If you've got a vacation / holiday coming up and need some reading material, here are some recommended books on investing, hedge funds, business, decision making, and life in general. Some are newer books, others are classics you might have missed and should catch up on.
Have any other suggestions? Hit the comments below. Enjoy!
2017 Summer Reading List
Competition Demystified: A Radically Simplified Approach to Business Strategy by Bruce Greenwald and Judd Kahn. Classic text on important concepts.
Wednesday, June 14, 2017
Market Folly's Summer Reading List
Tuesday, June 13, 2017
Senator Investment Group Shows Spirit Realty Capital Stake
Alex Klabin and Doug Silverman's hedge fund firm Senator Investment Group has filed a 13G with the SEC regarding shares of Spirit Realty Capital (SRC).
Per the filing, Senator now owns a 7.23% ownership stake in SRC with 35 million shares. This is a newly disclosed equity position and the filing was made due to activity on June 1st, 2017. In late April, shares traded from $10.44 down to a low of $6.71 in May and now trade around $7.70.
Per the company's website, Spirit Realty Capital is "one of the largest publicly traded triple net-lease real estate investment trusts (REITs) in the United States."
Carl Icahn Enters Forward Purchase Contracts on Herc Holdings, Adds to Freeport McMoRan Stake
Activist investor Carl Icahn has submitted a couple SEC filings recently.
Icahn Enters Forward Purchase Contracts on Herc Holdings
First, Icahn has filed a Form 4 with the SEC regarding shares of Herc Holdings (HRI), a spin-off from Hertz (HTZ).
Per the filing, Icahn has entered into forward purchase contracts on June 8th, 2017. These contracts have a forward purchase price of $35.00 per share, plus a financing charge. The contracts have expiration dates of June 7th, 2019. Multiple contracts were entered via various investment vehicles Icahn controls and in total they represent 23,607 shares.
Per the company's website, Herc Holdings "previously were known as Hertz Equipment Rental Corporation or “HERC.” We now operate in the U.S. under our new brand, Herc Rentals. We generated revenue of $1.6 billion in 2016 and offer customers a diversified fleet of equipment valued at $3.6 billion1. We serve customers through 270 company-owned locations, primarily in North America, and have approximately 4,800 employees. Through the years, we have been widely recognized as a pioneer and leader in the equipment rental industry, setting the standard for service and creating the performance metrics that are now commonplace for rental equipment companies."
Icahn Adds To Freeport McMoRan Stake
Second, Icahn has also filed an amended 13D with the SEC regarding his position in Freeport McMoRan (FCX). Per the filing, Icahn now owns 6.33% of the company with over 91.58 million shares.
The filing notes that on June 6th, Icahn acquired 351,644 shares in total at $11.41 per share.
Per Google Finance, Freeport McMoRan is "a mining company. The Company operates through geographical assets with proven and probable reserves of copper, gold and molybdenum, and traded copper producer. The Company's segments include refined copper products, copper in concentrate, gold, molybdenum, oil and other. The Company's segments include the Morenci, Cerro Verde, Grasberg copper mines, the Rod & Refining operations and the United States (U.S.) Oil and Gas Operations. The Company has organized its operations into five divisions, which include North America copper mines, South America mining, Indonesia mining and Molybdenum mines. The Company's portfolio of assets includes the Grasberg minerals district in Indonesia, copper and gold deposits, and mining operations in the Americas, including the large-scale Morenci minerals district in North America and the Cerro Verde operation in South America."
Farallon Capital Shows Savara Stake
Andrew Spokes' hedge fund firm Farallon Capital has filed a 13G with the SEC regarding shares of Savara (SVRA). Per the filing, Farallon now owns 9.5% of the company with over 2.22 million shares.
This is a newly disclosed equity stake and the filing was made due to activity on June 2nd. It's worth noting that Savara recently closed on a merger with Mast Therapeutics in April of this year. In conjunction with the merger, Master effected a 1 for 70 reverse stock split.
Also, Savara this month completed an underwritten public offering of over 9 million shares of common stock at $4.75 per share.
