Third Point's 2011 Letter: Rationale for Owning UniCredit, Skyworks, Abercrombie & More

Dan Loeb's $8.9 billion hedge fund firm Third Point is out with its year-end 2011 letter. They see the bullish ramp up of 2012 continuing but are obviously still doing work on the short side as well. Third Point writes,

"The start of this year has created one especially welcome dynamic: a fall in correlations. For the first time in nearly a year, single name stock picking is being rewarded. We have steadily increased capital invested in event-driven situations in equities, corporate credit and mortgages."

We've detailed how the hedge fund has increased exposure over the past few months.


Where Third Point is Putting Money to Work

Loeb's firm has focused on two areas recently: forced selling and hidden growth. Positions they've acquired when others have been forced sellers are Unicredit, Skyworks Solutions (SWKS), and EksportFinans.

Under the hidden growth thesis, they've invested in a long credit position in Ally Financial, as well as long equity stakes in Volkswagen and Abercrombie & Fitch (ANF). They acquired their position in Abercombie in January after shares had been cut almost in half, writing,

"A&F was attractive because we believe we paid roughly 10x cy12 EPS (ex $7 net cash) for a business that should grow earnings at a double digit rate for at least the next few years. That growth will come from recovering US profitability and from continued growth of the company's high margin online (2009-11 CAGR +38%) and international businesses (2009-11 CAGR +70%)."

The hedge fund also writes about their activist stake in Yahoo in Third Point's full 2011 letter which is embedded below (email readers click to come read it):



For more on Loeb's fund, we also recently wrote about Third Point's Technicolor stake.

What Hugh Hendry of Eclectica Asset Management Has Been Buying

Barron's has a great interview with Hugh Hendry of Eclectica Asset Management. His flagship fund returned 12% last year mainly by investing in the short end of interest rate curves and he now manages $700 million.

On what Hendry owns currently:

"In the next 12 months, we'll see further pathological swings in investor sentiment. Despite my reservations, I'm modestly long equity-market futures, some nonindustrial commodities, and some bullish fixed-income positions. We are very bullish agricultural commodities and agricultural equities, and hold a global basket of businesses—with interests ranging from fertilizer to farm equipment."

His hedge fund has established a bearish Japanese bet by buying protection on steel names and businesses sensitive to the yen. He's also bought credit protection on the shipping industry in Japan such as Mitsui OSK (TYO:9104).

Additionally, Hendry mentioned he's got protection on companies levered to the global economy such as Sumitomo (TYO:8053) and Marubeni (TYO:8002).

To see what else he's been up to, be sure to check out the rest of Hendry's interview at Barron's.

And for more on this hedgie, be sure to read Hendry's past views on hyperdeflation; something he's still talking about these days.

What We're Reading ~ 3/14/2012

Amazon.com (AMZN) is the secular short of 2012 [First Adopter]

A value investor's take on shorting [Distressed Debt Investing]

The most hated bull market in history [Abnormal Returns]

The bear case for Golar LNG (GLNG) [Pandora's Box Research]

Buy and hold no more? [Ultimi Barbarorum]

2012 annual compliance obligations: what you need to know [Lexology]

Where Asia's richest man is putting his money to work [Forbes]

How hedge funds have changed in a decade [Financial News]

Why women are better investors than men [Economic Times]

Why Green Mountain's momentum is over [Herb Greenberg]

On the new diamond ETF [Kid Dynamite]

Hedge fund firm RenTec: only scientists need apply [Reuters]

Institutional asset allocation for retail investors [Advisor One]

Schwab gets green light on alternative assets distribution [RIABiz]

Pension funds hot for long/short strategies [PI Online]

Why I'm leaving Goldman Sachs [NYTimes]

28% Discount to the Value Investing Congress Expires in 2 Days!

If you haven't heard, the Value Investing Congress taking place in May this year is in Omaha after Warren Buffett's Berkshire Hathaway annual meeting. Now you can knock out two investing stops in one trip.

Market Folly readers can receive a 28% discount to the event. Simply click this link and use discount code: S12MF1 but hurry, because the discount expires in two days!

