market folly

At the Value Investing Congress today, Ricky Sandler of hedge fund Eminence Capital talked about his long position in CME Group (CME) in a presentation entitled "Go Big; Go High: The Opportunity in Large Cap Quality Equities".

Be sure to check out all of our notes from the Value Investing Congress.


Ricky Sandler (Eminence Capital): Long CME Group (CME)

Embedded below is Sandler's full slideshow presentation:



Sandler's firm manages $2.9b and are bottom-up stockpickers, long and short. They average 120% long, 70% short and always run net long. They lever longs and use shorts to help ride out volatility. Currently, Eminence is 131% long and 65% short and he thinks stocks are cheap now as he has more than average exposure.

They avoid low quality businesses regardless of price. Shorts: structural or secular challenges to business or industry, obsolescence. They avoid high quality businesses/valuation-only shorts.

Opportunity in large caps today: underperformed Russell by 6.6% per year over last 10 years. Biggest companies are now trading at 11.5x P/E vs. 14x historic. Bulls say cheap, and VERY cheap vs. interest rates. Bears say stocks aren’t that cheap if you cut future earnings estimates.

Timing? “We started 2 months ago, we’re there, and this move up is just the beginning.” Earnings will slow, dividends increasing in importance. Right now there is no premium for “quality” stocks - trading at 11.3x P/E vs. his “junk stocks” trading at 14.3x (not sure how he defines “junk stocks.”) The good stocks only outperform 54.1% of the months, but 500 bp per year.

Specific stock idea: long CME group (CME): Derivatives and futures exchanges company. Natural monopoly. 60% operating margins, ROC over 100%, 15%. Revenue growing 18% CAGR over last 10 years. One risk is regulators could change the rules of the game; this actually works in their favor, as they want more over the counter trading to go onto the exchanges. Many new products, such as weekly options, emerging markets currency like RMB. They benefit from fears about counterparty risks. $22 EPS in 2012, 14% CAGR over last 5 years, no net gain in stock price. Trades at 11x 2012 EPS.

In addition to Eminence, some of CME's top holders are John Griffin's hedge fund Blue Ridge Capital as well as Paul Ruddock & Steven Heinz's Lansdowne Partners.



About Ricky Sandler: He manages the $3 billion hedge fund Eminence Capital. Prior to founding Eminence he co-managed Fusion Partners. He employs a 'quality value' approach to investing and has typically been 120% long and 70% short but they've ramped up exposure lately because they believe the market is cheap (131% long, 65% short).

In our September hedge fund performance numbers post, we highlighted that Eminence was -2.7% in September and -8.77% for the year at that time.


You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.