Bill Ackman's Presentation on Burger King

As we detailed previously, Bill Ackman has acquired a stake in Burger King via Justice Holdings Ltd (LON:JUSH). Ackman recently released a presentation on Burger King called "Justice is Best Served Flame Broiled" referencing BK's trademark flame broiled technique.


Key Takeaways From Ackman's Presentation:

- Burger King is the second largest quick-service hamburger chain in the world (80 countries). 92% of its restaurants are franchised and the company has key brand equity (Whopper, "have it your way" and "flame broiled").

- TEV $8.1 billion, Net Debt $2.6bn, Equity Value $5.5bn.

- Given Ackman's real estate background and propensity to focus on investments with assets in that arena, it should come as no surprise that he makes sure to point out that the company owns nearly $1bn of real estate assets.

- Refranchising: Company is expected to strategically re-franchise its company-owned stores.

- Turnaround Initiative: Management seeks to improve average revenue per unit (ARPU) in North America by introducing a new menu, new ad campaigns, re-image stores, and operational initiatives.

- International Growth Strategy: They see boosting global stores to 17,000 by 2016. Obviously with the success of McDonald's (MCD) and Yum Brands (YUM) abroad, BK wants to pursue this and has started an intriguing joint venture in Brazil which it hopes to replicate in other emerging areas.


Embedded below is Justice Holdings' presentation on Burger King:



Be sure to also check out Ackman on the fast food industry, booksellers, retail & the economy.

And for more presentations, head to Pershing Square's presentation on Canadian Pacific.

Eric Mindich's Eton Park Capital Discloses New Position in Teekay (TK)

Eric Mindich's hedge fund firm Eton Park Capital just filed a 13G with the SEC revealing a new equity stake in Teekay (TK).

Per the filing, they now own a 6.51% ownership stake in the company with 475,000 shares and options to purchase 4,000,000 shares.

The company spun off various operations over the last couple of years. It holds stakes in Teekay LNG Partners (TGP), Teekay Offshore Partners (TOO), and Teekay Tankers (TNK).

Wells Fargo recently upgraded its price target on the company to $38-41 (shares currently trade around $35). They feel that the company is undervalued and it will likely raise its dividend in 2013 and could possible boost its buyback later in 2012.

Per Google Finance, Teekay is "a provider of international crude oil and gas marine transportation services. It also offers offshore oil production, storage and offloading services, primarily under long-term, fixed-rate contracts. With a fleet of over 150 vessels, offices in 16 countries, Teekay provides marine services to the oil and gas companies, helping them link their upstream energy production to their downstream processing operations."

Glenview Capital Boosts Mueller Water Products (MWA) Stake

Larry Robbins' hedge fund Glenview Capital just filed a 13G with the SEC regarding Mueller Water Products (MWA) where they reveal a 6.35% ownership stake in the company with 9,945,383 shares.

This marks a 50% increase in their position size since the end of 2011. The disclosure was required due to trading activity on April 2nd. In other recent portfolio activity we also touched on Glenview's new stake in Tenet Healthcare.

Per Google Finance, Mueller Water Products is "manufacturer and marketer of products and services that are used in the transmission, distribution and measurement of drinking water and in water treatment facilities.

The Company’s product portfolio includes ductile iron pipe, water and gas valves, fire hydrants, water meter products and systems and a range of pipe fittings, couplings, hangers and nipples, which are used by municipalities, as well as the residential and non-residential construction industries, for heating, ventilation and air conditioning (HVAC), fire protection, industrial, energy and oil and gas applications."

Jim Chanos Shorting Coinstar (CSTR) & Dell (DELL)

Jim Chanos, founder of hedge fund Kynikos Associates, appeared on CNBC this morning talking about some of his latest short positions.

When it comes to shorting, Chanos says that valuation is the least important factor. Instead, he focuses on flawed businesses, accounting problems, and technological changes. He says the internet has been a great 'leveler' in that it's created successful businesses, but it's also destroying many others.

One company in particular he's shorting is Coinstar (CSTR). He points to DVD sales falling as VHS tapes once did. He highlights how cashflow margins are very high because you're "the last guy standing" so everyone looking to rent DVD's goes to them. But he asks what happens when DVD's are replaced by streaming?

