Highfields Capital Boosts Carter's (CRI) Stake, Shifts CoreLogic (CLGX) Stake to Passive Investment

Jonathon Jacobson's hedge fund firm Highfields Capital recently filed two 13G's with the SEC on Carter's (CRI) and CoreLogic (CLGX).

Carter's (CRI)

Per the filing, Highfields Capital has disclosed a 5.5% ownership stake in Carter's with 3,270,163 shares.  The filing was made due to portfolio activity on June 4th.

This marks almost an  85% increase in their position size in the name since the end of March. It also moves up Highfields as one of the top holders of the stock in addition to the likes of Viking Global and Matrix Capital.  Just a few months ago, we highlighted how Viking raised its stake in Carter's.

Per Google Finance, Carter's is "a branded marketer of apparel for babies and young children in the United States. The Company owns two brand names in the children’s apparel industry, Carter’s and OshKosh. Its Carter’s brand provides apparel for children sizes ranging from newborn to seven. OshKosh brand provides its line of apparel for children sizes newborn to 12. Its Carter’s, OshKosh, and related brands are sold to national department stores, chain and specialty stores and discount retailers."


CoreLogic (CLGX)

The second filing is a 13G from Highfields on CoreLogic indicates they have a 7.6% ownership stake in the company with 8,149,719.  This stake is unchanged from their last filing and the main reason they've filed is because their stake has shifted from an activist stake (with a previous 13D filing) to now a passive one (13G filing).

The hedge fund has withdrawn its nominees to the company's board after the company itself nominated three new directors and the chairman agreed to step down this year.  It appears as though the fund was mainly seeking members with more relevant business experience and it looks like they've achieved that.

Per Google Finance, CoreLogic is "a provider of property, financial and consumer information, analytics and services to mortgage originators and servicers, financial institutions and other businesses, government and government-sponsored enterprises. CoreLogic’s data, query, analytical and business outsourcing services help its customers to identify, manage and mitigate credit and interest rate risk. It offers its customers a databases of public, contributory and data covering real property and mortgage information, judgments and liens, parcel and geospatial data, national coverage eviction information, non-prime lending records, credit information, and tax information, among other data types."


About Highfields

Jacobson founded Highfields in 1998 after previously serving as the senior equity portfolio manager at Harvard Management Company. Highfields is an $11 billion value-oriented firm that doesn't want to swing at every pitch, but rather just the fat ones where they can hit home runs.  We've previously highlighted Jacobson's thoughts on whether there's alpha in asset allocation.


For more on this hedge fund, you can read Highfields' thesis on one of their top holdings: Sallie Mae here.

Our Answers From a Financial Blogger Panel on Investing

This week Abnormal Returns hosted a series of questions on investing and asked a panel of financial bloggers to give their answers.  We were honored to be included and have posted our answers below as well as links so you can see the answers from the other panel members as well.


Question: If you had a son or daughter just beginning to invest, what would you tell them to do to best prepare themselves for a lifetime of good investing?

Answer: "Take emotion out of the equation.  If you can think and act rationally when others do not, that’s an advantage.  Never stop learning… the best investors will tell you that investing is a continual education."  Check out others' responses here.


Q: Considering all the topics you have written about, which you you think is most underappreciated or overlooked by the majority of investors?

A: "Knowing which hedge funds to track.  Many people want to know what SAC Capital, RenTec, and Soros Fund are investing in.  The problem is hedge fund tracking only works if you’re following the right funds.  People get caught up in the big names when realistically SAC trades too frequently, RenTec is a quant (who knows why they buy anything) and Soros holds hundreds of positions.  People want updates on the ‘famous’ names, overlooking advice to the contrary."  See what everyone else answered here.


Q: If you could work, without pay, with any investor or trader for one year, who would it be? 

A: "John Griffin of Blue Ridge Capital."  Check out what other investors people picked here.


Q: What piece of wisdom or advice do you most wish you had ignored?

A: This question makes you really think and we honestly couldn't come up with an answer.  There are some creative responses from others here though.


Q: In the past year what book, article or blog post changed the way you think about an important topic?

A: "Philippe Laffont (hedge fund Coatue Management) talked about his concentrated portfolio approach which makes you think about position sizing and focusing on your best ideas."  Everyone else submitted their choices here.


Q: What asset would you feel most comfortable buying and holding for the next ten years?

A: "Unconventional answer: Invest in yourself.  That’s one 'asset class' you have the most control over."  See everyone else's answers to this question here.


Thanks again to Abnormal Returns and be sure to click that link to scroll through the site to read all the responses from the panel on each question.

Eric Sprott on the Recent Volatility in Gold

Seeing how gold has seen volatility as of late and numerous top hedge funds hold physical gold, we thought it would be prudent to check in with one of the most outspoken gold advocates: Eric Sprott of Sprott Asset Management.

After all, gold is one of Dan Loeb's top holdings at Third Point.  David Einhorn of Greenlight Capital has long held physical gold as a top stake.  And we highlighted in April how John Burbank's Passport Capital had been buying gold.


So what do investors make of the latest volatility?  Eric Sprott and Shree Kargutkar put out an interesting note on the precious metal on June 8th:

Sprott on Gold

"There have been key devel­op­ments in the phys­i­cal gold mar­ket over the last few weeks which we feel are worth highlighting:

1) The Chi­nese gold imports from Hong Kong in April, 2012 surged almost 1300% on a YoY basis. Total gross imports for the month of April were 103.6 tonnes and the net imports were 66.3 tonnes1. It is not the data for April alone which has caught our eye. There has been a stun­ning increase of gold imports through Hong Kong for export into China over the past 2 years. Between May 2010 and April 2011, China imported a net 66 tonnes of phys­i­cal gold through Hong Kong. Between May 2011 and April 2012, that num­ber jumped to 489 tonnes. This rep­re­sents an increase of 640%. 

