What We're Reading ~ 6/15/16

Calculating the return on incremental capital investments [Base Hit Investing]

The history of the online travel industry [Skift]

A conversation with Alphabet's Eric Schmidt [Charlie Rose]

Armstrong Flooring: a spinoff with big upside [StockSpinoffInvesting]

Time Warner's Jeff Bewkes fights the industry's urge to merge [Variety]

Why housing is about to eat the US economy [CSen]

Student loans as economic depressant [Across the Curve]

The college debt crisis is worse than you think [Boston Globe]

Thoughts from a recent trip to China [Going Long]

The future of banking is in China [WSJ] 

China's credit card clearing market now open for competition [SCMP]

China is close to having its own Silicon Valley [Business Insider]

Are we in a mattress store bubble? [Freakonomics]

The U.S. is richer than ever [Calafia Beach Pundit]

Welcome to Larry Page's secret flying car factories [Bloomberg]

What's the best management advice you've ever received [Alan Murray]

What's one thing you've learned at Harvard Business School [Medium]

Profile of Nike's CEO Mark Parker [SurfaceMag]

Struggling Ralph Lauren tries to fashion a comeback [WSJ]

Interview With Glenview Capital's Larry Robbins: Capitalize For Kids Investor Series

The Capitalize For Kids Conference has recently started an Investor Series of interviews.  Their first issue (Volume 1) features conversations with Larry Robbins of Glenview Capital, Pierre Lavellée of CPPIB as well as the team at Cambridge Associates.  The full document is available here, but we've pulled some select quotes from Robbins:


On how he invests:

"I think one of the challenges that many people have is that, in their pursuit of highly diversified investment strategies, they end up investing their own capital – or capital that they are the fiduciary for – on things that, due to time constraints, they have no contact with. Or of which they don’t have a capacity to develop a deep understanding. The theory, when we started Glenview – and that perpetuates today – is to invest in businesses that we believe we can adequately describe in a matter of minutes. Businesses where we can look at past and present fundamentals and try to predict future fundamentals – including future earnings growth, cash flow growth, shareholder returns, and where we can invest capital at valuations – absolute valuations – that we find reasonable. And the final thing is that, all along the way, we wanted to think and act like owners – which the business has allowed us to do."


On incentives in the hedge fund industry:

"I believe that the reason that hedge funds work over time is because the owner/operator hedge fund has a tremendous and complete alignment of interest between the fund manager and the client – because the fund manager is the largest non-diversified client. And because of that, I am not only well-motivated to drive returns over time, but I’m also extremely well motivated to manage risk. Unfortunately, most people gauge risk based upon the mark-to-market stock price movements or security price movements of the day, whereas in reality those risks are more appropriately measured through a cycle – based upon the certainty of outcomes and the hit rate in which one invests long and short with success. I think that alignment of interest is exactly fair and appropriate, and is the motivating factor by which hedge funds have delivered risk-adjusted returns and alpha over time."


On the unfortunate truth of the business:

"The unfortunate truth of our business is we’re trying to do something that’s very hard, and very unnatural. We were created in order to take advantage of market anomalies, and yet we are also expected to prevent market anomalies from negatively impacting capital balances. I’m not complaining about that dichotomy. We’re not crying about it, but we do recognize that there’s a natural tension between the times that opportunity sets are created and the times that the opportunity sets are harvested. And it is likely, over decades, that occasionally opportunity starts to get created on your watch while you’re holding that security. In order to encourage opportunistic investor behavior, I think you’re accurate in saying that we will go to great lengths to encourage opportunistic investor behavior – because we want to make sure that the clients know that we will do anything we can to support their objectives."


Update on Glenview's Thermo Fisher (TMO) stake:

"Thermo Fisher is an example of a company which is well run and well-managed – from top to bottom. So much of the popular press talks about hedge funds engaging underperforming companies, or entrenched managements, or dysfunctional boards. And yet, if you look at Thermo Fisher Scientific which is the aggregation of four different companies: Thermo Electron, Fisher Scientific, and Life Technologies – itself two different companies, it’s an example of a board and management operating on all cylinders. Number one, their business continues to exhibit the defensive growth characteristics that attracted us to want to invest in the life sciences industry. In the fourth quarter of 2015, they posted their strongest organic revenue growth quarter in five years, posting seven percent organic revenue growth. For a firm like ours, whose average portfolio earnings multiple is 12 times this year’s and 10 times next year’s earnings, it’s hard to find businesses that grow organically more than seven percent, so certainly we’re gratified that the business does that. Thermo has allocated capital extremely well. They repurchased shares and made meaningful acquisitions – the most significant of which in the last several years was their acquisition of Life Technologies, which was also a Glenview holding. At the time we pitched Thermo to your conference [October 2014], our thesis was that Thermo’s organic revenue growth would accelerate not only because Life Technologies was a financially accretive tuck in that offered significant cost savings, but because the platform that Life Technologies owned would actually accelerate organic revenue growth. That certainly has come to pass in 2015, and is reflected in increased optimism with respect to organic revenue growth in 2016 and beyond. Finally, Thermo is an example of what we would call the ‘wash-rinse-repeat trade’. There is much discussion in the market of companies that either employ financial engineering or have a too great reliance on leverage in order to drive financial returns. And yet Thermo, as an investment grade company, has developed enormous credibility with the credit markets and with the rating agencies, as well as with its shareholders, by identifying attractive acquisition candidates and financing them mostly with debt securities – but then using their prodigious free cash flow and the underlying EBITDA growth of the combined company in order to have the balance sheet self-repair over an 18 to 24 month period. As we sit here today, Thermo has de-levered to below three times debt to EBITDA, which puts them in a position in 2016 to again be a significant capital deployer. To date, they have bought back $500 million of stock and have announced the accretive acquisition of Affymetrix. We believe that the company has additional firepower to augment their strong organic top-line growth – and a strong margin expansion with additional accretive repurchases or M&A that'll further shareholder returns."


To read the rest of Robbins' in-depth interview, definitely check out the Capitalize For Kids Investor Series here.

Investing Lessons From KKR's Henry Kravis

Bloomberg has an excellent interview out with Henry Kravis, founder of the well-known private equity firm Kohlberg Kravis Roberts, better known as KKR.

Here are some interesting quotes on investing and hedge funds:


On the difference between hedge funds and private equity:

"So I imagine there will be many more private equity firms than there are today. It’s very hard to kill a private equity firm. You can kill a hedge fund overnight; people pull their money out as fast as they put it in. You can’t pull your money out of a private equity firm as easily. If a firm is bad, all that can really happen is that it won’t be able to raise another fund. Eventually it’ll go out of business. But that can take years."


On who make good investors:

"Because to me, people who are curious are going to be better investors and better stewards of others' money.  If there's no curiosity, you're basically doing something that's already been done by someone else."


On focusing on the downside & learning from mistakes:

"When I was in my early 30s at Bear Stearns, I’d have drinks after work with a friend of my father’s who was an entrepreneur and owned a bunch of companies. “Never worry about what you might earn on the upside,” he’d say. “Always worry about what you might lose on the downside.” And it was a great lesson for me, because I was young. All I worried about was trying to get a deal done, for my investors and hopefully for myself. But you know, when you’re young, oftentimes you don’t worry about something going wrong. I guess as you get older you worry about that, because you’ve had a lot of things go wrong."


On what he looks for in an investment:

"We focus a lot on disrupters.  What they're doing, what they could do..  When we're making an investment in a nonstartup-type company, we ask ourselves, "Who's going to disrupt this company or industry?"


On the birth of the industry-standard 20% fee:

"George’s father and my father were in the oil-and-gas business, and in those days there was something called “a third for a quarter.” If I had a lease and wanted to drill a well, I would go to the money person and say, “I’ll put up 25 percent of the cost, you put up 75 percent, and you’re going to get a two-thirds interest and I’m going to get a one-third interest for my 25 percent.” We thought 20 is close enough to 25. I’m often asked, “Why didn’t you pick 25 percent because that would have stuck and carried interest?” We were just trying to get started, so that was literally what we started from." 


On data that's interested him recently:

"Our most recent (FirstData ~ FDC) SpendTrend reports have shown that consumers’ largest expenditure, by far, has been on health care. It’s funny, you had a big dividend for the consumer with the advent of lower gasoline prices. You would think they’d go out and spend on things, go shopping at Macy’s or whatever. But they have not spent on things, except on essentials. A lot of people are saying, I want to spend my money on experiences. And we can pick that up."


Be sure to read the full interview here.

Jim Grant's Talk at Google

Jim Grant of Grant's Interest Rate Observer recently held a talk at Google.  His presentation focused on his book entitled, The Forgotten Depression of 1921: The Crash That Cured Itself.