He cites Netflix (NFLX) as a company that's been trying to transition to this. Ultimately, he sees streaming as the future and so thinks DVDs die, along with CSTR (assuming they don't adapt).

Chanos is also playing the "death of the PC" and the mobile revolution. He is short Dell (DELL), citing that PC sales are dropping and being replaced by tablets. Though it's unclear if he's short other PC companies, his choice of DELL is slightly puzzling because the bull thesis on this name in the past has focused on a shift to the enterprise.  Perhaps he'd be better served expressing his bet on a secular shift via a different stock.  For the opposite of Chanos, we've posted up why David Einhorn owns DELL as well.

The Kynikos manager also mentioned that he was previously short Research in Motion (RIMM) in the $60's and covered in the $20's last year.

To see what else Chanos has been shorting, we've also posted up another Chanos presentation: beware the global value trap.

Embedded below are is the videos of Chanos' interview (readers click the link to come watch):




To learn more from this manager, head to Chanos on short selling: the power of negative thinking.

Jim Chanos on China

Jim Chanos, well-known short seller and founder of hedge fund Kynikos Associates, appeared on CNBC this morning to give his thoughts on China and the market. Readers will recall that Chanos has been a bear on the country (see his China presentation here).

Chanos says that China is still trying to cull the property sector. He also says he is short China's banks which have been great shorts, down 30-40% over the past 2 years. While Chanos spent time talking politics, his shorts over there have been purely economic and financial.

Chanos also previously debated Xerion Fund's Dan Arbess as to whether China was a bubble or bonanza.

Embedded below is the video of Chanos' interview this morning:



Be sure to also check out some of Chanos' latest short positions.

Eddie Lampert Sells Autozone Shares & Covered Calls

Eddie Lampert's hedge fund ESL Partners just filed an amended 13D with the SEC regarding its position in AutoZone (AZO). After owning almost 5 million shares in January, Lampert now owns 2.4 million shares.

The hedge fund manager executed numerous open market sales of AZO shares at the beginning of April at prices ranging from $378-$385, with the bulk of them coming in the middle of the range.

Earlier in the year, Lampert cut his stake in AutoZone and distributed almost a billion dollars worth of AZO shares to investors. Additionally, he used some AZO shares as payment in kind to meet year-end redemptions.

In December of 2010, ESL Partners owned over 33% of the company. In the latest filing, they own only 6.1%. Lampert recently made a rare television appearance and talked about the markets and his positions in retailers.


Covered Call Sales

Lampert also sold 1,904 covered call options (representing an aggregate of 190,400 shares). These calls have exercise prices of $350, $360, and $370. The expiration dates include June 16th, 2012 and September 22nd, 2012. In aggregate, Lampert netted $5,011,110 from the call option sales. The vast majority of the calls sold were the June $360 strike.

It appears as though Lampert is hedging his position a little bit. AZO shares have been on quite a run, from $280 up to $376 over the past year.


AutoZone Thesis

AutoZone is a specialty retailer that sells automotive parts and accessories. The investment thesis on AutoZone is largely predicated on two factors. First, bulls point to the fact that more and more cars are aging each year and are in need of more parts/repair.

Second, while many traditional retailers face heat from internet-based competition offering lower prices, bulls argue that car parts are something that you "need now" if a car is broken. Not to mention, those less familiar with the mechanical aspects of vehicles seek professional advice/help from AZO staff. Lampert has been selling shares, but AZO has been on quite a run.

ESL had returned 25% annually in its first 14 years. In 2007 it was down 27% and in 2008 it was down 33%. In 2009, the fund rebounded, up 55% that year and up 16% in 2010.

For more on this manager, head to lessons Lampert's learned as an investor.

Bruce Berkowitz's Investment Thesis on Bank of America (BAC): Slideshow Presentation

Bruce Berkowitz of Fairholme Capital has put together a slideshow presentation on Bank of America (BAC) that outlines his investment thesis on the company.

Just yesterday, we shared Berkowitz's investment thesis on AIG (his largest holding). Today, we shift to his third largest position as of the end of the year: Bank of America.

