market folly

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Whitney Tilson of T2 Partners.  His talk was entitled 'My Favorite Ideas.'


Tilson's 3 Favorite Stocks

1. Netflix (NFLX) - He was originally short, but now he's long.  He says the company reminds him of Amazon.com (AMZN) back around 2001.  He also feels it could be a takeover target.

"The most controversial, risky thing in my portfolio." Rallied 80% in first 6 weeks of this year.

Quick overview: only $3B market cap, 400M net cash, $3.5B TTM revenues, EV/rev trading at less than 1x sales, FCF TTM collapsed only $61M because company is reinvesting all of its profits back into the company.  28.3M subs, each EV/sub about $99.  28.7% short interest.

Bull case:  market leader, in a global business that is growing 30-40% per year.  Lots of talk about competitors, but no actual market share losses.  Investing in better content, and international expansion which is losing money.

Using hulu as a comp, a $2B valuation on 2M subs, values it at $1000 per sub. Says downside protection due to "bite sized" acquisition for a half dozen companies that would find it attractive. "Mother of all bidding wars would erupt." 


2. Berkshire Hathaway (BRK.A) - "Total opposite."  Brief update: trading above the 110% of book level. Core operating businesses "are going gangbusters."  Insurance up 65% this year, because last year had some super cat events.

How to value it? $106,700 investments per share, $8600 eps ex investments x 8 (12 p/e) multiple, get $175,500 intrinsic value, which is 32% up from today's price.  Intrinsic value calculations have typically led the stock price a bit, but quite correlated.


3. Howard Hughes Corp (HHC) - His third largest position, after BRKA, and AIG.  HHC owns 34 commercial, residential and mixed-use real estate properties in 18 states.  It was a spin-off of the harder-to-value assets from General Growth Properties (GGP).

Real estate company with no income or dividend, so no natural investors for it.  $2.7B market cap, $3.1B EV. Bill Ackman is chairman, insiders own 50% of stock, CEO bought $15M of warrants with his own money, not an option grant.

Owns: Summerlin residential in Las Vegas.  40,000 homes in the area, 5880 acres remaining to be sold.   Woodlands in Houston. 3669 lots left.  Not as bad as overall, they had their bubble much earlier.  Ward Center in Honolulu.  60 acres, 1M sq ft of leasable space.  "Unbelievably hot market in Honolulu."  Could do 5-8 residential towers with ocean views.  At peak, $18M/acre, they have 60 acres. South St. Seaport.  #5 visited site in NYC, 11 acres, major development, worth about $200-300M now. They will tear down Pier 17 and replace it with a glass enclosed building, with panels that can open in the summer. Great views from the roof, they will build it.

Very hard to value, have to use a variety of methods based on the specific property.  Low end, gets $67 (where it is now) and high end gets you $125 per share, almost a double.  Also inflation hedge, hard assets. Risk is real estate market declines again.  Need good execution. 

For more from this manager, we've also posted up Tilson's presentation on AIG from the last conference. 


Question & Answer

NFLX- will Apple stream?  He says they seem perfectly content to just sell content, not at the unlimited fixed price.  AMZN is a bigger threat, with their Prime offering.  He says use the hulu example, which has gotten very little traction despite massive investment.

How are his funds ytd?  "about flat"  Strong 1st Q, especially with NFLX, but in hindsight, should have taken more money off the table.  "Kicked the market's butt for 12 years, but gotten it kicked for last 2 years."


Macro Thoughts

Great Recession was worse than thought- for Q408, estimates were -3.8%GP, it has been revised to -8.9%!  Consumer confidence still well below pre-crisis levels.

Job growth anemic, barely over the 150k needed to keep up with population growth. Unemployment fell from 10% to 8.1%, but still way above 2000 4% level. Job losses have been more severe than any downturn since the Great Depression, and the recovery has been weak.  Lost 8 million jobs, 6% of all jobs, still 3.5% below late 2007 number of jobs.

Each recession has taken longer to recover, 1981, 1990, 2001 and now 2007 which hasn't recovered yet. Govt running biggest deficits since WW2. Over last ten years, median household income has declined slightly to $50.876.   Reason the recovery is so slow?  no residential investment, like we usually get.  Private sector jobs strong, but government jobs are in decline.  The story is tremendous weakness in housing spending and loss of government jobs.

Big picture summary:  US has tepid recovery, little market upside unless the economy gets much better.  Factors that could derail the recovery: Europe gets worse, US housing market turns down, China hard landing, sovereign debt crisis in Japan.  Much more concerned about these 4 than the US.

In his talk, he pointed out that it's absurd to own 10 year Treasuries at 1.65% when you can own high quality companies like Exxon Mobil (XOM), Microsoft (MSFT), ADP (ADP), and Johnson & Johnson (JNJ).  Fidelity, the behemoth fund manager, now has more money in bonds than stocks. Massive mistake by investors by doing rear-view mirror investing.


Embedded below is Tilson's slideshow presentation from the Value Investing Congress:




Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.