He looks at high unemployment, a collapse in commodity prices, surge in bankruptcies and a sharp decline in stock prices.  His talk recreates the scene and deconstructs the situation.

Grant talks about how all of his Wall Street brethren spend every heartbeat focused on accumulating as much money as possible, but very few of them think much about the actual thing they're constantly amassing.

Embedded below is Jim Grant's talk at Google:



You can pick up a copy of James Grant's book here.


For other investors' presentations at Google, we've also highlighted Howard Marks' talk, as well as Michael Maubboussin's talk at Google.

Pershing Square Rolls Valeant Options Exposure From 2017 to 2019

Bill Ackman's hedge fund firm Pershing Square Capital Management has filed an amended 13D with the SEC regarding its position in Valeant Pharmaceuticals (VRX).  Per the filing, Pershing now owns 9.0% of VRX with 30.71 million shares.

The filing also notes that Pershing has closed its January 2017 options positions and opened similar positions in options expiring January 2019.  Basically, they've rolled their exposure back 2 years.

Pershing bought call options and sold put options and you can view the entire list of transactions here.

Other investors have also been active in this stock, as we highlighted how Ruane Cunniff sold half of its VRX stake recently.

For more on Bill Ackman's firm, we detailed how Pershing Square sold some Zoetis as well.

Per Google Finance, Valeant is "a specialty pharmaceutical and medical device company. The Company is engaged in developing, manufacturing, and marketing a range of branded, generic and branded generic pharmaceuticals, over-the-counter (OTC) products, and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices), which are marketed directly or indirectly in over 100 countries. The Company operates through two segments: developed markets and emerging markets. The Company's developed markets segment consists of sales in the United States of pharmaceutical products, OTC products, and medical device products. The Company's Emerging Markets segment consists of branded generic pharmaceutical products and branded pharmaceuticals, OTC products, and medical device products."

Elliott Management Writes Letter to CDK Global; Sachem Head Trims CDK Stake

Two activist investors have been active regarding their positions in CDK Global (CDK) recently:


Elliott Management Sends Letter to CDK Global

First, Paul Singer's Elliott Management has sent a letter to CDK Global.  In it, Senior Portfolio Manager Jesse Cohn outlines how they want the company to adopt the steps in the Value-Maximizing Plan 'without delay.' 

Elliott notes they've had discussions with shareholders that represent more than half of CDK's shares outstanding and many of these investors want the company to improve CDK's business operations and capital return program.

The hedge fund believes that, "Reducing product complexity will shorten product implementation times.  Enhanced leveraging of technology and automation will reduce customer response times.  Improved software version discipline will free up funds for higher overall product quality and a better customer experience as a greater proportion of R&D spend would be committed to new features rather than simply maintaining older products.  Implementing an automated contracting system will deliver a simplified, more transparent set of invoices for customers."

Elliott feels that CDK's share price should reach $81 or higher in 14 months if these steps are implemented.

You can read the full letter here.



Sachem Head Capital Trims CDK Stake

Second, Scott Ferguson's activist firm Sachem Head Capital has filed an amended 13D with the SEC regarding their CDK Global (CDK) stake.  Per the filing, Sachem now owns 6.8% of the company with 10.49 million shares. 

The filing also notes they have additional economic exposure to approximately 3.15 million shares under cash-settled total return swaps.  So their total aggregate exposure is actually 8.8% of the company with 13.65 million shares.

This means they've trimmed their position by a little over 1 million shares since the end of the first quarter.  Their trading data indicates they were selling in mid-to-late April, early May, and early June at prices ranging from $47.50 to $57.74.

Per Google Finance, CDK Global is "a provider of integrated information technology and digital marketing/advertising solutions to the automotive retail industry. The Company's segments are Automotive Retail North America (ARNA), Automotive Retail International (ARI) and Digital Marketing (DM). The Company's solutions automate workflow processes from pre-sale targeted advertising and marketing campaigns to the sale, financing, insurance, parts supply, and repair and maintenance of vehicles. Its automotive retail solutions offer technology that helps supply side of the retail value chain. It offers digital marketing solutions to enable its clients to create demand for their products by designing and managing complete digital marketing and advertising strategies for their businesses. The Company, through its DM segment, provides a suite of digital marketing solutions for original equipment manufacturers and automotive retailers, including Websites and management of their digital advertising spend.."

Wally Weitz's Wealthtrack Interview

A few months ago, value investor Wally Weitz of Weitz Investment Management sat down with Consuelo Mack in an episode of Wealthtrack.

In the interview, Weitz touches on the concept of valuable losses, or finding opportunities where others are seeing losses.


He says, "Selling begets more selling; people scare themselves and each other and almost always overshoot."

He has an 'on deck' list of stocks they've researched and are just waiting for the right price to buy.  That said, he says it's easier for him to buy stocks he's already involved with during downswings rather than jump on new names because he's more comfortable/familiar with management and how they will act during downturns, etc.

Weitz says that the fund he particularly runs is long/short but not designed to be market neutral or anything like that.  He noted he's typically 90% long and 30% short, running around 60% net long.  He mentioned they'd been short Sears (SHLD) in the past.

During the interview, Weitz talks about why he likes Liberty Global (LBTYA/K) and why he sold Valeant Pharmaceuticals (VRX).

Other investments Weitz mentions include Liberty Broadband (LBRDA), Charter Communications (CHTR), Berkshire Hathaway (BRK.A/B), Wells Fargo (WFC).

Embedded below is the video of Weitz's interview on Wealthtrack:

Hedge Fund Links ~ 6/10/16

A bearish George Soros is trading again [WSJ]

Activist investor heavyweights form new lobbying arm [Reuters]

These 14 stocks are hedge funds' new favorites [CNBC]

Goldman says hedge funds wedded to top picks [Bloomberg]

The economics and finance of hedge funds [ValueWalk]

Big insurers send wake up call to hedge funds [NYTimes]

Why I don't want to run a hedge fund anymore [eFinancialCareers]

Why the hedge fund industry should welcome the pain [Yahoo Finance]

12 best things Paul Tudor Jones ever said [NewTraderU]

Women still struggle to break into hedge funds [Institutional Investor]

Why a track record is not enough for a hedge fund launch [eFinancialNews]

Hedge funds look for hard hats in a year of collapsing mergers [NYTimes]

Hedge funds: there are too many and most stink [Yahoo Finance]

Trian Fund Updates Stakes in Sysco & Bank of New York Mellon

Nelson Peltz's activist firm Trian Fund Management has made some SEC filings recently.

Peltz Acquires Acquires Sysco Shares

First, in an amended 13D with the SEC regarding their position in Sysco (SYY), Trian disclosed it now owns 7.8% of Sysco with 43.95 million shares. 

Per a Form 4 filed with the SEC, Trian acquired 520,000 shares on June 3rd at a weighted average price of $48.7874 and 173,000 more shares on June 6th at $48.8295 (weighted average).

Per Google Finance, Sysco "along with its subsidiaries and divisions, is a North American distributor of food and related products primarily to the foodservice or food-away-from-home industry. The Company provides products and related services to approximately 425,000 customers, including restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Sysco provides food and related products to the foodservice or food-away-from-home industry. The Company has aggregated its operating companies into a number of segments, of which only Broadline and SYGMA are the main segments. Broadline operating companies distribute a line of food products and a variety of non-food products to their customers. SYGMA operating companies distribute a line of food products and a variety of non-food products to chain restaurant customer locations. The Company’s other segments include its specialty produce, custom-cut meat and lodging industry products segments."


Trian Buys More Bank of New York Mellon

Second, Peltz's firm also filed a separate Form 4 with the SEC regarding its stake in Bank of New York Mellon (BK).  They acquired 370,000 shares on June 6th at a weighted average price of $42.3905. 

After this buy, they now own over 32.21 million shares.

Per Google Finance, Bank of New York Mellon is "an investments company. The Company operates businesses through two segments: Investment Management and Investment Services. The Company also has an Other segment, which includes credit-related services; the leasing portfolio; corporate treasury activities, including its investment securities portfolio; its equity interest in ConvergEx Group; business exits, and corporate overhead. The Company has over $1.6 trillion in assets under management. BNY Mellon's subsidiaries include The Bank of New York Mellon and BNY Mellon, National Association (BNY Mellon, N.A.). The Bank of New York Mellon is a New York state-chartered bank, which houses its Investment Services businesses, including Asset Servicing, Issuer Services, Treasury Services, Broker-Dealer and Advisor Services, as well as the bank-advised business of Asset Management."

