Graham & Doddsville Fall 2018 Issue: Tweedy Browne, Greenhaven Road & More

Columbia Business School has just released the Fall 2018 issue of its Graham & Doddsville newsletter.  In it, they interview members of Tweedy, Browne Company such as Roger De Bree, Andrew Ewert, Frank Hawrylak, Jay Hill, Amelia Koh, Tom Shrager, John Spears, and Bob Wyckoff.  They also interview Scott Miller of Greenhaven Road Capital.

Additionally, the issue also includes student investment pitches such as long JD.com (JD) and long Qorvo (QRVO)


Tweedy Browne Buys Baidu, Sina, AutoZone

Tweedy recently bought some Chinese equities: search engine giant Baidu (BIDU) and Sina (SINA), which owns Weibo, a popular social media business.  They like the profitable advertising business models but have smaller position sizes due to various risks.

Domestically, Tweedy also purchased shares of AutoZone (AZO):  "If you lookover the previous 11-yearperiod, its intrinsic value grew by 16% per annum, with a significant percentage of that growth driven by share buybacks. The historical record also revealed a stable and defensive business. Same store sales at AutoZone have grown in 19 out of the last 20 years, including in 2008 and 2009.AutoZone has also historically produced high returns, with a 14% ROA (return on assets) and a roughly 30% lease adjusted ROIC (return on invested capital)."


Greenhaven Road Long Etsy, Fiat, Yelp

Greenhaven Road's founder talks about his positions in Etsy, (ETSY), Fiat Chrysler (FCAU) and Yelp (YELP). 

On Fiat, he notes: "Fiat Chrysler is reducing the low margin fleet business by getting out of sedans and focusing on SUVs, aligning themselves with customer preferences and higher margins.They are also going to either spin off or sell their parts division. If you backout the parts business, you're getting the core business for less than 3x earnings excluding net industrial cash and the parts business. That’s an attractive multiple for a growing earnings stream and a business that should remain profitable even if US new car sales decline by 30%."

Graham & Doddsville New Fall 2018 Issue

Embedded below is the new issue:



You can download a pdf copy here.

Hedge Fund Links ~ 10/19/18

Taking investment teams from good to great [CFA Institute]

Profile of Cliff Asness [Bloomberg]

Summary of Sohn Tel Aviv conference [Reuters]

Ray Dalio on the most important habits to build [LinkedIn]

Eddie Lampert was a wizard, now he's coming to terms with failure [NYTimes]

Profile of Joel Greenblatt [Barrons]

Hedge fund bets on beaten up New York Taxi medallions [WSJ]

Hedge fund stars crying uncle gives industry hope [Bloomberg]

Tips for aspiring portfolio managers [CFA Institute]

Hedge funds: Your fees are Bull%$&* [Institutional Investor]

Ray Dalio's Principles for Navigating Big Debt Crises: Free PDF

Bridgewater Associates founder Ray Dalio has recently released a free PDF entitled Principles for Navigating Big Debt Crises.  Dalio has written this for the 10-year anniversary of the financial crisis.

It's got quite the endorsement from former Federal Reserve Chairman Ben Bernanke himself, who said: "Ray Dalio's excellent study provides an innovative way of thinking about debt crises and the policy response."

You can download the free .pdf here.
 

And if you haven't already, be sure to also check out Dalio's first book, Principles which is quite the tome of knowledge on his ways of thinking and approaching things.

Value Invest New York Conference: Exclusive Discount

Value Invest New York

December 4, 2018, Metropolitan Club of

New York City

The conference speaker line-up includes Joel Greenblatt, Howard Marks, Matthew McLennan and many others - see the full speaker line-up and presentation titles below.

As a partner offer, the organizers have offered MarketFolly readers a $200 discount on a ticket to attend if booked before October 31, plus also a free eBook from Harriman House worth $20 (no conference ticket purchase required).

Take advantage of the exclusive discount before it expires in 2 weeks!  To save, click here to register and use discount code: Marketfolly-VINY18


Click here to see the full speaker line-up


- Howard Marks - Oaktree Capital: "Mastering the Market Cycle": Fireside Chat and Audience Q&A Hosted by Scott Wapner of CNBC

- Joel Greenblatt - Gotham Asset Management: Presentation title TBC

- Álvaro Guzmán de Lázaro & Fernando Bernad - azValor: "Buying Deeply Undervalued Real Assets"

- David Iben - Kopernik Global Investors: "The Value of Being Approximately Right In a Market that Appears to be Increasingly Precisely Wrong"

- Ben Preston - Orbis Investments: "Vale: Blue Sky Mine"

- Matthew McLennan - First Eagle Investment Management: "The Value of Scarcity and Resilience"

- Richard Chilton - Chilton Investment Company: "A Private Equity Approach to Investing in High-Quality Stocks"

- Bernard Horn - Polaris Capital: "A Global Snapshot of Value Opportunities"

- Andrew Wellington - Lyrical Asset Management: "Value Hidden in Plain Sight"

- Ronald Chan - Chartwell Capital: "The Value Handover"

- Nigel Waller & Andrew Goodwin - Oldfield Partners: "Value Investing in an Age of Disruption"

