Oaktree Capital's Chairman Howard Marks has released his latest memo entitled "It's All a Big Mistake." In it, he categorizes active management as "the search for mistakes."
If you think about it, it makes total sense. Forced selling is one example that comes to mind, especially during the financial crisis. In that regard, Dan Loeb's talked about how his hedge fund Third Point steps in to be a buyer for those forced sellers in his Q1 letter. That's one example of searching for mistakes.
Marks goes on to say that, "people should engage in active investing only if they're convinced that (a) pricing mistakes occur in the market ... (b) they - or the managers they hire - are capable of identifying those mistakes and taking advantage of them."
David Einhorn of Greenlight Capital has based his investment philosophy
on looking for mispricings and trying to understand why something is
mispriced. We've also highlighted East Coast Asset Management on mispricings as they penned an entire letter on the subject. Obviously, the focus on mispricing is a key component of investing.
Marks highlights how there's often behavioral sources of investment error (emotions like greed, fear, envy and hubris rule the roost more often than not). He also touches on herd behavior as market participants all pile in the same names instead of diverging from the pack.
Oaktree's leading man concludes that, "In the end, superior investing is all about mistakes ... and about being the person who profits from them, not the one who commits them."
Embedded below is the latest memo from Oaktree Capital's Howard Marks:
You can download a .pdf copy here.
Lastly, we wanted to draw attention to Marks' definition of hedging in his above memo: "In
other words, hedging consists of an attempt to cede some potential gain
in exchange for a great reduction in potential loss."
For more on this firm, head to Howard Marks on Oaktree's IPO as well as Marks on contrarianism.
Friday, June 22, 2012
Howard Marks: Active Management is the Search For Mistakes (Latest Memo)
Blue Ridge Capital Buys More Martin Marietta Materials (MLM): John Griffin Versus David Einhorn
John Griffin's hedge fund firm Blue Ridge Capital filed a 13G with the SEC regarding their position in Martin Marietta Materials (MLM). Per the filing, Blue Ridge has disclosed a 5.53% ownership stake in MLM with 2,530,000 shares.
This marks an increase in their share count by 36% since the end of March. Back then, Griffin's firm owned a position worth over $138 million. However, since then shares have fallen from around $85 to current levels of $68. Blue Ridge's additional shares means their stake is now worth around $173 million.
David Einhorn Bearish On Martin Marietta Materials
We always love when two prominent managers have a dichotomy of opinion on a certain name. It's what truly makes a market and in this case we have John Griffin & Blue Ridge long shares of MLM versus David Einhorn and Greenlight Capital who is bearish on the name.
At the Ira Sohn Conference (see notes here) last month, David Einhorn was bearish on shares of MLM. He argued that the company's multiple is too high (at the time a 35 P/E). Einhorn also said that one-time fiscal stimulus has goosed earnings.
Since his presentation talked about tons of stocks, that's all he mentioned about MLM in particular and he's presumably short the stock. MLM shares tanked 10% the day Einhorn made his presentation.
Long Thesis on MLM?
While we obviously don't know Blue Ridge's specific thesis for being long Martin Marietta Materials, Tom Russo of Gardner, Russo & Gardner made comments regarding why the company is attractive.
In an interview with Columbia Business School, Russo said that "(MLM's) business, stone quarrying, tends toward natural monopolies. It is very expensive to haul stone on a truck and stone isn't valuable enough to allow it to recoup shipping costs. Within 25 miles is about the only distance that you can draw from to get stone ... so if you own a quarry in an urban region, you have a very valuable asset."
The company tried to complete a $4.5 billion hostile takeover of rival Vulcan Materials (VMC) but it fell through. The company has appealed and many argue they only have a small glimmer of hope as it heads to Delaware's Supreme Court.
Per Google Finance, Martin Marietta Materials is "a producer of aggregates for construction industry, including infrastructure, nonresidential, residential, railroad ballast, agricultural, and chemical grade stone used in environmental applications."
For more on John Griffin, check out Blue Ridge Capital's recommended reading list.
What We're Reading ~ Tech Sector Edition
The real bull/bear case on Apple [MicroFundy]
Argus Research starts Facebook (FB) at hold [Barrons]
Google price target cut on soft search & euro decline [Notable Calls]
Seagate & Western Digital wait for the click of death [Inquirer]
Digital's ever-swifter incursion [NYTimes]
Microsoft's love affair with tablets [All Things D]
Microsoft made the MacBook Air & iPad look obsolete [Gizmodo]
Spectrum and the wireless revolution [WSJ]
Pandora faces rivals for ears and ads [NYTimes]
Tech press misses the Google/Amazon name grab [Scripting]
Vizio reboots the PC: quiet success story takes on sleeping giants [Verge]
Viewers use tablets, phones for more content [NYpost]
How Garmin failed to see the iPhone threat [All Things D]
Thursday, June 21, 2012
Capital Cube: A Revolutionary Tool For Investors
Whenever we come across interesting tools for investors, we like to flag them for readers. So today we're highlighting CapitalCube.com, a site that provides company analysis for stocks all around the world.