Berkshire Hathaway Buys More Phillips 66 (PSX)

Warren Buffett's Berkshire Hathaway has filed another Form 4 with the SEC regarding its stake in Phillips 66 (PSX).  Per the filing, Berkshire was buying PSX shares on June 3rd, 6th, and 7th at prices ranging from $80.085 to $80.76.  In total, Berkshire bought 469,604 shares.

We highlighted how Berkshire Hathaway bought PSX shares last month as well, as this has been an ongoing purchase for some time.

After the most recent transactions, Berkshire now owns over 78 million PSX shares.

Per Google Finance, Phillips 66 is "an energy manufacturing and logistics company with midstream, chemicals, refining and marketing and specialties businesses. The Company operates its business through four segments: midstream, chemicals, refining and marketing and specialties. It gathers, processes, transports and markets natural gas, and transports, fractionates and markets natural gas liquids (NGL) in the United States. The Chemical segment manufactures and markets petrochemicals and plastics. The Chemicals segment consists of its 50% equity investment in Chevron Phillips Chemical Company LLC (CPChem). The refining segment buys, sells and refines crude oil and other feedstocks into petroleum products (such as gasolines, distillates and aviation fuels) at 14 refineries, mainly in the United States and Europe. The Marketing and Specialties segment purchases for resale and markets refined petroleum products (such as gasolines, distillates and aviation fuels), mainly in the United States and Europe." 

Bruce Berkowitz Acquires More Sears Shares

Bruce Berkowitz's Fairholme Capital has filed another Form 4 with the SEC regarding its position in Sears Holdings (SHLD).  Per the filing, Fairholme bought SHLD on June 3rd, 6th, and 7th at prices of $13 and $13.5. 

Berkowitz acquired 260,600 shares in total.  After these buys, he now owns over 27.5 million shares.

This is the second time he's filed a Form 4 recently as we highlighted Fairholme's other recent buy of SHLD.

Per Google Finance, Sears Holdings is "an integrated retailer. The Company is the parent company of Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. (Sears). It operates through two segments: Kmart and Sears Domestic. It operates approximately 940 Kmart stores across over 50 states, Guam, Puerto Rico and the United States Virgin Islands. Kmart stores carry an array of products across various merchandise categories, including seasonal merchandise, toys, lawn and garden equipment, food and consumables and apparel, including products sold under labels, such as Jaclyn Smith, Joe Boxer and Alphaline and certain Sears brand products (such as Kenmore, Craftsman and DieHard) and services. Its Sears Domestic segment's operations consist of full-line stores, specialty stores, commercial sales and home services. Full-line stores offer an array of products and service offerings across various merchandise categories, including appliances, consumer electronics/connected solutions and tools."

Marc Andreessen on Hedge Funds Versus Venture Capital & Investing

Tim Ferriss (well-known author of The 4-Hour Workweek) recently interviewed Marc Andreessen, one of the founders of venture capital firm Andreessen Horowitz.

In the very interesting podcast, Andreessen wasn't directly asked about it but he basically touched on the similarities and differences between public market investing versus investing in private companies.

Here are some interesting quotes and takeaways from the interview:
 
On hedge fund managers:

“In investing and other things, people just hate changing their mind … If you talk to the world’s best hedge fund managers, they’re the exact opposite.  They love changing their mind.  I’m one of the few people who will openly admit I love spending time with hedge fund managers, I think they’re awesome.  They’re fantastic people and they’re the most open minded people I know.  They love when you tell them that they’re wrong.  They get all excited.  Their eyes light up.  They’re like, “Why? Why do you think that?”  And they’re genuinely interested.  Because if you’re right and they’re wrong, they will change their minds.  And they’re hedge fund managers, so they’ll literally reverse the trade.  If they were long a company, they’ll flip around and go short.“

This highlights one of the main benefits of liquidity.  While it can be a tricky task to pull a mental 180 and reverse your thinking on an investment, it's even more difficult to flip your position if there's no liquidity.  This is undoubtedly one of the biggest advantages in public investing versus private.

If you're wrong in the markets, you can simply sell the position as soon as the market opens.  But if you make a mistake with a private investment, you'll either be waiting much longer to offload the stake and/or doing so at potentially less than favorable prices.  Mistakes can easily be magnified.  


On conviction:

Andreessen also touched on the concept of 'strong opinions, loosely held' which ties into the point above about the ability to change one's mind.  He summed it up succinctly by illustrating a progressive thought process: "Conviction.  Conviction.  Conviction.  New facts.  Change."

Going back historically, this is basically an adaptation of John Maynard Keynes' oft quoted words: "When the facts change, I change my mind.  What do you do?"


On the hedge fund industry versus venture capital:

"A hedge fund manager can reverse himself.  The next day he can turn around and take the opposite trade.  We don’t get to do that.  When we invest, it’s knowing we’re in for 10+ years.  It’s a commitment of dollars but it’s also a commitment of somebody’s time and the organization’s time and bandwidth, and there’s only so much of that.  When we make a decision, we then become committed to that company in that category, and so we can’t invest in their competitors, including competitors that don’t even exist yet ... Our decisions are big decisions and they have huge consequences for the firm."

This underscores how difficult it can be to think so far into the future and to try and accurately predict it.  He gives a good example about how investors in Friendster couldn't invest in Facebook because it didn't exist at the time, but by time it came around, they were already tied to Friendster and thus they missed out on a much better opportunity.
    

On good versus great investments:

"One of our theories of venture capital: Everybody thinks in investing you either make a good investment or a bad investment.  I actually think that's not the big issue.  The issue in venture capital is you either make a good investment or a great investment.  Good is the enemy of great.  We see many companies that are just fine ... founders are good, market seems good, product seems good, customers kinda like it, and they got a little revenue and it's all fine, but those companies tend to never go anywhere.  Every once in a while we'll see these companies that have some extremely strong strength, some extremely special wonderful thing going on, that by the way may have all kinds of problems and issues, but there's something at the core of what it is that's really special and magical.  And those are the ones that we want to do.  We're trying to stock our portfolio with just investments like that."

This is similar to the notion that only a few great investments in a stock portfolio drive the majority of the returns and so investors are on a continual quest to find the holy grail.  But it's not just finding them.  You have to be able to buy them at a decent price.  As Warren Buffett says, "Price is what you pay; value is what you get."

Many great fund managers keep a watchlist of great companies they'd love to own at the right price (companies with huge moats, competitive advantages, great management teams, etc).  And if volatility presents an opportunity, they strike, often selling 'good' companies to replace them with 'great' ones.


On the importance of arguing the other side:

Andreessen then goes on to discuss his firm's investment process and the importance of arguing the other side.  There are pros and cons to doing this as he warns at first that, "It'd be very easy in a conversation about the weaknesses of something to beat the idea to death and you never invest."

At the same time, he says they can create a 'red team' or people designated to argue the other side (why they shouldn't invest, i.e. the bear case in public market investing).  Andreessen says, "Whenever (a partner) brings in a new idea, I just beat the shit out of it ... and he does the same to me.  It's the torture test."

Two quotes from Charlie Munger highlight just that:

"Invert, always invert."

and

"I never allow myself to have an opinion on anything that I don't know the other side's argument better than they do." 

Andreessen notes they're trying to take contrarian, non-consensus views to guide their investments.  This is quite similar to public market value investors, or other managers who identify the consensus view and then outline their variant perception.  Risk & mitigant lists are also pretty commonplace in investment pitches these days.


Books Recommended by Marc Andreessen:

During the interview, Tim Ferriss mentioned The Four Steps to the Epiphany.

He also singled out High Output Management, which Andreessen then called "the best book on management ever written."

Andreessen also recommended Only The Paranoid Survive, written by the same author.

He also highlighted Peter Thiel's book Zero To One as a great option.

Shifting gears a bit, the venture capitalist also noted that, "Where I got a lot of my education from was reading history.  I'd go back and read about Edison, Ford, Rockefeller, J.P. Morgan.  The period between 1870-1920 is really interesting."

He singled out The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World.

He also mentioned a book on Walt Disney as well as Schulz and Peanuts.

And while he didn't specifically name these books, here are some of the top rated biographies on the historical luminaries he mentioned above:

Titan: The Life of John D. Rockefeller, Sr.

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance


On other investors he studies:

"I study the people we compete with and collaborate with very closely.  I (also) particularly study value investors, on the completely other side of the spectrum.  Warren Buffett is the archetype but Seth Klarman, and others."

"Value investing is the only other place in the market where you can actually find long term investors."


