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.

Greenlight Capital's Q1 Letter: David Einhorn Defends Apple, Still Short St. Joe

David Einhorn's hedge fund Greenlight Capital is out with its first quarter letter to investors.  In it, the hedge fund details why they're long Apple (AAPL), why they're still short St. Joe (JOE), as well as updates on Seagate Technology (STX) and the Japanese Yen.


Net Exposure & Top Positions

Greenlight's average net exposure during the quarter was 36% net long (95% long & 62% short).  Their top five largest disclosed long positions were (in alphabetical order): Apple, Arkema, General Motors, gold, and Seagate Technology.  The hedge fund opened up to new money for the first time since 2008 which is also worth pointing out.


Refuting Apple Concerns

Greenlight presents the 'bear case' concerns often highlighted by investors and then refutes them.  They write,

"1. Too many hedge funds own AAPL.  It's not clear what the objection is here.  We suppose the worry is that there is a herd mentality among hedge funds, and that when one fund sells, there could be a cascade of hedge funds selling shares and the stock price will collapse.  Moreover, if everyone already owns AAPL, who is left to buy it?  Collectively, hedge funds currently hold less than 5% of AAPL's outstanding shares, and no hedge fund ranks among the top 40 holders of the stock.  The average hedge fund has less than 2% of its equity assets in AAPL versus AAPL's 4% weighting in the S&P500, which means hedge funds are actually underweight AAPL."


Einhorn's fund also points out that while many detractors view Apple as a hardware company potentially subject to decline, Apple is actually a software company that has repeated sales of high margin hardware. 

This is a perfect characterization that many seem to miss.  After all, many users bought Mac computers to get away from various viruses and "blue screens of death" often associated with Microsoft Windows.  In order to get the software, though, consumers have to buy the expensive hardware.

For more from this hedgie, head to David Einhorn's presentation at Ira Sohn as well as his slideshow on preferreds.

Embedded below is David Einhorn & Greenlight Capital's Q1 letter to investors:




Einhorn will be presenting his latest stock pick at the Value Investing Congress in NYC in October.  Market Folly readers can receive a discount to the event by clicking here and using code: N12MF3

Third Point Reduces Technicolor Stake

Dan Loeb's hedge fund Third Point late last month filed on the Paris Bourse regarding their stake in Technicolor (EPA:TCH).  Due to a disclosure on April 20th, Third Point have decreased their ownership stake in the company.

Third Point went from owning 7.66% of Technicolor's shares to 4.87% of shares.  This filing was made as they've now gone below the 5% ownership threshold that requires them to file.  We originally detailed when Third Point crossed the 5% threshold early this year to begin with.

About two weeks after Third Point's latest disclosure, Technicolor announced its plans to launch a rights offering to raise up to €158 million in order to fortify its balance sheet and implement its "Amplify 2015" strategic roadmap.

Third Point's founder Dan Loeb is profiled and interviewed in the new insightful book, The Alpha Masters.

Per Google Finance, Technicolor is "a France based company engaged in the development of broadcasting technologies. It supplies production, postproduction and distribution services for content creators, broadcasters and network operators. Technicolor’s activity covers services for Content Creators; digital home products and software service platforms, and research and licensing."

For more from this hedge fund, you can read Third Point's Q1 letter here.

What We're Reading ~ 5/31/2012

The holdings hedge funds don't want you to know about [Abnormal Returns]

On hedge funds and hiring [FINalternatives]

Josh Fink's wild hedge fund ride [AR+Alpha]

How Boaz Weinstein outsmarted JPMorgan [NYTimes]

Everyone's jumping into junk bonds [Reformed Broker]

Elliott Management's argument for sale of BMC Software [Dealbook]

Mary Meeker's latest presentation on internet trends [Business Insider]

Timing isn't everything for value investors [WSJ]

How Tim Cook is changing Apple [Fortune]

Why airlines are undervalued [Barrons]

Can Dell turn it around? [Techinsidr]

Analysis: deconstructing Sony [Brooklyn Investor]

For Paul Singer, success lies in humility [Dealbook]

Goldman Sachs VIP List: Most Important Stocks To Hedge Funds: Q1 2012

Goldman Sachs is out with its Q1 2012 Hedge Fund Trend Monitor report.  In it, they reveal the latest VIP list of 50 stocks that are most important to hedge funds.  These are the positions that appear most frequently in the top 10 holdings of fundamental focused hedge funds.

