Bernard Horn's Value Investing Congress Presentation

At day two of the Value Investing Congress, Bernard Horn of hedge fund Polaris Capital Management gave the case for a long of in a presentation entitled "Traveling the World to Uncover Value."

Be sure to check out all our notes from the Value Investing Congress.


Bernard Horn (Polaris Capital Management)

Embedded below is his full slideshow presentation:



Long discussion on his investment style- says markets are efficient, sounds like something of a closet indexed, “screen” approach, across markets worldwide. Says instead of the emerging world standard of living converging up to ours, ours will drop to theirs.

Defensive companies in their portfolio:

Nichirei Corp: Japanese frozen food manufacturer and logistics company. In deflationary environment, negative growth, but he still says stock goes from 360Y to 420Y because earnings will climb as they cut costs. “Chicken processing facility in Thailand” not an exciting company, lots of risks.

Methanex Corp: Largest global methanol producer. Chinese are more expensive, provide a floor to pricing. Stock at $20, price target $47. $2B market cap.

Trevi Finanziaria Industriale S.p.A.: Italian foundation equipment company. €450M market cap, stock €7 now, target price €15. Work on foundations of big buildings, such as the WTC. Risk is weak commercial real estate.

Smurfit Kappa: European packaging materials company, got hurt badly this summer, exposed to Europe. Stock price €4 now, price target €9. Lots of debt, €3B, €8.1B EV.

YIT OYJ: Building and industrial services. Construction in Finland.

Ameris Bancorp: South Georgia bank, very weak market. $9 stock, price target $19, expanding with FDIC- assisted deals.


Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.

Whitney Tilson's Value Investing Congress Presentation on Berkshire Hathaway & J.C. Penney

At day two of the Value Investing Congress, Whitney Tilson & Glenn Tongue of hedge fund T2 Partners gave the case for going long Berkshire Hathaway (BRK.A) and J.C. Penney (JCP) in a presentation entitled "Many Ways to Win."

Be sure to check out all our notes from the Value Investing Congress.


Whitney Tilson & Glenn Tongue (T2 Partners)

Embedded below is their full slideshow presentation:




The hedge fund pitched J.C. Penney (JCP) and they have a $71 price target (stock $31 now). “Decent” business. Followed Ackman, but got a lot more interested with new CEO on board. Story well known, same as Bill Ackman’s JCP thesis a few months ago. Persistent question about how the real estate value can be realized.

Other new stocks they have added in size: Goldman Sachs (GS), Citigroup (C), and Sandisk (SNDK). GS, C: Ackman also has these positions. Says trading at discount to book value. Says everyone ignores a fabulous business at C’s “good bank” and only looks at the bad bank portion.

SNDK: they own disk drive makers, says 90% storage on spin platters, the other 10% will be in Flash memory. Memory capacity constrained, explosive demand via tablets, smartphones. NAND has historically been commodity product, but being spec’d into a smartphone is different, enormous operating leverage, SNDK has IP on MLC.

You must overcome your initial knee-jerk reaction that “this is a terrible business.” The industry has changed- consolidated, and demand is exploding. Every iPad, iPhone needs it, yet analysts all expect pricing to fall as technology falls. They think pricing will improve. SNDK is trading so cheap, at a 6x P/E, and it could grow and trade at 20x P/E. Says a massive portion of the margin in iPhones is the incremental NAND. SNDK in the 4S.

As indicated in our September hedge fund performance numbers post, T2 was -9.5% in September and -29.6% for the year at that time.


Don't miss the rest of the hedge fund manager presentations in our notes from the Value Investing Congress.

Value Investing Congress Notes: Day 1

Today we're posting notes from the Value Investing Congress in New York where tons of prominent hedge fund managers are giving their latest investment ideas.

This post serves as an index and you can click each individual manager's name below for notes on their presentation.


David Einhorn (Greenlight Capital): short Green Mountain Coffee Roasters (GMCR)

Ricky Sandler (Eminence Capital): long CME Group (CME)

Joel Greenblatt Gotham Capital: The big secret for value investors

Guy Gottfried (Rational Investment Group): long Canadian company The Brick (TSE:BRK)

Jim Chanos (Kynikos Associates): Beware the global value-trap

Vladimir Jelisavcic (Longacre Fund): DryShips (DRYS) Convertible Bonds

Timothy Hartch (Brown Brothers Harriman): Dentsply (XRAY) & Energy Solutions (ES)

Alexander Roepers (Atlantic Investment Management): Anticipating more M&A



***UPDATE***: We just posted our Day 2 notes from the Value Investing Congress which features presentations from Bill Ackman, Leon Cooperman and many more hedgies.


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Alexander Roepers: Expects Increased M&A (Value Investing Congress Presentation)

At the Value Investing Congress today, Alexander Roepers of Atlantic Investment Management made the case for longs of Energizer Holdings (ENR), Ashland (ASH), Flowserve (FLS), MTU Aero Engines (MTX.GY), and Atos (ATO.FP) in a presentation entitled "Conducive Environment for Corporate Action, Activism & Takeovers".

Be sure to check out all of our notes from the Value Investing Congress.


Alexander Roepers (Atlantic Investment Management)

Embedded below is Roepers' full slideshow presentation:



His outlook is very positive for both stocks and especially takeovers/mergers.

1. Valuations attractive due to worst crash in 70 years. Record high equity risk premium

2. Balance sheets of corporations are strong

3. There are large cash pools for LBO out there

4. Low interest rates

5. Moderate organic growth in developed markets, so room for M&A

6. Cross border M&A activity heating up

7. If fear index falls below 25 (32 today) for 2-3 months, we will see increased M&A activity


What they look for: $1-10B, big enough to move the needle, small enough to get the deal done. Strategic franchises with high barriers to entry, <8x forward EBIT preferred, strong balance sheets, predictable & recurring cash flows, low insider ownership (<10% owned by management/family), noticeable activity in sector.