On Warren Buffett:

"On the one hand, there's no overlap between the worlds.  Anything Warren Buffett's willing to invest in we run screaming in the other direction and vice versa.  He invests in Heinz Ketchup and the reason he invests in Heinz Ketchup is that people have been eating Ketchup on hamburgers for 100 years and therefore the best guess would be that they're going to continue to eat Heinz Ketchup for the next 100 years.  We're wired completely opposite.  He's betting against change and we're betting for change.  When he makes a mistake it's because something changes that he didn't expect.  When we make a mistake it's because something doesn't change that we thought would.  They could not be more different in that way.  But what both schools have in common is an orientation towards original thinking, willing to view things as they are as opposed to what everybody says about them or what they've believed to be."



While these are just some takeaways from the interview, Andreessen and Ferriss also touch on a myriad of other subjects and we'd definitely recommending listening to the full podcast here.

Ruane Cunniff Dumps Half of Valeant Pharmaceuticals Stake

Ruane Cunniff & Goldfarb, managers of the Sequoia Fund and one of the longstanding holders of Valeant Pharmaceuticals (VRX) reported they've sold almost half of their stake, per a just filed 13G with the SEC.

They now own 4.72% of the company with only 16.11 million shares.  This is down from the 30.30 million VRX shares they owned at the end of the first quarter.

The filing was made due to activity on May 31st.

We've highlighted this ongoing saga and other investors involved include Jeff Ubben's ValueAct Capital, and much more recently Bill Ackman's Pershing Square.

Per Google Finance, Valeant is "a specialty pharmaceutical and medical device company. The Company is engaged in developing, manufacturing, and marketing a range of branded, generic and branded generic pharmaceuticals, over-the-counter (OTC) products, and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices), which are marketed directly or indirectly in over 100 countries. The Company operates through two segments: developed markets and emerging markets. The Company's developed markets segment consists of sales in the United States of pharmaceutical products, OTC products, and medical device products. The Company's Emerging Markets segment consists of branded generic pharmaceutical products and branded pharmaceuticals, OTC products, and medical device products.."

Carl Icahn Increases Hertz Position

Activist investor Carl Icahn has submitted some recent SEC filings regarding his position in Hertz (HTZ).  Per an amended 13D filing, Icahn now owns 15.24% of Hertz with over 64.69 million shares.

This means he's boosted his stake by just shy of 1 million shares.  The Form 4 Icahn filed with the SEC indicates he bought on June 2nd and 3rd at prices of $9.96 and $9.88.

For more on this investor, we recently highlighted how Icahn has taken a stake in Allergan.

Per Google Finance, Hertz is "engaged principally in the business of renting and leasing of cars through its Hertz, Dollar, Thrifty and Firefly brands, and equipment through its Hertz Equipment Rental brand. The Company operates through four segments: U.S. Car Rental, International Car Rental, Worldwide Equipment Rental and All Other Operations. It operates over 9,980 corporate and franchisee locations in North America, Europe, Latin America, Africa, Asia, Australia, the Middle East and New Zealand. Its brands maintain separate airport counters, reservations and reservation systems, marketing and all other customer contact activities. Its Hertz brand has approximately 8,510 corporate and franchisee locations in over 150 countries. Its Dollar and Thrifty brands combined have approximately 1,345 corporate and franchisee locations in over 75 countries and its Firefly brand has approximately 100 corporate and franchisee locations in over 20 countries.."

JANA Partners Slightly Trims ConAgra Foods Stake

Barry Rosenstein's activist hedge fund firm JANA Partners recently filed an amended 13D with the SEC regarding its position in ConAgra Foods (CAG).  Per the filing, JANA now owns 6.3% of CAG with over 27.38 million shares of exposure (including call options to purchase 6 million shares).

If you back out the 6 million shares via call options (which JANA disclosed as a new position in the first quarter), you're left with 21.38 million shares. 

Compare this with the 21.53 million shares JANA owned at the end of the first quarter, and this means they've slightly reduced their net exposure to the name. 

The filing was made due to activity on May 27th and the purpose of transaction notes that they "entered into an agreement with the Issuer that amends and restates the Cooperation Agreement (the "Amended and Restated Cooperation Agreement"). The full text of the Amended and Restated Cooperation Agreement is included as Exhibit D to this Amendment No. 2 by reference to Exhibit 99.1 of the Issuer's Current Report on Form 8-K filed with the SEC on May 31, 2016 (the "Form 8-K") and is incorporated by reference herein.

For more on this fund, we recently highlighted that JANA reduced its Walgreens Boots Alliance position.

Per Google Finance, ConAgra Foods "operates as a packaged food company. The Company offers branded and private branded food to households, as well as commercial foods, which serves various restaurants and foodservice operations. The Company operates in three segments: Consumer Foods, Commercial Foods and Private Brands. Its brands include Banquet, Chef Boyardee, Egg Beaters, Healthy Choice, Hebrew National, Hunt's, Marie Callender's, Orville Redenbacher's, PAM, Peter Pan, Reddi-wip, Slim Jim and Snack Pack, among others. The Company sells its products under private brand labels in grocery, convenience, mass merchandise, club and drug stores. Additionally, ConAgra Foods supplies frozen potato and sweet potato products, as well as other vegetable, spice, bakery, and grain products, to restaurants, commercial and foodservice customers. It has international manufacturing facilities in Argentina, Mexico and interests in ownership of international manufacturing facilities in India and Mexico.."

ValueAct Capital Sells More MSCI

Jeff Ubben's activist investment firm ValueAct Capital has filed a Form 4 with the SEC regarding its position in MSCI (MSCI).  Per the filing, ValueAct sold 1.8 million shares on June 1st, 2nd, and 3rd at prices of $78.96, $78.69, and $76.21.

As we've highlighted previously, ValueAct has been trimming its MSCI stake throughout the year.

After these transactions, ValueAct now owns 1.87 million shares.

Per Google Finance, MSCI "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."  

SRS Investment Management Reduces Avis Budget Stake

Karthik Sarma's hedge fund firm SRS Investment Management has filed an amended 13D with the SEC regarding its position in Avis Budget Group (CAR).  Per the filing, SRS now owns 9.5% of CAR with 9 million shares.

The filing indicates they sold 500,000 shares on May 5th at $25.40.  SRS previously owned 9.5 million shares at the end of the first quarter of 2016.

About SRS Investment Management  

Prior to founding SRS, Karthik Sarma worked at Tiger Global.  He started SRS in 2007 and has a large focus on international markets (particularly in India, China, etc) and typically invests in technology, media and other high-growth industries.  SRS's latest 13F filing indicates they manage in excess of $2.7 billion and that doesn't include their foreign positions.

About Avis Budget Group  

Per Google Finance, Avis Budget Group is "a provider of vehicle rental and car sharing services. The Company operates three brands, which include Avis, Budget and Zipcar. Avis is a rental car supplier and Budget is a rental vehicle supplier. It also owns Payless, which a car rental brand, and Apex, which is a car rental brand in New Zealand and Australia. It operates in two segments: Americas and International. The Americas segment provides and licenses the Company's brands to third parties for vehicle rentals and ancillary products and services in North America, South America, Central America and the Caribbean, and operates its car sharing business in certain of these markets. The International segment provides and licenses the Company's brands to third parties for vehicle rentals and ancillary products and services in Europe, the Middle East, Africa, Asia, South America, Central America, the Caribbean, Australia and New Zealand, and operates its car sharing business in certain of these markets.."

Paulson & Co Trims NovaCopper Position

John Paulson's hedge fund firm Paulson & Co has filed a Form 4 with the SEC regarding its stake in NovaCopper (NCQ).  Per the filing, Paulson sold 70,618 shares combined on May 27th and May 31st at prices of $0.5456 and $0.51.

After these transactions, Paulson now owns 11.73 million shares of NCQ.  Paulson had also previously done some other selling in late May.  The firm owned 11.82 million NCQ shares at the end of the first quarter this year.

Per Google Finance, NovaCopper is "a Canada-based company engaged in the exploration and development of its Upper Kobuk Mineral Projects located in the Ambler mining district in Northwest Alaska, the United States. The Company's segments are Alaska, USA; Antioquia, Colombia, and Corporate and other. Its Upper Kobuk Mineral Projects consist of Arctic Project, which contains a polymetallic volcanogenic massive sulfide (VMS) deposit, and Bornite Project, which contains a carbonate-hosted copper deposit. The Company also owns interest in the Titiribi gold-copper exploration project located approximately 70 kilometers southwest of the city of Medellin, in Antioquia Department, Colombia. The Arctic Project is located in the Ambler mining district of the southern Brooks Range, in the Northwest Arctic Borough (NWAB) of Alaska. The Bornite Project is located in the Ambler mining district of the southern Brooks Range, in the NWAB of Alaska. The Bornite Project is located within the Arctic Alaska Terrane."