Let's face it, there's plenty of tools out there that various levels of investors use. Retail investors use Yahoo Finance to look up numbers on their stocks, Financial Advisors often use Morningstar and similar platforms, while institutional investors use data providers like Bloomberg, CapitalIQ etc.
What's unique about CapitalCube is that they have an Analysis Platform that takes raw data from the data providers and provides enhanced analysis and commentary for over 40,000 global equities.
Investors can type in the ticker symbol of any company and pull up fundamental analysis about the company. But here's where things are differentiated from what's already available online on a site like Google Finance or Yahoo Finance. CapitalCube takes those raw numbers, analyzes them, compares them to key competitors (this is essential), provides historical context, and then explains things in plain English.
So not only do they provide a quantitative assessment for numbers-people, they dig deeper by featuring a qualitative approach, as well as graphical interpretations for context. They answer the questions – where is the company now (strengths and weaknesses along various dimensions), what can they do (share buybacks, increase dividends etc.), and how strong are their reported numbers (net income to cash flow discrepancies and accounting quality).
Fundamental Analysis
Here's an example. We'll look at Exxon (XOM) - an industry stalwart. Typing in the ticker symbol on CapitalCube shows the following:
Fundamental Analysis Score (based on their proprietary algorithms): 88 out of 100.
Dividend Quality Score: 67 out of 100.
The snapshot gives a summary across various sections from Fundamental Analysis to Earnings Quality. CapitalCube rates metrics on a 4-star scale such as: relative valuation, valuation drivers, operations, earnings leverage, drivers of margin, growth expectations, dividend quality, accounting quality and more.
The key here is the context. While other free services like Yahoo Finance will tell you XOM’s price to book ratio, it's just a raw number. CapitalCube's platform tells you XOM’s price to book ratio (2.5), compares it to its peer median (1.2), and further breaks down components (ROE and P/E) to visually paint a picture of how Exxon is doing relative to its peers. It characterizes Exxon as an Outperformer – something that is made use of later in the stock screener.
It also paints a historical picture of how Exxon has been doing relative to its peers along these metrics.
One of the keys to what makes Capital Cube unique is its peer relative analysis. A company is not analyzed in isolation – but is instead judged relative to its peers. The database automatically identifies a company’s peers, but you can also customize the peers to incorporate other companies you're interested in comparing with.
In addition to multiple areas of a company’s fundamentals, there are reports on corporate actions, dividend quality and earnings quality, breaking down key metrics for users. There are no price targets – just unbiased analysis.
Stock Screener
It's also a good tool for investment idea generation as you can use their stock screener. Again, they compare peer relative metrics which is useful. You can find high quality dividend paying stocks, stocks that are likely M&A targets, stocks whose earnings are coming from accounting reserves, and more.
Investors looking to understand the strengths and weaknesses of their portfolio can use CapitalCube’s Portfolio feature by importing their holdings and it will give you a summary analysis with various fundamental characteristics.
An alerts feature wraps it all up allowing you to set alerts on individual companies, an entire portfolio, or even on saved stock screens. You can choose to be alerted when any metrics change (for example a company’s borrowing capacity). Stock screener alerts will let you know if new companies meet your screening criteria or if existing companies in the screen no longer meet the selected criteria.
You can get a free trial at CapitalCube.com. They will be offering two subscription options starting in July – Premium for $79/month and Professional for $149/month, the difference being access to the corporate actions, dividend quality and earnings quality reports.
With 40,0000 companies analyzed, their database is truly global. It has 12,700 American companies, 18,200 Asian companies, 8,000 European companies and more. In summary, CapitalCube is all about context and saving you time. It compares companies directly to their competitors, highlights the relevant metrics, and shows you the key takeaways. It's a great tool for a quick snapshot of a company if you're just starting research or screening for investment ideas. And then if you want to dig deeper, their comprehensive platform has other options to do so.
Definitely check out CapitalCube.com's free trial and let us know if you find any interesting tools we might have missed.
Citadel Boosts Goodrich Petroleum (GDP) Holdings
Ken Griffin's investment firm Citadel just filed a 13G with the SEC regarding its stake in Goodrich Petroleum (GDP). Per the filing, Citadel now owns 5.39% of the company with 1,959,806 shares.
This means they've more than doubled their position size since the end of March. Griffin's firm has been active as of late and we've also detailed some of Citadel's other portfolio moves here.
Per Google Finance, Goodrich Petroleum is "an independent oil and natural gas company engaged in the exploration,
development and production of oil and natural gas on properties
primarily in Northwest Louisiana, East Texas and South Texas. It
includes the Haynesville Shale and Cotton Valley Taylor Sand in
Northwest Louisiana and East Texas, the Eagle Ford Shale and Buda Lime
formations in South Texas and the Tuscaloosa Marine Shale in Southeast
Louisiana and Southwest Mississippi. The Company owns interests in 401
producing oil and natural gas wells located in 29 fields in five states."
Steve Cohen's SAC Capital Adds to Shaw Group (SHAW) Position
Steve Cohen's hedge fund firm SAC Capital recently filed a 13G with the SEC regarding its position in Shaw Group (SHAW). Per the filing, the hedge fund now owns 5% of the company with 3,317,912 shares.