On May 6th & 7th, the speakers will include:

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Matt Swaim & Bruce Zessar ~ Advisory Research
Charles Akre ~ Akre Capital Management
Keith Trauner & Larry Pitkowsky ~ GoodHaven Capital
Tom Russo ~ Gardner Russo & Gardner
Aaron Edelheit ~ American Home Real Estate
Chan Lee & Albert Yong ~ Petra Capital
Whitney Tilson & Glenn Tongue ~ T2 Partners

So in one trip in May you can check out Warren Buffett's annual meeting and then head to the Value Investing Congress to get actionable investment ideas and network with other great investors.

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Glenn Greenberg's Brave Warrior Capital Starts New Position in Higher One (ONE)

Glenn Greenberg's hedge fund firm Brave Warrior Capital just filed a 13G with the SEC regarding shares of Higher One Inc (ONE). Per the filing, the hedge fund has revealed a brand new stake in ONE with 5,786,263 shares.

Brave Warrior now owns a 10.18% ownership stake in the company due to trading activity on February 29th, which required the disclosure to be filed.

Per Google Finance, Higher One is "a provider of technology and payment services to the higher education industry. The Company provides a comprehensive suite of disbursement and payment solutions specifically designed for higher education institutions and their students. It also provides campus communities with student-oriented banking services."

You can read a brief excerpt about Glenn Greenberg's approach to investing here.

David Einhorn Starts Cairn Energy Stake

David Einhorn's hedge fund Greenlight Capital have disclosed a position in Cairn Energy PLC (LON:CNE) traded in the UK. They now own 3.06% stake in the company with 19,966,666 voting rights.

It looks like this is what happened: Cairn Energy recently returned $3.5b to shareholders on the register on February 3rd, 2012 via an issue of 'B' shares following the disposal of a 40% shareholding in Cairn India to Vendanta.

Greenlight appear to have purchased after the return of capital to shareholders and after the share price fell in reaction to it. The one thing we can be sure of is that Greenlight bought some shares on March 7th that took them over the 3% ownership threshold that requires a regulatory disclosure.

Per Google Finance: "Cairn Energy PLC (Cairn) is an independent oil and gas exploration and production company. It is organized into two business units: Capricorn Group, being Capricorn Oil Limited and its subsidiary undertakings, and the Cairn India Group. There are two operating segments. Cairn India Limited Group’s operations are primarily within India.

Capricorn Group’s operations focus on exploration activities in Greenland and Mediterranean. The Capricorn Group also includes its interests in Nepal, and a share in North Indian assets operated by Cairn India Limited. Cairn Energy PLC exists to accumulate activities and results of Cairn UK Holdings Limited, an intermediate holding company and direct parent of Cairn India Limited, and Cairn Energy PLC company results."

For other portfolio takeaways from this hedge fund, be sure to read Greenlight's letter to investors.

Join Market Folly's Third Annual FREE March Madness Bracket Contest

It's that time of year again: March Madness. This is MarketFolly's third annual free bracket contest for all college basketball fans.

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You must fill out your bracket by 11:00 AM EST this Thursday! Only one entry per person, good luck!

Senator Investment Group Starts MedAssets (MDAS) Stake

Alex Klabin and Douglas Silverman's hedge fund firm Senator Investment Group just now filed a 13G with the SEC disclosing a brand new stake in MedAssets (MDAS).

Due to trading activity on March 2nd, Senator has revealed a 5.44% ownership stake in MedAssets with 3,147,200 shares.

The largest owner of MDAS shares at 2011 year-end was Brett Barakett's Tremblant Capital. Other notable large holders include D.E. Shaw, Renaissance Technologies, Highbridge Capital, and Milennium Management.


About Senator Investment Group

Alex Klabin and Doug Silverman founded the hedge fund firm in February 2008 with a focus on global long/short investing in distressed assets and equities. They were originally seeded by Blackstone Strategic Alliance Fund with $150 million. A year ago, they managed $3 billion, though we haven't seen up to date AUM numbers. Prior to founding the firm, both worked at Jamie Dinan's York Capital.


