market folly

Today we're covering in detail the recent presentation from Whitney Tilson and Glenn Tongue of hedge fund T2 Partners from the Value Investing Congress. Since inception, T2 is up 184.4% compared to an S&P 500 return of 17.7% over the same timeframe. Earlier in the week we detailed notes from the Value Investing Congress and briefly touched on T2's presentation. Below we'll take an in-depth look as their speech centered on a duopoly of investment ideas: one long and one short. We'll start with T2's bearish stance on the housing market and their short position in homebuilders.

Housing Market

Hedge fund T2 Partners gave a bearish presentation on housing two years ago at the Value Investing Congress and they were back this time around with continued skepticism. In the near term, they felt that the government tax credit and the fear of rising rates has spurred buying activity in the marketplace. However, they are quick to point out shadow inventory that lurks in waiting. The current housing overhang is around 7 million homes, and that doesn't include the 300,000 new defaults that occur each month.

Of the defaulters who haven't made a payment in a full year, 23.6% still have yet to be foreclosed on. Interestingly enough, T2 also notes that homes with negative equity are a much bigger driver of defaults than those affected by unemployment. The mortgage crisis is now being driven by underwater borrowers. This differs from the previous scenario where default was driven by resets. They also present a hypothetical scenario that if house prices were to drop an additional 10%, we'd see an increase of 56% more underwater homeowners.

It's clear we're still not out of the woods here yet. While most wouldn't argue with that statement, the numbers are pretty frightening. A weak housing market was ultimately one of the main contributors to the weak economy. As such, the American economy can't truly be repaired until the housing market itself is repaired. Thus, T2 Partners is short the industry via the iShares Dow Jones US Home Construction Index, ticker ITB. You can read more specifics regarding their short in the presentation at the bottom of the page. T2's presentation is a stark contrast to that of hedge fund Ellington Management's who as we covered earlier are bullish on housing.

Long position

Whitney Tilson and Glenn Tongue also presented an investment idea on the long side: Anheuser-Busch InBev (BUD). Their presentation entitled, 'Return of the King' focuses on how the merger between the two previous entities has created the largest global brewer which is seeing huge beer volumes, revenues, and EBITDA. Their hedge fund's investment thesis on BUD centers on the fact that this is a best of breed business with pricing power and high margins in major markets. On the valuation side of things, BUD trades at 8.5x 2012 free cash flow.

The company has a very wide moat with attractive returns on capital and they are able to generate high EBITDA margins through regional economies of scale. Not to mention, in Anheuser-Busch InBev's top 31 markets, they are #1 or #2 in 25 of them, as they have effectively gobbled up tons of market share. And, one intriguing fact about the company: they are also the largest bottler of Pepsico products outside of the US. Overall, Tilson and Tongue think shares are worth anywhere between $79 and $91 over the next two years. This position joins T2's ever growing portfolio of undervalued blue chip stocks.

Embedded below is hedge fund T2 Partners' entire presentation from the Value Investing Congress:



You can download a .pdf here.

In terms of their general stock market stance, Tilson and Tongue feel that the market is likely range bound as interest rates are low but P/E multiples are high. They don't necessarily see how a sustained bull market can occur in the near future. For more coverage of the Value Investing Congress, be sure to check out notes from day one as well as a summary of day two's presentations as well. Lastly, check back here daily as we'll be posting up more in-depth research from the event.

Overall, a well-illustrated set of ideas from Tilson and Tongue. For more on their hedge fund, we've covered T2 Partners' short positions, Tilson's explanation of their short in LULU, as well as T2's annual letter.