Bruce Berkowitz Buys More Sears Holdings

Per a Form 4 filed with the SEC, Bruce Berkowitz's Fairholme Capital has increased its position in Sears Holdings (SHLD). 

Fairholme was buying shares on May 27th, May 31st, and June 1st.  In total, Fairholme purchased 778,000 SHLD shares at prices ranging from $12.48 to $13.3.  After these buys, Fairholme owned over 27.23 million shares of Sears.

For more from this manager, be sure to check out Bruce Berkowitz's investment checklist.

Per Google Finance, Sears Holdings is "an integrated retailer. The Company is the parent company of Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. (Sears). It operates through two segments: Kmart and Sears Domestic. It operates approximately 940 Kmart stores across over 50 states, Guam, Puerto Rico and the United States Virgin Islands. Kmart stores carry an array of products across various merchandise categories, including seasonal merchandise, toys, lawn and garden equipment, food and consumables and apparel, including products sold under labels, such as Jaclyn Smith, Joe Boxer and Alphaline and certain Sears brand products (such as Kenmore, Craftsman and DieHard) and services. Its Sears Domestic segment's operations consist of full-line stores, specialty stores, commercial sales and home services. Full-line stores offer an array of products and service offerings across various merchandise categories, including appliances, consumer electronics/connected solutions and tools. ."

Baupost Group Files Amended 13D on Keryx Biopharmaceuticals

Seth Klarman's investment firm Baupost Group has filed an amended 13D with the SEC regarding shares of Keryx Biopharmaceuticals (KERX).  Per the filing, Baupost now has ownership of 42.53% of Keryx with over 59.21 million shares.

The filing was made due to activity on May 27th.  At the end of the first quarter, Baupost previously disclosed a position of only 25.79 million shares.

In the purpose of transaction section of the 13D, Baupost notes that:

"On May 27, 2016, the Issuer announced that at the Issuer’s Annual Meeting of Stockholders held on May 25, 2016 its stockholders approved an amendment to the Issuer’s Certificate of Incorporation to increase its authorized share capital by 50,000,000 shares of Common Stock. As a result of the increase in the authorized share capital, the Notes became convertible only into shares of the Issuer’s Common Stock. Based on the initial conversion rate, the $125 million aggregate principal amount of Notes is now convertible into 33,422,459 shares of Common Stock."

For more from this firm, we've highlighted previous Baupost Group portfolio activity here.

Per Google Finance, Keryx Biopharmaceuticals "is a biopharmaceutical company. The Company is focused on the development of products for the treatment of renal diseases. The Company's product Auryxia (ferric citrate), also known as Riona in Japan and Fexeric in Europe, is an oral, absorbable iron-based compound, which is indicated for the control of serum phosphorus levels in patients with chronic kidney disease (CKD), on dialysis. The Company operates through the products segment. Auryxia can bind to phosphate in the gastrointestinal tract and form non-absorbable complexes to reduce intestinal absorption and aid in the management of hyperphosphatemia in patients with CKD. The adverse events for Auryxia treated patients were gastrointestinal-related, including diarrhea, nausea, constipation, vomiting and cough. The Company focuses on Keryx Patient Plus program to assist with patient accessibility to Auryxia. ."

Meritage Group Boosts Dunkin' Brands Stake

Investment firm Meritage Group has filed a 13G with the SEC regarding Dunkin' Brands (DNKN).  Per the filing, Meritage now owns 5.4% of the company with over 4.96 million shares.

The filing was made due to activity on May 24th.  They previously owned 3.78 million DNKN shares at the end of the first quarter.

For more from this firm, the Graham & Doddsville newsletter recently interviewed Meritage's Alex Magaro.

Meritage is the family investment vehicle of Renaissance Technologies founder Jim Simons.

Per Google Finance, Dunkin' Brands is "a franchisor of quick service restaurants (QSRs) serving hot and cold coffee and baked goods, as well as hard serve ice cream. The Company franchises restaurants under its Dunkin' Donuts and Baskin-Robbins brands. The Company operates its business through four segments, which include Dunkin' Donuts-U.S., Dunkin' Donuts International, Baskin-Robbins International and Baskin-Robbins-U.S. Dunkin' Donuts serves in the hot regular/decaf/flavored coffee category and the iced regular/decaf/flavored coffee category. The Company has over 18,000 points of distribution in approximately 60 countries across the world. It has over 11,750 Dunkin' Donuts points of distribution, of which approximately 8,430 are in the United States and over 3,320 are international, and approximately 7,610 Baskin-Robbins points of distribution, of which over 5,104 are international and approximately 2,500 are in the United States. ."

PointState Capital Discloses Grupo Supervielle Position

Zach Schreiber's hedge fund firm PointState Capital has filed a 13G with the SEC regarding shares of Grupo Supervielle S.A. (SUPV).  Per the filing, PointState now owns 6.3% of the company with 3 million American Depositary Receipt (ADR) shares, which is equivalent to 15 million Class B shares.

The filing was made due to activity on May 19th as the company just completed its initial public offering (IPO). 

For more from this manager, Schreiber recently gave investment ideas at the Sohn Conference in New York.

Per Google Finance, Grupo Supervielle is "an Argentina-based holding company primarily engaged in the financial sector. The Company provides services through numerous subsidiaries, such as Banco Supervielle SA, that offers bank services, mainly to individuals and commercial customers; Cordial Compania Financiera SA, which focuses on credit card issuing, as well as providing consumer loans and insurance for Wal-Mart Argentina customers; Tarjeta Automatica SA, which issues and administrates credit cards; Cordial Microfinanzas SA, that offers financing for urban micro-enterprises; Supervielle Seguros SA, which sells insurance products; Supervielle Asset Management Sociedad Gerente de FCI SA, which manages investment funds, and Espacio Cordial Servicios SA, that distributes audio and video equipment, computers, home appliance and air conditioning units, among others. The Company operates in the domestic market. ."

12 West Capital Reveals Papa Murphy's Stake

Joel Ramin's hedge fund firm 12 West Capital has filed a 13G with the SEC regarding shares of Papa Murphy's (FRSH).  Per the filing, 12 West now owns 6.3% of Papa Murphy's with over 1.06 million shares.

The filing was made due to activity on May 18th. This is a newly disclosed equity position as they did not show a stake at the end of the first quarter.

Per Google Finance, Papa Murphy's "is a franchisor and operator of the Take 'N' Bake pizza chain in the United States. The Company franchises the right to operate Take 'N' Bake pizza franchises and operates Take 'N' Bake pizza stores owned by the Company. The Company operates through three segments: Domestic Company Stores, Domestic Franchise and International. Its Domestic Franchise segment consists of its domestic franchised stores, which represent its system-wide stores and derives its revenues from franchise and development fees and the collection of franchise royalties. The Domestic Company Stores segment consists of its Company-owned stores in the United States and derives its revenues from retail sales of pizza and side items to the general public. Its International segment consists of its stores outside of the United States, all of which are franchised and derives its revenues from franchise and development fees."

London Value Investor Conference Notes 2016: Marks, Eveillard, Montier & More

The 2016 London Value Investor Conference recently concluded and we've assembled notes from the event.  Click the links below to go to a summary of each speaker's presentation:


Notes From 2016 London Value Investor Conference


- Howard Marks (Oaktree Capital) presentation

- Jean-Marie Eveillard (First Eagle) presentation

- James Montier (GMO) on emerging markets

- Jonathan Mills (Metropolis Capital): long Ryanair

- Philip Best and Marc Saint John Webb (Quaero Capital): 2 long ideas

- Nick Kirrage (Schroder Recovery Fund): long Royal Bank of Scotland

- Alex Wright (Fidelity Special Situations Fund): 2 long ideas

- Michael Keller (Brown Brothers Harriman): long Zoetis and long Perrigo

- Anne-Mette de Place Filippini (Burgundy Asset Management): long Cielo

- Alex Morozov (Morningstar Equity Research): long Elekta

- Dan Abrahams (Alfreton Capital): long Ocado

- Andrew Hollingworth (Holland Advisors): long Exor

- David Iben (Kopernik Global) presentation

- Francois Badelon (Admiral Gestion): long Easyjet

Howard Marks' Presentation at London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Howard Marks of Oaktree Capital.


Howard Marks' London Value Investor Conference Presentation

Markets have been pretty boring for the last six years. We have to keep our focus in times of boredom.  We are living through a period of complacency with zero interest rates leading some to believe in TINA (there is no alternative). There are no areas of acute over-valuation in Marks’s main markets which are corporate bonds, distressed debt, and real estate. In the stock market he thinks social media stocks are overvalued.