2) Cen­tral banks from around the world bought over 70 tonnes of gold in April, 2012. Data from the IMF showed devel­op­ing coun­tries such as the Philip­pines, Turkey, Mex­ico and Sri Lanka were sig­nif­i­cant buy­ers of gold as prices dipped.

3) Iran pur­chased $1.2B worth of gold in April, 2012 through Turkey. As the devel­oped nations con­tinue devalu­ing their cur­rency at the expense of devel­op­ing nations, coun­tries such as Iran, China and Mex­ico are forced to look at alter­na­tive stores of value.

4) After twenty years of lack­lus­ter returns and stag­nant bond yields, Japan­ese pen­sion funds have finally dis­cov­ered the value of invest­ing in gold. The $500M Okayama Metal and Machin­ery pen­sion fund placed 1.5% of its assets into gold bullion-backed ETFs in April in order to "escape sov­er­eign risk"4.

5) Bill Gross writes, "Soar­ing debt/GDP ratios in pre­vi­ously sacro­sanct AAA coun­tries have made low cost fund­ing increas­ingly a func­tion of cen­tral banks as opposed to pri­vate mar­ket investors. Both the lower qual­ity and lower yields of pre­vi­ously sacro­sanct debt there­fore rep­re­sent a poten­tial break­ing point in our now 40-year-old global mon­e­tary sys­tem. […] As they (investors) ques­tion the value of much of the $200 tril­lion which com­prises our cur­rent sys­tem, they move mar­gin­ally else­where — to real assets such as land, gold and tan­gi­ble things, or to cash and a fig­u­ra­tive mat­tress where at least their money is read­ily acces­si­ble". Is the bond king rec­om­mend­ing gold? YES, YES YES!

6) The Gold Min­ing ETF, GDX, has seen strong inflows in the past 3 months. The num­ber of units out­stand­ing have increased from 162.5M to roughly 187M between March 1, 2012 and May 31, 2012. This rep­re­sents an increase in assets of almost $1.2B in a span of 3 months. It is worth point­ing out that for a major­ity of this three months period, GDX, and by exten­sion the gold min­ing com­pa­nies were expe­ri­enc­ing sig­nif­i­cant declines in their mar­ket values.


We believe there has been a mate­r­ial change in the gold invest­ing land­scape. The HUI, which is the Gold Bugs Index, is now up over 20% from its lows since May 16th, 2012. The slide in gold equi­ties seems to be sub­sid­ing as a foun­da­tion for a strong move upwards is set. New buy­ers, rep­re­sented by the Chi­nese, cen­tral banks, Japan­ese pen­sion funds and the Ira­ni­ans, bought almost 140 tonnes of gold in April alone. To put this into per­spec­tive, the annual gold pro­duc­tion is approx­i­mately 2600 tonnes. China and Rus­sia pro­duce around 500 tonnes of gold annu­ally, which never makes it to the open mar­ket. This leaves about 2100 tonnes of gold pro­duc­tion annu­ally for the rest of the world.


When buy­ers rep­re­sent­ing 140 tonnes of new demand enter a mar­ket which only has 175 tonnes of monthly sup­ply, we are left won­der­ing about two things:

1) In a bal­anced mar­ket, where is the source of sup­ply to the new buy­ers going to come from?

2) How can a new buyer of size get into the gold mar­ket, which is already bal­anced, with­out sig­nif­i­cantly impact­ing the price of gold? The answer is fairly obvi­ous. When demand out­strips sup­ply, prices move higher. These sig­nif­i­cant macro changes in the sup­ply­de­mand dynamic of the gold mar­ket should pro­pel the price of gold to new highs."  


For more from this fund manager, we've also highlighted Sprott's previous commentary on how 2012 is the year of the central bank.

Soros Fund Adds to Shutterfly (SFLY) & Digital River (DRIV) Convertibles

George Soros' family office Soros Fund Management recently filed a 13G on shares of Shutterfly (SFLY) and a Form 4 on Digital River (DRIV) with the SEC.

Shutterfly

Per the 13G filing, Soros Fund has revealed a 6.78% ownership stake in Shutterfly (SFLY) with 2,426,272 shares.

This is a massive increase in their position as they only owned 150,000 shares at the end of March.  In total, they've boosted their holdings in SFLY by 1,517%.  The filing was made due to portfolio activity on May 30th.

Per Google Finance, Shutterfly is "an Internet-based social expression and personal publishing service that enables consumers to share, print and preserve their memories its technology, manufacturing, Web-design and merchandising capabilities. The Company provides a range of personalized photo-based products and services that allow consumers to upload, edit, enhance, organize, find, share, create, print, and preserve their memories. It generate revenues by producing and selling professionally bound photo books, greeting cards and stationery, personalized calendars, other photo-based merchandise and prints ranging in size from wallet-sized to jumbo-sized 20x30 enlargements."


Digital River

Soros Fund also filed a separate Form 4 with the SEC regarding their position in Digital River.   Soros has acquired $18.5 million worth of 2.00% convertible bonds due November 1st, 2030 that are convertible at any time.  These were acquired on June 7th and 8th with a conversion/exercise price of $49.131.

After all was said and done, the Form 4 says that Soros owns $232 million worth of these derivative securities.  Just a few weeks ago we highlighted how Soros was acquiring Digital River bonds and that trend has continued.  The family office originally purchased a stake back in March of this year.

Per Google Finance, Digital River is "engaged in providing end-to-end global e-commerce and marketing solutions to a range of companies in software, consumer electronics, computer games, video games, and other markets. 