Per Google Finance, Savara is "formerly Mast Therapeutics, Inc., is a clinical-stage pharmaceutical company. The Company is focused on the development and commercialization of novel therapies for the treatment of patients with rare respiratory diseases. Its pipeline includes AeroVanc, Molgradex and AIR001. AeroVanc is an inhaled formulation of vancomycin, which the Company is developing for the treatment of persistent methicillin-resistant Staphylococcus aureus, lung infection in cystic fibrosis patients. Molgradex is an inhaled formulation of recombinant human granulocyte-macrophage colony-stimulating factor. It is developing Molgradex for the treatment of autoimmune pulmonary alveolar proteinosis, a rare lung disease. AIR001 is a sodium nitrite solution for inhalation via nebulization. AIR001 is in Phase II clinical development for the treatment of heart failure with preserved ejection fraction, also known as diastolic heart failure or heart failure with preserved systolic function."
Monday, June 12, 2017
Jim Chanos Interview on Bloomberg
Jim Chanos, founder of hedge fund Kynikos Associates recently sat down with Bloomberg to share his thoughts on markets.
He talks about the macro landscape, how the recent political shift has changed things, and other topics.
Chanos is worried about China because it's a debt driven model. He thinks they've added trillions to the system.
Turning to US healthcare, Chanos says it's a system designed to be gamed: "It's a hybrid of socialized and free market healthcare."
He thinks the kidney dialysis business is "headed for difficulties." DaVita (DVA) seems to be one play that Chanos is short.
Telsa (TSLA) is another company Chanos has been short. He would cover the short if the company actually began to make money. They were also short Solar City before it got folded into Tesla. The company burns a lot of cash (he thinks up to as much as $1 billion a quarter). The upcoming Model 3 is the big test.
Embedded below is the video of Jim Chanos' Bloomberg interview:
For more recent interviews with prominent investors, be sure to also check out Paul Singer's chat with David Rubenstein.
Paul Singer Chats With David Rubenstein
Paul Singer of hedge fund Elliott Management sat down with Carlye Group co-founder David Rubenstein to chat at Bloomberg Invest New York.
They talk about how Singer founded Elliott, investing, and more.
Elliott manages $34 billion now and started in 1977 with $1.3 million. Singer was a practicing lawyer at the time but started with friends and family money as he found investing much more enjoyable.
Convertible bond hedging was the first strategy Elliott used for around ten years. (Elliott, by the way, is Singer's middle name). Over 40 years, Elliott has compounded at 13.5% net.
Embedded below is the video of Singer's chat with Rubenstein:
For more profiles of prominent investors, check out Howard Marks' recent interview with Bruce Karsh.
Howard Marks Interviews Bruce Karsh at Wharton School
University of Pennsylvania's Wharton School has started a Howard Marks investor series where the founder of Oaktree Capital interviews outstanding investors and this time around he's interviewed Bruce Karsh, his co-founder at Oaktree.
They talk about the founding of Oaktree, distressed investing, and a myriad of other topics.
Embedded below is the video of Howard Marks' interview with Bruce Karsh:
For more from Marks, check out his most recent memo: Lines in the Sand.