- Rajiv Jain - GQG Partners: Title TBC

- Jonathan Boyar - Boyar Value Group: Title TBC

- Robert Hagstrom - EquityCompass Strategies: Title TBC

- David Shapiro - Willis Towers Watson (Moderator)

 

If you have any questions about Value Invest New York please direct them to the organizers at newyork@valueinvest.com

What We're Reading ~ 10/16/18

Why family businesses outperform [Credit Suisse]

Exclusive interview with Amazon founder Jeff Bezos [Forbes]

Op-ed from AQR's Cliff Asness: Buyback derangement syndrome [WSJ]

The untold story of Stripe, the secretive $20 billion payments startup [Wired]

Profile of the owner of the In-N-Out burger chain [Forbes]

Bob Iger's bets are paying off big time for Disney [TIME]

Pitch on Henry Schein (HSCI) [Spruce Point Management]

A pitch on Tempur Sealy [Barrons]

A capacity to suffer and setting the right expectations [Scuttlebutt Investor]

Can Larry Culp fix General Electric? [WSJ]

LendingTree is the secret success story of FinTech [TechCrunch]

Why facts don't change our minds [James Clear]

Atomic Habits: An easy and proven way to build good habits [James Clear]

A day in the life of a Waymo self-driving taxi [The Verge]

The gambler who cracked the horse-racing code [Bloomberg]

Carl Icahn Buys Dell Technologies Tracking Stock, Opposes Merger, Sends Letter

Activist investor Carl Icahn today unveiled a new 8.3% ownership stake in Dell Technologies tracking stock (DVMT) with over 16.5 million shares.  He opposes the DVMT merger and released a very detailed lettering outlining his thesis and thoughts (all emphasis his):


Icahn's Letter to DVMT Shareholders

"Fellow DVMT Stockholders:

Over the decades I’ve spent much of my time searching for undervalued companies.  We are very proud of our record.  In fact, an investment in Icahn Enterprises depositary units made at the beginning of 2000 (when Icahn Enterprises began to fully embrace the activist strategy) has increased by approximately 1,514%, or an annualized return of 16%, through October 11, 2018 (assuming reinvestment of dividends).  We have also made hundreds of billions of dollars for stockholders in companies in which we have been activist investors.  However, we freely admit that many of the companies we have invested in were identified to us by stockholders who sought our assistance against mediocre management who were attempting to profit at stockholder expense.  As you know, even the worst management and boards in this country are extremely difficult to dislodge.

A few months ago, several large holders of Dell Technologies Inc.’s tracking stock (“DVMT” or the “Tracker”) contacted me to express their concerns regarding, and their opposition to, Michael Dell’s and Silver Lake’s machinations and activities related to the Tracker, as well as stressing that the Tracker was, and is, deeply undervalued.  (Five years ago, I vehemently fought Michael Dell who many stockholders believed was severely underpaying for the company in a going-private transaction).  After researching the current situation, I quickly realized that while we have unearthed many undervalued opportunities in the past, very few companies compare to the current opportunity and the massive undervaluation of DVMT — which exists in plain sight for all to see.

We Don't Say This Lightly: 

Over The Past Few Months We Have Acquired Beneficial Ownership Of Over 16.5 Million, or 8.3%, DVMT Shares.

We Will Vote AGAINST.

And Will File A Proxy Statement To Solicit Your Vote AGAINST, Dell's Proposed DVMT Merger!

The Dell Tracker currently sells for approximately $92 per share but is worth on a pure mathematical basis approximately $144 per share[1].  In my opinion, this massive distortion exists because (i) as a result of the 2013 going-private transaction, we believe the market does not trust Michael Dell or Silver Lake; (ii) the Tracker has basically zero governance rights and is trapped within a capital structure that has some of the worst corporate governance in America (at Dell, the Certificate of Incorporation even requires that the CEO has to agree to replace the CEO!), however, investor fear of this poor governance is overdone and we believe strong activism combined with litigation, if necessary, can mitigate the governance risks; and (iii) for the better part of the past year, Dell and Silver Lake worked to destroy the value of the Tracker by (1) raising the possibility of a Dell IPO, (2) floating the idea of a merger with VMware and (3) threatening a forced conversion of the Tracker into Dell common stock, among other tactics. These scare tactics are reminiscent of the tactics Machiavelli advised the Borgia rulers to use centuries ago.

The Facts

Several years ago, I believe Dell and Silver Lake realized that Dell Technologies was simply a highly-leveraged hardware company facing great secular challenges and would never enjoy the growth and success of Apple and Microsoft. Therefore, they levered up dramatically to purchase EMC Corporation (“EMC”), a better positioned hybrid hardware and software company, whose crown jewel was its 82% ownership interest in VMware, Inc. (“VMware” or “VMW”).  But, to purchase EMC, Dell needed $10 billion more than its bankers could possibly arrange, and they also needed to convince EMC stockholders that Dell’s offer was worth accepting.  They accomplished this by engineering the DVMT Tracker that they said would allow EMC stockholders to continue to participate in VMware’s upside.