This marks almost a 260% increase in their position size since the end of the first quarter. At the end of March, SAC Capital owned 922,431 common shares of SHAW but also owned 100,000 via call options as disclosed in their 13F filed with the SEC.
Other Hedge Funds Involved
Some readers may recall that we've featured Shaw Group on the site before as Jay Petschek and Steven Major's hedge fund Corsair Capital have been long. Additionally, in February we highlighted when Dmitry Balyasny's hedge fund firm Balyasny Asset Management took a big stake in the company too.
Investment Thesis on Shaw
In the past, we've featured Corsair's investment thesis on Shaw if you want to know the rationale behind owning the name.
And then more recently, we've posted the firm's update on their stake excerpted from Corsair's Q1 letter where they wrote:
"two of its main customers received the final requisite Nuclear Regulatory Commission licensing to construct two new nuclear power plants and the EPA's increased environmental standards drove power plant maintenance contract wins. The company also reported a strong fiscal Q2 and the upcoming divestiture of the Energy and Chemicals division in the next few months should create additional shareholder value. We estimate that SHAW could earn $3.00/share in FY 2013, which would increase its net cash position to over $17.00/share."
Per Google Finance, Shaw Group is "a provider of technology, engineering, procurement, construction,
maintenance, fabrication, manufacturing, consulting, remediation and
facilities management services to a diverse client base that includes
multinational and national oil companies and industrial corporations,
regulated utilities, independent and merchant power producers, and
government agencies. The Company has developed and acquired intellectual
property, including downstream petrochemical technologies, induction
pipe bending technology and environmental decontamination technologies."
For more on Steve Cohen's firm, we've posted SAC Capital's recent activity here.
Wednesday, June 20, 2012
Neev Capital's Rahul Sharma on H&M, Inditex & Emerging Market Retail
Rahul Sharma of Neev Capital recently sat down with Bloomberg Television to talk about consumer trends, emerging markets, and retailers like H&M and Zara. We wanted to flag this interview as Sharma is on our recently released alpha list of the top finance people to follow on Twitter.
He says that Hennes & Mauritz (HMSB), known as H&M, is a turnaround story as the company 'gets its mojo back' because they had dropped the ball in terms of pricing and they've struggled in Europe where the economy has been problematic.
To curb this, the retailer has focused more on fashion and to be more conscious about price. Sharma points to the company's geography as very compelling.
Sharma sees Zara as an even bigger winner than H&M. Zara falls under the Inditex (IXD) umbrella of brands. We've noted that Steve Mandel's hedge fund Lone Pine Capital has held a stake in Inditex.
It seems as though traditional 'popular' brands in emerging markets such as Esprit have been supplanted by the likes of fast fashion movers such as H&M and Zara. Esprit seems to be struggling as both the CEO and CFO left within a month of each other.
Retail in Emerging Markets
One of the trends many hedge funds have been playing is the rise of the emerging market consumer. Sharma touches on this by noting that these consumers are very aspirational so premium retail brands do well in these environments.
He says that pricing power is high and barriers to entry are high, mentioning Richemont (RITB) as a big player with their Cartier brand. Louis Vuitton Moet Hennessey (MC) also comes to mind.
The Neev Capital man thinks the mainstream retail market does well in emerging markets due to the rising wage dynamic, and he also feels that premium brands do well due to the wealth effect.
Embedded below is Sharma's video interview with Bloomberg:
Julian Robertson on the Hedge Fund Industry Past & Present
Tiger Management founder Julian Robertson made a rare media appearance with Tom Keene on Bloomberg Television we wanted to highlight.
On How Hedge Funds Differ Now Versus Then
Robertson says, "the hedge fund business is tougher today than it was 15 years ago... there's more hedge funds in the business. And hedge funds are the toughest competition for other hedge funds."
He also points to borrowing costs going up for shorting. In terms of management fees, he feels that it's really a self-fulfilling prophecy based on performance. Funds that perform well will be able to charge high fees while lower performance could lead to lower fees.
Robertson argues that the problem with hedge fund performance has been stock selection, rather than macro issues.
On How He Invests
In investing, he says he focuses on management and you have to give them a long period of time. He's a long-term investor of course and doesn't focus on short-term gyrations.
He notes he still has a position in Sherwin Williams (SHW). We've posted an in-depth resource on his investment philosophy with a recent interview with Robertson by Columbia Business School.
On where he sees value, the Tiger Management man says you can probably find some in Europe right now, even though there are obvious problems (though he didn't mention any specific names). We've also highlighted Avenue Capital's Marc Lasry on opportunities in Europe.
Embedded below is the 12-minute interview with Julian Robertson:
For more on this legendary manager, we've posted a profile/biography of Julian Robertson.
Strategist Jeff Saut's Latest Market Commentary
Market strategist Jeff Saut's latest commentary is entitled "Mood", referring to the market's mood of course. Saut states something quite obvious but often overlooked by investors: "Importantly, market mood frequently sets the near-term trend."
Saut points to the recent action in the market as encouraging, as the recent rally has been the first time the market has ignored bad news in two months. In terms of technical support levels, he says to watch the 1330-1340 level to see if the market will continue to ignore bad news.
