process (i.e. RMR’s management were terrible). Every day not buying their selling.
•    Didn’t have a hard time concluding that they should liquidate some of the assets.
•    Baseball adage – in the 8th inning on commercial real estate.
•    Once you get to the 9th inning – value dramatically dictated by quality of assets. High quality assets minor alterations but the marginal items in historical pricing is where you will see an impact in value.
•    US doing great today but the rest of the world isn’t. Starting to see the impact.
•    The disparity between B/A asset will increase.
•    Thoughts of activism? Thinks activism in most cases is another word for ownership. Biggest fallacy in capital markets is that companies are not “owned”.
•    Companies will be better out of activism. There are some good guys and some bad guys.
•    Not many viable opportunities as there is cash piling up.
•    Sending back $5.4B at EQR as they don’t think the cash can be invested at attractive returns. That is an ownership decision.
•    Where are you seeing opportunities? Difficult to broadly identify where there is significant demand.
•    Always steals/opportunities but don’t remember a signal period in his career where broad generalizations where irrelevant.
•    Investing in western Mexico – manufacturing is going there, other parts is weak.
•    Enormous amounts of liquidity and financing at attractive rates = lots of competition which is destructive.
•    Any place to use his grave dancer status? Energy sector. Haven’t seen all of the ramifications. Banks are just starting to redo their lines, and twill see the security they had wasn’t their anymore.
•    Most attractive at the moment.
•    You have to assume oil prices aren’t going to zero but you don’t need to bet that they go $70, don’t need that to win.
•    Looking for forced sellers – keep drilling or jettison midstream assets? Might find the midstream assets attractive (PARR)
•    Brazil? Went into Brazil early created a couple significant companies sold all buy one at higher prices. Brazil 180MM people, still growing although slowing.
•    PBR/scandals and political situation is the elephant in the room.
•    Less competition there now.
•    Institutions there are prepared to take discounts to clear the market.
•    Single bank hasn’t taken a single voluntary write off.
•    Thinks rates too low for too long.


Check out the rest of the presentations from Invest For Kids Chicago 2015.

Stan Druckenmiller's Dealbook Conference Interview

Legendary investor/trader Stan Druckenmiller appeared at The New York Times Dealbook conference recently and was interviewed by Andrew Ross Sorking.  They talked about a myriad of topics related to the economy, markets, and investing.

He says he doesn't know what the Federal Reserve's endgame is, but that it's going to end badly.

"Everybody's managing for the short-term now, and that's the problem with the Fed."

Druckenmiller paid special attention to the elevated level of stock buybacks and noted that corporations buyback stock when speculation is rampant.

He says he's anticipating chaos but is "playing around like everybody else.  I'm watching and leery and ready to move."

In equities, he's "working under the assumption that we may have started a primary bear market in July."  He's said he was short value stocks and the Euro.

While it sounds like he covered shorts in the recent volatility, he has also been neutral/long the high beta and high growth plays; companies that he thinks will do well with low/nominal growth.  He pointed out his fondness for Amazon (AMZN) because they're constantly investing in their future and their dominating AWS platform.

On the market in general, he noted "I could see myself getting really bearish.  I can't see myself getting really bullish, so I'm kind of on the sidelines in equities in terms of exposure."

On being a successful investor, Druckenmiller says one of his biggest assets is his openness and ability to change his mind very quickly.

On shorting, he opined that "It's very hard to short stocks.  It sounds great in theory,  it's very difficult because you're basically playing against the house."

Embedded below is the video of Druckenmiller's interview:

Carl Icahn's Dealbook Conference Interview

Activist investor Carl Icahn recently appeared at The New York Times Dealbook Conference.  Andrew Ross Sorkin interviewed him and talked about markets and activist investing.

"The real money I've made over the years is holding companies for 7, 8, or 9 years.  You gotta buy them when nobody wants them, that's the real secret.  It sounds very simple, but it's very hard to do."

On the Fed, he said he agrees with Stanley Druckenmiller and we could be walking into a minefield there.

Icahn also talked about how 'easy money' is affecting companies.  They're buying back tons of stock, inflating their earnings and not in any way showing you the real earnings.  He also noted that certain less attractive companies have been getting access to cheaper capital.

We've highlighted some of Icahn's recent portfolio activity here.

Embedded below is the video of Carl Icahn's Dealbook conference interview:



For more from this conference, be sure to also check out Stan Druckenmiller's interview at the Dealbook conference.