Because a tracking stock is unusual and rarely included as merger consideration, Dell and its bankers had to convince EMC stockholders that the Tracker would efficiently “track” the economic value of VMware shares.  To that end, one of Dell’s bankers at the time delivered a fairness opinion that assumed the Tracker would trade at a range of +/- 5% to VMware shares; while another banker assumed the Tracker would not trade at more than a 0-10% discount to VMware shares.[2]  Dell sold EMC stockholders the Tracker assuming, at most, no more than a 10% discount, yet today, Dell and some of those same bankers are now soliciting your vote to agree to exchange your DVMT shares at a 36% discount![3]

It seems clear that Dell has long-planned to repurchase the Tracker at bargain basement prices.  For two years, Dell management have publicly boasted about Dell’s “…opportunistic opportunities in the market to take advantage of the discount between the two securities”[4] and have repurchased over 23 million DVMT shares at substantial discounts.  This plan significantly benefits Michael Dell and Silver Lake, but at a huge cost to the DVMT stockholders.  Why hasn’t the Dell Board been exercising its fiduciary duties owed to the DVMT stockholders, as opposed to just the controlling stockholders?  Make no mistake, if the current “opportunistic” deal succeeds, 100% of the discount, approximately $11 billion, will be an economic windfall mostly attributable to Michael Dell and his Silver Lake partners.  It is clear to me that Dell and Silver Lake have followed Machiavelli’s advice to the letter:  It is better to be respected than loved, but better still to be feared than respected.

Creating the Fear

In January 2018, Dell commenced its fear campaign by telling stockholders that Dell was evaluating potential business combinations between Dell and VMware, Inc.  DVMT stockholders and the market generally feared that this meant a possible reverse-merger with VMware which would result in a significant multiple contraction for the combined companies which would mean a much lower combined company stock price for the former VMware stockholders.  This obviously would also result in a lower value for the DVMT stock.  For good reason, these disclosures sowed fear and uncertainty that resulted in a precipitous fall in price for both VMW shares and DVMT shares.  In a two-week period both stocks dropped over 25%.  It is very hard to believe that Michael Dell and Silver Lake did not fully anticipate this drop and we believe this was a carefully calculated (and successful) attempt to frighten VMW and DVMT stockholders.  It appears to us that VMW management and the VMW independent board members wanted no part of a merger with Dell.  Instead, they agreed to dividend $9 billion to Dell to obtain some relief from, and at least postpone, a merger with Dell.  Once the threat of a merger was effectively off the table, VMW and DVMT shares recovered a good part of their lost value and the discount narrowed modestly, but it continues to persist.

But, Michael Dell’s and Silver Lake’s ultimate objective was, and still is, to purchase the Tracker at a large discount and they would not be deterred.  They therefore successfully struck a deal with Dell’s independent directors to exchange DVMT shares for cash and Dell stock, at a ridiculously low valuation.  Instead of paying the mathematical value of $144 per share for the Tracker, they are currently offering to pay what we estimate is only $94 per share.[5]  Although I know and respect one of the Dell independent directors, by agreeing to this deal, I can only conclude the independent directors must have been misinformed by advisors working for Dell and Silver Lake or by Michael Dell and Silver Lake themselves.  Otherwise, it is unquestionable, in my opinion, that the independent directors breached their fiduciary duties to the DVMT stockholders.  How else can one explain an agreement that so obviously transfers $11 billion in value to the controlling stockholders at the expense of the minority stockholders?  The one thing these independent directors did get right, however, was to condition the deal on DVMT stockholder approval.  I believe the Dell independent directors must take their fiduciary duties to the DVMT stockholders seriously.  Any future transactions proposed by the controlling stockholders must always be assumed to be at the expense of the DVMT stockholders and the independent directors must always demand robust protections for the DVMT stockholders. The Board’s fiduciary duty to all stockholders demands nothing less, especially after this fiasco!

Dell now appears to be realizing that DVMT stockholders are uniformly and stubbornly against the proposed DVMT merger and is now moving into the next phase of its fear-mongering campaign.  By using the scare tactic of disclosing that they have met with investment bankers to explore a potential IPO of Dell’s Class C common stock, Dell is effectively telling its public stockholders that if we, the DVMT stockholders, do not approve their proposed DVMT merger, they will invoke a draconian provision in their Charter and force us to convert our DVMT shares into Dell stock following a Dell IPO.  Fortunately, in my opinion, their threat to “cram down” a forced IPO conversion is another empty one, if we stand together.  

An Empty and Ridiculous IPO Threat 

We believe that a Dell IPO would face significant challenges and trade very poorly given the possibility of the issuance of a tsunami of stock in connection with a forced conversion.  I believe Dell’s IPO valuation would be severely penalized with: 1) a larger than average IPO discount for its abominable corporate governance, 2) a conglomerate discount for the myriad of partially owned assets and complex structure and 3) a large and incalculable discount for the up to $20 billion of backflowing shares that could hit the market following a forced conversion of DVMT stock.  It would also be one of the most closely watched and scrutinized IPOs in history – the spotlight’s glare would be blinding!  In short, we are not intimidated by Dell’s threat of a forced IPO conversion, and ultimately, we ask ourselves: “Who would ever buy Dell stock knowing that a tsunami of stock may hit the market?” And, given these chaotic dynamics and uncertainties, as well my and other DVMT stockholders strong opposition to a forced IPO conversion, can you imagine the required disclosures or the roadshow?  Could you even find an investment bank willing to risk its reputation (not to mention the potential liability) with a Dell IPO under such circumstances?  