Everyone thinks that interest rates will remain low in the future, there is low demand for capital and the demographics are quite poor. His intellectual side says that low growth is here to stay. His alter ego tells him that when everyone is thinking the same thing he should be more optimistic. However, he did say that he does not listen to his alter ego very often.

Value investing is a big tent.  He also referred to it as the value pantheon. It ranges on a continuum from cigar butts to investing in franchise businesses with large moats and good management at a reasonable price.  He referred to this as Buffett’s journey. What is outside the value tent? Only dreams – companies with no earnings and only growth prospects.

Marks said that he had never carried out a liquidation and that he was not drawn to the cigar butt end of the spectrum. Because he wants high returns, he is very price sensitive so he does not buy safe, quality, unleveraged companies. He is somewhere in the middle of the value pantheon.

When Marks and his partners set up Oaktree they adopted the motto, “If you avoid the losers the winners will take care of themselves.”  In high yield bonds Oaktree have only suffered a 1.4% default rate. While avoiding the losers worked in bonds as they moved into other markets like distressed debt and mezzanine it became less appropriate. If you want more than high single digit returns in these markets you have to do more than avoid losers. ‘Risk control’ and ‘loss avoidance’ are important but not ‘risk avoidance’.  He warned that risk avoidance often leads to return avoidance.

If you hear that an asset is so dangerous that there is no price at which it can be bought your antennae should prick up. It probably means it is a good time to buy.  Throughout his career he has bought assets that other people would not invest in. When an asset class gains a reputation for being unseemly and becomes stigmatised like high yield bonds in the 1980s, emerging markets in the late 1990s, bank securities in 2008 and more recently the oil sector it is usually time to buy.

Investing is harder today than earlier in his career because there is more competition from other investors. The search for bargains has become more intense. Like the growth investor, the value investor needs to think about disruption. He highlighted the big changes a foot in the media, television cable area as an example.

Oaktree put some money to work in the oil sector earlier this year. They have been doing more commercial real estate investing than anything else over the last five years.   The real estate market is heterogeneous. Prime office buildings are expensive in the US today. They have been busiest in out-of-the-way places in non-prime properties. He mentioned that they have been buying zombie properties that require renovation and new tenants which they have been buying from banks at a discount.

Howard Marks' recommended reading for young investors:

- Berkshire Hathaway's annual reports written by Warren Buffett

- Ben Graham's The Intelligent Investor

- Chapter 1 of Marks' book The Most Important Thing on second level thinking


Be sure to check out the rest of the presentations from the London Value Investor Conference.

Jean-Marie Eveillard's London Value Investor Conference Presentation

We're posting notes from the London Value Investor Conference 2016.  Next up is Jean-Marie Eveillard of First Eagle.


Jean-Marie Eveillard's London Value Investor Conference Presentation

Jean Marie said the tennis player, Stan Wawrinka, has a quote from Samuel Beckett tattooed on his arm that is appropriate to investing: “Ever tried ever failed no matter. Try again fail again. Fail better!”

Much of life that is worthwhile comes hard. Investment is no different.

Temperament and not intelligence is the most important trait of a value investor. The good investor needs the temperament to move away from the herd.

Deep value stocks today – they are in countries like Brazil and Russia and you can still find net-nets in microcap stocks in Japan.  He cautioned that you can lose money in net-nets if the business turns down. Also there are no hostile takeovers in Japan. He was positive about India but less so on China. “A credit boom is a credit bust as surely as night follows day.” China will be held back by its command economy.


Be sure to check out the rest of the presentations from the London Value Investor Conference.

James Montier on Emerging Markets: London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is James Montier of GMO who talked about emerging markets.


James Montier's London Value Investor Conference Presentation

It is hard to be a contrarian investor. Human nature makes us feel safer and warmer in the middle of the herd. The Institutional imperative means it is better to fail conventionally than to succeed unconventionally. Asset managers tend to play it safe. As Jeremy Grantham has noted career risk produces conformity and anchoring among investment managers . Montier pointed out that value metrics can provide investors with a powerful alternative anchor that can be used as strong form of behavioural self-defence.


Investment idea: Emerging Markets  

Earlier in the year GMO were considering whether or not to put money to work in emerging markets. EM had been hated by investors in recent years and Graham and Dodd P/E ratios showed them as undervalued. It looked as though value stocks in emerging countries were particularly cheap which got them more excited. The value proposition in EM looked the best it had been for many years.

They stripped out financials and resources stocks from their analysis because both sectors are hard to value.  It is difficult to value resource companies as future returns are tied to the price of the underlying assets such oil or gold. Financials are opaque because of the difficulty of knowing what assets they hold. After they had stripped out financials and resource stocks they concluded that EM still looked cheap.

Montier’s team asked themselves how could they be wrong? A question Montier said investors do not ask enough. They thought perhaps that EM equities have not been equity like? Perhaps they were not like developed equities? Their results showed that EM equities were indeed like developed equities at least in terms of earnings yield – with a 6.5% average annual return. 

They asked whether the average future conditions for EM going forward were likely to be similar to the average past conditions? They had been looking at the last 15 years in particular and they wondered if that period was normal? They asked what sort of growth would be required over the next 10 years in EM to make them feel comfortable that today’s prices offered a good value?

They concluded earlier in the year that about 1.5% real growth would do it. That did not seem like a huge hurdle, however, when they went back and looked at the last 15 years they was surprised to find that the EM value subgroup had only grown at 1.5% per annum in real terms. That tempered their enthusiasm a bit. It made them conclude that EM valuations were fair but not cheap. Compared to the opportunity set faced by investors today, though, EM appeared to be preferable to other assets.

They also started to worry that looking back 15 years was not long enough especially as the Asian currency crisis of 1997 was excluded from the data. This gave them further pause for thought as earnings yields in that period were crushed. He pointed out that it is also important to balance this with the recognition that EM economies are in better health than they were back in the late 1990s. For example, today most EM countries run a current account surplus rather than deficit and there are less fixed exchange rates. They also worried about the high level of private sector debt at a macro level but were relieved to find that it did not show up in the balance sheets of individual companies that make up the MSCI emerging index.

Even if they were right about valuations in local terms could they still lose on the currencies? They found that the EM currencies had already fallen a lot from expensive to fair value. This meant that if they fell further they would have the reassurance of knowing that the currencies were cheap and should mean revert at some point - a temporary but not a permanent impairment of capital.

In the end they decided they would buy some emerging equities but they tempered their buying because of the negatives they had found around earnings.



Be sure to check out the rest of the presentations from the London Value Investor Conference.

Jonathan Mills Long Ryanair: London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Jonathan Mills of Metropolis Capital who pitched long Ryanair.


Jonathan Mills' London Value Investor Conference Presentation

Investment idea: Ryanair 

Ryanair is the fourth largest airline by market cap and the largest in Europe.  It has greater coverage than any other airline in Europe. The CEO, Michael O’Leary, is an ‘owner occupier’ with a stake in the company worth over Euro 600m.

Ryanair has the lowest short haul fares in the industry by a significant amount yet surprisingly has the highest margins. It has done this by having the lowest costs and by being very efficient.  It has the lowest route charges, it does not spend as much on sales and marketing as its competitors and it pays less for its planes.  Ryanair work their people harder and there are no unions. Ryanair employees work longer hours and receive incentive based pay.

Customer behaviour has been changed to reduce costs further. Being the first to introduce charging for check-in bags resulted in faster check-ins, fewer desks and less fuel. Ten year CAGR +15%. They are planning to double passenger numbers by 2024. There is plenty of room to gain market share in Europe with current share at 13%. Ryanair is generating more cash than it needs to fund its growth.

What are the dangers to the business? Load factors could decline. Oil prices are rebounding. Labour law changes could increase costs. Terrorism or a plane crash could reduce demand. Mills thinks the biggest risk is that O’Leary exits the business.

Ryanair is the Amazon of the airline industry. It is the largest and lowest cost producer - but with the highest margins. It has excellent capital allocation with large share buybacks and dividends and a balance sheet with net cash. It trades on a forward multiple of 11x.


Be sure to check out the rest of the presentations from the London Value Investor Conference.

Quaero Capital's 2 Ideas at London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Philip Best and Marc Saint John Webb of Quaero Capital who pitched longs of Sonae Capital and Fluidra.


Quaero Capital's London Value Investor Conference Presentation

Quaero Capital is a European focused smallcap fund that adopts a deep value approach.