Friday, June 9, 2017
Hedge Fund Links ~ 6/9/17
Seth Klarman says investors are missing huge risks [Business Insider]
As Point72 returns flatline, Steve Cohen eyes $20 billion for fund [Bloomberg]
John Paulson is struggling to hold onto client money [Bloomberg]
Hedge funds go to war over US defense contractor TransDigm [FT]
Elliott Management on 5 lessons that have shaped how it invests [Business Insider]
Machine learning set to shake up equity hedge funds [FT]
The quants run Wall Street now [WSJ]
Paul Tudor Jones said to back AI hedge funds [Bloomberg]
Thursday, June 8, 2017
20% Off Scuttleblurb For Our Readers: Investment Analysis and Commentary. Sample Posts Available
Market Folly readers get 20% off their first year of Scuttleblurb using coupon code: marketfolly
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Wednesday, June 7, 2017
What We're Reading ~ 6/7/17
Investing between the lines: how to make smarter decisions decoding CEO communication [Rittenhouse]
Honored to be included in list of 50 of the best investing blogs [Acquirers Multiple]
Interview with Blackstone's Steve Schwarzman [Bloomberg]
What do you know with a high degree of confidence about investing? [Abnormal Returns]
Why it's so hard to admit you're wrong [NYTimes]
Inversion: the crucial thinking skill nobody ever taught you [James Clear]
Is Sephora killing the department store beauty counter? [Consumerist]
Estee Lauder vs L'Oreal: who's winning beauty's arms race? [Business of Fashion]
The economics of eSports [Digits to Dollars]
Profile of the founders of Atlassian (TEAM): The Wizards From Oz [Forbes]
Profile of SoulCycle's CEO [Fortune]
How the QR code has forever changed China's social habits [SCMP]
An introduction to LIDAR: the key self-driving car sensor [Voyage Auto]
Ten myths about machine learning [Medium]
Why Amazon is eating the world [Techcrunch]
On retail carnage: perception vs reality [Peridot Capitalist]
US unemployment hits lowest level since 2001 [CNN Money]
US home prices rising 2 times faster than wages [KSL]
Tuesday, June 6, 2017
Tiger Management Increaes T2 Biosystems Position
Julian Robertson's hedge fund firm Tiger Management has filed a 13G with the SEC regarding its position in T2 Biosystems (TTOO). Per the filing, Tiger now owns 5.68% of the company with over 1.73 million shares.
This is an increase of around 373,000 shares since the end of the first quarter. The filing was made due to activity on May 25th.
Per Google Finance, T2 Biosystems is "an in vitro diagnostics company engaged in developing a technology platform offering an alternative to diagnostic methodologies. The Company's T2 Magnetic Resonance platform (T2MR) enables detection of pathogens, biomarkers and other abnormalities in a range of unpurified patient sample types, including whole blood, plasma, serum, saliva, sputum and urine, and can detect cellular targets at limits of detection as one colony forming unit per milliliter (CFU/mL). The Company's initial development efforts target sepsis, hemostasis and Lyme disease. T2MR is a miniaturized, magnetic resonance-based approach that measures how water molecules react in the presence of magnetic fields. Its platform detects a range of targets, including molecular targets, such as deoxyribonucleic acid (DNA), immunodiagnostics, such as proteins, and a range of hemostasis measurements. The Company offers T2Dx Instrument (T2Dx) and the T2Candida Panel. "
Third Point Trims Baxter Stake
Dan Loeb's hedge fund firm Third Point has filed a 13D and Form 4 with the SEC regarding its stake in Baxter International (BAX). Per the 13D, Third Point now owns 7.5% of BAX with 41 million shares.
The Form 4 indicates Third Point sold 5 million shares on June 1st at $59.5. After this sale, they still own over 41 million shares.
For more from this fund, check out Third Point's Q1 letter.
Per Google Finance, Baxter "provides renal and hospital products. The Company operates through two segments: Hospital Products and Renal. Its Hospital Products business manufactures sterile intravenous (IV) solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filled vials and syringes for injectable drugs, IV nutrition products, parenteral nutrition therapies, infusion pumps, inhalation anesthetics and biosurgery products. The Renal business offers a portfolio to meet the needs of patients with end-stage renal disease, or irreversible kidney disease and acute kidney injuries, including technologies and therapies for peritoneal dialysis (PD), hemodialysis (HD), continuous renal replacement therapy (CRRT) and additional dialysis services. Its products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors' offices and by patients at home under physician supervision. ."
Berkshire Hathaway Acquires More Liberty SiriusXM Shares Again
We've highlighted recently that Warren Buffett's Berkshire Hathaway has been buying Liberty Sirius XM (LSXMA / LSXMK). Well, they're at it again.
Per Form 4's filed with the SEC, Berkshire acquired 377,656 shares of LSXMA across May 26th, 30th, and 31st at weighted average prices around $41.xx. After these buys, they own over 14.86 million LSXMA shares.
The second Form 4 indicates they also bought 644,172 LSXMK shares on May 26th, 30th, and 31st at weighted average prices ranging from $40.9877 to $41.7432. After these buys, they own over 31 million LSXMK shares.
We've also previously noted that it seems likely that Berkshire's portfolio manager Ted Weschler is the one buying here.