Even in the almost impossible event that Dell overcomes these massive execution challenges of the IPO “cram down,” we believe applicable law will suffocate Dell’s ability to achieve the draconian outcome they so desire.  The Delaware courts are clear that controlling stockholder transactions must be reviewed under the stringent entire fairness standard, not business judgment, unless certain procedural safeguards are satisfied.  If Dell invokes the forced IPO conversion, we believe the Board must treat such a transaction as a conflicted controlling stockholder transaction and obtain protections for the DVMT stockholders, otherwise the Board’s decisions will be reviewed under the entire fairness standard.  Particularly because a forced IPO conversion would result in irreparable harm to DVMT stockholders, we also believe that any transaction that fails to include minority stockholder safeguards will be exposed to an injunction and/or substantial damages.

Importantly, against the backdrop of DVMT stockholders rejecting the proposed DVMT merger transaction, it will be very difficult not to conclude that the forced IPO conversion was pursued in retaliation against DVMT stockholders. Given the fact that in one recent discussion, a very reputable stockholder told us that Goldman Sachs, one of Dell’s advisors, has been telling stockholders that (and I paraphrase) “…the IPO could be for a small number of shares and who knows how that will trade…”, Dell’s and Silver Lake’s current vote solicitation activities already appear to be tainted by coercion.  In my view, this is obviously another threat to take advantage of DVMT stockholders who do not understand that an IPO is nearly impossible!  Dell, Silver Lake and Goldman Sachs should all absolutely understand that Delaware jurisprudence has developed to protect minority stockholders from coercive controlling stockholders, and I strongly believe, as do my lawyers, that the Delaware courts will protect DVMT stockholders from Dell’s and Silver Lake’s coercive actions. Even if we fail to obtain an injunction, we believe we would have valid claims for substantial damages, which Dell would have to defend under entire fairness, for many years, which is not something either Dell or the Board will want to do.  Suffice it to say, we believe it is obvious that the threat of a forced IPO conversion is empty, no matter what they say.

Continuing the "Status Quo" - Another Empty Threat

Another threat Dell has made is that they will do nothing and will continue with the “status quo”.  But this is ridiculous!  Time is Dell’s enemy and our friend!  As time goes on, we expect Dell’s very cyclical business to be basically stagnant or to decline, while VMware’s business should continue to grow and become more profitable.  This dynamic will largely put our 50% economic ownership in VMware out of their reach.  We therefore believe that Dell purchasing the Tracker is a “must have” for Dell.  Today Dell, ex-VMware, is a mundane highly-levered hardware company that will only face greater disruption and competition.  The combination of high leverage and the cyclicality of Dell’s business means that it is possible that Dell’s cash flow may be severely impaired by any downturn in its business, making it very important for them to get control of VMware’s more stable recurring cash flow.  Dell has over $46 billion in gross debt, and its recent debt paydown has substantially relied on cash generation from asset sales and working capital, instead of operating income.  To continue paying down debt, we believe that Dell has a more pressing need for VMware’s cash flow than management would have you believe.

It is our strong opinion that capturing the discount is only the first step in Dell’s grand expropriation of value.  As astute technology investors, we believe that Michael Dell and Silver Lake perceive that VMware is right at the beginning of a multi-year inflection point.  As its fast-growing network and cloud solutions gain scale, we believe VMware is likely to experience the business nirvana of both accelerating growth and expanding margins.  We believe this could result in over $12 per share of free-cash flow generation in a few years, and a stock price of potentially over $250 per share.[6]  Clearly Michael Dell and Silver Lake take us for fools if they think that we would exchange this future value potential for only $94 per share.

THE Next Steps

We believe Dell’s next step will be to modestly increase the deal price in an attempt to receive voting commitments from those willing to sell at a discount, just not as large as the current 36% discount.  We strongly believe that DVMT stockholders should not consider accepting any discount, but if they do, in no event should that discount be greater than the 0 to 10% discount that was assumed when the DVMT Tracker was first issued.  Even then, note, I merely say “consider.”

Despite the numerous arguments I have made to explain why DVMT stockholders should not accept Dell’s proposed deal, or for that matter, even a new deal unless it contains a very, very substantial increase, I understand that some DVMT stockholders may want to exit their investment and accept an improved offer.  For that reason, and in preparation for the possible announcement of an improved offer, I am considering several options.  I believe that if Dell does raise the offer, it will be important to provide liquidity to the DVMT stockholders that want to sell, while also protecting the DVMT stockholders that do not want to sell from being forced out in a merger.  In my opinion the best way to balance these competing interests would be to offer a competing partial bid that provides partial liquidity without forcing a merger.  As such, I intend to continue evaluating this idea and determine whether other interested parties, including financing sources, may want to participate in, or finance, a transaction of this nature.