There is quite a lot of research that shows that family owned businesses outperform. Between 2002 and 2016 family run listed businesses on the Dax returned 397% vs 149% for the Dax index. They define a family owned business as one that controls at least 20% of the supervisory board. The family are stewards of the company but often outsource management.

There are several reasons why family businesses outperform. Owner guided governance, thinking in generations rather than financial quarters, risk aversion/conservatism, strong balance sheets, aversion to debt, the importance of dividends, aversion to dilution and cautious acquisitions policies.


Investment idea: Sonae Capital 

Sonae is diversified holding company with assets in Portugal. It was listed in 2007 and the majority of assets are real estate - residential and offices. Other assets include hotels, power plants, fitness clubs and air conditioning engineering. The Azevedo family own 64% of the shares. The slow economic recovery in Portugal has allowed the company to sell off some assets at good valuations. Gearing has been reduced to 30%. They pay a large dividend and there is a 50% discount to NAV according to Cushman and Wakefield.


Investment idea: Fluidra 

The company was founded in 1969 by four families. It is a world leader in swimming pool equipment with a presence in 41 countries. It sells water treatment pumps, plumbing, valves and chemicals under the Astral Pool brand. The shares have fallen over 50% since the IPO in 2007. A cost reduction programme, lean manufacturing and development outside of Europe have improved the company’s prospects. Profitability and sales are improving helped by the recovery in southern Europe. Fluidra is trading on a 2016 PE of about 12.5x.



Be sure to check out the rest of the presentations from the London Value Investor Conference.

Nick Kirrage Long Royal Bank of Scotland: London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Nick Kirrage of Schroder Recovery Fund who pitched long Royal Bank of Scotland (RBS).


Nick Kirrage's London Value Investor Conference Presentation

The Schroders Global value team are the UK’s largest dedicated value investment franchise. Nick Kirrage and Kevin Murphy co-manage the UK Recovery Fund which has beaten the FTSE 100 by 2.9% per year over their ten year tenure with about 20% annual portfolio turnover. 

Kirrage’s presentation was titled Successful Failure and reviewed some of the losers they have had over the years. They are Graham and Dodd style value investors and believe that you have to fish in dangerous waters to get great returns.

They have had several big losers including Blacks Leisure, Wagon and Avis Europe. In Blacks and Wagon they were all but wiped out but the investment in Avis Europe went on to make good returns. At last year’s conference they pitched Lonmin which has lost 90% since then.  They still like Lonmin and doubled down on it during the rights issue earlier in the year.

The nature of their deep value approach means that they will often invest early sometimes by several years and they will often look stupid.


Investment idea: Royal Bank of Scotland RBS

Things have been getting better at RBS very slowly but most people have not noticed. Loans are down by a half since 2008. The investment banking arm has been more or less shut down. Regulatory capital is up by 6% and the regulation is much more stringent. Barriers to entry in retail banking in the UK are high even though the government has been encouraging challenger banks. Customers are sticky and do not change banks partly due to laziness. Retail banking has good long term returns with ROEs of >10%. Banks have been de-risking for nearly a decade.


Be sure to check out the rest of the presentations from the London Value Investor Conference.

Alex Wright's 2 Ideas at London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Alex Wright of Fidelity Special Situations Fund.  Alex pitched long Royal Mail and long CRH.


Alex Wright's London Value Investor Conference Presentation

Likes situations where capital is leaving an unloved sector. They try not to invest where there is too much supply. They like oil and gas, banks and life insurers but do not like mining and supermarkets where there is too much supply.

They look at internal changes to companies and for credible turnarounds. They like to research companies where there are lots of changes taking place – 10 or so changes are more interesting than 1 or 2. They research competitors, customers and suppliers but try not to be led by management. There are lots of opportunities for value investors in the UK at the moment.


Investment idea: Royal Mail 

A recently floated stock with 8% FCF and 5% dividend yield. There are substantial changes going on within the company and in the sector. Amazon does not want to take more business away from RM. It has already taken what it wants – about half of RMs business – only small packages remain.

Some competitors are exiting, especially in the letter delivery business. Royal Mail can make more efficiency savings. Belgium Post now has 3x RM’s margins. He is not scared by RMs pensions commitments. RM workers are already well rewarded compared to competitors and might keep the highly unionised workforce acquiescent. There are significant property assets which could be sold off. 


Investment idea: CRH 

CRH is building materials company. It is the second largest building and material company globally focusing on mature rather emerging markets.  It has a very strong balance sheet.  Projected FCF for next year 9%. CRH is a cyclical recovery play. The building industry is still recovering in the US after the recession. Things are recovering slowly in the EU. There is plenty of recovery potential still to go from a cyclical point of view.

CRH made a good purchase of assets at a cheap price last year which came out of the merger of Lafarge and Holcim. That combined with a cyclical recovery means there is potential for a recovery in margins.



Be sure to check out the rest of the presentations from the London Value Investor Conference.

Michael Keller Long Zoetis & Perrigo: London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Michael Keller of Brown Brothers Harriman who pitched long Zoetis (ZTS) and long Perrigo (PRGO).


Michael Keller's London Value Investor Conference Presentation

Brown Brothers Harriman are bottoms up, research intensive high quality franchise investors who look to hold stocks for at least five years. Too many investors are index huggers that charge large fees. They aim to beat the market on the way down. They focus on the full cycle even if it means missing out on some of the upside.


Investment idea: Zoetis (ZTS)

Tim Harch of Brown Brothers Harriman pitched Zoetis at the conference last year. They still like it. Zoetis is a global leader in animal health for livestock and pets. It offers a broad array of products for preventative care and disease treatment. Unlike human healthcare animal medicine does not suffer from a lack of government reimbursement issues. The secular trends in animal health are durable. Expect steady mid-single digit revenue growth.  (MF note: Bill Ackman recently sold ZTS shares.)


Investment idea: Perrigo (PRGO)

Perrigo produces white label consumer goods for chemists – pain medication, health products, branded products and generics. It holds royalty rights for Tysabri a mature MS drug with a large patient population. It is domiciled in Ireland.

There are three business drivers: the ageing demographic that favours pharma; store brand products; conversion of Rx to over the counter. The stock is down because:

- The long term CEO has left to join Valeant (VRX)
- Pricing pressures in generics
- The Omega acquisition has been less successful than expected

Keller believes the price weakness is overdone. The current valuation implies an 8% FCF.



Be sure to check out the rest of the presentations from the London Value Investor Conference.

Anne-Mette De Place Filippini Long Cielo: London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Anne-Mette De Place Filippini of Burgundy Asset Management who pitched long Cielo.


Anne-Mette de Place Filippini London Value Investor Conference Presentation

Anne Marie advocated ‘winning by not losing’ in emerging markets (EM). Like tennis players investors should try to minimise unforced errors. Only invest within your circle of competence. Be independent in thought and research. Focus on quality. Chose partners carefully. Invest with a margin of safety.

If you invest in an emerging market ETF you will have to partner with Chinese, Brazilian and Russian government entities that own stakes in many of the largest companies e.g., Petrobras, Vale. She suggested that it was better to ignore the EM index altogether. Most of the index is un-investable. Burgundy’s EM portfolio only has a 3% overlap with the index.

Burgundy prefers to invest in family run businesses that are too small to be included in the index. 

She warned against overpaying for EM stocks. Obviously high quality companies are expensive with the best Asian companies trading on a P/E 43x. EM investing is risky anyway so do not take on extra financial risks by buying expensive stocks.


Investment idea – Cielo 

The payments industry in Brazil boasts a number of attractive characteristics. A small fee is taken on each transaction. As consumption grows and more spend gets done on plastic the payments industry benefits. Card payments in Brazil remain below half the level in the US.

Three players dominate with 90% of the market. With over 50% of the market Cielo is Brazil’s largest provider of services related to payment cards. Cielo has an inflation proof business model which is important when investing in an inflation prone country.  Capital requirements are used mainly to buy electronic equipment to lease to merchants.

Burgundy bought Cielo stock in 2008, 2009, 2013 and 2016. The stock market has kept serving up opportunities. Since 2008, Cielo’s growth revenue has compounded at 21% and gross profit at 18%.



Be sure to check out the rest of the presentations from the London Value Investor Conference.

Alex Morozov long Elekta: London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Alex Morozov of Morningstar Equity Research who pitched long Elekta.


Alex Morozov's London Value Investor Conference Presentation

Investment idea: Elekta 

Elekta is a Sweden based company specialising in making radio therapy machines for patients with cancer. It’s not new technology but it is effective. Expect secular growth outside the US in radio therapy – 4-6% per year. Current guidelines call for radio therapy in 50% of cancer patients and the incidence of cancer is going up.