Lastly, it's interesting to see Saut mention how he treats position sizing as well as profit-taking and loss prevention. He likes to sell 25-33% of a position if it is up 100% and if something goes against him by 15-20% he likes to either hedge, sell some, collar, etc. We've previously highlighted Saut's approach to risk management.
He prudently observes: "Indeed, avoiding the big loss is the key to better returns in the markets."
Embedded below is Jeff Saut's latest market commentary:
You can download a .pdf copy here.
For more from this strategist, head to Saut on investor sentiment.
What We're Reading ~ 6/20/12
Q&A with Market Wizards author Jack Schwager [Abnormal Returns]
Hot topic in distressed: coal names [Distressed Debt Investing]
Jim Chanos on his short China position [Huffington Post]
The Wall Street marketing machine [Globe & Mail]
Are we in a recession? [Crossing Wall Street]
On screening for bargains [Stone Street Advisors]
Global fund managers dash for cash [Short Side of Long]
The 10% free cashflow yield club [Portfolio14]
Cheapest ETF in each category [ETFdb]
Crisis has barely begun says GLG hedge fund manager [Reuters]
The problem with hedge funds [Simon Lack]
J.C. Penney and the curse of discounts [The Atlantic]
Centaurus alums reunite to launch new fund [Hedgeworld]
TempurPedic executives pick tops and bottoms? [MarketSqueeze]
Financial advice for life [iShares]
Monday, June 18, 2012
Trian Fund's Presentation on Lazard
We just highlighted how Nelson Peltz's Trian Fund Management has disclosed a new stake in Lazard (LAZ). We've also posted Trian's presentation on Lazard below which they just released today (June 18th).
Trian's analysis on improving Lazard focuses on a few main points:
- Boosting margins
- Shareholder friendly capital deployment
- Efficient allocation of capital
- Improved corporate governance
Trian's analysis concludes that LAZ is worth $42 with their base case, $51 with their midpoint and $61 with their high growth estimates. Shares currently trade around $24 so that's considerable upside even with their base case.
Embedded below is Trian's presentation on Lazard:
You can download a .pdf copy here.
Nelson Peltz's Trian Fund Reveals Lazard Stake
Nelson Peltz's Trian Fund Management has disclosed a 5.1% ownership stake in Lazard (LAZ).
Today the firm filed an amended 13F with the SEC for the first quarter which shows that they actually originally started acquiring shares in the first quarter. In the amended filing, Trian disclosed they owned just over 5.5 million shares at the end of March.
So, why did Peltz buy a stake in Lazard? We've posted up Trian's presentation on Lazard which they released today.
Lazard approved a plan in April to raise operating margins and to improve shareholder value via buybacks and dividends. Trian is well-known for taking large ownership stakes in companies and implementing change, often through activist positions.
Per Google Finance, Lazard is "a financial advisory and asset management company. It operates in two
segments: Financial Advisory, which offers a range of financial advisory
services regarding mergers and acquisitions and other strategic matters
and various other financial matters, and Asset Management, which
includes strategies for the management of equity and fixed income
securities and alternative investment and private equity funds, as well
as wealth management. Lazard has diverse set of clients around the
world, including corporations, governments, institutions, partnerships
and individuals."
This is yet another new position by Trian as last month we detailed their activist position in Ingersoll-Rand as well.
For more on this fund, you can read excerpts from Trian's letter on some of their other investments here.
Lone Pine Capital Starts New Cooper Companies (COO) Position
Steve Mandel's hedge fund firm Lone Pine Capital just filed a 13G with the SEC on Cooper Companies (COO). This is a brand new stake for the hedge fund as they've not reported a position in it before.
Per the filing, Lone Pine now discloses a 5.1% ownership stake in Cooper Companies with 2,435,937 shares. This 13G filing was made due to portfolio activity on June 8th.
For more on this hedge fund we also today posted up why Steve Mandel likes Kohl's.
Per Google Finance, Cooper Companies is "a global medical products company that serves the specialty healthcare market through its two business units, CooperVision, Inc. (CVI) and CooperSurgical, Inc. (CSI). CVI develops, manufactures and markets a range of contact lenses for the global vision correction market. CVI specializes in lenses for astigmatism, presbyopia and ocular dryness. CVI is a manufacturer of toric lenses, which correct astigmatism, multifocal lenses for presbyopia (blurring near vision due to advancing age) and spherical lenses that correct the common visual defects."
Top Finance People to Follow on Twitter: Market Folly's Alpha List
Given the various "who to follow on Twitter" posts that have popped up this year, we thought we'd add a group of around 50 people we find insightful: the alpha list. Note that this list is approached from a buyside mindset: it focuses on equity analysis, market flow, and hedge funds. After all, Gordon Gekko once said: "the most valuable commodity I know of is information."