To see the rest of Soros Fund's latest equity portfolio, head to our Hedge Fund Wisdom newsletter.

Ricky Sandler's Eminence Capital Buys More MicroStrategy (MSTR)

Ricky Sandler's hedge fund firm Eminence Capital have filed a 13G with the SEC regarding shares of MicroStrategy (MSTR).  Per the filing, they have disclosed a 5.5% ownership stake in the company with 470,825 shares.

This marks a 140% increase in their position size since the end of March.  The hedge fund previously owned 195,991 shares.  The filing was made due to portfolio activity on June 1st.

At the end of the first quarter, Eminence was already one of the top 10 largest holders of the stock, but now they're around the third largest.

For more activity from this fund, we've highlighted a stock Eminence has been short.

Per Google Finance, MicroStrategy is "a worldwide provider of enterprise software platforms for business intelligence, mobile intelligence and social intelligence applications (apps). The Company operates in two segments: core business intelligence software and services, and other. The MicroStrategy BI Platform delivers reports and dashboards to business users via a Web interface and mobile devices."

We've also previously highlighted Ricky Sandler's presentation on CME Group (CME).

Free Excerpt From The Alpha Masters: Ray Dalio The Global Macro Maven

Today we're pleased to present a free excerpt from the excellent new book, The Alpha Masters.  The publisher has released Chapter 1 on Ray Dalio of Bridgewater Associates entitled "The Global Macro Maven."

Written by CNBC's hedge fund specialist Maneet Ahuja, the book profiles and interviews some of the top hedge fund managers in the game and we've reviewed it here.

Enjoy the free excerpt from the book embedded below, Chapter 1 on Ray Dalio:



And after getting hooked on that chapter, you'll undoubtedly want to read the rest of the book which features other chapters on David Tepper, Dan Loeb, Bill Ackman, John Paulson, Jim Chanos and more. 

You can get a physical copy of The Alpha Masters as well as the Kindle e-book version here.

What We're Reading ~ 6/13/12

On screening for value investments [Aswath Damodaran]

Update on the latest macro trends [Reformed Broker]

A look at Francesca's Holdings (FRAN) [LongShortTrader]

Hedge funds: do some mislead their investors? [BBC]

Is Trip Advisor's (TRIP) growth story just beginning? [Sigma Swan]

Davidowitz says J.C. Penney is the new Sears [Daily Ticker]

2 keys to investing: pickiness & persistence [NYTimes]

Macroeconomics of Chinese kleptocracy [Bronte Capital]

It isn't all about alpha [All About Alpha]

Hedge funds saw $5 billion outflow in April [Reuters]

Berkshire Hathaway sells some ResCap debt [CNBC]

Technicolor rejects higher JPMorgan offer [Reuters]

Advice from a newly-turned 60 year old [Herb Greenberg]

Bill Ackman & Pershing Square's Q1 Letter: On Canadian Pacific, J.C. Penney & Citigroup

Bill Ackman's hedge fund firm Pershing Square is out with its first quarter letter to investors.  The hedge fund is up 9.3% year-to-date and updates investors on its holdings in Canadian Pacific (CP), J.C. Penney (JCP), as well as Citigroup (C) and General Growth Properties (GGP).

Pershing highlights that they've started buying a new stake and have added a rare equity short, but they've declined to disclose any names.

In the letter, Ackman touched on the notion of time arbitrage, something he defines as "taking advantage of the opportunity for long-term profit offered when short-term investors sell due to disappointing short-term macro or business progress."

He says that this has been a big source of profits for the hedge fund and long-time readers will know this isn't the first time we've seen this.  John Griffin of Blue Ridge Capital has long classified investments as either time arbitrage or catalyst driven.

Ackman touches on J.C. Penney in-depth in the letter and we've also highlighted Ackman's JCP slideshow from the Ira Sohn Conference.

Ackman is also profiled and interviewed in the brand new book, The Alpha Masters.

Embedded below is Bill Ackman & Pershing Square's Q1 letter to investors:





For more hedge fund letters, head to:

- Greenlight Capital's Q1 letter

- Third Point's Q1 letter

David Einhorn's Greenlight Capital Adds to Seagate Stake in Size

David Einhorn's hedge fund Greenlight Capital has recently been out buying more shares of Seagate Technology (STX).  Per a 13G just filed with the SEC, Greenlight has disclosed a 5.4% ownership stake in STX with 23,114,026 shares.


Sizable Seagate Stake

These purchases mark almost a 59% increase in their position size since the end of March.  STX shares have fallen from a recent peak of around $32 in May down to current levels of around $22.75 (almost a 30% drop).  This new disclosure was made due to portfolio activity on June 1st.

This activity is interesting because Seagate was already one of Einhorn's top 5 holdings at the end of the first quarter and now they own even more shares.  Not to mention, STX is still trading around (or even slightly below) where Greenlight was recently buying.


Greenlight's Thoughts on STX

From Greenlight's first quarter letter, the hedge fund writes that,

"It is STX's normal practice on earnings calls to provide financial commentary looking ahead only one quarter.  However, in January, STX shared its financial outlook for all of calendar year 2012, forecasting revenues of $20 billion.  The prior consensus was for less than $15 billion.  A good chunk of the increased forecast comes from higher pricing enabled by the industry shortage following the floods in Thailand last year.

STX also announced that it would be using some of its excess cash to ramp up its stock repurchase program, with a target of decreasing outstanding shares by 25%.  When business conditions eventually normalize, the lower share count will enable STX to generate higher earnings per share.