Elekta has a wide moat – there are two main players, Electa and Varian, that make radio therapy machines now that Siemens has exited the market.

Intangible assets: IP, brands, chemical databases, R&D productivity.

Switching costs: clinical relationships, there is a large installed base in large hospitals, re-training.  Aftermarket sales provide a lucrative revenue stream.

The share price has pulled back due to a slowdown in order growth, software issues, change of CEO, poor cash flow conversion. The company has been known to use aggressive accounting practices. R&D expenditure has been high.  Margins have bottomed and cash flow is improving. Valuation is attractive but patience will be required.



Be sure to check out the rest of the presentations from the London Value Investor Conference.

Dan Abrahams Long Ocado: London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Dan Abrahams of Alfreton Capital who pitched long Ocado.


Dan Abrahams London Value Investor Conference Presentation

Alfreton Capital is a European focused value investor that runs concentrated portfolios with long holding periods.

Investment idea: Long Ocado 

Ocado is a popular short with long short funds. It trades on a P/E of over 100x and does not have significant market share at present.

Abrahams likes self-reinforcing virtuous circle business models.  Over the last 30 years supermarkets grew at 22% per year. Ocado can experience the same kind of growth. They already have the leading customer proposition in the British grocery sector. Over 50% of people order their groceries from Ocado using a smart phone. It takes on average about 3 minutes to make the order.  Ocado offers a price guarantee to customers and delivers the shopping directly to their door.

In terms of freshness Ocado has the shortest supply chain. It can get the food from the farm to customer’s house quicker than a supermarket. It offers twice as much choice as the largest supermarket. It does all this with industry leading margins.

Can Ocado’s model be replicated? Abrahams thinks not because the weekly grocery shop consists of on average 50 items that need to be treated in different ways – frozen, chilled and ambient. The packing needs to be done carefully so as not to squash items. Ocado has adopted a unique approach to picking using automation and robotics. The existing supermarkets have to send workers out to pick individual online orders off the shelves. The inefficiency of their approach means that they make a loss on online orders. 

Can Ocado compete against Amazon? Amazon is rolling out Amazon Fresh in the US and will probably do the same in the UK soon. The bricks and mortar supermarkets are likely to lose out to Amazon just as books and electronics retailers already have. Amazon’s entry into the food sector is an opportunity for Ocado. Ocado can sell their technology to Amazon. Morrisson’s are already partnering with Ocado. Alfreton Capital’s research indicates that Ocado have the only solution to online grocery shopping.

Ocado’s CEO and CFO have large shareholdings in the business so are aligned with other shareholders. Grocery is the largest retail category – double the size of everything else. There is plenty of room for Ocado to grow as customers move online.


Be sure to check out the rest of the presentations from the London Value Investor Conference.

Andrew Hollingworth Long Exor: London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Andrew Hollingworth of Holland Advisors who pitched long Exor.


Andrew Hollingworth's London Value Investor Conference Presentation

Franchise investing has beaten deep value handily in recent years. Going forward, the franchise investors’ margin of safety has gone. Powerful compounding franchises will not do as well in the future because they are starting from high valuations.

There is value today in four places:

- Hated sectors like US banks and autos
- Blood in the streets value like Greece, China, and Japan
- Beat the fade franchises like Apple, Sports Direct, and Disney
- The complicated parent like Jardine Strategic and Exor


Investment idea: Exor 

Exor is a family dominated Italian investment holding company which is a major shareholder in Fiat and Cushman and Wakefield. Exor is sometimes seen as an Italian conglomerate run by a playboy son, John Elkann. Elkann has great drive and hunger for success. He is simplifying the company and trying to copy the Berkshire, Markel, Fairfax model. Exor’s takeover of Partner Re last year gives it float to invest. In terms of a sum of the parts valuation based on listed prices Exor trades at a 25% discount. It is currently trading on a PE of 2 or even less.


Be sure to check out the rest of the presentations from the London Value Investor Conference.

David Iben's Presentation at London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is David Iben of Kopernik Global Investors.


David Iben's London Value Investor Conference Presentation

Kopernik is a deep value fund that looks for unconventional ideas to add to a diversified portfolio.  Dave Iben is not keen on discounted cash flow analysis believing that assets have an inherent value whether or not they produce an income stream. He has been finding plenty of value in unloved countries like Russia, Ukraine, and Brazil. His recent purchases include farm land, hydroelectricity franchises, gas companies, electricity transmission companies, and railroads.

It is not a good time to hold cash but it is a beautiful time to buy assets. Franchises are overvalued and now is the time to go back to Graham and Dodd investing. Patience and conviction are the most important traits an investor requires.  He loves emerging markets at the moment but you need to diversify country risk. No investment idea.


Be sure to check out the rest of the presentations from the London Value Investor Conference.

Francois Badelon Long Easyjet: London Value Investor Conference

We're posting notes from the London Value Investor Conference 2016.  Next up is Francois Badelon of Admiral Gestion who pitched long Easyjet.  Badelon filled in for Gary Channon who could not make the event.


Francois Badelon's London Value Investor Conference Presentation

Investment idea: Easyjet

Growth at a value price.  The low cost carriers have had amazing growth.  Growth will continue, maybe at a slower pace.  Easyjet and Ryanair will continue to take share from airlines like Air France.


Be sure to check out the rest of the presentations from the London Value Investor Conference.

Carl Icahn Reveals Allergan Stake

Activist investor Carl Icahn today in a statement revealed he has taken a position in Allergan (AGN).  On his website, he writes:

"We have recently acquired a large position in Allergan and are very supportive of CEO Brent Saunders. We were instrumental in bringing Brent on board as the new CEO of Forest Labs a few years ago and worked cooperatively and constructively with him to help increase value for all Forest shareholders. Less than a year later Forest was acquired by Actavis (which subsequently merged with Allergan) resulting in massive gains for Forest shareholders. While we at that time disposed of our position in Forest, we still have always maintained great respect for Brent. We have every confidence in Brent’s ability to enhance value for all Allergan shareholders."

As our brand new Hedge Fund Wisdom issue detailed last week, AGN is a crowded hedge fund trade.  The company's merger with Pfizer (PFE) was called off after the US government implemented anti-inversion rules.  AGN has now basically become a capital deployment optionality story.

Howard Marks' Latest Memo: Economic Reality

Oaktree Capital's chairman Howard Marks is out with his latest memo entitled Economic Reality.  If you haven't spent time reading any of Marks' stuff before, all you really need to know is that Warren Buffett reads them religiously.

Marks' latest letter touches on the actions of central banks and governments and the underlying effects on economies.

Embedded below is Howard Marks' latest memo: 'Economic Reality'



You can download a .pdf copy here.

To hear more from Oaktree's chairman, head to Howard Marks' talk at Google.

For more recent fund manager letters, head to Third Point's Q1 letter and Greenlight Capital's Q1 letter.

Corvex Management Boosts Signet Jewelers Stake, Files 13D

Keith Meister's activist hedge fund Corvex Management has filed an amended 13D with the SEC on shares of Signet Jewelers (SIG).  Per the filing, Corvex now owns 8.3% of Signet with over 6.52 million shares.

The filing notes that Corvex "commend the Issuer for the announcement in its quarterly earnings call on May 26, 2016 of its commitment to conduct, along with its advisor Goldman Sachs, a strategic evaluation of its credit portfolio.  The Reporting Persons strongly support the Issuer’s review of credit portfolio alternatives, and believes that it is essential that the Issuer complete this review as quickly as reasonably practicable, and thereafter promptly both announce to the shareholders and implement the actions which were determined to create the greatest enhancement to financial and shareholder value."

Corvex also indicates they purchased shares of SIG in April and May with the bulk of the activity coming on May 26th at $98.25 per share.

The firm previously owned 5.93 million Signet shares at the end of the first quarter.

Per Google Finance, Signet Jewelers is "a retailer of jewelry, watches and associated services in the United States, Canada and the United Kingdom. The Company's segments are the Sterling Jewelers division, the UK Jewelry division, the Zale division, which consists of Zale Jewelry and Piercing Pagoda, and the Other segment. The Other segment includes subsidiaries involved in purchasing and conversion of rough diamonds to polished stones. The Company operates retail jewelry stores in various real estate formats, including mall-based, free-standing, strip center and outlet store locations. It operates approximately 3,620 stores and kiosks across approximately five million square feet of retail space. The Sterling Jewelers division operates approximately 1,540 stores. Its stores operate nationally in malls and off-mall locations as Kay Jewelers, and regionally under various mall-based brands. Zale Jewelry consists of brands, including Zales Jewelers and Zales Outlet."