Here are his main reasons for owning BAC shares:

- Trades at less than one-third book value

- Core businesses generating 1% return on assets and 10% return on equity

- Fortress balance sheet

- Largest US retail deposit market share and serves one in every two US households

And the last one is a kicker: "essential to global economic security." You want too big to fail? You got it.


Berkowitz sees a 20% implied annual return on his investment in Bank of America, which he argues is a reasonable return since you're buying BAC for less than half of book value. He also highlights trends improving in BAC's favor: a strengthening job market, a stabilizing housing sector, and improving fundamentals in the financial sector.


Margin of Safety: Fairholme's leading man says that $7 of BAC shares buys you something that's worth $20+.


Thesis Simplicity: Yesterday, we highlighted Sam Zell's advice on investing where he said something is only worth buying if you can explain the thesis in a few sentences.

Regarding BAC, Berkowitz writes, "Its earnings power has been disguised by the intense provisioning for loan losses. But when the provisioning gets back to a normal level, you'll start to see that incredible earnings power come down to the bottom line. And it's as simple as that."


Embedded below is Bruce Berkowitz's slideshow presentation on Bank of America:



For other presentations from Fairholme, check out Berkowitz's AIG thesis & presentation.

And to learn about his approach as an investor, head to Berkowitz's checklist for investing.

Interviews With Sam Zell, William Von Mueffling & Michael Karsch: Columbia Business School Newsletter

Columbia Business School is out with the latest installment of its investment newsletter: Graham & Doddsville. Edited by MBA students, the issue features interviews with Sam Zell (Chairman of Equity Group Investments), William von Mueffling (President of Cantillon Capital), and Michael Karsch (founder of Karsch Capital Management).

Below are some excerpts we found insightful:

Sam Zell on key tenets of his investing philosophy: "I philosophically believe that if you can't delineate your idea in one or two sentences, it's not worth doing ... simplicity is critical."


Sam Zell on what has allowed him to be successful: "The definition of a great investor is someone who starts by understanding the downside. You must make the judgment in advance as to how much downside risk you are willing to take. I knew that I could always survive the good days, but the critical element is to be able to survive when the market isn't doing well or the investment isn't performing. I always focus on how much exposure I am taking."


William Von Mueffling on Cantillon's investment style: "One can broadly divide value investing into two camps. The first camp is the Graham & Dodd style which is buying assets at a discount or cash at a discount. The second camp is the Buffett style, which I characterize as buying financial productivity at a discount. We fall into the second camp. We believe that there are many different types of moats to be found, and that a moat around a business should allow it to produce outsized margins and wonderful returns on capital. The trick is being able to buy this stream of cash flows at a discount. Unlike Graham & Dodd investing where you might look at low price-to-book value companies or net-net companies, we are trying to buy high financial productivity at a discount to its intrinsic value."


Michael Karsch on the lifecycle of investing approach: "(It) is a framework that states that markets, industries, companies and stocks typically move through 5 stages over time. These stages are: 1) distressed, discarded and/or undiscovered, 2) value, 3) growth at a reasonable price (GARP), 4) growth, and 5) momentum. The lifecycle analysis and an appreciation for a company‘s evolution through the cycle often lead us to ask whether a company will be perceived as better (up the cycle) or worse (down the cycle) over a reasonable investment horizon."


Embedded below is the Graham & Doddsville issue:




For more from these three investors, we've posted:

- Michael Karsch on risk management

- Sam Zell on Brazil's investment opportunity

- Cantillon converts from hedge fund to long-only

Bruce Berkowitz's Investment Thesis on AIG (Slideshow Presentation)

Bruce Berkowitz of Fairholme Capital has put together a case study on his investment in American International Group (AIG). Given that many investors love seeing analysis from prominent investors, we figured this was a useful resource for readers.

The Fairholme manager frames AIG as a company that trades at less than one-half tangible book value, has a fortress balance sheet, has a shareholder equity-to-assets ratio of 15%, and has a leading position in its market.

Berkowitz believes that a 10% return on owner's equity = a 20% implied annual return on investment. For a further look at the investment thesis, we've analyzed AIG in the August 2011 issue of our Hedge Fund Wisdom newsletter as well.