This quarter, they've also released a new list of very important short positions to hedge funds which we've posted up as well.

Goldman's VIP list of the most important holdings is accessible on Bloomberg via < GSTHHVIP >.  It has "outperformed the S&P 500 by 55 bp on a quarterly basis since 2001."

Goldman Sachs VIP List (Q1 2012)

Stock: Number of funds with stock as top 10 holding

1. Apple (AAPL): 106
2. Google (GOOG): 73
3. Express Scripts (ESRX): 56
4. Microsoft (MSFT): 46
5. Qualcomm (QCOM): 38
6. Citigroup (C): 31
7. General Motors (GM): 29
8. Priceline.com (PCLN): 29
9. JPMorgan Chase (JPM): 27
10. Liberty Media (LMCA): 26
11. Delphi Automotive (DLPH): 24
12. BP (BP): 23
13. Pfizer (PFE): 23
14. Tyco (TYC): 22
15. Visa (V): 21
16. Yahoo (YHOO): 21
17. LyondellBasell (LYB): 20
18. Anadarko Petroleum (APC): 19
19. Bank of America (BAC): 17
20. Ford Motor (F): 17
21. WellPoint (WLP): 17
22. American International Group (AIG): 16
23. Charter Communications (CHTR): 16
24. eBay (EBAY): 16
25. Rock-Tenn (RKT): 16


It's no surprise that Apple (AAPL) is the most widely owned top position amongst fundamental hedge funds.  But despite that, Greenlight Capital's David Einhorn argued hedge funds actually have less than 2% of assets in his Ira Sohn conference presentation.  We've also posted Dan Loeb's thesis on AAPL as he was a big buyer of shares.

Both Tyco and Priceline were featured in the equity analysis section of our Q4 2011 Hedge Fund Wisdom newsletter due to heavy ownership by top funds.  TYC is an event-driven play while PCLN is a huge growth and international play.


Here's the rest of Goldman's VIP list:

26. Seagate Technology (STX): 16
27. Berkshire Hathaway (BRK.B): 15
28. Cisco Systems (CSCO): 15
29. Equinix (EQIX): 15
30. Hertz Global (HTZ): 15
31. Liberty Interactive (LINTA): 15
32. Pioneer Natural Resources (PXD): 15
33. Visteon (VC): 15
34. Valeant Pharmaceuticals (VRX): 15
35. Wells Fargo (WFC): 15
36. Baidu (BIDU): 14
37. Dollar Thrifty (DTG): 14
38. Hess (HES): 14
39. Mastercard (MA): 14
40. News Corp (NWSA): 14
41. Williams Companies (WMB): 14
42. Barrick Gold (ABX): 13
43. CIT Group (CIT): 13
44. Capital One (COF): 13
45. Calpine (CPN): 13
46. Devon Energy (DVN): 13
47. EMC (EMC): 13
48. Hewlett Packard (HPQ): 13
49. Illumina (ILMN): 13
50. Salesforce.com (CRM): 12

Of the above, we've previously highlighted why Passport Capital likes LINTA.  And in the brand new issue of our Hedge Fund Wisdom newsletter, we've analyzed Equinix (EQIX), a big new position by Philippe Laffont's Coatue Management and John Thaler's JAT Capital.

Some of the stocks on the list are brand new additions as enough hedge funds boosted their positions in Q1: ABX, AIG, BRK.B, COF, CPN, CRM, DVN, EBAY, EMC, EQIX, F, HES, HTZ, ILMN, RKT, WLP.


Be sure to also check out Goldman's brand new list of hedge fund very important short positions.

Goldman Sachs Very Important Short Positions For Hedge Funds: Q1 2012

Goldman Sachs is out with its Q1 2012 Hedge Fund Trend Monitor and we've already posted up Goldman's VIP list of most important stocks to top funds.  Now we're posting a new addition to their research: the very important short position list.

This tracks short exposure of hedge funds as an equal-weighted basket that "consists of 50 S&P 500 constituents with the highest total dollar value of short interest outstanding."  It can be accessed on Bloomberg via < GSTHVISP >.

Goldman emphasizes that this list is not based on 13F holdings (because hedge funds are not required to disclose shorts).  They also note that it's not a basket of stocks most held short.