Investment Ideas:

Energizer Holdings (ENR): Batteries and personal care (razors). “A small Proctor and Gamble” good number two. Target is $102 in 12-18 months, based on 11x FY12E EBIT.

Ashland (ASH): Special chemical company. Trades at 5x EBIT, 7x P/E on FY2012 estimates. Target is $105 in 12-18 months at 10x EBIT.

Flowserve (FLS): Flow control products, pumps, valves, seals for pipeline and nuclear power industries. Trades at 5.7x EBIT on 2012 estimates, target is $135 in 12-18 months on 11x 2012E EBIT. Competitor just bought for 12x EBIT.

MTU Aero Engines (MTX.GY): German company. Military and commercial engines. Same thing, price target depends on multiple going from 7.8x EBIT to 11x EBIT

Atos (ATO.FP): French version of Accenture. IT and high tech consulting.



About Alexander Roepers: Manages $1.4 billion (part of which is long only). Has seen 19% compounded returns.


You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Timothy Hartch: Long Dentsply & Energy Solutions (Value Investing Congress)

At the Value Investing Congress today, Timothy Hartch of Brown Brothers Harriman gave the case for longs of Dentsply (XRAY) and Energy Solutions (ES) in a presentation entitled "Quality and Value".

Be sure to check out all of our notes from the Value Investing Congress.


Timothy Hartch (Brown Brothers Harriman)

Embedded below is his full slideshow presentation:



Dentsply (XRAY): Number one company in the dental industry, trades at a discount to “intrinsic value.” Sells consumables to dentists, equipment to labs, and orthodontists. Very attractive industry. Aging population, rising standard of care in emerging markets, private pay in the US.

Big secular story is instead of pulling teeth in emerging markets, they are saving teeth. Dental is private insurance, or out of pocket, so supply and demand determine prices. Over time, there have been 1-2% price increases on top of volume growth. Very fragmented supply market, XRAY has number one, but fewer than 10% market share, can keep making tuck-in acquisitions. Customers are very fragmented, 2-3 person dental offices- no buying power.

Competitive advantage: scale, dominant brands, 2800 person sales force, customer relationships.

Key risks: macro economic weakness, large presence in Europe, integration of Astra Tech acquisition, still recovering from disruption of Japanese supplier.

Revenue declined 2% in 2009. Average rate is 6-7% growth rate over last 20 years. Stock flat over last 5 years, down from 40 to 32 recently on Europe fears.

Valuation: Currently trades at $32, has a $44 target price, 13x 2012 FCF. He says multiple doesn’t look that low, but for this high quality, steady business, this is a good price.



Energy Solutions (ES): Stock has been in total collapse since LBO IPO’d the company. Number one nuclear waste disposal company in the US. Disposal city an hour outside of Salt Lake City. Near-monopoly for disposal of commercial nuclear waste in the US, 95% of it goes through this site in Utah. It has a 30-year remaining life for the current facility.

May have contracts in Japan for their clean up. They have life-of-plant contracts with 84 of 104 reactors in the US. Other 20 they do business. Doing the dismantling of the Zion plant owned by Exelon. There are 12 waiting to be dealt with, and several plants are closing over the next few years.

Obvious risks: political risk, waste risk. Leverage, but generating 40M in cash flow to pay down debt.

Potential Upside: additional contracts with the other 20. Acceleration in large component removals. International opportunities.

Stock trades at $3, they say value $8+ with low single digit revenue growth, modest de-levering.


Q&A Session:

1. How does XRAY create value? Answer: further small acquisitions they can roll up, and stock buybacks

2. How do they measure/predict intrinsic value? used EBAY as an example, they like it, own it now, say intrinsic value over 40. Steady business is easier for them to value.

3. Why XRAY vs. Henry Schein? XRAY is leading manufacturer, not only distributor. Likes the Henry Schein as well.

4. ES public at $23, now $3, how does it get back to $8? Answer- it was promoted as a growth story and the volumes declined instead of growing. Nuclear industry is under a cloud, but this is actually an opportunity for them.


About Timothy Hartch: He manages the fund that won Lipper 2008 large cap fund of the year in 2008.


You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Vladimir Jelisavcic on DryShips Convertible Bonds: Value Investing Congress Presentation

At the Value Investing Congress today, Vladimir Jelisavcic of hedge fund Longacre Fund Management gave a presentation entitled "DryShips Convertible Bonds: Dislocation & Deep Value Opportunity".

Be sure to check out all of our notes from the Value Investing Congress.


Vladimir Jelisavcic (Longacre Fund): DryShips (DRYS) Convertible Bonds

Embedded below is his full slideshow presentation:



He gave a presentation on the distressed debt of DryShips (DRYS), saying that the company's drillships are valuable unique vessels and that capital expenditure in deepwater drilling continues to grow.

Dryships: originally a dry bulk vessel company, owns 46 dry bulk ships, 12 tankers, and 9 ultra deep-water rigs (not all completed). The rigs are the driver of the business, as dry bulk shipping business declines. Tight market for the newest ultra-deep drill ships. Booked for next 2 years.

Key point of thesis is demand is high and supply tight for these rigs, and DRYS owns several. Says day rates are expected to rise, which has led some owners to hold off their supply to wait for better deals. $15/share price x 130M is $2B mkt cap, gets to $5B EV. So about $637M value per drilling units, a discount to recent $800M-1B per unit private market value based on recent transactions.

Convertibles also attractive, he didn’t put too much time into the numbers. Showed the converts chart- collapsing. He figures they have 166% asset coverage. He believes that DRYS 5% convertibles are a good investment.

The dry bulk shipping sector has been beatdown lately, but Jelisavcic argues there's fundamental value there. He also pointed out that DRYS owns 75% of Ocean Rig (ORIG). ORIG has a market capitalization of $2 billion and DRYS has a market cap of $1 billion.


Q&A Session:

What happened to corporate bond market? He says hedge funds own 15% of the securities, compared to only 3% of stocks, and they sell out very quickly.