For more on Berkshire Hathaway, check out a recent interview with Warren Buffett here.
Per Google Finance, Liberty SiriusXM is "Liberty Media Corporation owns interests in subsidiaries and other companies, which are engaged in the media and entertainment industries. The Company's principal businesses and assets include its consolidated subsidiaries Sirius XM Holdings Inc. (SIRIUS XM) and Braves Holdings, LLC (Braves Holdings), and its equity affiliate Live Nation Entertainment, Inc. (Live Nation). The Company's segments are SIRIUS XM, and Corporate and other. SIRIUS XM provides a subscription-based satellite radio service. Through its subsidiaries and affiliates, the Company principally operates in North America. The Company also owns a portfolio of minority equity investments in publicly traded media companies, including Time Warner, Inc. and Viacom, Inc. SIRIUS XM transmits music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services, in the United States on a subscription fee basis through two satellite radio systems."
Corvex Management Boosts Energen Position
Keith Meister's activist hedge fund Corvex Management has filed a 13D with the SEC regarding its stake in Energen (EGN). Per the filing, Corvex now owns 5.5% of EGN with over 5.37 million shares. This is up from the previous 1.34 million shares they owned at the end of the first quarter.
The filing was made due to activity on May 22nd. The 13D notes that they've been quite active buying call options and selling put options and you can view the full list of transactions here.
They've had discussions with management and Corvex feels that:
"(Energen) has some of the most attractive leaseholds for oil and gas development in the Permian Basin. However, despite this leading asset position, the Issuer’s operational performance has fallen short of its peer companies, leading to underperformance both in terms of financial results and shareholder returns. As a result, the Reporting Persons’ believe the Issuer needs to strongly consider what actions can be taken to enhance and maximize shareholder value – including a review of the potential value delivered to shareholders through a change of control transaction given the recent wave of acquisitions in the Permian Basin at per acre values well in excess of the Issuer’s current implied value."
For more on this fund, Keith Meister also recently presented at the Sohn Conference New York and you can catch up on his presentation here.
Per Google Finance, Energen is "an oil and natural gas exploration and production company. The Company is engaged in the exploration, development and production of oil and natural gas properties and natural gas. Its operations are conducted through subsidiary, Energen Resources Corporation and occur within the Midland Basin, the Delaware Basin and the Central Basin Platform areas of the Permian Basin in west Texas and New Mexico. The Company is focused on increasing its oil, natural gas liquids and natural gas production and proved reserves through active development and/or exploratory programs in the Permian Basin. As of December 31, 2016, oil, natural gas liquids and natural gas represented approximately 60%, 20% and 20% of its reserves. As of December 31, 2016, its development activities added approximately 327 million barrels of oil equivalent (MMBOE) of reserves from the drilling of 623 gross development, exploratory and service wells and 73 well recompletions and pay-adds."
ValueAct Capital Trims Willis Towers Watson Stake Again
Jeff Ubben's activist investment firm ValueAct Capital has been trimming more of its holdings. Per a 13D filed with the SEC, ValueAct now owns 4.9% of Willis Towers Watson (WLTW) with 6.66 million shares.
Per Form 4's filed with the SEC, ValueAct sold 500,000 WLTW shares in total across May 25th, 26th, 30th, and 31st at around $145.xx.
This is the second time they've sold WLTW shares in recent months.
Per Google Finance, Willis Towers Watson is "a holding company. The Company operates as a global advisory, broking and solutions company. It is engaged in offering risk management, insurance broking, consulting, technology and solutions, and private exchanges. The Company operates through eight segments: Willis International; Willis North America; Willis Capital, Wholesale & Reinsurance (CWR); Willis GB; Towers Watson Benefits; Towers Watson Exchange Solutions; Towers Watson Risk and Financial Services; and Towers Watson Talent and Rewards. The Willis GB segment comprises four business units: Property and Casualty, Transport, Financial Lines and Retail Networks. The Willis Capital Wholesale and Reinsurance segment includes Willis Re; Willis Capital Markets & Advisory; Willis' wholesale business, and Willis Portfolio Underwriting Services. The Willis North America segment provides risk management, insurance brokerage and related risk services."