VOTE AGAINST THE PROPOSED DVMT MERGER!

In conclusion, I firmly believe Dell and Silver Lake are trying to capture $11 billion of value that rightly belongs to us, the DVMT stockholders.  As such, I intend to do everything in my power to STOP this proposed DVMT merger. In my opinion, it is better to have peace than war, but be assured, I still enjoy a good fight for the right reasons, and in the current situation, I do not see peace arriving quickly!  Stay tuned!

Sincerely,

Carl C. Icahn"



[1] Based on DVMT share price of $91.74 and VMware stock price of $141.49, as of October 11, 2018.  Assumes Class V Common Stock interest in 61.1% of the 331 million VMW shares attributable to the Class V Group, per Dell Technologies Inc.’s Form S-4/A, filed with the Securities and Exchange Commission, on October 4, 2018.

[2] As disclosed in the EMC Definitive Proxy Statement, dated June 6, 2016.

[3] Based on the value of 199 million outstanding DVMT shares, at $91.74 per share, compared to the value of 61.1% of Class V Group’s interest in 331 million VMware shares, at $141.29 per share.

[4] Dell Chief Financial Officer comments made during Dell’s earnings call on March 30, 2017.

[5] Based on a 5.0x multiple of FY2019E “Core Dell” EBITDA of $7 billion and market prices as of October 11, 2018 for VMware, Pivotal and SecureWorks. Assumes DVMT shares exchanged for $9 billion of cash and 1.3665 subject to proration.

[6] Cash flow projections based on Bank of America Merrill Lynch report, dated July 16, 2018.  FCF valuation multiple based on comparable company analysis, including MSFT, RHT and CTXS.

Cat Rock Capital Increases SharpSpring Position

Alexander Captain's hedge fund firm Cat Rock Capital has filed an amended 13G with the SEC regarding its stake in SharpSpring (SHSP).  Per the filing, Cat Rock now owns 15.01% of the company with over 1.22 million shares.

This is up from the 936,935 shares they reported as of July 16th in their previous 13G filing.  The newly amended 13G was made due to activity on September 24th.   Prior to founding Cat Rock, Captain worked at Tiger Global.

Per Yahoo Finance, SharpSpring is "operates as a cloud-based marketing technology company worldwide. The company offers SharpSpring, a marketing automation solution for small and mid-size businesses. It markets and sells its products and services through sales teams and third party resellers. The company was formerly known as SMTP, Inc. and changed its name to SharpSpring, Inc. in December 2015. SharpSpring, Inc. was incorporated in 1998 and is headquartered in Gainesville, Florida."

Tiger Global Buys More Sunrun

Chase Coleman's hedge fund firm Tiger Global has filed a Form 4 with the SEC regarding its position in Sunrun (RUN).  Per the filing, Tiger Global now owns over 15.23 million shares.

They purchased RUN shares on October 9th, 10th, and 11th at weighted average prices of $11.1267, $11.9614, and $11.9757.  In total, they bought 231,357 shares.

As we've detailed previously, Tiger Global has increased its stake over the course of the year.

Per Yahoo Finance, Sunrun "engages in the design, development, installation, sale, ownership, and maintenance of residential solar energy systems in the United States. It also sells solar leads. The company markets and sells its products through direct channels, partner channels, mass media, digital media, canvassing, referral, retail, and field marketing. Sunrun Inc. was founded in 2007 and is headquartered in San Francisco, California."

Sohn San Francisco Investment Conference: Final Speakers & Registration

The Sohn San Francisco Investment Conference is only a few weeks away on October 29th.  It will feature top investment managers sharing investment ideas in order to support the Excellence in Investing for Children's Causes Foundation and its beneficiaries.

The conference supports organizations improving educational opportunities for under-served youth and a portion of the proceeds also benefits The Sohn Conference Foundation and their research on pediatric cancer.

If you're on the west coast, this is the investment conference to attend.  You can get more information about the conference here: https://excellencesf.org/


Sohn San Francisco Speakers List

- Mick McGuire, Marcato Capital Management

- Alex Gleser, TPG Public Equity Partners

- Glen Kacher, Light Street Capital

- Andrew Parmentier, Highland Capital

- Shashin Shah, Think Investments

- Dan Morehead, Pantera Capital

- Kevin Oram, Praesidium Investment Management

- Jeff Osher, No Street Capital

- Jeff Shen, Ph.D., BlackRock

- Gil Simon, SoMa Equity Partners

- Mayor London N. Breed, Mayor of San Francisco


You can hear all the investment pitches from these managers by registering for the conference here.


Next Wave Sohn Speakers

- Vineer Bhansali, Ph.D., Long Tail Alpha

- Marcelo Desio, Lucha Capital Management

- Daniel Kozlowski, Plaisance Capital

- Franklin Parlamis, Aequim Alternative Investments


Event Details

When: October 29th, 2018

Where: Hyatt Regency, San Francisco


Schedule:  

11:30am to 12:30pm - Networking and Buffet Lunch

12:30pm to 2:00pm - Next Wave Sohn: Emerging Managers

2:30pm to 6pm - Sohn Conference Main Event

6:00 pm to 7:30pm - Cocktail Reception


The conference is only a few weeks away, so act quickly before it's too late.  Click here to register for the event.