What We're Reading ~ 11/4/15

Evaluating sustainable competitive advantages [Symantaka]

99% of long-term investing is doing nothing; it's the other 1% [Morgan Housel]

The third emotion of investing [Insecurity Analyst]

Daniel Kahneman on intuition and the outside view [Compounding My Interests]

Software is the new oil [AVC]

China's money exodus [Bloomberg]

The unbelievable power of Amazon Web Services [The Atlantic]

How to maximize value of using Finance Twitter [BarbarianCap]

Michael Wolf's predictions on tech and media [Business Insider]

Comcast's weapon to take on wireless giants: Wifi hotspots [Bloomberg]

Interview with Fox's James & Lachlan Murdoch [Hollywood Reporter]

Death rates rising for middle-aged white Americans [NYTimes]

Third Point's Q3 Letter on Baxter, Seven & i Holdings

Dan Loeb's hedge fund firm Third Point in its third quarter letter talks about its investments in Baxter and Seven & i Holdings in Japan.

Regarding Baxter, Third Point has joined the board and helped select the new CEO.  They see an execution and portfolio reshaping story as well as margin expansion.

Third Point also owns Japan's Seven & i Holdings (which owns the 7-11 convenience stores).  They think the company should get rid of its underperforming Ito Yokado stores to become a pureplay on convenience stores.  As with some of their other theses in Japan, they're also looking for the company to eventually focus on capital return via buybacks and dividends.

Embedded below is Third Point's Q3 letter:



We've also highlighted other recent shorting activity from Third Point.

Eminence Capital Ups Pandora Stake

Ricky Sandler's hedge fund firm Eminence Capital has filed a 13G with the SEC regarding shares of Pandora Media (P).  Per the filing, Eminence now owns 5.6% of the company with over 12 million shares.

This is up from the around 10 million shares Eminence owned at the end of the second quarter.  The new filing was made due to activity on October 23rd.

We've highlighted other recent portfolio activity from Eminence here.

Per Google Finance, Pandora is "a provider of Internet radio services. The Company offers personalized experience for each of its listeners wherever and whenever they want to listen to radio on a range of smartphones, tablets, computers and car audio systems, as well as a range of other Internet-connected devices. In addition, Pandora offers local and national advertisers to provide targeted messages to its listeners using a combination of audio, display and video advertisements. The Company has operations in the United States, Australia and New Zealand. The Company enables each of its listeners to create up to 100 personalized stations. Its technologies include Music Genome Project, Comedy Genome Project, Playlist Generating Algorithms, Pandora User Experience, Pandora Mobile Streaming, Automotive Protocol, Pandora API and Tv.pandora.com. The Company provides its services through two models, which include Free Service and Pandora One."

For more from this hedge fund manager, check out Ricky Sandler's appearance on Wall Street Week.

David Tepper's Latest Interview

CNBC's Kelly Evans sat down with David Tepper of Appaloosa Management at Carnegie Mellon University recently.

Tepper said that the ECB and China surprisingly eased but his firm has been cautious on the stock market because of margins and other things.

He said that, "You have to keep some cash on the sidelines, have a diversified portfolio."  He also noted he doesn't love the bond market right now.

On General Motors (GM), Tepper said that it's leveraged to the US economy and they're doing better than other folks in China.  He thinks management is doing a good job there.

Tepper also likes HCA (HCA) adding to the position recently as he thinks it's been hit too hard.

Embedded below is the video of Tepper's interview with CNBC:



If you missed it, be sure to check out Tepper's previous interview from a few months ago where he said he was "not as bullish as I could be."

Viking Global Increases Pioneer Natural Resources Position

Andreas Halvorsen's hedge fund firm Viking Global has filed a 13G with the SEC regarding its position in Pioneer Natural Resources (PXD).  Per the filing, Viking now owns 6% of PXD with over 8.96 million shares

This is up from the 6.39 million shares Viking owned at the end of the second quarter.  The filing was made due to activity on October 20th.

On the other side of this trade of course has been David Einhorn who has been short PXD.

We've highlighted other recent portfolio activity from Viking Global here.

Per Google Finance, Pioneer Natural Resources is "an independent oil and gas exploration and production company with operations in the United States. The Company focuses on production of oil, natural gas liquid (NGLs) and gas through development drilling, production enhancement activities and acquisitions of producing properties. The Company's properties include Spraberry/Wolfcamp oil field located in West Texas; the liquid-rich Eagle Ford Shale field located in South Texas; Raton gas field located in southern Colorado; the West Panhandle gas and liquids field located in the Texas Panhandle, and the Edwards gas field located in South Texas. The Company's operations include well stimulation and hydraulic fracturing. The Company's proved reserves include approximately 89 million Bbls (MMBbl) of oil, 42 MMBbls of NGLs and 317 billion cubic feet (Bcf) of gas. The Company owns interests in six gas processing plants and eight treating facilities.."