If you don't already, be sure to follow @MarketFolly on Twitter
Also, we've made it public so you can follow the Alpha List here
Top Finance People To Follow on Twitter: The Alpha List
In no particular order:
@HedgeFundInvest - a hedge fund manager full of insight
@PhilipEtienne - a L/S hedgie with prudent market commentary
@FirstAdopter - a trader providing original ideas, earnings call summaries & more
@TMTanalyst - a tech/media/telecom hedgie analyst with great info
@NotableCalls - great summaries of sell-side research & trading calls
@CapitalObserver - former author of our 'stock of the week' posts
@DDInvesting - distressed debt investing
@LongShortTrader - value/macro hedge fund guy
@MebFaber - CIO of Cambria Investment Management, author of World Beta
@bespokeinvest - plenty of market data & analysis
@StockJockey - name says it all
@ritholtz - author of TheBigPicture, tons of market insight
@footnoted - digging through company filings: 10K's, 10Q's and the like
@Legacy_Trades - market flow & commentary on companies
@zerohedge - you probably already follow
@AllAboutAlpha - appropriate to include on an 'alpha' list
@abnormalreturns - all the market links worth reading each day
@reformedbroker - shares market flow with humor thrown in
@StockTwits - summarizes top finance news & tweets from users
@Benzinga - tons of business news daily
@Street_Insider - continuous market news
@tradefast - tweets from a Chief Investment Officer
@researchpuzzler - resources on investment decision making
@Retail_Guru - global consumer fund manager
@MicroFundy - market and economic tweets
@djacome - equity research analyst
@StoneStAdvisors - many notable posters in this group, follow them too
@MarioGabelli - the well-known investor posts his thoughts publicly
@samgadjones - FT's hedge fund correspondent
@herbgreenberg - CNBC senior stocks commentator
@m_delamerced - NYTimes Dealbook
@TheStalwart - goes beast-mode daily covering financial news
@Alphal_pha - PM on a long/short equity fund
@ericjackson - Ironfire Capital manager & activist investor
@John_Hempton - Bronte Capital manager & short-selling specialist
@BergenCapital - hedge fund manager
@fundmyfund - Paladin Long Short manager
@mojoris1977 - special situations / event-driven focus
@BarbarianCap - fund analyst
@VolSlinger - hf manager
@savitz - Forbes SF bureau chief
@TechStockRadar - more great tech insights
@jennablan - editor of US investment strategy @ Reuters
@Blueshiftideas - research boutique to institutions & hedgies
@vitaliyk - value investor & author
@valuepicker - value investor
@Greg_Speicher - investing educator & value investor
@asifsuria - merger arbitrage related news
@JackSchwager - author of the Market Wizards books
@DanZanger - famous swing trader
@OptionsHawk - technical analysis & trading ideas
@slopeofhope - trader, tweets on technical analysis
@cperruna - tweets on investing & technical analysis
@charlesrotblut - AAII sentiment updates & more
@calculatedrisk - your stop for housing market info
And as a bonus, we'll also mention @DavidEin - David
Einhorn. Yes, that one. He was posting his World Series of Poker
updates. It's extremely doubtful he'll post market material, though. Also, @Dasan seems to have disappeared from Twitter, but if he ever comes back he'd be on this list.
P.S. - Are you a hedgie/PM/analyst on Twitter? Send us an "@" reply to let us know as we've surely missed following many insightful others! You can follow @MarketFolly on Twitter here.
Why Lone Pine's Steve Mandel Likes Kohl's (KSS)
At the Ira Sohn Conference last month, Steve Mandel of hedge fund Lone Pine Capital talked about how he was long Kohl's (KSS) and bearish on fixed income. Since KSS was the only particular stock he spoke of, we thought it was worth examining why Mandel likes Kohl's.
During Steve Mandel's presentation, he noted that he likes "share count shrinkers": companies that use free cashflow to shrink the number of outstanding shares by 8% to 10% annually. He cited KSS as an example as the company has gone from 30 stores to national over 20 years and they have higher sales than J.C. Penney (JCP).
Mandel said that at $46, the stock trades less than 10x 2012 eps and is buying back stock. The bear case on the name is that the company is viewed as 'obsolete' as internet retailers take market share.
Now, the above is direct from Mandel. But we wanted to take it a step further to look for other potential reasons as to why Lone Pine might like the stock.
Kohl's: Best of a Bad Bunch
The following is a guest post from valuhunteruk.com:
Kohl’s is a national chain of 1,100+ department stores with a moderate focus toward the Midwest/West regions of the US. Department stores generally got very hard hit by the market decline in 2008 and they have slumped since the end of 2009 so valuations are quite reasonable with Kohl’s trading at roughly 10x trailing earnings.
If we first look to Kohl’s operating performance we find that this it is an able competitor. The competitors I have chosen to focus on are those in the Department Store Index apart from Sears: Nordstrom (NYSE: JWN), Macy’s (NYSE: M), Dillard’s (NYSE: DDS), and J.C. Penney (NYSE: JCP). On the basis of these comparisons Kohl’s should be trading at a slightly more ambitious multiple.
The core of this advantage appears to be structural — Kohl’s stores are on average far smaller than competitors. For example, Nordstrom’s average store is 211,000 square feet, Dillard’s is 174,000 but Kohl’s is only 87,000. As a result, Kohl’s SGA (selling, general, and administrative) costs are the lowest in the industry at the per store level. Coping with pressure on the top-line is far easier with this kind of advantage.