Hedge Fund Links ~ 10/12/18

Hedge fund Highfields Capital to shut down [Reuters]

Another shutdown: Tourbillon Capital [Bloomberg]

Recent thoughts from Stan Druckenmiller [Business Insider]

Profile of Elliott Management's Paul Singer [New Yorker]

Profile of Jim Chanos [Institutional Investor]

Profile of Joseph Edelman: The 41% man [Institutional Investor]

Study finds funds in the business of breaking up deals see payday [CNBC]

At hedge funds, where are the women? [WSJ]

The incredible shrinking hedge fund [Bloomberg]

When not to invest in a hedge fund [Institutional Investor]

A fund manager's fancy car might be a red flag [Barrons]

Viking Global Files 13D on Urovant Sciences

Andreas Halvorsen's hedge fund firm Viking Global has filed a 13D with the SEC regarding shares of Urovant Sciences (UROV).  Per the filing, Viking now shows a 75.6% stake in the company with over 22.7 million shares, though the 13D notes that "The Reporting Persons do not directly own any Common Shares." 

The company recently completed its initial public offering (IPO).  Viking has previously invested in Roivant Sciences in 2016, a holding company that has created numerous subsidiaries, including newly public Urovant, which could explain Viking's SEC filing.  Other Roivant subsidiaries include Axovant Sciences, Myovant Sciences, and Enzyvant Sciences, to name a few.

Viking also invested in Roivant again in 2017 with an undisclosed amount of funding.  SoftBank's Vision Fund is also an investor in Roivant, but not the subsidiaries, at least that was the case as of mid-2017.  Roivant was founded by Vivek Ramaswamy.

Third Point's Presentation on Campbells (CPB): Refresh the Recipe

Dan Loeb's hedge fund firm Third Point has an activist position in Campbells (CPB).  They recently released a presentation called #RefreshTheRecipe where they are pushing for change at the company.

Third Point highlights that Campbells has underperformed both peers and the S&P under various timelines (19% shareholder return vs 306% for S&P over the last 20 years).  Third Point seeks to replace the board to enact change and originally pushed for the company to sell itself or merge with another packaged foods company.

Dan Loeb's firm is looking to turnaround the soup business, stabilize the fresh food business and stop margin declines with disciplined cost management, and make the overall product offerings more relevant to modern consumers via ingredients/flavors and new designs/packaging.

For the snacks business, Third Point sees opportunity to innovate with new flavors, ingredients and packaging to drive market share, execute on deal synergies from the Snyder's-Lance deal, and wants them to explore divestitures of non-core brands like Pop Secret and Pepperidge Farm frozen cakes.

If the whole business were to be sold, they comp relevant transactions leading to a 14-15x EBITDA multiple, or between $52 and $58 per Campbells share.  CPB currently trades around $37.


Third Point's Campbell's Presentation: Refresh The Recipe

Embedded below is the slideshow:



For other recent hedge fund commentary, we posted up Bill Ackman's presentation on Starbucks as well as Greenlight Capital's Q3 letter.

Trian Partners Discloses PPG Industries Stake

Nelson Peltz's Trian Partners has filed an amended 13F with the SEC.  In it, they reveal a new position in PPG Industries (PPG).  As of the end of the second quarter, they owned 2.59 million shares. 

They had previously disclosed this information privately to the SEC and requested confidential treatment. 

It's unclear what their position size is currently, and we won't see it until they update their 13F as of the end of the third quarter.  That filing will come in mid-to-late November. 

The paints and coatings company recently reported earnings and guidance, and shares sold off sharply on the news.

JANA Partners Trims HD Supply Position

Barry Rosenstein's hedge fund firm JANA Partners has filed a Form 4 with the SEC regarding its stake in HD Supply Holdings (HDS).  Per the filing, JANA sold 621,235 shares on October 5th at a weighted average price of $42.37.  After this sale, they still own over 5.39 million shares.

Bill Ackman Long Starbucks: Pershing Square Presentation

At the Grant's Interest Rate Observer Conference, Bill Ackman of Pershing Square unveiled a new long position: Starbucks (SBUX).  The presentation is entitled 'Doppio' and Pershing now owns over 15 million shares with a cost basis of $51 and they've used forward contracts.  It's around a $900 million stake.

Pershing notes SBUX is trading at 22x, a discount to the average of 26x and they feel premium coffee is a secularly growth category.  If same store sales and valuation can return to average levels, SBUX shares can double in three years.

Pershing's thesis is that this is a rare opportunity to own one of the world's best franchises at a discount.  They're encouraged by actions of the new leadership team, as they've streamlined the portfolio (sold Tazo, closed Teavana stores, sold the consumer packaged goods business to Nestle).  They're also initiating cost savings and a significant share buyback plan (~$19bn three year target).

Pershing Square: Long Starbucks Presentation

Embedded below is the .pdf of the presentation:



You can download a copy here.