Goldman Sachs Very Important Short Positions For Hedge Funds

Stock, value of short interest (in $ billions)

1. Johnson & Johnson (JNJ): $2.9
2. Exxon Mobil (XOM): 2.8
3. Intel (INTC): 2.6
4. International Business Machines (IBM): 2.4
5. Amazon.com (AMZN): 2.4
6. AT&T (T): 2.3
7. Chevron (CVX): 2.1
8. Verizon (VZ): 1.8
9. Duke Energy (DUK): 1.7
10. Walt Disney (DIS): 1.5
11. Abbott Laboratories (ABT): 1.4
12. Coca Cola (KO): 1.4
13. General Electric (GE): 1.4
14. Walmart Stores (WMT): 1.3
15. Caterpillar (CAT): 1.2
16. ConocoPhillips (COP): 1.2
17. Walgreen (WAG): 1.2
18. Time Warner (TWX): 1.1
19. Lockheed Martin (LMT): 1.1
20. Home Depot (HD): 1.1
21. Dell (DELL): 1.1
22. Bristol Myers Squibb (BMY): 1.1
23. Oracle (ORCL): 1.1
24. Schlumberger (SLB): 1.0
25. United Parcel Service (UPS): 1.0


Of the above. David Einhorn recently made comments about Amazon.com (AMZN) at the Ira Sohn conference.  While he seemed to be skeptical of the company during his talk, he did not say he was short.  He highlighted that the company has destroyed other businesses, taking market share, but criticized their weak profit growth.

Jim Chanos is short Dell (DELL) and he points to the decline of personal computing in favor of tablets and other mobile devices.  He's been correct in that regard as Dell recently reported declines in those segments in their latest earnings release.  But of course the bull case points to Dell's other business lines as they shift toward the enterprise. 


Here's the rest of Goldman's Very Important Short Positions List:

26. Amgen (AMGN): 1.0
27. AvalonBay (AVB): 1.0
28. Chipotle Mexican Grill (CMG): 1.0
29. Boston Properties (BXP): 1.0
30. Union Pacific (UNP): 0.9
31. Simon Property Group (SPG): 0.9
32. Procter & Gamble (PG): 0.9
33. Cerner (CERN): 0.9
34. Host Hotels & Resorts (HST): 0.8
35. Kohl's (KSS): 0.8
36. Waste Management (WM): 0.8
37. CenturyLink (CTL): 0.8
38. Carnival (CCL): 0.8
39. Philip Morris (PM): 0.8
40. American Express (AXP): 0.8
41. DuPont (DD): 0.8
42. McDonalds (MCD): 0.8
43. MetLife (MET): 0.8
44. Fastenal (FAST): 0.8
45. Merck (MRK): 0.7
46. Comcast (CMCSA): 0.7
47. Sysco (SYY): 0.7
48. Freeport McMoran (FCX): 0.7
49. Alcoa (AA): 0.7
50. Staples (SPLS): 0.7


Be sure to also check out Goldman Sachs VIP list of most important stocks to hedge funds for Q1 2012.

On Seth Klarman & Baupost Group's Chargeurs Investment

Seth Klarman is one of the most successful investors of our time, so it's no surprise that investors have an insatiable appetite for any information regarding Baupost Group's investments.  Today after rummaging through the French regulatory database, we found a French company Klarman's firm has been invested in for quite some time: Chargeurs (CRI:PAR).

It appears as though they originally invested in the company over 16 years ago (or at least that's the earliest trace of their ownership we could find).  But the main reason we're highlighting it is because the company says the hedge fund still holds a stake in the company.

Not to mention, it appears as though the equity is trading at lower levels now than it was back in 1996 (the first trace of Baupost's activity).


Chronicling Baupost's Chargeurs Ownership

Looking back through the collection of Baupost Group letters we've previously posted up, we found Chargeurs listed as a holding back in one of their 1996 letters.

Searching through past filings in the Autorite Des Marches Financiers (France's equivalent of the SEC), it shows that Baupost held a 5% stake in 1998.  Then after shares of the company dropped, the following year they disclosed a 10% ownership stake in Chargeurs.  In 2011, their ownership dipped below the 10% threshold.

And now, according to the company's website, Baupost currently hold the equivalent of 8.68% of Chargeurs voting rights, or 1.16 million shares.


Stock & Convertible Bonds

We use the term equivalent because it appears as though Baupost owns a mixture of shares and convertible bonds.

A search of the French regulatory system revealed that Baupost had 1.24 million shares on April 13th, 2010, the date the filing was made public.

Because preferential rights were given to existing shareholders to purchase the convertible bonds, it seems likely that Baupost would have purchased some prior to the March 12, 2011 cut off.  Bear in mind that there was also a secondary market in the preferential rights which complicates the situation a bit further. 

