market folly

The CIO/CEO Leaders in Investing Summit took place on Tuesday at The Metropolitan Club of New York and featured presentations from numerous high-profile hedge fund managers.

The summit is a peer-only event only open to those investing third party capital. We're pleased to present notes from the event concerning specific investment ideas and/or commentary on the economy:


Leon Cooperman (Omega Advisors): The legendary hedge fund manager's talk centered on equities as the best house in the financial asset neighborhood. He argued that you need to believe four issues in order to have a positive view on today's market:

1. The U.S. is not another Japan and will not suffer a lost decade.
2. The European Central Bank (ECB) will act to stabilize Europe.
3. President Obama will move to the center.
4. The Middle East's turmoil leads to democracy and oil stays below $135.

Cooperman continued to voice his concern over employment. He also pointed out that the yield curve is quite steep and that the Federal Reserve is trying to inflate the country out of debt. Cooperman says inflation is not bad for stocks (see the best investments during inflation).

He argues that stocks are cheap trading at 13.6x relative to bonds and history. The Omega Advisors founder also thinks that bonds are 'screaming' to be shorted. Other hedge fund managers have also advocated shorting bonds. Don't forget that you can also hear Cooperman's latest investment ideas at the Value Investing Congress in October (click here for a discount).



Larry Robbins (Glenview Capital): Formerly of Cooperman's Omega Advisors, Robbins founded Glenview Capital. His presentation yet again focused on Life Technologies (LIFE). The company trades at a 11x P/E and is likely to grow EPS 20% over the next few years as they were able to grow EPS throughout the slowdown and 95% of their business grows with research spending.

Robbins highlighted free cashflow is 91% of EPS and that the company will have 80% market share versus competitor Illumina (ILMN). One could postulate that he's short ILMN as a hedge but when asked about it he said that he's "only here to discuss my longs."

And speaking of longs, he said some of his top holdings are Expedia (EXPE), Flextronics (FLEX), Xerox (XRX), and BMC Software (BMC) in technology. We've detailed the in-depth investment thesis on EXPE in the latest issue of our Hedge Fund Wisdom newsletter.

In general, Glenview looks for good businesses, low valuations, excess capital, a business that can succeed regardless of economic environment, and pricing power. Currently, Robbins thinks the economy will grow slowly and with heightened volatility due to excess government intervention.



Tom Russo (Gardner Russo & Gardner): The long-only manager is still bullish on China and pitched Nestle (NSRGY) at the event. His idea is simply to buy prominent international players and hold through the ups and downs. In the past, he's talked about how Nestle can invest large amounts of money in emerging markets and see high rates of return.

He is also still holding SAB Miller (LON: SAB) despite declining EBITDA margins as the company is now making acquisitions to make up for the lack of growth. Russo did not seem to like the Foster bid.



Howard Marks (Oaktree Capital): His presentation focused on the keys to success in a low return world. Marks focused on three key questions to ask yourself as an investor today:

1. Should we prepare for prosperity? He argued no because the economic recovery is faltering.

2. Should we worry about losing money or missing opportunity? For now, he says to be mindful of losing money.

3. What holds the key? Capital and nerve? Or discernment, discipline, risk control and selectivity? Marks argues the latter right now, saying that stocks are slightly cheap, but not by much.

Marks says that your choices today are as follows: invest for the long-term, go to cash, take more risk (chase yield), or find niches. Take your pick. Marks also brought up a good point that just because stocks are flat over a ten-year period doesn't mean they are a buy because the P/E was 30x ten years ago.

Oaktree recently filed for an initial public offering and Marks' recently released his new book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor which has received praise from legendary investors Warren Buffett and Seth Klarman.



Paul Singer (Elliott Associates): This hedgie's talk focused on the shape of the next crisis. He mentioned that all major banks are quite opaque and no one can truly analyze them, meaning the next crash could be even faster because the leverage is still there. He doesn't seem to be a fan of Bernanke.

Singer points out that the lesson was "sell first, move assets first, ask questions later." Those that took more time to do so got stuck and that is dangerous. He also believes that Dodd-Frank has made the system more brittle and thinks there should be NO financial institution that is too big to fail.

Lastly, he also mentioned that monetary policy has caused commodity inflation (Howard Marks also thinks this is the case).



Bill Ackman (Pershing Square Capital): Speaking on activist investing, Ackman said that you have to work *with* management. He cited his investment in J.C. Penney (JCP) as an example as the company has a new CEO who redesigned Target (TGT) then most recently headed Apple's (AAPL) wildly successful retail operation. He also says that the company has a big advantage by owning its own real estate and not paying rent. We've covered Ackman's JCP thesis here in-depth for more.

Concerning his recent investment in Family Dollar (FDO), Ackman said that Nelson Peltz's Trian Fund is driving the effort. The company has a bid on the table and is a prime leveraged buyout candidate. The vote is in January and management has to fix the company or sell it. We've also posted Ackman's presentation on FDO.

Ackman also talked about lessons he learned from his mistakes. He said that liquidity is very valuable and lack of it is a big opportunity cost. Also, he pointed out that as you get older, you further understand the opportunity cost of time. He likes to measure whether the potential return justifies the time and risk.

Citing his past failed investment in Borders (BGPIQ), Ackman said he underestimated the risk of technological change. He would rather invest in a good business than just good management. He said the limitation of his approach is that although the stocks he invests in are liquid, his concentrated stakes are not (Ackman also mentioned 27% of his fund was redeemed during the crisis).



Ron Gutfleish (Elm Ridge Capital): Gutfleish likes the defense sector and in particular, Lockheed Martin (LMT). He argues the company doesn't make bad acquisitions, pays a good dividend and does smart buybacks. While he admits to being "usually too early," the hedgie thinks that these stocks are very cheap no matter what you think about the defense sector.

The bear case there is very obvious, he notes, pointing to a budget under pressure. However, he argues that these companies generate huge cash flow during down cycles and deploy it in shareholder friendly ways.



Joel Greenblatt (Gotham Capital): Greenblatt's presentation focused on the 'big secret for value investors.' He was, of course, referring to his new value-weighted indexing method which is detailed in his new book, The Big Secret for the Small Investor: A New Route to Long-Term Investment Success.

He argues that indexes have the flaw of market cap weighting. Evenly weighted, the SPX outperforms by 3% per year over the last 20 years. A value weighted index of 800 stocks beats the SPX by 7% a year.

Right now, Greenblatt says his statistics point to stocks being at about average valuations. Some of the stocks on his list right now include: Gamestop (GME), Wellpoint (WLP), and Intel (INTC). He says that these companies are trading at bargain prices either due to uncertainty or because they are troubled.




That sums up notes from the summit. Keep in mind that many of these hedge fund managers will be presenting investment ideas at the upcoming Value Investing Congress in October and Market Folly readers can receive a discount to the event by clicking here.