For other recent hedge fund commentary, we also posted up David Einhorn & Greenlight Capital's Q3 letter.

Greenlight Capital Q3 Letter: Sold Apple, Still Short Tesla

David Einhorn's hedge fund Greenlight Capital has had a rough 2018.  They're now down 25.7% for the year.  During the quarter, they exited the last of their longstanding Apple (AAPL) position at $228 per share. 

They feel their AAPL thesis that was once differentiated has now become consensus and the valuation of 17x forward earnings is "much less enticing and we are somewhat worried about Chinese retaliation against America's trade policies."

Greenlight also continues to be bearish on Tesla and noted many similarities to Lehman Brothers before its collapse.  They also highlighted CEO Elon Musk's erratic behavior.  There's numerous paragraphs about TSLA in the letter below.


Greenlight New Longs: Altice USA and BT Group

In other notable portfolio activity, they initiated two new longs: Altice USA (ATUS) and BT Group. 

ATUS they acquired at $18.38 and view it as a discounted play on cable peers in the US.  They feel the company has better cashflow conversion and more investment opportunities than rivals. 

BT Group they purchased at £2.19 and feel that shares were cheap at 4.7x EV/EBITDA and an 8% dividend yield. 

They also covered their 11 year short in Martin Marietta Materials (MLM) and covered another short: TransDigm Group (TDG). 

Also, they sold out of their Micron (MU) position and exited their Mylan (MYL) stake as well.


Greenlight Capital's Q3 Letter

Embedded below is Greenlight Capital's Q3 Letter:



For more recent hedge fund commentary, check out Bill Ackman's new long Starbucks SBUX presentaiton.

Baupost Group Files 13D on Viasat, Joins Board

Seth Klarman's investment firm Baupost Group has filed a 13D with the SEC regarding its stake in Viasat (VSAT).  Per the filing, Baupost owns 23.06% of the company with over 13.73 million shares.  This ownership stake amount is unchanged from the end of the second quarter.

In the filing, Baupost notes they recently were invited to join the company's board in a non-voting capacity.

In a press release issued by the company, they noted: 

“As a decade-long investor in Viasat, we remain excited about the Company’s growth potential in both its defense and commercial businesses,” said Greg Ciongoli, partner, The Baupost Group. “We appreciate this opportunity to contribute to boardroom discussions.”

“Baupost has a successful long-term philosophy of value investing,” said Mark Dankberg, chairman and CEO, Viasat. “Inviting Baupost to participate as a Board observer provides us with an opportunity to capitalize on their strategic insight, as well as their valuable financial and investment expertise.”

Steve Einhorn - Omega Advisors Interview on Boyar Podcast

Steve Einhorn of Omega Advisors was recently interviewed on The World According to Boyar Podcast.  Einhorn has been Lee Cooperman's longtime partner at the firm, which recently converted into a family office.


Steve Einhorn Interview on Boyar Podcast

-  Omega runs long/short, primarily in the US with average exposure in developed economies.  Would prefer 15% lumpy return than a 8% non-lumpy return.

- They also spend a lot of time on macro thinking and strategy to combine with their equity research.  They assess a number of factors: economic activity, earnings growth, monetary/fiscal policies, valuation, supply and demand, etc.

-  This helps them determine what exposure they want in the portfolio.  If they're constructive overall, they're willing to take more stock specific risk.  They're bottom-up stock pickers, but if a macro outlook leans certain ways, they can look to take more exposure to a certain sector.  They'll also sell options premium in certain instances.

- On position sizing: they first look at liquidity as they don't want to be so large in a name that they can't get out without disturbing the market.  The second is the risk/reward associated with a given name.  A large long for them is 3-5% of assets and large short would be 1-2%.

-  They'll exit a stock if it meets their stock price target and upside is diminished, or if they were simply wrong on their assessment of fundamentals, or if there's another stock in the sector that's more attractive.

-  Currently he likes the tech sector (software) due to rapid growth in revenue and cashflow.  They see moats around many of these names allowing them to keep pricing flexibility.  They think global growth will be less than it has been historically, and in this environment they want to be invested in growth names, as tech names are often independent of the business cycle.  Not to mention, the multiples they're paying is not excessive in their view.

- Another sector they like is industrials as a synchronized global economic expansion will benefit some of these companies.  They like the position in the cycle.  They also like financials, feels they're cheap relative to tangible book and can see high dividend growth.  In the energy sector, oil prices have ramped up, but some of those stocks haven't reflected that.

- They're not interested in utilities or telecom names, anything interest rate sensitive.  Consumer staples is another area that "looks expensive to them on a multiple basis relative to underlying growth prospects."


Steve Einhorn's Bear Market Checklist

Five items are almost always present at the end of a US bull market and the start of a bear market.  The five are:

1)  Problematic inflation:  if wage inflation is around 3.5% it's a problem (it's currently well below that).  Also watch core consumer prices (you'd need to see consumer inflation in excess of 2.25%)

2)  A hostile Federal Reserve:  raising rates well above the neutral rate of 2.5-3% causes a hostile Fed (currently below that).  Thinks they'll gradually lift rates.