Circle of competence: Berkowitz echoes a concept often taught by Warren Buffett himself: invest in your circle of competence. Berkowitz had experience with insurance companies and found one trading at attractive prices.

Margin of Safety: The Fairholme manager also touches on a key tenet as outlined by Baupost Group's Seth Klarman: a margin of safety. Berkowitz says that you give $25 and received $45 worth of AIG assets.

Courage of Conviction: He lastly highlights the lonely road contrarians sometimes face. When the going got tough, he stuck to his guns. After all, Fairholme's slogan is: "ignore the crowd."

Many great investors are of the belief that your highest conviction picks should garner the most capital. Berkowitz obviously follows this school of thought as his AIG position represented almost 35% of his firm's reported assets at the end of 2011.


Embedded below is Bruce Berkowitz's case study on AIG:



To learn more from this investor, head to Bruce Berkowitz's checklist for investing.

What We're Reading ~ 4/11/12

Notes from Howard Marks' speech at NYSSA [Distressed Debt Investing]

What a market top looks like [Howard Lindzon]

A battle cry for hedge funds: separate but not equal [FINalternatives]

The market's obsession with the Fed & QE [Economic Musings]

The 10 commandments of trading [BCLund]

First Trust plans hedge fund-related ETF [IndexUniverse]

Family offices poaching hedge fund talent [Dealbook]

On hedge fund advertising [Fortune]

Fairholme's Berkowitz has big recovery in first quarter [Reuters]

After bumper first quarter, hedge funds take profits [Reuters]

Barron's annual online broker survey [Barrons]

How to negotiate your next salary [Harvard Business Review]

How much is investment management worth? [Capital Spectator]

Jamie Dimon's annual letter to shareholders [JPMorgan]

Whither the Yale model? [Unstructured Finance]

Egypt's 2012 boom worries some fund managers [Reuters]

Guy Gottfried to Speak at Value Investing Congress Next Month

The Value Investing Congress is right around the corner on May 6th and 7th right after Warren Buffett's annual meeting for Berkshire Hathaway in Omaha, Nebraska. It's just been announced that Guy Gottfried of Rational Investment Group will also present investment ideas at the event.

Gottfried's investment idea from last October's Congress is up almost 38% since then. And at last year's spring event, Gottfried pitched an idea that is up 56% since then.

See what his latest investment idea is in Omaha. Market Folly readers receive a $400 discount to the event by clicking here and using code: S12MF3


Gottfried joins the list of other speakers:

- Doug Kass (Seabreeze Partners)
- David Nierenberg (D3 Family Funds)
- Matthew Swaim & Bruce Zessar (Advisory Research)
- Keith Trauner & Larry Pitkowsky (GoodHaven Capital)
- Thomas Russo (Gardner Russo & Gardner)
- Aaron Edelheit (American Home Real Estate)
- Douglas Grey (Saddle Peak Asset Management)
- Robert Robotti & Isaac Schwartz (Robotti & Co)
- Albert Yong & Chan Lee (Petra Capital)
- Whitney Tilson & Glenn Tongue (T2 Partners)


If you're planning on going to Omaha for the Berkshire Hathaway meeting, knock out two great investing gatherings in one trip and network with tons of other investors. Don't forget the $400 discount for Market Folly readers with code: S12MF3

Mohnish Pabrai Sells Pinnacle Airlines (PNCL) Shares

Value investor Mohnish Pabrai just filed a Form 4 with the SEC regarding shares of Pinnacle Airlines (PNCL). Per the filing, Pabrai has just sold 158,464 shares on April 3rd at a price of $0.70.

After the transaction, Pabrai Investment Fund II LP now owns 777,868 shares of PNCL. At the end of 2011, all of Pabrai's entities filed owning a collective 1,985,902 shares.

Shares of Pinnacle Airlines have plunged from $5.50 in 2011 down to where they currently trade at around $0.31. The company recently filed for bankruptcy protection to help tackle its debt and costs.