Another advantage from smaller stores is high sales per square foot. Nordstrom is way in the lead here with $400 of sales per square foot but Kohl’s with $190 per square foot is way above everyone else. Again, it appears that that these smaller stores allow Kohl’s some protection against changes in the top line and allow it to use its space more effectively.
Kohl's historicals are just as strong. Over the past five years, Kohl’s has continued to expand adding 198 stores and nearly 16,000,000 square feet of capacity whilst the rest of the sector, except Nordstrom, has stood still.
More surprisingly, whilst this expansion has led to declining sales figures at a per store and per square foot level, the pace of decline is comparable to that experienced by the sector as a whole. It has outpaced Dillard’s, the clear laggard, and only Macy’s managed to prevent declines in sales per store and per square foot over the past five years.
At an operating level, it is difficult to understand that the market has attached to Kohl's. On the basis of trailing P/Es, Kohl’s trades at a 30% discount to Nordstrom and a 14% discount to Macy’s.
On an EV/store basis, this gap is even larger although this is surely complicated by accounting for leases. Considering the fact that Kohl’s has the second highest pre-tax margins in the industry, a structurally lower cost base, and more potential for expansion we may argue that this discount is unwarranted.
The company is also attractive at a financial level, which seemed to be the focus of Stephen Mandel's decision. Kohl’s has just begun paying dividends but it is the share buyback program that is most interesting. In 2010, the company bought back just under 19m shares worth $1bn and in 2011, Kohl’s bought back just under 46m shares worth $2.3bn. In the first quarter of 2012, $325m worth of shares were bought back.
This program is being achieved through drawing down the company’s cash balance, which amounts to a modest re-leveraging. However, despite the substantial repurchases already made, EBIT/Interest Expense (inc. rental expenses) was 7.2x at the end of January 2012. The company expects to return another $1bn through 2012.
On both a financial and operating basis, the case for Kohl’s looks strong. However, in this sector one always has to consider the effect of broader movements in consumer spendings. Pundits are widely divided on where the economy is going although, as might be expected, the recent decline in broad market indexes has led to a wave of negativity.
For this sector, one should bear in mind that over the last five years (the longest period for which results are comparable) there was very little to choose between the companies in terms of sales growth.
Certainly, Kohl’s and Nordstrom were boosted by continued store expansion but the standard deviation of sales growth for the group was steady around 5.7%. Kohl’s definitely stands out in the sector, but the investor must feel comfortable with taking the risk of investing in the department store sector as a whole.
To see what other US stocks this prominent hedge fund owns, head to the new issue of our premium research: Hedge Fund Wisdom.
Ken Griffin's Citadel Boosts Cypress Semiconductor & Hercules Offshore Stakes
Ken Griffin's investment firm Citadel has filed two 13G's with the SEC regarding its positions in Cypress Semiconductor (CY) and Hercules Offshore (HERO).
Cypress Semi
Their 13G filing indicates that Citadel owns a 5.21% stake in the company with 7,941,732 shares. This marks a 42% increase in their position size since the end of March. The filing was made due to activity on June 12th. At the end of March, Citadel also owned various puts and calls on the name as well.
Per Google Finance, Cypress Semiconductor is "delivers high-performance, mixed-signal and programmable solutions. The
Company operates in four segments: Consumer and Computation Division,
Data Communications Division, Memory Products Division, and Emerging
Technologies and Other.
The Company’s offerings include the flagship
Programmable System-on-Chip (PSoC) families and derivatives, such as
CapSense touch sensing and TrueTouch solutions for touchscreens. The
Company is engaged in universal serial bus (USB) controllers, including
the West Bridge solution that enhances connectivity and performance in
multimedia handsets. In addition the Company operates in static random
access memories (SRAMs) memory market and programmable timing devices.
It serves markets, including consumer, mobile handsets, computation,
data communications, automotive, industrial and military."
Hercules Offshore
Per the filing, Citadel has revealed a 5.08% ownership stake in the company with just over 8 million shares. This marks around a 15% increase in their position size since the end of March.
It's also worth noting that in Citadel's most recent 13F (detailing positions as of March 31st), they disclosed ownership of various puts and calls on HERO as well. Citadel's most recent disclosure was made due to portfolio activity on June 12th.
Per Google Finance, Hercules Offshore is "provides shallow-water drilling and marine services to the oil and
natural gas exploration and production industry globally. It provides
these services to national oil and gas companies, integrated energy
companies and independent oil and natural gas operators."
You can view additional recent portfolio activity from Citadel here.
Friday, June 15, 2012
Mark Rachesky's MHR Fund Joins Carl Icahn in Activist Navistar Stake
Today, Mark Rachesky's activist oriented MHR Fund Management filed a Form 3, Form 4 and 13D with the SEC regarding shares of Navistar International (NAV).
Per the activist 13D filing, MHR Fund Management has disclosed a 13.6% ownership stake in Navistar with 9,335,837 shares. This stake consists of common stock as well as numerous share forward transactions (right to buy) with various counterparties.
The filing was made due to activity on June 7th. MHR started acquiring shares of NAV in the open market in late May and the bulk of their purchases came between $26-27 per share. Their right to buy forward transactions have a price per share of $25.5399.