About Vladimir Jelisavcic: He co-founded Longacre Fund Management in 1998 with John Brecker and Steven Weissman. They were previously members of the high-yield group at Bear Stearns. It's worth noting that Longacre recently announced they'd be winding down some of their funds by the end of the year, though they will still manage certain products.


You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Jim Chanos: Beware the Global Value-Trap (Presentation From Value Investing Congress)

At the Value Investing Congress today, Jim Chanos of hedge fund Kynikos Associates talked about various companies to short in a presentation entitled "Beware the Global Value-Trap!"

Be sure to check out all of our notes from the Value Investing Congress.


Jim Chanos (Kynikos Associates): Short Exxon Mobil (XOM), GameStop (GME) & ITT Educational (ESI)

Embedded below is his full slideshow presentation:



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Chanos' entire presentation focused on “how value investors can avoid value traps.” He went from basics things to watch for, to his current specific short themes.


Value Stock Traits: Predictable, consistent cash flows, defensible business, don’t need superior management, low/reasonable valuation, margin of safety, reliable transparent financial statements, “analyzable.”


Classic Short Selling Themes

1. Booms that go bust, debt-driven asset inflation; real estate in US, telecom overbuild, far east real estate now. Cyclical: Sometimes cycles become secular. Autos, airlines. Overly dependent on one product. Coleco, renewable energy. Illegal does not equal value. Be careful- they often look deceptively cheap. Online Poker.

2. Consumer fads

3. Technological obsolescence: Probably killed more value investors in last 20 years than any other. Examples: Minicomputers, Eastman Kodak, Video Rental. The cash flows drop off faster than you think they do. At some point, cash flows hit a tipping point, and drop precipitously.

4. Structurally flawed accounting: Free cash flow/Run by accountants. Tyco example. Be “Triply careful” whenever management pulls out some metric that they define- such as cash flow. Be careful when they keep pointing to a metric they like. Accounting issues. Confusing disclosure. BFT. Nonsensical GAAP. Sub prime lenders example.

5. Selling $1.00 for $2.00

6. Rapid Prior Growth: “Law of large numbers” Telecom build out example. When tech shift occurs, old metrics that value investors use are totally irrelevant.

7. Value Traps



Other Traits of Value Traps

Marquis management. New CEO as a savior- it is often the business that exits with its reputation intact. Conseco example. Keep doing your work. Look at their incentive- often they win no matter what.

Famous investors: In every great stock market disaster or fraud, there is always one or two great investors invested in the thing all the way down. Enron, dot-com, banks, always "smart guys" involved all the way down. Don’t let your work stop because a smart guy is in the stock. It always happens, even the best make mistakes.

Appears cheap only using management’s metric. EBITDA example. Almost every major business needs depreciation, capital deprecation, if you don’t consider this, you are cheating yourself. Cable TV example. Stocks have done nothing for years because they always quote EBITDA only, in a capital-intensive business.

Ignore restructuring charges at your own peril. Eastman Kodak. Those charges were actual charges, and they never fixed the revenue line. Yet investors used management metrics and ignored the real situation.

Growth by acquisition. Tyco, roll-ups. Be very careful. Earlier today David Einhorn said to short Green Mountain Coffee Roasters (GMCR) and pointed out that the company has largely grown through acquisition.

Buying low growth low P/E businesses with expensive high P/E stock should be a huge red flag. Be careful when you see big write-downs because management is claiming to be conservative, they are banking some earnings. Rely on a “supranational put”- government will bail me out.



Current Value Traps

Liquidating Trusts: Integrated oil companies. Cost structure grown dramatically; finding and development up from $5/bbl to $22/bbl. Production $5/bbl to $15/bbl. Cost of marginal barrel of oil is up and rising, $37 all-in now, where oil bottomed out in 2008/9. Gas has opposite problem. Monster acquisition in gas area. Exxon Mobil (XOM): FCF dropping off, not even enough to cover its cash needs. Also applies to other national oil companies, look even worse.

Digital Distribution Destruction: video games. Will follow music and movies, to digital distribution. Gamestop (GME): Looks cheap, has lots of stores, in a terrible business. Will appear cheap all the way down. As bandwidth and wireless speed increases, the value of their brick and mortar will collapse, just as it has with movies and music. Also other video rental. (Coinstar (CSTR) perhaps? Didn’t say the name.)

"Mis-education" For-Profit Colleges: Now they look cheap as value investors pile into them, says gainful employment didn’t have teeth. “Can’t think of a more predatory business in the US right now.” Congressional support is waning. 90% of the loans are federal loans, and default rates are skyrocketing, was 20% in 2009, now heading toward 30%. Serious line item in the federal budget now. ITT Educational (ESI): Have an off-balance sheet entity. Cohort default rate 22.4% and rising, one of the most expensive tuition of the colleges. Bulls say Republicans will give them cover, but now Republicans have started to walk away- General Petraues' daughter has been investigating the abuse of soldiers.

Nationalistic Commodity: Be careful- they are down a lot and appear cheap, especially Iron Ore, down from $200 to $150-160. Problem is it was $30 forever. Commodities look cheap, but not if you look at longer-term charts. Leveraged to Chinese growth. Vale (VALE): Looks cheap, but in Brazil, which isn’t your friend as a shareholder. VALE is building its own Navy, which they don’t expect to have a positive rate of return.

China Bubble: Chinese State Banks. Underground lending is a significant risk. CDSs went from 30 bp to 200 bp in the summer. PRC sovereign fund said they would be buying stock in these banks. They are instruments of state policy; they are not there to maximize shareholder wealth. They are cheap, but there are many lurking time bombs. They were recapitalized twice in last 12 years even during strong economy in PRC. The refrain in China is “yes there is a lot of silly stuff going on, but the government won’t let anything happen.” Agricultural Bank of China (HKEX.1288): Cheap, but half the capital is bogus. Chinese banks are very levered. PRC this year will expand credit outstanding by 35% of GDP; it was 25-30% each year for 4 years, 100% of GDP. “The only westerners in history that ever got a dollar out of China were the Opium dealers, and they had the British Royal Navy behind them.”