Though the shares advanced from $16.40 to $26.96 during the quarter, the share price remains at a very low multiple of both near-term and longer term earnings.  Based on our somewhat more conservative revenue outlook in 2012, we expect earnings to reach $10-$15 per share this calendar year, before settling at an average of about $5 per share in future years when the industry shortage will have ended."

  
About Seagate

Per Google Finance, Seagate Technology "designs, manufactures, markets and sells hard disk drives. Seagate produces a range of disk drive products addressing enterprise applications, where its products are designed for enterprise servers, mainframes and workstations; client compute applications, where its products are designed for desktop and notebook computers, and client non-compute applications, where its products are designed for a range of end user devices, such as digital video recorders (DVRs), personal data backup systems, portable external storage systems and digital media systems."


For more resources on this hedge fund, head to David Einhorn's slideshow on use of preferreds as well as notes from Einhorn's Ira Sohn presentation.

John Paulson Sells More Delphi Automotive (DLPH)

John Paulson's hedge fund firm Paulson & Co just filed a 13G with the SEC regarding their position in Delphi (DLPH).  Per the 13G, the firm has reported a 9.98% ownership stake in DLPH with 32,764,336 shares.

This marks a decrease in their position size by 28% since the end of March.  We've highlighted before how Paulson has been selling Delphi.  The most recent disclosures were made due to portfolio activity on June 7th.

John Paulson is profiled and interviewed (along with many other top fund managers) in the new book The Alpha Masters.

Per Google Finance, Delphi is "a global vehicle components manufacturer and provides electrical and electronic, powertrain, safety and thermal technology solutions to the global automotive and commercial vehicle markets. The Company operates through four segments: Electrical / Electronic Architecture; Powertrain Systems; Electronics and Safety and Thermal Systems."

For more from this manager, we've also highlighted Paulson's three long ideas from the Ira Sohn Conference.

Apple CEO Tim Cook's Lengthy Interview at All Things Digital Conference

CEO of Apple (AAPL) Tim Cook recently gave a lengthy talk at All Things Digital's Conference.  We wanted to highlight this because AAPL is the top stock held by hedge funds.

Not to mention, this is the lengthiest interview we've seen with him publicly.  We've embedded the video below, but for those who might not have an hour and forty minutes to sit and watch, we've highlighted the key takeaways:

On Innovation

Right from the start of the interview, Cook focused on how Apple always has been and will continue to be about innovation.  He says the products he's seen (but obviously can't talk about) that they're working on are phenomenal.

With the late Steve Jobs' passing, many investors questioned where the innovation would come from and we asked similar questions in our post on the Apple conundrum.  Cook says innovation is what the company will always be about.


On the Halo Effect

Cook himself pointed out the 'halo effect' that many analysts have recognized.  He said that when the iPod was released, it exposed Apple to customers in the developed world that didn't know about the company.  Those consumers then were exposed to Mac computers and many of them became customers there as well.

And when the iPhone came out, Cook says a similar phenomenon occurred, but this time more-so in the developing world: China, Middle East, Russia, and Latin America.

And now, he says they're in the first inning of the iPad because he thinks the tablet market can overtake the personal computer (PC).


On What Cook Learned From Jobs

Obviously, things at the company have changed since Tim Cook took over as CEO.  But of course Jobs taught Cook many things and he shared some of that wisdom at the conference. 

Of the things Jobs taught him, Cook said that focus is key, not only in running a company, but also in your personal life.  "You can only do so many things great... cast the rest aside."

Cook also revealed that when Jobs had a conversation with him about becoming CEO, he emphasized that he didn't want people to sit around and wonder "What would Steve do?" after he was gone.  Instead, he only desired that things be done right.

On some of the key differences between AAPL under Jobs versus Cook, the current CEO says, "we did the right thing by doing dividends and share buybacks."  But there will also be similarities as they'll continue to invest heavily in research and development.


Chinese Manufacturing

Cook also touched on how it makes sense for Apple to outsource certain aspects of their operation where they think others can do the same or better.  One area in particular is manufacturing as they've let others handle this while they focus their time on doing what they do best: creating and innovating.

And while the company outsources manufacturing, Apple still focuses on running the supply chain and the managing the operational aspects of the company.


On the TV Market

"This is an area of intense interest for us ... We're gonna keep pulling the string and see where it takes us."  

Cook kept talking about the current iteration of the Apple TV (set top box) and Walt Mossberg prodded for more information and wondered if they would make an actual television set instead.

Cook said that they key to any new product is figuring out what the key components are and how they could control them.  They want to make products where they can improve upon something and give people something that they would want.

Cook of course did not comment on what they specifically were doing in the television space aside from pointing to their current product and saying the area is very interesting to them.


On Potential Acquisitions

Instead of focusing on revenue streams of potential acquisitions, Cook says they like to focus on great people, great products and intellectual property instead.  He said they currently aren't looking at any big acquisitions, but he wouldn't rule them out.  They did not look at Instagram (Facebook purchased them).


Embedded below is Tim Cook's appearance at the All Things Digital Conference:




For hedge fund resources on Apple:

- Dan Loeb's investment thesis on Apple

- David Einhorn refutes bear concerns on AAPL

- Goldman Sachs VIP list of most important stocks to hedge funds

- The Apple Conundrum: when to sell?

Andrew Diaz's Presentation on WebMD (WBMD): Ira Sohn Contest Finalist

Today we're presenting an investment write-up that was a finalist at the Ira Sohn investment contest.  We've already posted up notes from the Ira Sohn Conference where you got to read about investment ideas from top fund managers.

Now, we're posting up some entries that made it to the final round of judging from the investment contest at Ira Sohn that was judged by the likes of Seth Klarman, David Einhorn, and Bill Ackman.  The following is Andrew Diaz's pitch of WebMD (WBMD).