We've highlighted Pabrai's activity since it's a rare glimpse at his movements. As of the end of 2011, PNCL was his smallest US equity long allocation. His largest stakes were in Wells Fargo (WFC), Berkshire Hathaway (BRK.B), Potash (POT), and Terex (TEX).

For more on this investor, head to Pabrai on his checklist on how to approach an investment.

Per Google Finance, Pinnacle Airlines "an airline holding company based in Memphis, Tennessee. It is a parent company of three wholly owned subsidiaries: Pinnacle Airlines, Inc., Colgan Air, Inc. and Mesaba Airlines. The company's operating platforms include Regional Jet Operations and Turboprop Operations."

Nantahala Capital Management Discloses Stake in Scientific Learning Corp (SCIL)

Wilmot Harkey's hedge fund Nantahala Capital Management filed a 13G with the SEC regarding shares of Scientific Learning Corp (SCIL). In it, they reveal a 7.79% ownership stake in the company with 1,849,672 shares.

The filing was made due to activity on March 28th, 2012. On that date, Scientific Learning had settled a private placement of $7.2 million worth of common stock and warrants. The company sold 4.2 million shares of stock and warrants representing 2.5 million shares. These warrants have an exercise price of $1.82.

This is a newly revealed position for the hedge fund as they did not report owning a stake in their last disclosure as of December 31st, 2011.


About Nantahala Capital

This is the first time we've covered Nantahala's movements so here's some background: The hedge fund runs a fundamental strategy with a primary focus on small cap stocks. They have a market-neutral discipline as they take a balanced risk management approach (their long book resembles their short book). They focus on expected return on capital.

Though we haven't seen more recent numbers, as of mid-year 2010, Nantahala had seen a 19.2% net annualized return over 5 years. Wil Harkey founded the firm in 2004. Prior to founding Nantahala, he worked at Sagamore Hill Capital where he focused on capital structure arbitrage. He earned his BA in Mathematics and Economics from Williams College.

Dan Mack joined as co-portfolio manager in 2007. Prior to that, he also worked at Sagamore Hill Capital focusing on event-driven and convertible arbitrage strategies. He earned is BS in Economics and a BSE in Computer Science and Engineering from the University of Pennsylvania.


About Scientific Learning

Per Google Finance, Scientific Learning Corp "distributes the Fast ForWord family of software. The Company creates educational software that accelerates learning by improving the processing efficiency of the brain. Its products are marketed primarily to K-12 schools. The Company’s products are marketed in 45 countries globally. It offers an online data analysis and reporting tool that uses algorithms to provide diagnostic and prescriptive information and intervention strategies."

John Paulson Keeps Buying NovaGold Resources (NG)

John Paulson's hedge fund firm Paulson & Co has been active in shares of NovaGold Resources (NG) yet again. They've just filed an amended 13D filing with the SEC revealing they've purchased an additional 4.5 million shares.

You'll recall that we recently detailed how Paulson had been buying NovaGold and how the company has plans to spin-off NovaCopper. The hedge fund has continued to buy and now owns 34,563,518 shares of NG, or 12.4% of the company.

The latest disclosure was made due to portfolio activity on April 3rd. They made various purchases at the beginning of April, the largest of which were: 1 million shares at a price of $7.17, 500,000 shares at a price of $7.01 and 586,500 shares at a price of $6.82. The filing says that Paulson has paid $209,652,160 to acquire their collective stake.

For more from this hedgie, check out background on John Paulson's gold fund.

Per Google Finance, NovaGold Resources is "a precious metals company engaged in the exploration and development of mineral properties in North America. The Company has a portfolio of mineral properties located in Alaska, the United States and British Columbia, Canada.

The Donlin Gold project in Alaska is held by a limited liability company owned equally by wholly owned subsidiaries of NovaGold and Barrick Gold Corporation (Barrick). The Galore Creek project is held by a partnership owned equally by wholly owned subsidiaries of NovaGold and Teck Resources Limited (Teck). The Ambler project in Alaska is wholly owned by NovaCopper Inc., a wholly owned subsidiary of NovaGold."

Paulson & Co was recently named as one of the top 10 hedge funds by net gains since inception.

Dan Loeb Files 13D on Enphase Energy (ENPH)

Dan Loeb's hedge fund firm Third Point just filed a 13D with the SEC on Enphase Energy (ENPH). This is a newly revealed stake for the hedge fund.