Tuesday, May 30, 2017
London Value Investor Conference Notes 2017: Parames, Roden, Channon & More
Below are notes from the recent 2017 London Value Investor Conference. Each link takes you to that speaker's presentation. Enjoy!
London Value Investor Conference Notes 2017
Francisco Garcia Parames (Cobas Asset Management): Long Teekay Corp and Teekay LNG
Stuart Roden (Lansdowne Partners): His talk on investing
Gary Channon (Phoenix Asset Management): Long Easyjet
Steve Romick (FPA Funds): Loan to Sears Canada
Nick Train (Lindsell Train): Long Diageo
Django Davidson (Hosking Partners): Talk on the consumer
Kevin Murphy (Schroders): Long Standard Chartered
Alex Wright (Fidelity Special Situations Fund): Two long ideas
Michael Keller (Brown Brothers Harriman): Long Wendel SE
Jonathan Boyar (Boyar Value Group): 4 long ideas
Ben Preston (Orbis): Long Samsung SDI
Charles Heenan (Kennox Asset Management): Long Texwinca
Joe Bauernfreund (Asset Value Investors): Long Wendel
Ronald Chan (Chartwell Capital): Long Far East Consortium
Rhys Summerton (Milkwood Capital): Long John Menzies
Filip Weintraub (Skagen Funds): Long Taiheiyo Cement
Francisco Garcia Parames Long Teekay: London Value Investor Conference
We're posting up notes from the 2017 London Value Investor Conference. Next up is Francisco Garcia Parames of Cobas Asset Management. He pitched long Teekay Corp (TK) and long Teekay LNG Partners (TGP).
Francisco Garcia Parames London Value Investor Conference Presentation
Whilst at Bestinver 1993-2014, Parames’s returned 15.7% per annum in his Spanish equity fund, equivalent to 2,279% compounded compared to 410% for the Spanish index. In 1997 he also began to manage an international portfolio, which returned an average 10.6% per annum versus 2.9% for the MSCI World Index. He left Bestinver due to a difference of opinion over whether to take on more capital. He felt that at $10bn euros the fund had become too big.
Temperament is more important than IQ for success in investment management. He qualified this by saying that you manage risk by knowing what you are doing. Studying companies in depth is important – if you don’t it will lead to mistakes. You can reduce risk by buying assets that have gone down a lot in price.
His approach to valuation is to buy good businesses trading on less than 10x earnings. He looks for companies with high returns on capital. He said that one of the things he wished he had learnt earlier in his career was to invest in better quality companies. Joel Greenblatt’s Little Book That Beats the Market helped him to develop this side of his game and to avoid value traps.
A distinctive feature of Parames’s style is that he actively changes the size of his positions in companies. The names in his portfolio do not change that often but under the surface there is a high turnover of money. All things being equal, if one stock in his portfolio goes up by 20% and another goes down by 20% he moves money from the winner to the loser.
In terms of sell discipline, he only sells when there is something better to buy. “We almost never go to cash.” The current market is on the expensive side but it is not in a bubble.
Long Teekay Corporation (NYSE: TK) and Teekay LNG Partners (NYSE: TGP)
Teekay is his first shipping investment in 27 years of investing. It is the main investment in the new Corbas fund – about 9% of the portfolio. Teekay is a family owned company. He trusts family owed companies to keep watch on management and over his career about 80% of the investments have been in family owned businesses. Shipping is cyclical, leveraged, tends to have low returns and can be a lousy business.
Teekay Corporation currently receives $40m in payments per annum from its subsidiaries but before the collapse in the oil and gas price it received much more. The largest subsidiary, Teekay LNG Partners, is expected to return to paying the parent company $100m a year as it did in 2014 and 2015. Given these cash flows Parames’s thinks that Teekay Corporation is worth $19.5 per share (it is trading around $6.40).
Teekay LNG is the key to the valuation. It is trading at 5-6x FCF. It is leveraged 50-60% of assets - lower than most other shipping companies that are in the 70-90% range. Compared to most other shipping businesses LNG companies work on very long-term contracts with companies like Shell and Total. Free cash flows will increase every year for the next 10 years and are predictable. He expects an IRR of 18% per annum.