Convertible bondholders who hold until maturity in January 2016 will receive 6.06 shares at par, so shareholders will continue to be diluted by bondholders.  

It's situations like this that provide a good reminder that it's never wise to blindly follow a hedge fund without trying to grasp the situation and doing your own research first.

It's also an amazing example of how Klarman truly focuses on the long-term.  He's held a stake in this company for 16 years, an eternity by today's investment timeframe standards.


About Chargeurs

Per Google Finance, Chargeurs SA is "a France-based company which, manufactures and distributes wool and textiles. The Company manufactures fabrics and garment interlinings for the apparel industry. It operates in three business segments: temporary surface protection, through Chargeurs Protective Films, primarily in the building materials industry, but also in electronics and household appliances; Technical textiles, through Chargeurs Interlining and Raw material processing, through Chargeurs Wool which specializes in topmaking, which consists of designing wool blends. Chargeurs SA operates in five production unites and it's present in 34 countries on five continents."


This isn't the only French company Klarman owns, as it recently came to light that Baupost had been buying Vivendi (VIV:PAR), the stock of a French conglomerate.

Stay tuned as we'll be revealing more of Seth Klarman's investments that have been flying under the radar.  In the mean time, check out notes from Seth Klarman's Margin of Safety.

What We're Reading ~ 5/23/2012

Warren Buffett's Berkshire sought to buy mortgage lender [FINalternatives]

Notes from David Einhorn's Greenlight Re annual meeting [Santangel's Review]

Nardin Baker on the low volatility anomaly [Abnormal Returns]

Interview with Bridgewater's Ray Dalio [Barron's]

Institutional clients prod hedge funds for more transparency [P&I]

Inside Canadian Pacific's overthrow [Globe & Mail]

Look at CP Rail after Ackman's proxy fight [Financial Post]

Implications of Google becoming a hardware company [BusinessWeek]

Buffett buys local newspapers [Omaha]

Why Buffett is buying newspapers [PaidContent]

Infographic: Apple by the numbers [Give Me Mind]

Inspirational commencement speech from Neil Gaiman [Vimeo]

Bill Ackman's Ira Sohn Slideshow Presentation on J.C. Penney (JCP)

Last week we posted up notes from the Ira Sohn Conference including a summary of the Pershing Square founder's talk on J.C. Penney.  Now, courtesy of the WSJ Deal Journal, is Bill Ackman's slideshow presentation on JCP from the event.

Entitled "Think Big", Ackman examines the future of the retailer under new CEO Ron Johnson.  He notes that all the requirements for a turnaround are in place:

- Solid core business with natural competitive advantages

- New, high-quality management team

- Management incentives are aligned with shareholder returns

- High potential new sales strategy

- Abundant "low hanging fruit" in the cost structure to fund sales opportunity


The hedge fund manager compares the turnaround at JCP to that of The Gap (GPS) in the mid 1980's as that company had a broken model to fix, hired talented new management, implemented a strategy change, and after some poor results eventually turned around and the stock rose ~60x.

While JCP's first quarter was disappointing in terms of same store sales (SSS) and gross margin, Ackman is thinking long-term here and points to goals of growing sales and achieving ~40% gross margins.   He also highlights that the dividend cut has caused forced selling by yield investors.


Embedded below is Bill Ackman's slideshow presentation on J.C. Penney from the Ira Sohn Conference:




You can download a .pdf copy here.

Be sure to check out the rest of the notes from the Ira Sohn Conference where tons of big-name hedge fund managers presented.

And for more actual slideshows, we've also just posted up David Einhorn's Ira Sohn presentation on preferreds.

David Einhorn's Ira Sohn Slideshow on Use of Preferreds

David Einhorn's Greenlight Capital just released his presentation from the Ira Sohn Conference on preferreds.  The presentation is entitled "Greenlight Opportunistic Use of Preferreds (GO-UP)."

If you missed it, we've also posted up a summary of Einhorn's presentation at Ira Sohn, as well as notes from the Ira Sohn Conference.

On its website, Greenlight has posted its idea for a security that would satisfy investors' enormous appetite for yield.  They argue that many companies have great balance sheets but their stocks trade at low multiples as investors don't want to pay for earnings.

While most companies elect to pay dividends, Einhorn says that these companies then just become "a stock with a low P/E and an attractive dividend."