Third Point now owns 8,089,099 shares of ENPH which is a 20.4% ownership stake in the company. The disclosure was required due to trading activity on March 30th, 2012 when the company set its initial public offering (IPO).

The vast majority of shares were received in the IPO at a price of $6.00 per share. Third Point received theses shares due to conversion of numerous tiers of convertible preferred stock as well as junior convertible secured notes. They also purchased 948,386 shares in the open market at a price of $8.05.

In other portfolio activity from the fund, we've detailed that Third Point has an activist stake in Yahoo and is pressing for change with a proxy contest.

Per Google Finance, Enphase Energy "designs, develops and sells microinverter systems for the solar photovoltaic industry. The Company sells its microinverter systems primarily to distributors who resell them to solar installers. It also sells directly to installers, as well as through original equipment manufacturers (OEMs). The Company’s microinverter system consists of three components: Enphase microinverter, Envoy communications gateway and Enlighten Web-based software."

You can view the latest exposure and positioning of Third Point here. Be sure to also check out the very popular post: lessons Dan Loeb's learned as an investor.

Seth Klarman's Baupost Group Sells Out Of Targacept (TRGT)

Seth Klarman's hedge fund firm Baupost Group just now filed an amended 13G with the SEC. In it, they disclose that they've sold completely out of their equity position and no longer own any shares.

This disclosure was made due to activity on March 31st, 2012 which portfolio managers will note is coincidentally the end of the first quarter.

Baupost Group had previously owned 6 million shares in TRGT, initially revealing the position just a short time ago (in the fourth quarter of 2011). This position represented only a miniscule slice of Baupost's already small long US equity allocation.

It appears as though the hedge fund exited their shares after news broke that AstraZeneca had given up on an experimental anti-depressent drug (licensed from Targacept). Additionally, TRGT then said that the company would be ending the development of its diabetes drug. In response, shares dropped from $7.49 to the current price of $4.85.

Baupost Group is listed as one of the top 10 hedge funds by net gains since inception.

Per Google Finance, Targacept is "a biopharmaceutical company engaged in the design, discovery and development of neuronal nicotinic receptor (NNR) Therapeutics for the treatment of diseases and disorders of the nervous system. The Company’s NNR Therapeutics target NNRs."

You can view other portfolio activity from Baupost Group here.

Steve Cohen's SAC Capital Reveals New Annie's Stake

Steve Cohen's hedge fund firm SAC Capital just filed a 13G with the SEC. In it, they reveal they've taken a brand new position in Annie's (BNNY).

The hedge fund now owns a 4.8% ownership stake in Annie's with 806,000 shares as the company just went public at the end of March. The disclosure today was required due to trading activity on March 28th.

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

Per Google Finance, Annie's is "a natural and organic food company offering consumers products in packaged food categories. The Company sells its products in three product categories: meals; snacks; and dressings, condiments and other."

For more recent portfolio activity from this fund, we've also detailed how they increased their stake in GNC Holdings.

Passport Capital Sees "Major Retrenchment in Risk Assets": Latest Portfolio Changes

Passport Capital founder John Burbank recently sent out a letter to investors updating their macro views.

Despite being net short, their Passport Global fund is up 4.1% for the year. Their neutrally-exposed Long/Short fund has returned 7.5% and their net long Special Opportunities fund is up 12.9% for the year.

Burbank writes, "I have strong conviction about our current positioning - perhaps as strong as I have ever felt in the 11+ years that I have been running Passport Capital. Simply put, I believe that the current market environment is setting up for a major retrenchment in risk assets and we are well positioned to benefit from this."

Just a month ago, Burbank made an appearance and said that 2012 is a stockpicker's market.


Passport Capital's Main Views

They feel that Central Bank liquidity has merely boosted prices but has done nothing else constructive. Burbank believes that deflation is the real risk (see the best investments during deflation). The hedge fund also takes the stance that equity markets are misconstruing economic growth in the developed world.

Passport feels a recession is coming in 2012 or early 2013 in the US. They note that average equity declines during recessions is 40%, though even a 20% decline would take the market back to the October 2011 lows.