Parames noted that it was the first time in his career that he had seen a stock’s price fall 75% with no change in the earnings estimates.
Be sure to check out the rest of the presentations from the London Value Investor Conference.
Stuart Roden's Presentation at London Value Investor Conference
We're posting up notes from the 2017 London Value Investor Conference. Next up is Stuart Roden of Lansdowne Partners.
Stuart Roden's Presentation at London Value Investor Conference
Stuart Roden and Peter Davis managed Lansdowne’s flagship long/ short equity fund, The Developed Markets Strategy, until the end of 2014. Since then he has taken on the role of Chairman.
He does not regard himself as a value investor or a growth investor - he is eclectic. He likes to focus on situations that involve change typically at an industry level rather than a company level.
Investment managers need to have an appetite for risk and be able to cope with loss. Most of Lansdowne’s employees have First Class degrees but he said that sometimes very academic people particularly from a science and maths background cannot deal with uncertainty. It’s partly due to not being used to things ‘not working out’ but also because they may not have experienced enough set-backs in life. “The stock market can make a fool of you for quite a long time.” Fund managers need common sense as well as brains and managers need to understand that they may be wrong. You can’t control events and things are going to happen that you are not ready for – you will be shocked at times. If you can’t deal with that level of uncertainty it can make you emotionally unstable.
At Lansdowne, they encourage their portfolio managers to get four things right. Firstly, you need a creative idea. Secondly, strong analysis. Thirdly, risk management and correlation control to make sure that you are not missing a risk that runs throughout the portfolio. Fourthly, monitoring. He likes Barton Biggs’s advice on portfolio management: ask yourself is this the portfolio you would build today? His role was often to be ‘questioner in chief’. He watched out for thesis creep. Do the reasons why you wanted to buy a stock in the first place still hold true? Do you need to change your view? If you can’t change your view you won’t make it as a fund manager.
He values imagination pointing out that they made a very successful investment in Amazon by thinking creatively about the way Amazon would look in 3-5 years. This was not a momentum trade but instead required long-term thinking. They were only able to make the investment because they did not hold a static view of Amazon’s valuation.
If you can find two people who complement each other partnerships work very well in investment management. He said three people was too many. He was very lucky to have worked with his partner, Peter Davis. There was something about their partnership that worked, they were very different people, their emotions were different, Davis was optimistic whereas he was looking over his shoulder the whole time to see what might go wrong – a combination of confidence and humility. There was also an age gap that avoided them becoming competitive. Good partnerships require respect and mutual admiration.
Given the state of the markets, if he was opening a fund today it would be a long/ short fund and not a long-only fund. In the past 16 years when a lot of Lansdowne’s shorts have been in indices rather than single stocks the markets have tended to go up. Today all their shorts are in single names. Shorts are easy to find because there are so many businesses being hurt by disruption. When he first started he was often confident that they could hold equity investments for at least 5 years but today he feels that has shrunk to 3 years. There is so much uncertainty – not just in interest rates and valuations.
Be sure to check out the rest of the presentations from the London Value Investor Conference.
Gary Channon Long Easyjet: London Value Investor Conference
We're posting up notes from the 2017 London Value Investor Conference. Next up is Gary Channon of Phoenix Asset Management who pitched a long of Easyjet (LON: EZJ).
Gary Channon's Presentation at London Value Investor Conference
Phoenix is a UK focused fund that since inception in 1998 has returned 12% annualised vs the 4.9% for the UK benchmark.
Long: Easyjet (LON: EZJ)
There is an intrinsic human desire to travel. GDP per capita and the cost of travel drive the overall market. Air travel has been doubling about every 12 years. Yet airlines have been terrible businesses except for Southwest Airlines in the US. The Southwest model has been copied by both Ryanair’s and Easyjet’s founders.
It is often assumed that Ryanair and Easyjet are competing. Ryanair is thought of as the low-cost producer and to be more effective than Easyjet. Channon argued that the two airlines have different strategies and are not competing. They do not fly the same routes – there is only 4% overlap. This is not an accident but a deliberate strategy. Easyjet takes customers from convenient airport to convenient airport. Ryanair is low cost - inconvenient airport to inconvenient airport. Both companies produce a similar return on capital.