The 13D contains the standard boilerplate that Rachesky's firm has acquired a stake because it feels the company is undervalued and they may seek to engage with discussions with management.
Carl Icahn Involved Too
Rachesky is now the company's largest shareholder, just ahead of Carl Icahn. Icahn has also previously filed a 13D on the company.
It just so happens that Rachesky previously was a managing director for Carl Icahn's investment vehicles as well. Icahn was recently named as one of the top 25 highest earning hedge fund managers of 2011.
Icahn originally launched his bet on NAV back in late 2011 and he has been the top shareholder until Rachesky came along. Icahn also recently boosted his stake to almost 12% of the company, purchasing shares around $24.xx. However, he originally purchased his stake at prices between $35-40. As such, the bulk of his investment has an unrealized loss at current prices.
It seems the two activists are angling for a larger industrial giant to take a stake in the company or perhaps partner with Navistar. Icahn has also been allowed by the company to put his directors up for election to the board this year.
While Icahn has made some progress, it will be interesting to see if the two activist investors' combined forces can spark more change.
About MHR Fund Management
Rachesky received his B.S. in molecular aspects of cancer from the University of Pennsylvania and an M.D. from Stanford University School of Medicine. Additionally, he also holds an MBA from the Stanford Graduate School of Business. Prior to founding MHR Fund Management, Rachesky previously worked as a senior investment officer and managing director to Carl Icahn.
About Navistar International
Per Google Finance, Navistar is "a manufacturer of International brand commercial and military trucks, IC
Bus (IC) brand buses, MaxxForce brand diesel engines, Workhorse Custom
Chassis (WCC) brand chassis for motor homes and step vans, and Monaco RV
(Monaco) recreational vehicles (RV), as well as a provider of service
parts for all makes of trucks and trailers."
Highfields Capital Boosts Carter's (CRI) Stake, Shifts CoreLogic (CLGX) Stake to Passive Investment
Jonathon Jacobson's hedge fund firm Highfields Capital recently filed two 13G's with the SEC on Carter's (CRI) and CoreLogic (CLGX).
Carter's (CRI)
Per the filing, Highfields Capital has disclosed a 5.5% ownership stake in Carter's with 3,270,163 shares. The filing was made due to portfolio activity on June 4th.
This marks almost an 85% increase in their position size in the name since the end of March. It also moves up Highfields as one of the top holders of the stock in addition to the likes of Viking Global and Matrix Capital. Just a few months ago, we highlighted how Viking raised its stake in Carter's.
Per Google Finance, Carter's is "a branded marketer of apparel for babies and young children in the
United States. The Company owns two brand names in the children’s
apparel industry, Carter’s and OshKosh. Its Carter’s brand provides
apparel for children sizes ranging from newborn to seven. OshKosh brand
provides its line of apparel for children sizes newborn to 12. Its
Carter’s, OshKosh, and related brands are sold to national department
stores, chain and specialty stores and discount retailers."
CoreLogic (CLGX)
The second filing is a 13G from Highfields on CoreLogic indicates they have a 7.6% ownership stake in the company with 8,149,719. This stake is unchanged from their last filing and the main reason they've filed is because their stake has shifted from an activist stake (with a previous 13D filing) to now a passive one (13G filing).
The hedge fund has withdrawn its nominees to the company's board after the company itself nominated three new directors and the chairman agreed to step down this year. It appears as though the fund was mainly seeking members with more relevant business experience and it looks like they've achieved that.
Per Google Finance, CoreLogic is "a provider of property, financial and consumer information, analytics
and services to mortgage originators and servicers, financial
institutions and other businesses, government and government-sponsored
enterprises. CoreLogic’s data, query, analytical and business
outsourcing services help its customers to identify, manage and mitigate
credit and interest rate risk. It offers its customers a databases of
public, contributory and data covering real property and mortgage
information, judgments and liens, parcel and geospatial data, national
coverage eviction information, non-prime lending records, credit
information, and tax information, among other data types."
About Highfields
Jacobson founded Highfields in 1998 after previously serving as the senior equity portfolio manager at Harvard Management Company. Highfields is an $11 billion value-oriented firm that doesn't want to swing at every pitch, but rather just the fat ones where they can hit home runs. We've previously highlighted Jacobson's thoughts on whether there's alpha in asset allocation.
For more on this hedge fund, you can read Highfields' thesis on one of their top holdings: Sallie Mae here.
Our Answers From a Financial Blogger Panel on Investing
This week Abnormal Returns hosted a series of questions on investing and asked a panel of financial bloggers to give their answers. We were honored to be included and have posted our answers below as well as links so you can see the answers from the other panel members as well.
Question: If you had a son or daughter just beginning to invest, what would you tell them to do to best prepare themselves for a lifetime of good investing?
Answer: "Take emotion out of the equation. If you can think and act rationally when others do not, that’s an advantage. Never stop learning… the best investors will tell you that investing is a continual education." Check out others' responses here.
Q: Considering all the topics you have written about, which you you think is most underappreciated or overlooked by the majority of investors?