Q&A Session:

1. Commodity boom not supported by China, what about India? Chanos says India is self-sufficient in Iron Ore, and China demand is 50-80% of many of the commodities.

2. China: real estate sales volume was down 40-50% in golden month. Prices haven't fallen, but transactions always dry up first. High-speed rail crash was a psychological hit- even if only 5% of GDP, it was a source of pride for China. Corners being cut, this crash highlighted to the public that there was a cost to the “growth at all costs” mentality in China.

3. When asked about Japanese bonds, Chanos added some humor to his talk by saying, "we only want to piss off one Asian country at a time."



About Jim Chanos: He manages the short-selling focused hedge fund Kynikos Associates. We've covered how Chanos thinks China is a bubble and that he is also targeting alternative energy, shorting Vestas and First Solar.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Guy Gottfried's Long The Brick Presentation from Value Investing Congress

At the Value Investing Congress today, Guy Gottfried of Rational Investment Group talked about his long position in The Brick (TSE:BRK) in a presentation entitled "Prospecting for Value in the Great White North".

Be sure to check out all of our notes from the Value Investing Congress.


Guy Gottfried (Rational Investment Group): Long The Brick (TSE:BRK)

Embedded below is his full slideshow presentation:



Gottfried started by talking about Canada's general economic situation: 11 years of budget surpluses price to recession, lowest debt-to-GDP and fastest growth in G7, world’s strongest banking system for 4 straight years, no bank required bailout during financial crisis. Less sophisticated stock market than US, value investing not practiced, investors obsessed with resource stocks, yet miners are actually only 1/3 of the stocks on the TSX.

His long idea was The Brick (TSE:BRK) and Brick Warrants (BRK.WT). It's a specialty retailer of furniture, appliances, mattresses, etc. $2.45 price, 140m shares. It has 3 segments: corporate retail. 177 stores in Canada, financial services: extended warranties sold at stores, credit insurance on proprietary credit card, $22m FCF franchising: 58 stores, franchise fee and ongoing royalty of 2.5% of sales, $4m FCF (smallest, but fastest growing segment).

It trades at 6.2x FCF, market valuing core retail chain at below zero. Strong balance sheet, good business, insiders buying shares on open market. Mismanagement and financial distress in the past, paid too much of cash flow in dividends, and was in distress when recapitalized in 2009. Issued 12% debentures, and 100M warrants, now has $100M in cash, has turnaround specialist CEO. Operations have recovered, but stock has not.

Why so cheap? Investors burned by near-death experience, illiquid due to heavy insider ownership, no institutional following.

Very recognized brand in Canada, economies of scale in furniture and appliances. Financial services is durable business, even in 2009 sales held up. Good lead shareholder- Prem Watsa of Fairfax, the “Warren Buffett of Canada”. Bill Gregson CEO has a history of successful retail turnarounds- focus on costs, not growth. Cut its shares outstanding by 20% through “cashless exercise offer” for warrants. 13 senior execs and directors have bought shares on open market. Company now has $100M in cash, will end year with no net debt; overcapitalized, could buy back 20% of its shares, even with $50M still in the bank, boosts FCF by 27%. Valuation: 6.2x P/FCF. With operational improvements and repurchases, you get company at 4.2x P/FCF.


Q&A Session:

1. Why is it a good business? He says they've improved logistics

2. Aren't Toronto and Vancouver housing markets still very strong? Answer is even if business slows down, you're getting the retail business for free anyways.

3. T2 Partners' Whitney Tilson pressed him on the housing bubble in Canada - Gottfried admitted that real estate is overvalued, but it doesn't pose the same risk as the US did, due to less crazy mortgages.


About Guy Gottfried: He founded Rational Investment Group and focuses on a risk-averse, research-intensive strategy. He is a value manager and prior to founding his firm was an analyst at Bruce Berkowitz's Fairholme Capital.


You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Joel Greenblatt: The Big Secret For Value Investors (Presentation From Value Investing Congress)

At the Value Investing Congress today, Joel Greenblatt of hedge fund Gotham Capital gave a presentation entitled "The Big Secret For Value Investors".

Be sure to check out all of our notes from the Value Investing Congress.


Joel Greenblatt (Gotham Capital): Value Investing

He started out with a review of the concepts in his book, The Little Book That Still Beats the Market. He says you want stocks that are “cheap and good” and used the Compustat database to rank them by the two measures. Cheap: EBIT/EV. Good: EBIT/ (Net WC + Net fixed assets) (return on tangible capital).

Updated results through 2009: Decile 1: +15.2%, bottom decile: -0.2%. For 20 years ending 12/31/10: SPX annualized 9.1%, 11.8% on equal weight, “Value 1000” value-weighted index is 16.1%. Same Beta as SPX, same std dev. 1.01 Beta vs. 0.99 SPX.

Now, the current situation, and the meat of the presentation: A week ago, the Russell 1000 had average FCF of 9.2% (in the 94th percentile toward cheap!) Looking backwards, cheaper than 94% of periods over the last 20 years and that correlates with a 15-20% return over next one year (market up 5% over week since slide finished) "on only 10-15% left, but still pretty nice."

Average FCF of Value 1000 a week ago was 13.7% and was cheaper than 93% of the last 20 years, which correlates with a year forward return of 30-35% for value index. Greenblatt said that "Not only is the market cheap, but the value stocks are even cheaper."

Large cap long/short portfolio is in the 82% percentile- very big spread between long and short opportunity. ROIC long 59.4%, shorts 4.8%. Arguments against stocks being cheap (playing devils advocate): one argument is that we are at peak operating margins, but he showed a graph that indicated it is unclear what the real mean operating margins should be. The second argument is return on tangible capital continues to climb. In addition, outsourcing of factories, moving to a service economy, so tangible capital may not be the right way to look at it, and again it's unclear where the mean level is. He also showed a graph of tangible capital per dollar in sales is declining to 35 cents from 50 cents, 20 years ago.