Target Price and Rationale    

$26 - $30 per share 

Base Case:  A DCF valuation was used to determine intrinsic value, which assumed WebMD’s overall market share would decrease from ~40% today to ~20% in equal increments over five years, ~$530 million of revenues per year ($558 million in 2011) and 20% EBITDA margins (33% in 2011). The assumed cost of capital and terminal growth rate were 16% and 4%, respectively. Even in adverse conditions such as a highly competitive advertising environment, online pharmaceutical spending growth more than offsets any market share erosion that WebMD may experience and also builds in the potential for premium ad pricing declines. Advertising dollars continue to shift from offline to online sources.  

LBO:  In December 2011 the board conducted management meetings with several private equity funds but anticipated receiving bids below the Company’s then quoted market price of ~$38 per share. In a hypothetical take-private transaction with the price at $21.85 a PE fund could generate a 5 year IRR of ~20% by buying the business at ~7x LTM EBITDA (~$26 per share), using conservative leverage of ~3x and applying single digit revenue and EBITDA growth.  

Free Options: This valuation excludes (i) ~$250 million (~$5 per share) NPV of federal NOLs, (ii) mobile growth, (iii) international opportunities and (iv) an increase to the repurchase program.   

According to management, the NOLs could remain usable in a tax efficient change of control transaction with a private equity buyer. An important area of growth that was excluded from the valuation was mobile because it is only a small portion of revenues today, but it can one day be a meaningful contributor to revenue. Additionally, this valuation excludes the impact for international opportunities which includes new website launches in Europe and other emerging markets where there is meaningful revenue potential.  


Relevant Comps  

Epocrates (Ticker: EPOC) is a physician platform for clinical content, practice tools and health industry engagement primarily in the mobile space. Epcorates derives $100 million of revenues from 1.4 million physician members. Epocrates trades at ~8x Adj. EBITDA of $13.8 million and does not generate consistent free cash flow. The Company has grown revenue at a ~15% CAGR since 2007. 

HealthStream (Ticker: HSTM) provides internet based learning and research solutions for the healthcare industry. HealthStream derives $87.2 million of revenues from approximately 2.5 million hospital-based healthcare professionals. The company trades at ~30x EBITDA of $17 million and generates ~$10 - $15 million of free cash flow annually. The Company has grown revenue at a ~19% CAGR since 2007.  

Everyday Health (Private) provides online consumer health solutions. The Company offers content and advertising-based services across a portfolio of websites that span the health spectrum. It is estimated that the Company has revenues and EBITDA of $102 million and $2.6 million, respectively.  


Catalysts  

There are several catalysts: (i) Expiration of the shareholder rights plan, (ii) Sale of the Company, (iii) Increases to the authorized stock repurchase plan and (iv) Hiring of a new CEO  

(i)    In November 2011, the board adopted a shareholder rights plan limiting any shareholder to a maximum 12% ownership. The rights expire on November 1, 2012, or approximately 6 months from today. Currently, Carl Icahn and Kensico Capital Management are the two largest shareholders with stakes of 13.1% and 12.9%, respectively. (Both stakes are above the threshold due to the Company’s recent tender offer). These investors may seek to meet with the board and unlock shareholder value through strategic opportunities.  

(ii)    In late 2011, the board of directors engaged private equity buyers for a potential transaction, but the discussions never proceeded to a formal offer as a result of anticipated declines to 2012 results primarily due to its pharmaceutical customer base deferring marketing spend. Given the temporary nature of these declines, the board may re-engage private equity buyers as the poison pill nears expiration and 2013 revenue visibility comes into focus. The stock is currently 42.5% lower than the price when negotiations between potential buyers commenced. 

(iii)    In April 2012, WebMD offered to tender 5.8 million shares at a price of $26.00 per share, for an aggregate cost of $150 million (~10% of the common stock). There is approximately $86 million (~7% of market cap) remaining under the buyback plan authorized in October 2011. Management has indicated an interest in upsizing the repurchase program given WebMD’s $1 billion cash balance and undervalued stock.  

(iv)    Currently, the board is searching for a new CEO to lead WebMD after the CEO resigned in early 2012. A new CEO with relevant healthcare/online advertising experience would enable the Company to better monetize its online assets, 100+ million user base, and strong brand.   


Investment Thesis   

Why does WebMD trade at ~$22 per share today? I believe the main drivers of the recent stock price decline are (i) a failed sales process and (ii) temporary decline in ad spending by its pharmaceutical customer base. 

(i)    Last summer, the board held preliminary discussions of a transaction involving one or more potential private equity buyers. However, neither transaction was pursued in light of the market turmoil. In November 2011, the Company re-engaged discussions with four private equity funds who conducted a due diligence investigation of the Company’s business. The board believed it would receive offers well below the then quoted price of ~$38 per share. On January 10th, after announcing that 2012 would be weaker than previously anticipated, the stock price fell to ~$27 per share. At which point management contacted three new potential private buyers. Once again, the board felt that offers would be lower than the stock price and therefore took the Company off the auction block. I believe management made the right choice by not selling the business at a most inopportune time.  

(ii)    The underlying business value has been overshadowed by a temporary decline in ad spending by pharmaceutical companies. This is due to uncertainty surrounding FDA regulations for healthcare advertising as well as several blockbuster patent expirations. Many pharmaceutical companies have been sued over false portrayal and advertisements. As a result of uncertainty surrounding the FDA’s new standards, pharma customers have temporarily postponed advertising spend. Ad spending currently goes through a rigorous 3-step process including legal, medical and regulatory reviews. However, as customers become attuned to the new approval process, advertising spend should normalize.   