Easyjet has a moat which is underappreciated by the market. The moat is derived from the slots it owns. The slot is the right to take off and land at a certain time on a certain day. The slots are regulated by quasi-legal international conventions referred to as Grandfather Rights. The slots belong to the airlines not the airports. A slot can provide pricing power if it is at a sought-after airport where demand outstrips supply. The lack of runways in the UK and Europe and the failure to build new ones guarantees a shortage of supply. Because of the value of slots airlines tend to be against the expansion of runways while the owners of airports tend to be supporters.
The slots provide a barrier to entry as people’s propensity to switch airports is limited. Only 20% of passengers are prepared to add an extra hour to their travel if they are on a short-haul European flight. Easyjet’s real competitors are those who fly the same routes from busy airports - mainly British Airways and Air France but certainly not Ryanair. British Airways and Air France are not strong competitors to Easyjet because they have structurally higher costs due to pension schemes, staffing costs and culture. This creates an environment in which Easyjet will keep expanding, gradually taking the flag-carriers business.
Channon estimates that three-quarters of Easyjet’s business is protected by a slot-constrained moat. This provides pricing power and high returns.
The opportunity for Phoenix to invest in Easyjet came about because of Brexit. Channon said he thought Brexit was a non-event for Easyjet. It does not change the competitive landscape and Easyjet will get a European license. Phoenix bought their Easyjet stock 9 months ago. Channon said he would not buy today but would wait for the price to fall below £10 per share (the stock is trading at around £13.80).
Be sure to check out the rest of the presentations from the London Value Investor Conference.
Nick Train's Presentation at London Value Investor Conference
We're posting up notes from the 2017 London Value Investor Conference. Next up is Nick Train of Lindsell Train.
Nick Train's Presentation at London Value Investor Conference
Even though Train regards himself as a value investor he has changed his investment style considerably in the last 20 years. He quoted Michael Lewis:
“Graham and Dodd investors are people who place a very high price on having the last laugh… “
“….in exchange for that privilege they have missed out on a lot of laughs in between.”
Train missed the TMT boom in the 1990s, not owning any technology stocks. He missed both the boom and the bust but the experience left him feeling dissatisfied. As a traditional value investor, he felt that he had been ill equipped to analyse and deal with an historic, world changing and enormously value creating technology shift. He felt his traditional value investor’s mindset had blinkered him and revealed some limitations. The value discipline had led him to spend too much time looking at cycles and not enough time looking out for trajectories. He had been waiting for years for reversions to the mean that did not happen and not enough time looking for self-reinforcing trends. He felt he had missed the whole point of what creates long-term equity value.
Today he believes the single most important thing that they can do is to extrapolate long term trends. Cycles are irrelevant. Today he likes to invert Howard Marks’s well-known quote:
“Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do.”
He gave global whisky shipments as an example of a re-enforcing trend that has continued to grow over the last 100 years. There is no sign of cyclicality or reversion to the mean and he says he expects the trend to continue for the next 30 years. Similarly, he noted that £1 invested in the UK Engineering Industry in 1900 would have grown to £2283 today while £1 invested in the UK alcohol Industry would have grown to £243,152. Again, he expects this trend to continue and it is a reason why Lindsell Train have a large investment in Diageo.
It’s far better to lock into the value creating trajectories and leave the tricky cyclical-type trades alone. The stock market is better viewed as a trajectory rather than a series of potentially ruinous ups-and-downs.
Value investing with its focus on cyclicality can make us too prone to cynicism and pessimism. Optimism is hard but if you hold on to those investment trajectories you will benefit from looking on the bright side.
Everyone has their favourite Buffett quote. Train said that the one that resonates most for him is that the best holding time is forever. “My starting point is that I’ve made a permanent/ semi-permanent commitment to a franchise and I am prepared to ride through the fluctuations.” If the trajectory that we are trying to capture turns out to be misplaced or the company cannot deliver on what we are hoping for that’s a reason to sell. The other reason he would sell is if the balance sheet is deteriorating to such an extent it is threatening the survival of the company.
Be sure to check out the rest of the presentations from the London Value Investor Conference.