Some of companies currently in the value 1000: Gamestop (GME), Aeropostale (ARO) ~ (Revolting companies, you’d never want to buy, he joked), Hewlett Packard (HPQ) ~ terrible, but selling at 5x eps, Dell (DELL), Microsoft (MSFT), General Dynamics (GD), Wells Fargo (WFC), and Merck (MRK). For every name, he mentioned why they are terrible, only half-joking. Part of the reason this works is “it’s really hard to buy these companies.”

He says that the current fixation on short-term returns causes managers to avoid buying cheap companies, because they need the ones that are doing well right now. Buying these stocks with very low expectations gives you a chance for asymmetric returns on the upside if they do even a little bit better than expected. He expects this “time arbitrage” will continue to be exploitable. He is very optimistic for the next year.


Q&A Session:

1. Role of dividends? He's indifferent in his strategy.

2. How does he incorporate financials now, he used to exclude them? He now ranks the financials separately, and adds to index if they are cheap, but he didn’t give what metrics he used.

3. Question about Michael Burry. (Background: In “The Big Short”, writer Michael Lewis made Greenblatt out for a villain for taking money from Burry even as Burry was right.) Greenblatt was a little annoyed by the question: “Michael Lewis has never let the facts get in a way of a good story. What they got wrong in the book is Burry wanted to side pocket both mortgage and corporate CDS... we did not want him to side pocket the liquid corporate CDSs … only reason we took money from him was we were getting redemptions.”

4. Where does he see the market now? He’s not a market timer, but he would argue for raising exposure to stocks now if asked.

5. Can you use the value screen and really juice returns by using further fundamental analysis? Answer: we were small, had 6-8 concentrated names, that’s why we made 40% returns - it’s impossible on large amounts of money or a very diversified portfolio. This solution is good for a very diversified portfolio, same beta as the market and beats the SPX. We’ve tried, but haven’t been able to beat the indexed approach. “We’re pretty good at picking stocks, so it’s hard to do.”

6. Large cap stocks are pretty cheap, this is an interesting time- HPQ at 5 times earnings. Bond bubble, even bigger than the stock bubble- which is crazy. Still plenty of opportunity in special situations for smaller funds.


About Joel Greenblatt: He manages Gotham Capital and saw 40% annualized returns for 20 years. He's the author of the new book The Big Secret for the Small Investor: A New Route to Long-Term Investment Success. And for aspiring investors, numerous prominent hedge fund managers such as Seth Klarman have recommended Greenblatt's other book: You Can Be a Stock Market Genius.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Ricky Sandler's Long CME Group (CME) Presentation from the Value Investing Congress

At the Value Investing Congress today, Ricky Sandler of hedge fund Eminence Capital talked about his long position in CME Group (CME) in a presentation entitled "Go Big; Go High: The Opportunity in Large Cap Quality Equities".

Be sure to check out all of our notes from the Value Investing Congress.


Ricky Sandler (Eminence Capital): Long CME Group (CME)

Embedded below is Sandler's full slideshow presentation:



Sandler's firm manages $2.9b and are bottom-up stockpickers, long and short. They average 120% long, 70% short and always run net long. They lever longs and use shorts to help ride out volatility. Currently, Eminence is 131% long and 65% short and he thinks stocks are cheap now as he has more than average exposure.

They avoid low quality businesses regardless of price. Shorts: structural or secular challenges to business or industry, obsolescence. They avoid high quality businesses/valuation-only shorts.

Opportunity in large caps today: underperformed Russell by 6.6% per year over last 10 years. Biggest companies are now trading at 11.5x P/E vs. 14x historic. Bulls say cheap, and VERY cheap vs. interest rates. Bears say stocks aren’t that cheap if you cut future earnings estimates.

Timing? “We started 2 months ago, we’re there, and this move up is just the beginning.” Earnings will slow, dividends increasing in importance. Right now there is no premium for “quality” stocks - trading at 11.3x P/E vs. his “junk stocks” trading at 14.3x (not sure how he defines “junk stocks.”) The good stocks only outperform 54.1% of the months, but 500 bp per year.

Specific stock idea: long CME group (CME): Derivatives and futures exchanges company. Natural monopoly. 60% operating margins, ROC over 100%, 15%. Revenue growing 18% CAGR over last 10 years. One risk is regulators could change the rules of the game; this actually works in their favor, as they want more over the counter trading to go onto the exchanges. Many new products, such as weekly options, emerging markets currency like RMB. They benefit from fears about counterparty risks. $22 EPS in 2012, 14% CAGR over last 5 years, no net gain in stock price. Trades at 11x 2012 EPS.

In addition to Eminence, some of CME's top holders are John Griffin's hedge fund Blue Ridge Capital as well as Paul Ruddock & Steven Heinz's Lansdowne Partners.



About Ricky Sandler: He manages the $3 billion hedge fund Eminence Capital. Prior to founding Eminence he co-managed Fusion Partners. He employs a 'quality value' approach to investing and has typically been 120% long and 70% short but they've ramped up exposure lately because they believe the market is cheap (131% long, 65% short).

In our September hedge fund performance numbers post, we highlighted that Eminence was -2.7% in September and -8.77% for the year at that time.


You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

David Einhorn Short Green Mountain Coffee Roasters (GMCR): Value Investing Congress Presentation

At the Value Investing Congress in New York today, David Einhorn of hedge fund Greenlight Capital revealed he is short Green Mountain Coffee Roasters (GMCR) in a presentation called "GAAP-uccino".

Be sure to check out our notes from the Value Investing Congress.


David Einhorn (Greenlight Capital): Short GMCR

Einhorn famously gave a presentation on shorting Lehman Brothers a few years ago and shorting St. Joe (JOE) last year at the same conference. This year he's back with a short of GMCR. Whitney Tilson of T2 Partners has been short GMCR for a while as well.