Compelling Long-Term Value 

Media advertising is undergoing a fundamental shift, from print to online, especially in mobile areas such as tablets and smart phones. In the search for alpha, one can find no relationship between the numerous tail risks present in the macroeconomic environment today and the secular growth of online media advertising. As proof, WebMD has grown revenue and EBITDA since 2007 at a CAGR of ~15% and ~17%, respectively.  

Broadly speaking, WebMD is in the business of online media advertising. WebMD markets to 107 million unique consumers per month which collectively generate over 10 billion page views per year. Additionally, WebMD has a professional network that averages ~2.6 million physician visits per month. While WebMD has not yet monetized its mobile customer base, ~11.5 million people have downloaded the WebMD mobile app and more than 2 million physicians have downloaded the Medscape Mobile app. It should also be noted that WebMD derives minimal revenues from abroad, but has recently launched German and French sites for physicians and is in discussions to launch sites in other international markets. International markets could contribute a meaningful portion to revenue growth in the future, but have not been considered for this thesis.  

WebMD has positioned itself to take part in favorable secular trends impacting online media. According to eMarketer, healthcare and pharma advertisers’ US online ad spend is expected to see double-digit growth over the next few years, rising from $1.03 billion in 2010 to $1.86 billion in 2015. This currently represents ~3.5% of the annual $28 billion spent on pharmaceutical advertising. By 2015, eMarketer’s suggests ~7% of total pharma ad spending would be online. WebMD’s is in an enviable position to capture this growth due to its strong brand and 100+ million unique visitors per month. 

Over time a long term horizon, the percentage of online advertising spending should become a bigger portion of the overall spending pie. Cost-conscious drug makers are seeking less expensive marketing strategies. For example, the number of US pharmaceutical sales reps has declined since 2005 and may accelerate further once the Physician Payments Sunshine Act takes effect in late 2013. This law requires all US manufacturers of drug, device, biologics, and medical supplies to publically report physician payments. This should help shift advertising dollars to relatively cheaper and more effective alternatives such as online advertising. Assuming that one day 30% of the total pharma ad spending will be online and suppose that total market gets cut in half due to more cost effective advertising. One could project online pharma ad spending to be ~$4 billion sometime in the next decade.  

As evident by the lack of comparables, WebMD is undeniably the market leader in its niche, representing ~40% of total online pharma ad spending in 2011. One might wonder what the “moat” is and how WebMD can maintain its share of a growing market. WebMD’s value is powerful and stems from its first mover advantage which has allowed the Company to amass a large user base that would be difficult to replicate. Unlike most online advertisers, WebMD offers targeted advertisements to individuals researching a specific topic or condition. Through providing information about therapies available to treat that topic, WebMD’s advertising can be viewed as a valuable source of information provided to a potential prescriber or patient when they are already focused on finding said information. Conversely, other media advertising is focused on diverting the user’s attention away from what they are already doing. I believe this fundamental difference between WebMD and other online advertisers helps to alleviate risks of potential declines to premium ad pricing.  

Selling into a weak 2012 did not make much sense for shareholders and I believe management made the right choice to call off discussions. Instead of selling the business entirely, the Company held a tender offer to repurchase $150 million of common stock at a price of $26 per share which suggests that management is shareholder friendly. I believe directors and management still have a strong incentive to sell the business since they own ~8% of the outstanding stock (~$100 million market value) and would be entitled to receive an additional ~$30 million of compensation in the event of a change of control. The CEO resigning certainly raises some concern, but as previously mentioned, I believe the right CEO could be a positive catalyst. With the poison pill expiring in 6 months and management motivated to sell, I believe WebMD is an attractive takeover target with a strong competitive advantage attributable to its 100+ million user base and strong brand coupled with favorable long term trends for online pharma ad spending.


Embedded below is Andrew Diaz's slideshow presentation on WebMD from the Ira Sohn investment contest where he was a finalist:




Were you also a finalist in the contest?  Please click the contact link at the top of the page and get in touch.  And if you haven't seen them already, check out notes from the Ira Sohn Conference.

Tempur-Pedic (TPX) Plummets: Analysis Excerpt From Our Newsletter

Today, shares of Tempur-Pedic (TPX) are down 48% after the company cut its full-year forecast.  We wanted to draw attention to this because we featured analysis of TPX two weeks ago in our premium Hedge Fund Wisdom newsletter which pointed out that the potential warning signs were there.

TPX today cited that an "unprecedented" number of rival products with huge marketing/promotion have hit their sales. 

Below is an excerpt from the current issue of our newsletter which drew attention to these potential red flags two weeks ago:


Excerpt From Our Hedge Fund Wisdom Newsletter

"Tempur-Pedic (TPX)

Current Situation

Following its 1Q earnings call after the market close on April 19th, TPX shares lost 20% from $84 to $67. The company reported robust growth of 18% in sales, which was in line with analyst expectations, as were its earnings. However, the impression is that the industry grew faster than TPX, which was a big blow to the stock. Also, the company reaffirmed its 2012 guidance of $3.80-3.95 on $1.6bn of sales, which fell short of consensus of $4.06 EPS and $1.7bn sales. Analysts became less sanguine about the stock’s growth prospects because of intensifying competition in the specialty bedding segment and the potential of cannibalization from the introduction of lower-priced beds.

More intense competition in specialty beds will translate into slower growth for TPX and potentially lower prices and margins. Also, TPX has been focused on the higher end of the premium segment with very few low-priced offerings. In order to continue growing, it has to expand its product line into lower-priced products. These products may satisfy some of TPX’s current customers, thus resulting in a down-mix shift.