Greenlight advocates companies creating a new type of preferred security, essentially a "perpetual preferred stock distributed directly to shareholders, so that shareholders would own and could separately trade both the GO-UP and the common stock."


Here's how Einhorn envisions it:

- 4-6% dividend rate (taxed at preferential rates)
- Quarterly cash payments
- Customary protective provisions


Greenlight also highlights the benefits to issuers:

- "Since the liquidation preference only needs to be satisfied upon a sale or wind-down of the business, there is no immediate use of cash, no maturity or refinancing risk, and no default risk."

- Very high quality credits (trades to reflect long-term interest rate expectations)

- Bought or sold as needed to suit investment goals


Embedded below is David Einhorn's slideshow from Ira Sohn on preferreds:




You can download the slideshow here.  And Greenlight has also posted an Excel spreadsheet analysis on its website here.


For more actual slideshows from the Ira Sohn Conference, head to Bill Ackman's presentation on J.C. Penney as well.

BlueCrest Capital's Michael Platt on European Crisis & How He's Trading

BlueCrest Capital Management's Michael Platt spoke with Bloomberg Television about the European crisis and how he's trading the current situation.



On the financial impact of a Greek exit:

“I think the order of events would be Greece exits, shock wave across Europe, massive stress in banks, Spain turns into the battleground for the euro because of distresses in their own banking system, and then we either get a very swift and strong European solution or we get a hugely disorderly meltdown in Europe. “


On whether Spanish banks are acknowledging their real estate positions:

“No, they are not. In a country with 24% unemployment, they have a 3% provision against their mortgage book…The mortgage book of Ireland has a 10% provision. What is going on in Spain is that 22% of Spanish mortgages have been reworked, half of them more than twice. In other words, there’s evidence that the banks have been evergreening loans.  In which case, 7% of it, you have to take another allowance of 7% to get it to Irish levels against 650 billion euros. That’s another 50 billion euros there. And the same is going on in the loans to small and medium enterprises.”


On how he's trading Europe right now:

“The problem is you can make a pretty sensible argument for almost any outcome in Europe. It could be a run on the banks very quickly. The Greeks could end up staying in for a little bit longer. They could vote to take themselves out. There could be a eurobond. The whole situation could be overtaken by events. We could have bank runs in Spain. We could have LTRO. We could have a concerted bond-buying action from the ECB. You can make a sensible argument for almost any outcome it's in such a state of flux right now. I think that when you get into these sorts of situations, the first thing you want to do is you want to ensure that your money is in a place where you like the credit so that if there is a major banking problem you're not going to lose money on credit…The reason why the treasury market's doing so well. Treasuries, and the short end of Europe with German government bonds, for two years now yield being essentially zero.”


Embedded below is the video of Platt's interview with Bloomberg Television:



For more on how hedgies are playing the European crisis, head to Marc Lasry on opportunities in distressed debt.

Eton Park Capital Discloses Cove Energy Stake, Reduces Sable Mining Position

Eric Mindich's hedge fund Eton Park Capital has just disclosed activity in two positions in UK markets.


Cove Energy

First, Mindich's firm has disclosed a new position in Cove Energy (LON: COV).  Due to trading on May 16th, the hedge fund has disclosed a position of 3.09% of outstanding shares in COV via equity swaps.

Per Google Finance, Cove Energy is "engaged in the exploration for and the development and production of oil and gas reserves. The Company operates in two segments: oil and gas exploration, and mineral exploration. The Company properties include Rovuma Offshore, where it has 8.5% working interest; Mozambique Onshore, where it has 10% working interest; Tanzania Mnazi Bay, where it has 16.38% working interest in production and 20.475% exploration interest; Kenya Offshore (L5, L7, L11A, L11B and L12), where it has 15% working interest, and Kenya Offshore (L10A and L10B), where it has 25% and 15% working interest."


Sable Mining

Second, Eton Park has significantly reduced their position in the London listed African miner Sable Mining (LON: SBLM).  Their disclosure shows they've gone below the threshold of a 3% ownership stake.  Market Folly originally flagged when Eton Park bought Sable back in April 2010 at a placing.

Sable Mining is still owned by Audley Capital who hold 7.1% of the shares outstanding.

Per Google Finance, Sable Mining is "formerly BioEnergy Africa Limited, is a mining company. It focuses on investing in early stage exploration and development mining businesses or assets located in sub-Saharan Africa."


In other activity from this hedge fund, we've detailed Eton Park's new position in Teekay (TK).