Embedded below is his full slideshow presentation:



Einhorn began with company background and the well-known bull case. Green Mountain Coffee is a K-cup company with a razor-razor blade model; 95% of business is at-home use.


Bull case: 64 million households drink coffee, 1/3 buy K-cup machines, 2 cups per day, 15.5B k-cups, 0.15 profit per cup, get $1.4B profit, on 160M shares is $8 eps. Recognized brands like Starbucks, Dunkin Donuts will grow installed base, and bring higher margins. Management calls itself the “iPod of coffee.” Great income statement growth in last few years, aided by acquisitions. And the stock has done very well: 57x P/E, 35.6x next year estimated eps. Up 185% this year, best stock in SPX 1500.

Einhorn then moved onto criticizing the company: Poor transparency. Doesn’t even report lbs shipped, k-cup units, or precise Keurig brewers units. GMCR has cut their amount disclosure over time, which is what companies usually do when metrics are deteriorating.


Bear case: The opportunity is smaller than bulls believe. Attachment rate is smaller than bulls believe and is declining. They already have widespread distribution and brand awareness. Machines are expensive, $250 vs. $80 Mr. Coffee, or cheap $20 brewers. K-cups are much more expensive compared to buying the bags of coffee yourself, 60 cents per serving vs. as cheap as 5 cent per serving. This limits the actual available market to about 20M households, not 64M. Growth in retailers selling Keurig is slowing.

Attachment rate is declining or flat, only about 1.3 per brewer per day. GMCR doesn't disclose the attach rate!

Starbucks deal: non-exclusive and multi-year, in stores and at SBUX. Deal does not apply to next generation brewer - SBUX keeping its options open? About $0.22 estimated profit per K-cup. How will they split it? Using Smucker’s deal, can estimate that GMCR only got .06 of .17 total profit, to make the k-cups. Therefore, SBUX should get 2/3 of the 22 cents, leaving GMCR only 7 cents. In fact, SBUX deal could cannibalize their other K-cup sales.

GMCR hasn't generated much FCF. In fact, it's been negative for 4 years. Due to acquisitions and CAPEX, they are burning cash and expect to continue. ROIC only 16.3%, yet high multiple, doesn’t justify current stock price.

Competition/Patents: Bulls say patent expiration unimportant due to large market share. However, patents that keep others from making k-cups for the existing brewers may be expiring in 2012. Competitors will be able to produce k-cups!

GMCR has been buying out licensees and paying too much. Usually allocates 95-104% of the purchase prices to good will when buying them. Goal may have been to avoid competing with licensees when patents expire. Big deals with SBUX, Dunkin are to mitigate competition when patents expire. Only advantage they have is contract manufacturing, which is a lousy business. GMCR may instead create a totally new system to stop others.


Bear Case Summary: GMCR will no longer have monopoly on making the K-cups next September. Others will gear up to enter the market with much cheaper alternatives- they already have the equipment to do it (Crystal Lite maker example). There is lots of branded competition: Kraft, Nestle, and Maxwell House.

Bear case, vs. the bulls $9 eps estimate. Cut attach rate to 1.25 K-cups per brewer, add 20% private label penetration, cut profit per cut to 0.12 from 0.15, gets you $3.50 eps, not $9.00.


CAPEX: Spending a lot on CAPEX that is “unexplained.” As much as $186M in 2011- where is this money going? Next year it looks even worse, $431M in unexplained CAPEX based on their guidance. CAPEX growing faster than the business, when the opposite should be happening.

Recent summer quarter revenue was $717M, 100M higher than Street, all upside on K-cup sales. Historically, they’ve been very predictable. What happened? Implies attach rate soared by 11%, no good answers on the conference call.


SEC inquiry: Revenue recognition practices. Internal investigation exonerated the company. “We believe there may be a material issue.” Something fishy with MBlock, the third-party fulfillment company that handles their distribution and inventory. 51% of accounts receivable were to them. Einhorn’s people have interviewed witnesses who spoke of phony transactions that had revenue recognition issues. Former workers may have been fired for asking too many questions! The company uses excel instead of stronger ERP software; open to abuse and mistakes. Keurig was shipping stuff to themselves according to an interview. Believes this may explain the excess K-cups sold in the quarter. Significant problems with expired coffee. His interviews with ex-employees showed astounding levels of inventory discrepancies- shipping to themselves, expiring coffee, sales that never happened.

He says there's been a lot of surprises with recent accounting and he accused management of "shenanigans" (SuperTrooper anyone?) After his presentation, GMCR stock was down as much as 12%.


Conclusion: Market is smaller and more penetrated than bulls believe. Attachment rates matter and they are falling. $3.50 eps is more likely than $9.00. The patent expiration is a real problem. The March quarter was such a surprise that it was suspicious, especially in light of conversations with workers. GMCR did a big stock deal, where insiders sold, right after the 19% jump in the stock after the quarter. The accounting is aggressive, transparency is limited, and controls seem to have material weaknesses. GMCR is a serial issuer of stock for acquisitions, while insiders have sold in droves. Limited FCF, large number of warning flags here.

It should be noted that GMCR has largely been labeled a "momentum stock" and some of the top holders include hedge funds like Philippe Laffont's Coatue Management, Steve Cohen's SAC Capital, and John Thaler's JAT Capital.


Q&A Session:

1. MBlock owners or relationship? Unclear.

2. NPD data shows evidence of good growth - how do you reconcile this with what you find? "No doubt they are selling a lot of coffee. We have seen an increase in expired or nearly expired coffee."

3. Will the SEC do anything here? They've been here for a year, there is some hope.

4. Vodafone? Says the thesis is playing itself out.

5. Sprint, any change in outlook? They're trying to do a lot of things at once. Still like the stock, despite high amount of debt, company still has access to funding without diluting shareholders. Strategic asset to a number of large players. What they are doing now makes a lot of sense, if we are sufficiently patient, if anything goes right, we have a chance at an asymmetrical return.