3)  Prospect of recession: "virtually nothing we look at shows the economy in the US is prone to a recession anytime soon."

4)  Investor sentiment:  climbing a wall of worry.  Currently doesn't think it's excessive or speculative.

5)  Valuation: When it becomes extended relative to interest rates and inflation.  Current multiples aren't extended in relation to interest rates.  Modestly above long-term average.


- Sees forward equity returns of 7-9%.  "Bull markets don't die of old age, they die because they are murdered by the Federal Reserve.  Our Federal Reserve is not in a murderous mentality given tame inflation and moderate economic growth."


For other recent podcasts, we've also previously highlighted Boyar's interview with Chris Mayer, the author of 100 Baggers.

Embedded below is the podcast audio of Boyar's interview with Steve Einhorn:



Email readers:  Click here to listen

If you missed it, we also posted up complimentary equity research from Boyar on Charter Communications (CHTR), Franklin Resources (BEN), and SunOpta (STKL). 

What We're Reading ~ 10/3/2018

The decision matrix: how to prioritize what matters [Farnam Street]

Sustainable sources of competitive advantage [Collaborative Fund]

Deep dive on wireless future: 5G [Axios]

How Shopify is the platform powering the direct-to-consumer revolution [Digiday]

Why Google Fiber is high-speed internet's most successful failure [HBR]

Pulling back the curtain on how SoftBank's massive Vision Fund works [TechCrunch]

A pitch on Yelp [Barrons]

Inside the world's fastest growing food delivery service [Eater]

Food delivery apps are impacting your favorite restaurants [Democrat & Chronicle]

How seltzer/sparkling water is upending coffee and beer [WSJ]

App-only banks rise in Europe and aim at traditional banks [NYTimes]

For some platforms, network effects are no match for local know-how [HBR]

David Rubenstein interviews Amazon's Jeff Bezos [YouTube]

How TripAdvisor changed travel [The Guardian]

The $29 billion battle to own how America sleeps [Fast Company]

How Paytm clinched its Berkshire Hathaway investment [Economic Times]

'Peak car' and the end of an industry [Bloomberg]

Howard Marks Interview With Tim Ferriss on Mastering the Market Cycle

Tim Ferriss recently interviewed Oaktree Capital's Howard Marks on his popular podcast as part of Marks' press tour for his new book that's coming out: Mastering the Market Cycle: Getting the Odds on Your Side. Here are some notes/summary as well as the full audio below.


Howard Marks Interview on Tim Ferriss Podcast

- "You can't predict, you can prepare."  This quote is from one of Marks' memos from way back in the 1990s. He uses this to note that he didn't predict the housing crash, but he was prepared because of cautious preparation in advance.

-  His previous book The Most Important Thing outlines the concept that you have to know where we are in the cycle.  "And where you are in the cycle is the primary determinant of risk."  So his new book, Mastering the Market Cycle, focuses on that aspect because just knowing the position in the cycle is a huge advantage.

- The book focuses on looking at the future not as the past or something that's already happened that might repeat, but look at it as a range of possibilities, a probability distribution.

-  "Most of us have an inherent bias, (we're) essentially cautious or essentially aggressive."  He notes it's very important to assess your personal bias as that affects so much of your success in investing.

-  "One of the keys to successful investing is to either be unemotional or at a minimum, act like you are.  The great investors I know behave in an unemotional fashion."  The problem of course is teaching yourself to be unemotional is counter to human behavior.  So part of it is being born with that predisposition.

-  " 'I don't know.'  It's a great thing to say and not enough people say it."

-  Marks recommends people read Nassim Taleb's book, Fooled by Randomness

-  "There's nothing more dangerous in life than being sure you know something that you don't know."

-  Marks thinks the most useful chapter of his new book is the one that talks about one's attitude toward risk.  From the book: "If I could ask only one question about each investment I had under consideration, it would be, 'how much optimism is factored into the price?'"

-   "We make money from favorable surprises.  If the positive conviction is so high then by definition there can never be a favorable surprise."  Marks labeled this as a number one concept.

-  He says the greatest thing he was ever taught was about stages of a bull market and how people shift from not believing things will get better, to people accepting things are improving, to finally people believing the good times will go on forever.  Buying in the first phase gives cheapest prices because there's not much optimism in the price.  The second phase is when the favorable surprise happens.  Then you reach the phase where there's so much optimism in the price that it's unlikely to yield a profit.

-  Marks thinks we're in the 8th inning of the markets.  However, we don't know how many innings there are in the game.  In a normal game, the good times could be close to ending.  "I think this is a time for more caution than usual."

-  Marks likes playing backgammon since probability is the name of the game.

-  On cycles: the biggest mistake you can make is to ignore the repetitive nature of the cyclical pattern.

-  Marks likes reading Grant's Interest Rate Observer.  Another book that Marks has enjoyed: Factfulness, which he recommends as it takes qualitative viewpoints commonly held and debunks them with data.

- Marks believes bitcoin can't be valued.


Podcast Audio:  Here is the link to stream the podcast episode (mp3 format): click here



Be sure to also check out Marks' new book: Mastering the Market Cycle.