A: "Knowing which hedge funds to track. Many people want to know what SAC Capital, RenTec, and Soros Fund are investing in. The problem is hedge fund tracking only works if you’re following the right funds. People get caught up in the big names when realistically SAC trades too frequently, RenTec is a quant (who knows why they buy anything) and Soros holds hundreds of positions. People want updates on the ‘famous’ names, overlooking advice to the contrary." See what everyone else answered here.
Q: If you could work, without pay, with any investor or trader for one year, who would it be?
A: "John Griffin of Blue Ridge Capital." Check out what other investors people picked here.
Q: What piece of wisdom or advice do you most wish you had ignored?
A: This question makes you really think and we honestly couldn't come up with an answer. There are some creative responses from others here though.
Q: In the past year what book, article or blog post changed the way you think about an important topic?
A: "Philippe Laffont (hedge fund Coatue Management) talked about his concentrated portfolio approach which makes you think about position sizing and focusing on your best ideas." Everyone else submitted their choices here.
Q: What asset would you feel most comfortable buying and holding for the next ten years?
A: "Unconventional answer: Invest in yourself. That’s one 'asset class' you have the most control over." See everyone else's answers to this question here.
Thanks again to Abnormal Returns and be sure to click that link to scroll through the site to read all the responses from the panel on each question.
Thursday, June 14, 2012
Eric Sprott on the Recent Volatility in Gold
Seeing how gold has seen volatility as of late and numerous top hedge funds hold physical gold, we thought it would be prudent to check in with one of the most outspoken gold advocates: Eric Sprott of Sprott Asset Management.
After all, gold is one of Dan Loeb's top holdings at Third Point. David Einhorn of Greenlight Capital has long held physical gold as a top stake. And we highlighted in April how John Burbank's Passport Capital had been buying gold.
So what do investors make of the latest volatility? Eric Sprott and Shree Kargutkar put out an interesting note on the precious metal on June 8th:
Sprott on Gold
"There have been key developments in the physical gold market over the last few weeks which we feel are worth highlighting:
1) The Chinese gold imports from Hong Kong in April, 2012 surged almost 1300% on a YoY basis. Total gross imports for the month of April were 103.6 tonnes and the net imports were 66.3 tonnes1. It is not the data for April alone which has caught our eye. There has been a stunning increase of gold imports through Hong Kong for export into China over the past 2 years. Between May 2010 and April 2011, China imported a net 66 tonnes of physical gold through Hong Kong. Between May 2011 and April 2012, that number jumped to 489 tonnes. This represents an increase of 640%.
2) Central banks from around the world bought over 70 tonnes of gold in April, 2012. Data from the IMF showed developing countries such as the Philippines, Turkey, Mexico and Sri Lanka were significant buyers of gold as prices dipped.
3) Iran purchased $1.2B worth of gold in April, 2012 through Turkey. As the developed nations continue devaluing their currency at the expense of developing nations, countries such as Iran, China and Mexico are forced to look at alternative stores of value.
4) After twenty years of lackluster returns and stagnant bond yields, Japanese pension funds have finally discovered the value of investing in gold. The $500M Okayama Metal and Machinery pension fund placed 1.5% of its assets into gold bullion-backed ETFs in April in order to "escape sovereign risk"4.
5) Bill Gross writes, "Soaring debt/GDP ratios in previously sacrosanct AAA countries have made low cost funding increasingly a function of central banks as opposed to private market investors. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. […] As they (investors) question the value of much of the $200 trillion which comprises our current system, they move marginally elsewhere — to real assets such as land, gold and tangible things, or to cash and a figurative mattress where at least their money is readily accessible". Is the bond king recommending gold? YES, YES YES!
6) The Gold Mining ETF, GDX, has seen strong inflows in the past 3 months. The number of units outstanding have increased from 162.5M to roughly 187M between March 1, 2012 and May 31, 2012. This represents an increase in assets of almost $1.2B in a span of 3 months. It is worth pointing out that for a majority of this three months period, GDX, and by extension the gold mining companies were experiencing significant declines in their market values.
We believe there has been a material change in the gold investing landscape. The HUI, which is the Gold Bugs Index, is now up over 20% from its lows since May 16th, 2012. The slide in gold equities seems to be subsiding as a foundation for a strong move upwards is set. New buyers, represented by the Chinese, central banks, Japanese pension funds and the Iranians, bought almost 140 tonnes of gold in April alone. To put this into perspective, the annual gold production is approximately 2600 tonnes. China and Russia produce around 500 tonnes of gold annually, which never makes it to the open market. This leaves about 2100 tonnes of gold production annually for the rest of the world.
When buyers representing 140 tonnes of new demand enter a market which only has 175 tonnes of monthly supply, we are left wondering about two things:
1) In a balanced market, where is the source of supply to the new buyers going to come from?
2) How can a new buyer of size get into the gold market, which is already balanced, without significantly impacting the price of gold? The answer is fairly obvious. When demand outstrips supply, prices move higher. These significant macro changes in the supplydemand dynamic of the gold market should propel the price of gold to new highs."
For more from this fund manager, we've also highlighted Sprott's previous commentary on how 2012 is the year of the central bank.