6. Japanese bonds, surprised they've rallied? Yes, but Japan is in a tough spot due to so much debt and budget deficit, bad demographics (Kyle Bass of Hayman Advisors has been short Japanese JGBs).



In our September hedge fund performance numbers post, we highlighted that Greenlight was -0.76% in September and -6.16% for the year at that time.


About David Einhorn: He manages the $7 billion hedge fund Greenlight Capital. He is the author of Fooling Some of the People All of the Time which is a great read. We've also posted up David Einhorn's recommended reading list for all aspiring fund managers.

Earlier this year we also posted up Einhorn's presentation on Microsoft (MSFT).



You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Larry Robbins' Glenview Capital Adds to Lincare Holdings (LNCR) Stake

Larry Robbins' hedge fund Glenview Capital filed a 13G with the SEC regarding its position in Lincare Holdings (LNCR). As of October 11th, Glenview owns 6.14% of LNCR with 5,731,403 shares.

This marks an increase of 85% in their position size since the close of the second quarter. Glenview crossed the 5% regulatory threshold in Lincare shares on September 29th and continued buying up to a 6.14% stake.

Glenview was already one of the largest owners of LNCR shares and now they move into the top-5 stakeholders. For other portfolio activity from Robbins' fund, we also detailed Glenview's thesis on Clearwire (CLWR).

Taken from Google Finance, Lincare Holdings is "a provider of oxygen and other respiratory therapy services to patients in the home. Its customers suffer from chronic obstructive pulmonary disease (COPD), such as emphysema, chronic bronchitis or asthma, and require supplemental oxygen or other respiratory therapy services. Lincare also provides a variety of durable medical equipment (DME) and home infusion therapies in certain geographic markets."

Berkowitz's Fairholme Cuts Regions Financial Position in Half

Bruce Berkowitz's Fairholme Capital filed an amended 13G with the SEC regarding shares of Regions Financial (RF) and disclosed they now have a 4.8% ownership stake in RF with 60,568,917 shares.

The SEC filing was made due to activity on September 30th and marks a 51% reduction in Berkowitz's position. The last time we covered Berkowitz was at the Harbor Investment Conference where he said there was black box risk to owning banks but that after three years you can get an idea of who's going to do well.

Fairholme also owns stakes in other financials like AIG (AIG), Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), and CIT Group (CIT). In our Hedge Fund Wisdom premium newsletter, we outlined the investment thesis on AIG as Berkowitz has pressed his bet there and it is by far his largest position at over 20% of his portfolio.

Per Google Finance, Regions Financial is "a financial holding company. The Company operates throughout the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of investment banking, asset management, trust, mutual funds, securities brokerage, insurance and other specialty financing."

Steve Mandel's Lone Pine Buys More Esprit Holdings

Steve Mandel's hedge fund Lone Pine Capital recently raised its stake in Esprit Holdings (HK:0330) listed in Hong Kong. The hedge fund is now the second largest shareholder at 6.23% of Esprit Holdings. This is up from a 3.22% stake previously.

Lone Pine Capital purchased almost 39 million shares at around HK $9.50 on October 4th according to Hong Kong regulatory disclosures. Over the past month, shares of Esprit are down 45% as the company saw revenue from Europe decline again due to the debt crisis there.

In other activity from this hedge fund, last week we covered how Lone Pine added to its Oceaneering position as well as their new position in Williams Sonoma.

Per Google Finance, Esprit is "principally engaged in wholesale and retail distribution, and licensing of fashion and life-style products designed under its own Esprit brand name. The Company operates with 12 established product lines offering women’s wear, men’s wear, kid’s wear, edc youth, as well as shoes and accessories in over 800 directly managed retail stores and over 14,000 controlled-space wholesale point-of-sales internationally."

Steve Cohen's SAC Capital Buys More Forest Oil (FST) on Dividend Play

Steven Cohen's hedge fund firm SAC Capital just now filed a 13G with the SEC regarding shares of Forest Oil (FST).

As of October 10th, SAC owns 4.8% of Forest Oil with 5,457,851 shares. This marks an increase of 50% in their common stock position size since the end of the second quarter (though it should be pointed out that SAC also owned FST call options at the end of Q2).

Since then, SAC Capital has bought 1,829,850 additional shares of FST. However, in the footnotes of the SEC filing, it notes that SAC owned more than 5% of FST on September 30th. Yet over the past 10 days, their ownership stake has decreased down to 4.8%.

Forest Oil Special Dividend

The September 30th date is important here because Forest Oil executed a special dividend of 70 million shares of Lone Pine Resources (LPR) that are owned by Forest. That distribution was made to FST investors on September 30th and shareholders on record as of September 16th received 0.612 of a share of Lone Pine common stock for every share of FST owned.

In early September we covered how Jeffrey Altman's hedge fund Owl Creek started a Forest Oil stake, presumably playing this dividend catalyst just like SAC. So while these major hedge funds held a sizable position before the special dividend, it will be interesting to see if they will still hold a position going forward.

Per Google Finance, Forest Oil is "an independent oil and gas company engaged in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in North America."

Hedge Fund Manager Jonathan Ruffer Concerned About Inflation

UK hedge fund manager Jonathan Ruffer's third quarter letter highlights the UK economic and investment environment and outlines his concern regarding the potential for high inflation.

Ruffer LLP manages £12 billion and has seen annual returns of around 11.5%. Ruffer's well known for warning investors of the credit crisis as early as 2006. When markets tanked in 2008, Ruffer returned positive double digits. His next concern is inflation.

Ruffer writes, "Interest rates are welded to a near-zero rate. The central banks simply cannot put interest rates up, almost whatever happens to inflation. It is a gaping hole above the waterline, which could sink the ship if rates are raised to combat inflation. It leaves us all defenceless."

While the manager says inflation isn't violent yet, there are many catalysts that could make it so. He cautions that high inflation, low interest rate environments are horrible for savers. So how do you combat it?