On May 7, TPX made a surprise announcement that it will be offering its Cloud Supreme mattress on sale from mid-May to July. Offering sales discounts is very uncharacteristic of TPX and goes against its strategy, which is why the market reacted so negatively. The stock lost almost 20% within a couple of days as the move was interpreted as a red flag that could signal deeper fundamental issues and slowing growth.


The Bear Case

The company's growth cycle has matured, so it doesn't deserve the historically high valuation multiples that reflected much higher growth. The risk is that competitor Select Comfort (SCSS) has a lot of ground to cover in terms of increasing its brand awareness and distribution before it can catch up to TPX, which means that SCSS may capture most of the incremental segment growth. In addition, the high growth of the segment has attracted significant competition. Therefore, growth may be more difficult to achieve than expected. What’s more, TPX has leading margins, but as competition intensifies it may have to give back some of its pricing power. If EPS growth doesn’t materialize at ~20% for the next couple of years, there is downside to the stock.

Summary

Hedge funds have been attracted to TPX because of its strong balance sheet, shareholder-friendly management, robust growth, and solid execution. It has all the ingredients to continue growing earnings at a rapid pace. However, competition is intensifying and what has made TPX successful can also be viewed as a source of risk to the relatively rich valuation: growth can slow down with more players, and margins can compress. The stock price took a big hit following disappointing guidance and concerns that the company needs to resort to discounts in order to boost sales."

Then fast forward two weeks ahead to today and the company has now cut its full year forecast.


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Presence of Hedge Funds in Chapter 11 Process & Effects on Bankruptcy Outcomes

Today we wanted to highlight a paper by Wei Jiang, Kai Li, and Wei Wang, entitled "Hedge Funds and Chapter 11" found via The American Finance Association, Publishers of the Journal of Finance.

The abstract of the paper reads as follows:

"This paper studies the presence of hedge funds in the Chapter 11 process and their effects on bankruptcy  outcomes. Hedge funds strategically choose positions in the capital structure where their actions could have a  bigger impact on value.  Their presence, especially as unsecured creditors, helps balance power between the  debtor and secured creditors. Their effect on the debtor manifests in higher probabilities of the latter’s loss of  exclusive rights to file reorganization plans, CEO turnover, and adoptions of KERP, while their effect on secured  creditors manifests in higher probabilities of emergence and payoffs to junior claims."


The paper finds that some of the biggest players in Chapter 11 are household names: Oaktree Capital, Appaloosa Management, Apollo Advisors, Cerberus Capital Management, and Silver Point Capital, among others.

And for those of you that might not have time to read an entire paper, it intriguingly concludes that:

"We find that hedge fund presence is associated with a higher probability of the debtor’s loss of  exclusive rights to file a reorganization plan, a higher probability of emergence, more favorable distributions to  the claims they invest in, greater CEO turnover, and more frequent adoptions of KERP.  We further establish the  causal effects of hedge funds, especially in their role as creditors, through instrumentation for hedge fund  participation.  Finally, we show that the favorable outcomes for claims in which hedge funds invest do not come  at the expense of other claimholders—they are more likely to result from value creation by alleviating financial  constraints and mitigating conflicts among different classes of claims."


Embedded below is the paper Hedge Funds and Chapter 11:




You can download a .pdf copy here.


For more on hedge funds and distressed investing, check out notes from Dan Loeb & Daniel Krueger's talk at a distressed investing panel as well as Marc Lasry's thoughts on distressed opportunities.

Third Point's Top Holdings & Latest Exposures

Dan Loeb's Third Point Offshore Fund finished May -2.6% and was up 3.7% year-to-date at that time.  The fund now manages $4.6 billion and has seen annualized returns of 17.1%.  Below are their top positions and latest exposures.


Third Point's Top Holdings

1. Yahoo! (YHOO)
2. Gold
3. Delphi (DLPH)
4. Apple (AAPL)
5. Sara Lee (SLE)

The hedge fund's top winners from the past month included three consumer short positions, one industrial short position, as well as a long of Vertex Pharmaceuticals.  Their top losers in the quarter included gold, YHOO, DLPH, Hess (HES), as well as Abercrombie & Fitch (ANF).

We've previously posted Third Point's Q1 letter which includes their thesis on AAPL among other positions.

Their stake in Sara Lee slides into their top holdings again as this catalyst play will spin-off its coffee business at the end of June and then will  rename its remaining business Hillshire Brands to reflect its line of meat products.

In other recent activity from this hedge fund, we've highlighted that Third Point reduced its Technicolor stake as well.


Latest Exposure Levels

We've noted that throughout the first half of the year, Third Point ratcheted up net long exposure as they liked the risk/reward skew.  However, given the ramp in volatility this past month, it should come as no surprise that Third Point reduced exposure.

At the end of May, they were 31.4% net long equities (44.4% long and -13% short).  This compares to 40% net long the month prior.  During the month, they cut long exposure and increased short exposure.

Geographically, they are net long Americas at 61%, net short EMEA at -10%, and net short Asia at -3%.

They also decreased their exposure to credit.  In April they were 20.7% net long and at the end of May they were only 14.2% net long.  Of note is the fact that they increased their short bet against government securities.


Dan Loeb is featured in the new book The Alpha Masters and you can check out our review here.

