market folly

The 5th Annual Sohn Conference San Francisco took took place on Wednesday October 29th.  MarketFolly was there to cover the event. Excellence SF is in partnership with the Sohn Conference Foundation and is focused on improving educational opportunities and life outcomes for underserved youth.  Conference proceeds also support the Sohn Conference Foundation.  Donations may still be made at www.excellencesf.org 


Sohn Conference San Francisco 2014 Notes


Jeff Ubben - ValueAct Capital - LONG Agrium (AGU) Thesis:  They have a $750M stake in the company.  Generally sees opportunity in the space.  AGU has continued to invest in the business the past 7 years, thinks this investment will start to show returns.  JANA went after mgmt and lost proxy battle, but this still lead to change in mgmt.  They agreed with Jana.  AGU's retail business is the jewel of the company.  Wholesale business is volatile.  AGU has put $7.6B into capex since 2012.  $1.7B should start to get returned to stockholders starting in 2016 or 2017.  Sees a share price of $120 to $150 a share. 

Key reasons for liking AGU:
1)  New CEO has a more focused game plan;
2)  Strong growth in FCF despite down cycle;
3)  Cheap any way you look at it;
4)  Well positioned in consolidating market. Thinks this is a good investment that offers potential returns of 20% a year for a few years.  


Kurt Billick - Bocage Capital - LONG Lundin Mng (LUNMF) Thesis:  Has a commodity focus.  For a while, China had been the key driver in increased commodity demand.  The lack of investment in infrastructure up to that point, lead to a steep climb in prices, which in turn lead to more capital and investment.  Nickel and Zinc are seeing excess inventories absorbed.  Copper is even more interesting.  Likes mining companies that mine base metals and LUNMF mines Nickel, Zinc and Copper.  


Mick McGuire - Marcato Capital Management - LONG Packaging Corp of America (PKG) Thesis:  Started his presentation out by noting that his pick from last year Sotheby's (BID) is down since he presented, and he likes it even more than he did last year.  With respect to PKG, it has a market cap of roughly $7B and they own roughly 3% of that.  Favorable trend for companies in this space as there has been consolidation leading to pricing power.  There's also an opportunity for part of the business that processes virgin wood pulp to become an MLP.  Sees possible price of $122 or 77% upside compared a price of roughly $70 at the time of the presentation.


Brian Zied - Charter Bridge Capital - LONG CaesarStone (CSTE) Thesis:  Likes to focus on industries driven by evolving consumer landscape.  CSTE's product is engineered quartz surfaces for kitchen countertops, bathrooms, floors and walls.  Quartz is gaining share vs. granite and marble.  Quartz has similar aesthetic, but superior performance.  Better characteristics include: scratch and heat resistant, non-porous, identical slabs, lifetime warranty.  Quartz is less expensive too.  Kitchens have become a larger part of the American home over time and are now a focal point of the home compared to say the 50s or 60s.  Remodels now usually also focus on kitchens first.  Quartz is gaining share relative to granite and marble.  CSTE is the only branded luxury quartz countertop maker.  EBIT margin and ROE are much higher than peers.  Compound sales growth over the last two years has been 45%.  Sees a possible stock price of $97 based on eventual EPS of $6.50 and a PE multiple of 15.  


Carl Kawaja - Capital Research Company - LONG Zulily (ZU) Thesis:  Internet retailer that is largely unpopular right now with large short interest.  IPO in November of 2013.  Most people in the audience at Sohn in SF are men, and men don't get ZU.  ZU vs AMZN, about half of items on ZU are not on AMZN.  Site is customized and successful.  ZU offers merchants better terms on their site.  Potential market is big.  Typical customer spends $150 in first year, but if they stay, they eventually avg $500 a year.  Reminds him of Costco.  Bear arguments include:  slow ship time, shipping charges not sustainable, and kid sales are dropping.  By 2018 he sees a potential market value of $11B compared to a bit over $4B right now.  