Ruffer writes, "Inflation-linked government bonds (of surviving nations) are designed for exactly this economic climate. It is not a high inflation rate which makes them thrive – it is the differential between inflation and interest rates. They have the capacity to become enormously valuable – like Titanic lifeboats – in a world where the ordinary saver despairs of keeping his nest egg safe. We have a great deal of your assets in them because we are approaching what I’ve described before as an airless valley which we have to pass through."

It seems the hedge fund manager is advocating indexed linked Gilts in the UK - the equivalent of TIPS in the US. This is one of the recommendations for the best investments during inflation.

Embedded below is Ruffer's letter (email readers click the link to come read it):




We've also highlighted how hedge fund Kleinheinz Capital says inflation is the biggest threat to emerging markets.

Hedge Fund Lansdowne Partners Increase Prudential Plc Short

Paul Ruddock and Steven Heinz's UK-based equity long/short hedge fund Lansdowne Partners has increased its short position in London listed financial services group Prudential plc (LON: PRU).

According to a filing made on October 6th, Lansdowne now hold a short position equivalent to -1.6% of Prudential's outstanding shares. The hedge fund has actually held a short in this company since 2009. In February 2009, their short represented -0.45% of outstanding shares and that position was gradually increased throughout 2010 and 2011 (now at its highest point).

Prudential Plc is Lansdowne Partners only disclosed short position in a UK listed financial company at the moment. As we have reported previously, during 2010 and 2011 Lansdowne reduced their shorts in Old Mutual (LON: OML), Legal and General (LON: LGEN) and Aviva (LON: AV.) to below the regulatory threshold of -0.25%.

In our September hedge fund performance numbers post, we highlighted that Lansdowne's $8 billion UK equity fund was -1.59% in September and -15.16% for the year at the end of September.

In other UK hedge fund activity, we also just detailed how hedge fund manager Odey added to their RSM Tenon Group Position. You can also read Odey's market outlook as well.

Per Goodle Finance - "Prudential plc (Prudential) is an international financial services group, with operations in Asia, the United States and the United Kingdom. Prudential is structured around four business units: Prudential Corporation Asia, Jackson National Life Insurance Company (Jackson), Prudential UK insurance operations and M&G. Prudential Corporation Asia's core business is life insurance, health and protection, either attached to a life policy or on a standalone basis, and mutual funds. It also provides selected personal lines property and casualty insurance, group insurance, institutional fund management and consumer finance (Vietnam only). In the fund management business Prudential holds a 49% stake in a joint venture with ICICI, in the People’s Republic of China, it had a 49 % stake in a joint venture with CITIC and in Hong Kong it has a 36% equity stake in a joint venture with Bank of China International."

Corsair Capital: Is Negativity "Priced In" the Market? (Q3 Letter)

Jay Petschek and Steve Major's hedge fund Corsair Capital outline how their portfolio has performed in their third quarter letter. They pinpoint the notion that fear has been driving markets for the past few months. Instead of focusing on hindsight, they look to what investors should be doing today.

Simply put, Corsair does not believe this is a repeat of 2008. They point to better liquidity, solid corporate balance sheets, and insider buying. While they acknowledge that things are not "rosy," they wonder if all the negativity is now priced in the market.

Their letter goes on to talk about their positions in Globe Specialty Metals (GSM), Lyondell Basell (LYB), Neo-Material Technologies (TSE:NEM), Reader's Digest (RDA), and TNS (TNS). They also mention they sold their position in Keystone Industries (KYCN) in a negotiated transaction.

For some of the hedge fund's latest investments, we posted Corsair's investment thesis on Shaw Group (SHAW).

Embedded below is Corsair's letter (email readers click the link to come read it):




As noted in our September hedge fund performance numbers update, Corsair was -9.5% for the year at the end of September but has seen 14.2% annualized returns since inception in 1991.

Corsair Capital's Investment Thesis on Shaw Group (SHAW)

Jay Petschek and Steven Major's $749 million hedge fund Corsair Capital recently sent their third quarter letter to investors and attached a write-up of their new position in Shaw Group (SHAW). Below you'll find their investment thesis.

The hedge fund bought SHAW as shares have tumbled due to the nuclear disaster in Japan. SHAW currently trades just under $22 per share and Corsair writes,

"We believe SHAW is worth $37-$43 per share and will trade near that level over the next year. Several catalysts will drive the stock higher including reporting a simplified and cash-rich balance sheet, executing a buyback worth 30% of the current market cap (the 2nd such program in calendar year 2011), and earnings growth in FY 2012."

They also believe that if those various catalysts do not result in the stock trading higher, Shaw Group could potentially be a compelling takeover target for competitors who could use stock to finance the acquisition.

Embedded below is the letter. Email readers please click to come read Corsair's thesis on Shaw Group:



For more on Corsair, we covered their past letter where they anticipated increased market volatility as well as their investment thesis on Innophos.

Odey Add to RSM Tenon Group Position

Crispin Odey's UK based hedge fund Odey Asset Management have been adding to their position in London listed RSM Tenon Group (LON: TNO). Back in June we reported that Odey had purchased 5% of RSM Tenon's outstanding shares.

Fast forward to the recent disclosures on September 26th and October 3rd and you see that Odey have increased their position to 6.92% of RSM Tenon Group's shares initially, and then even higher to 8.19% of the company. It's clear they fancy TNO shares at recent levels.

For more from this hedge fund, you can read Crispin Odey's latest market outlook that we posted yesterday as well.

Per Google Finance, RSM Tenon Group PLC "provides a range of professional and business services. The Company has five segments: audit, taxation and advisory; turnaround and corporate recovery; risk management; financial management, and specialist tax. It provides solutions to clients that range from individuals and entrepreneurially-led owner-managed businesses to corporations and public sector organizations. In December 30, 2009, the Company completed the acquisition of RSM Bentley Jennison. Its subsidiaries include RSM Tenon Limited, RSM Tenon Corporate Finance Limited, RSM Tenon Financial Services Limited and Premier Strategies Limited."