Burbank's Portfolio Changes

In late 2011, they reduced portfolio illiquidity and have been selling into strength in the equity markets as of late. They've also boosted hedges and shorts "less to reduce net exposure and more to add idiosyncratic risk aligned with our negative economic view."

Burbank's firm also bought more physical gold and also started a position in Brent Crude Oil. These are both plays on increasing Central Bank liquidity. You'll recall that John Paulson originally started his gold fund as a bet against the US dollar as well.

Passport has also started a position in mortgage backed securities which they believe to "have the potential to deliver high risk-adjusted yield irrespective of equity market valuations." Additionally, they initiated a positive-carry position in deflationary rates trade (3yr1yr) which they feel will benefit from either the Fed holding short-term rates low or a risk-off period.


Saudi Equities Most Compelling

Passport has their single largest equity allocation to Saudi equities. Even though that market is up 23% year-to-date, they feel that "Saudi equities constitute the best single asymmetric equity market we can find."

For more coverage on this hedge fund, we've highlighted why Passport likes Marathon Petroleum as well as their rational for owning Liberty Interactive.

Is Gamestop (GME) a Value Play or Value Trap? Quick Pitch

Market Folly has been adding a bunch of new features as of late. We started off with our stock of the week series and now we're going to begin a monthly 'quick pitch' on certain equities that hedge funds have been long or short.

Today's quick pitch focuses on Gamestop (GME): Value Play or Value Trap? The following is from Chris Lau, a SeekingAlpha contributor:

A major shake-up in the way games are distributed is unfolding. Activision (ATVI) and EA’s (EA) entrance in digital gaming is proving to be a winning strategy. EA’s online site, Origin, bypasses traditional sales channels. In the social networking space, Zynga’s (ZNGA) IPO showed investor willingness to take risks. Investors are putting money in the yet-to-be proven model of social networking games.

This leaves one major question: What does this mean for retailers like GameStop?


Hedge Fund Ownership (Or Lack Thereof)

The top holders of GME stock are largely vanilla mutual fund players like Vanguard and Fidelity. While Cliff Assness' quant firm AQR Capital owned a decently sized position as of 2011 year-end, there is practically no major hedge fund ownership in this stock (at least in the top 100 holders).


GameStop Backstory

GameStop has grown throughout the years, and especially after its acquisition of Electronic Boutique in 2005 for $1.44B. In the last few years as the digital downloading of games has proliferated, GameStop touted its knowledge of gaming and its consumers as a competitive advantage.

In recent months, investor pessimism has grown. Shares are 22.91% off from 52-week highs, closing recently at $21.70. The main concern lies in the rising shift to digital gaming from the traditional physical console games.

GameStop has tried to attack this shift head-on and saw over $450 million in digital sales last year. They've mainly offered access codes in stores that allow gamers to download content at home. GME was originally spun-off from Barnes in Noble (BKS) in 2002, yet another company battling digital distribution of content.

GME's management team has set aside money for further acquisitions in digital as they have cash and no debt.


Valuation

At $21.95 per share, GME trades at a P/E of 7.63 (using 2011 EPS of $2.87 that excludes write-downs). By comparison, Best Buy (BBY) traded recently at $22.95 with a P/E of 6.30 (using 2011 EPS of $3.64).


Why the Bulls Own the Stock

Bulls point to fears over digital distribution as being overblown and argue that the digital transition will take longer to play out and won't cripple GME. They feel as though GME has a dominant market position in the industry.

Joel Greenblatt of Gotham Capital runs a Compustat screen to create a 'Value 1000' index for value investors. GME is one of the main companies on that list due to its cheap valuation. Other bulls might point to a cap structure strategy and its cashflow story as compelling reasons to own it. The massive repurchases could potentially place a floor on the stock that can keep shares buoyant even if things take a turn for the worse. And given the high short interest, there's also potential for various short squeezes as these buybacks reduce the float size.