What We're Reading ~ 6/6/12

Full text of George Soros' speech on Europe [Business Insider]

Rescuing your investment plan [Covestor]

Thoughts on behavioral finance from Daniel Kahneman [Derek Hernquist]

Seeds being sown of new secular bull market? [Abnormal Returns]

Advice for those working with financial advisors [TheBigPicture] 

Why Macau is lucrative location for gaming companies [Trefis]

The biggest stock bargain in Europe? [SmartMoney]

Moving back into the mortgage market [AR+Alpha]

Why Starbucks' bakery purchase is brilliant [Herb Greenberg]

A Greek contrarian opportunity? [SumZero]

Lansdowne bets on Italian & Greek stocks [Bloomberg]

Investors leery of Paulson's big gold bet [NYPost]

An interesting assessment of Transocean (RIG) [SeekingAlpha]

Why value investing is for grown-ups [CBS]

Inside the death of Palm and webOS [The Verge]

Sellside note on Salesforce.com (CRM) [William Blair]

Michael Lewis' commencement speech [Princeton]

Lone Pine Capital Discloses Kinder Morgan Stake Via El Paso Deal

Steve Mandel's hedge fund firm Lone Pine Capital filed a Form 3 and 13G with the SEC regarding shares of Kinder Morgan (KMI).  The hedge fund now owns a sizable chunk of common stock and warrants that they received via their previous position in El Paso (EP).

As pointed out in our new issue of Hedge Fund Wisdom two weeks ago, El Paso was Lone Pine's largest disclosed US equity holding as they were playing the risk arbitrage there.  EP was acquired by Kinder Morgan in a stock/warrant/cash deal.

Lone Pine has now disclosed a 12.9% ownership stake in the company with 71,780,836 shares.  This is represented by 17.6 million shares of common stock and 54.1 million shares via warrants.  The warrants have an expiration date of May 25th, 2017 and a conversion/exercise price of 40.

Numerous other prominent hedge funds were playing this arbitrage as well, so it will be interesting to see who holds on to the new entity (KMI) and who sells their position.  Our premium newsletter drew attention to the sizable stakes in El Paso by Lone Pine, Farallon Capital, Paulson & Co, Omega Advisors, JANA Partners, and Third Point.

Per Google Finance, Kinder Morgan "owns and manages a diversified portfolio of energy transportation and storage assets. The Company operates in five business segments: Products Pipelines-KPM, Natural Gas Pipelines-KMP, CO2-KMP, Terminals-KMP and Kinder Morgan Canada-KMP. The Company through Kinder Morgan Energy Partners, L.P. (KMP) operates or owns an interest in approximately 37,000 miles of pipelines and approximately 180 terminals. These pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and other products, and its terminals store petroleum products and chemicals, and handle such products as ethanol, coal, petroleum coke and steel."

In other portfolio activity from Mandel's firm, we've highlighted how Lone Pine has been buying Ulta Salon.

SAC Capital Reveals Gaylord Entertainment Position

Steve Cohen's hedge fund firm SAC Capital recently filed a 13G with the SEC regarding a stake in Gaylord Entertainment (GET).  Per the filing, SAC has disclosed a 5.1% position in GET with 2,508,358 shares.

This is a brand new position for the hedge fund and the disclosure was made due to trading activity on May 31st.

The catalyst for this play comes via an announcement that Marriott will acquire the Gaylord Hotels brand for around $210 million and then Gaylord will convert into a REIT, continuing to own the Grand Ole Opry property.

Cohen was named one of the top 25 highest earning hedge fund managers of 2011.

Per Google Finance, Gaylord Entertainment is "a hospitality company. The Company’s operations are organized into three segments: Hospitality, which includes its hotel operations; Opry and Attractions, which includes its Grand Ole Opry assets, WSM-AM and its Nashville attractions, and Corporate and Other, which includes corporate expenses."

For more of Steve Cohen's latest activity, head to 10 stocks SAC Capital has been buying.

Pennant Capital Reduces Homeserve Position

Alan Fournier's hedge fund firm Pennant Capital has reduced its position in UK traded Homeserve (LON:HSV).  Due to trading on May 22nd, the hedge fund has reduced their position under the 3% disclosure threshold.

Shares of Homeserve fell 29% on May 22nd after the company announced that it was downsizing its operation in the UK in response to a formal investigation by the Financial Services Authority.  On May 19th, the company received a  £750,000 fine over its cold calling practices, the largest fine ever handed out by Ofcom.

While the official notification says that Pennant now hold 2.96% of the voting rights, there's no way to know of further sales as they aren't required to disclose them after falling below that level.

We originally posted about Pennant's new position in Homeserve back on March 6th.  Hedge fund Marathon Asset Management was another previously sizable holder of shares as they reported a 5.24% stake back in November 2011.

Per Google Finance - "Homeserve plc provides home emergency and repair services to over 4.9 million customers across the United Kingdom, the Unites States of America, France and Spain. Services are provided through its membership businesses, which are responsible for the marketing and administration of over 11 million home repair and appliance warranty policies. The Company operates in five segments: UK, USA, Domeo, Spain and New Markets. "

In other activity from Fournier's fund, we've highlighted how they've been buying Huntington Ingalls Industries.

Market Strategist Jeff Saut on Investor Sentiment

Given the volatility in markets as of late, we thought it'd be prudent to check in with market strategist Jeff Saut.  His latest missive, entitled "1-800-Get-Me-OUT?!" obviously hints at the prevailing investor sentiment at the moment: sell sell sell.

Saut examines the psychology behind why and when investors sell, which is definitely worth the read below in his commentary. 

But what's funny is how he points out that, "Since last October 4th's 'undercut low' the chant from most investors has been, 'We want a pullback to become more fully invested.'  Now that we have the pullback, everyone is in panic mode (again)."

In order for a rally from oversold levels to commence, Saut points to the 1290 level on the S&P 500.  If the market can recapture and stay above that level, things are looking up (it currently trades around 1281). 

However, if it fails, he argues it would be time to acquire more hedges or raise more cash.  We've also previously highlighted Saut's approach to risk management.


Embedded below is Jeff Saut's weekly market commentary:




You can download a .pdf copy here.

For more from the strategist, head to his thoughts on why it's time to dip into stocks.