Sandy Colen - Apex Capital - LONG Container Store (TCS) Thesis:  Likes big opportunities that can be held for a long time.  TCS is down 60% YTD.  IPO'd at 18 and went to the 40s and is now at 17.  Some see weak traffic.  Keys to success include:  grow store base, branded closet line, controlled spending, improve operating leverage.  Sees potential EPS of $1.40 in 2017 and $8.50 in 2025 compared to analyst consensus of $1.00 for 2017.  


Mick Hellman - HMI Capital - LONG LPL Financial (LPLA) Thesis:  In money management there are two key groups, the manufacturers and the distributors.  LPL is in distribution.  Has over 14,000 advisors with $465B in Assets Under Control.  Stock is down a lot recently, but believes problems are solvable.  90% return on tangible capital.  Tailwinds include: large recurring opportunity, more need for financial advice, mix to fee based, client money tends to stay on platform.  Chokepoints include:  best platform, compliance and practice mgmt, scale play, stickiness of platform, flexible product platform.  Sees opportunity for low 20% annual returns.  


Scott Fearon - Crown Capital Management - LONG Grand Canyon Education (LOPE) Thesis:  Owns 115,000 shares of LOPE.  Focus is companies less than a couple billion in market cap.  Lots of money managers don't understand LOPE.  Of the for profits, LOPE is the only one up since 1/3/2012.  Revenues have also been growing.  There is a large short interest in the stock.  There are 11,000 students in the physical school and another 53,000 online.  Four positives about LOPE include: ground campus, affordable, christian, relevant degrees.  Outside possibility of turning dorms into REIT.  Admission standards are high.  Low default rates on student loans on par or better than traditional nonprofit colleges.  Potential for $12 in EPS in 10 years with a 15 PE implies a price potential of $180.


Meridee Moore - Watershed Asset Management - LONG W.R. Grace (GRA) Thesis:  This was also her stock pick in 2011.  Feels like October 2011 again.  All chemical companies are down, but GRA is different kind of chemical company.  Three main lines: Catalyst Technologies, Materials Technologies, Construction Products.  Focus is on ROIC.  Stock is at $89 now.  Was roughly at $39 when she recommended it in Oct. of 2011.  GRA emerged from Chapter 11 in February of 2014.  Stock could be up 37% a year from now based on peer value of EBITDA.  Risks: global slowdown, high rare earths prices, strong dollar, delaying in construction infrastructure spending, recent declines in oil if sustained could mean low prices for Catalyst Technologies.  


Jose Medeiros - Stonerise Capital Partners - LONG QVC (QVCA) Thesis:  Likes to have concentrated portfolio of 6 to 8 long investments a year.  QVC is value hiding in plain sight.  Digital retail.  High retention rates with spend per customer going up.  Attractive financial model and 8% FCF yield.  Was buried in LINTA before, but now trading.  Not much analyst coverage yet.  Trades at $25 with potential for a price of roughly $42 in 2016. Second Pick: LONG Global Eagle (ENT) Thesis:  In flight entertainment and connectivity is a growing market and ENT is a leader.  Has 150+ airline customers.  Deals with airlines are recurring and have long term contracts of 7 - 10 years.  Air traffic is doubling every 15 years and connectivity is growing even faster.  Penetration and take rates are low now.  Gogo, a competitor, is based on ground to air.  Doesn't work over water and other issues as well as that.  Satellite based better.  Market cap of $800M.  Is down more than 40% in the last 12 months.  Has a strong balance sheet.  Other potential catalysts like Dish sponsorship deal.  


Jeff Osher - Harvest Small Cap Partners - LONG Green Dot (GDOT) Thesis:  They own over $50M of stock.  Sees at least 88% upside over 6 to 12 months as concerns get addressed.  Growth is reaccelerating.  30% of cap is cash.  Has a $1.1B market cap.  TAM is 160M customers (17M unbanked, 51M underbanked, 90M unhappily banked).  Simple financial model, sales come from: sale of cards, transfers / reloads, interchange.  Amex entry into market scared investors, but Amex not doing well with prepaid cards.  Misconceptions include:  concerns about collapsing margins, structural growth issues, loss of WMT will destroy GDOT.  


For more recent conference coverage, head to our notes from Sohn Canada investment conference as well as a summary of the stock picks from the Robin Hood Investors' Conference.