- During the last quarter, GME grew market share to record levels.
- Its expertise allowed the company to create new business models to fill profitability gap
- PowerUp Rewards program (launched October 2010) now has over 17 million members
- Pre-owned digital and mobile business will add $800 million in revenue in 2012
- The company is debt-free
- $500 million stock buyback
- Cheap valuation
- Continued partnerships with publishers to sell DLC


Why the Bears Are Short

Bears will argue that a secular shift to digital distribution of games and the rise of social gaming will lead to the demise of GME ala Blockbuster.

Hedge fund manager Jim Chanos of Kynikos Associates is a notable bear on GME shares as he argues that game publishers like EA are increasingly becoming direct competitors with GME. You can view his bearish presentation on GME here.

He argues that GME looks cheap and will appear cheap all the way down. Just like movies and music, Chanos says that the value of their brick and mortar presence will collapse. GME's counterpart in the UK, Game Group, recently filed for protection from creditors.

And while GME currently thrives on used game sales, that revenue stream could be in jeopardy in the future. It's been rumored that future iterations of Microsoft's Xbox and Sony's Playstation will likely have some sort of "anti-used games measures" built in to the consoles.

One risk that short sellers are cognizant of is that GME could potentially take themselves private or be taken over by private equity. Additionally, the cost to borrow is quite expensive due to the crowded short.

- Fewer packaged game titles are being released
- Short interest has climbed to 41%
- In its recent quarter, GME said physical console category declined faster than projected
- Comparable store sales dropped 3.6% in the last quarter
- 20% decline in hardware sales


Further Talking Points

During the company's recent quarterly conference call, management said that digital receipts are ahead of schedule. They have a goal of $1.5b receipts by 2014.

GameStop's recommerce (buy-sell-trade) for mobile devices, electronics, and tablets started in 2011. The company believes it can resell items like Apple iPads, assuming 5% trade-ins annually and a 12-18 month upgrade cycle. Sales would account for $200m by 2012 and $600m by 2014 which you can read about here.

GME forecasts growth that is reliant on physical games, hardware, and software. The short-term problem for the company is that a lack of new consoles in 2012 will pressure margins. GME's loyalty program must attract a higher proportion of digital sales.

Hot titles like Grand Theft Auto, FIFA Soccer, Call of Duty, and Max Payne 3 may be a catalyst for higher growth. These catalysts aren't necessarily reflected in the current share price and management kept only a conservative forecast for these releases.


Conclusion

GameStop (GME) is a company that dominates in its traditional space of selling physical video games, but it needs to grow-up in the digital world and faces challenges in adaptation. The negative price action in its stock as well as competitors (BBY), suggests that there is further downside. If console makers implement anti-used game measures, GME would have a tough uphill battle. Weak retail sales in electronics and heavy competition make this a stock to avoid at this time.


Thanks to Chris Lau for his contribution to Market Folly in our new 'Quick Pitch' series. If you have an investment write-up you'd like to submit, please click here to email us

Submit Investment Ideas to Be Judged By Seth Klarman, David Einhorn & Bill Ackman: Ira Sohn Contest

For the second year in a row, the Ira Sohn Investment Idea Contest is back. Here's your opportunity to have an idea judged by some of the top investors in the game.

Judges for this year's contest include: Seth Klarman (Baupost Group), David Einhorn (Greenlight Capital), Bill Ackman (Pershing Square), Michael Price (MFP Investors), and Joel Greenblatt (Gotham Capital).

The winner will be selected based on the judges' determination of the most compelling investment idea.


How To Apply: Click here to submit your idea

Deadline: You must apply by Wednesday May 9th at 11pm EST.

Rules: You can choose any marketable security (long or short) with a market cap above $1 billion. The time horizon for the idea should be one-year.

Prize: The winner gets to present their investment idea in front of 2,000 people at the renowned Ira Sohn Investment Conference.


The Ira Sohn Investment Conference was founded in 1995 and proceeds from the event go to organizations dedicated to care and treatment of children with pediatric cancer and life-threatening illnesses.

At the conference, top hedge fund managers present their latest investment ideas and it's one of the best events each year. This year the conference will take place on May 16th from 12pm to 6pm at NYC's Avery Fisher Hall at Lincoln Center. More information can be found at SohnConference.com.

Don't forget to submit your investment idea before May 9th. Good luck!