About MedAssets

Per Google Finance, MDAS "provides technology-enabled products and services. The Company’s technology-enabled solutions are delivered primarily through company-hosted software, or software as a service (SaaS) or Web-based applications, supported by implementation, consulting and outsourced services and consulting, as well as enterprise-wide sales and customer management and support."

For more institutional movement, be sure to scroll through our posts of recent hedge fund activity.

Strategist Jeff Saut on How to Position Your Portfolio This Year

Market strategist Jeff Saut's weekly investment strategy highlighted what dividend stocks he likes last week. This week, he provides some answers to some interesting portfolio positioning questions:


Q: Cyclical or defensive stocks?
A: "I would buy cyclicals because barring some major event I don't embrace the view that we are going to see another recession in the U.S. for the near/intermediate future."


Q: 2011 was a risk on/risk off year, so is it a top down or bottom up strategy for 2012?
A: "Last year you only had to get two things right. You had to raise cash in March/April and put it back to work during the bottoming sequence of August – October. I did that and think a similar strategy will work this year as well. That said, one always needs to employ a 'bottom up' strategy combined with a 'top down' view."


Q: Should we buy gold or gold stocks?
A: "Both; but if I am forced to pick just one, I would buy gold stocks because they are well behind gold’s performance. Therefore, after the yellow metal’s consolidation is finished, gold stocks are likely to play catch up."

We've posted up articles on this very subject in the past: gold versus gold miners. Last week we also highlighted how John Paulson has been buying NovaGold.


You can read the rest of Saut's answers to questions about Treasury yields, GDP, and QE3 in his full investment strategy embedded below:



You can download a free .pdf copy here.


To read other recent commentary, head to Jeremy Grantham's 10 investment lessons as well as PIMCO's Bill Gross on his defensive outlook.

Why George Soros Owns Comverse Technology (CMVT): Stock of the Week

Continuing our new feature at Market Folly, today's stock of the week focuses on why George Soros' family office owns Comverse Technology (CMVT). If you missed the inaugural stock of the week, be sure to check out why Carl Icahn bought WebMD (WBMD) as well.



The following is written by Tsachy Mishal, Portfolio Manager at TAM Capital Management. He provides background on the situation, as well as what he likes and dislikes about the company:

Comverse Technology (CMVT) was involved in an accounting saga that dragged on for years and cost well over a billion dollars to untangle. During that period, a who's who of hedge funds tried to catch the CMVT falling knife unsuccessfully. Currently, Soros Fund Management and Barry Rosenstein's Jana Partners own major stakes in Comverse.

There has recently been progress as Comverse's financials are up to date and Comverse announced plans to separate their businesses with a spinoff of their Comverse unit. After the spin-off, shareholders will own the Comverse operating business and eventually shares in Verint (VRNT). The full details are not yet available as they are trying to structure this in a tax efficient manner and are still in discussions with the IRS on exactly how to do this.

Comverse trades with a market cap of $1.356 billion. They own $755 million worth of shares in Verint, a publicly traded company. They have $393 million in cash on hand at the Comverse operating unit. They own a 65% interest in Starholme, which at a conservative valuation is worth $45 million. Once one removes these items, the Comverse business is being valued at $162 million:

Comverse market cap @ 6.22 a share: $1,356 million
less value of Verint shares @ $27.98 a share: -$755 million
less cash on hand at Comverse operating unit: -$393 million
less 65% stake in Starholme: -$45 million

equals implied value of Comverse operating unit = $162 million


Comverse creates billing software for telecom companies. The most comparable company is Amdocs (DOX), which trades at a very conservative valuation of 1.5 times revenue. Comverse has revenue of $700 million, which means that at Amdocs valuation Comverse would be worth $1.05 billion. That is a far cry from the current $162 million the market is currently valuing Comverse.

Comverse management is guiding to 10% operating margins, which means net margins will likely be 10%, as Comverse has billions of dollars worth of NOLs. Amdocs has net margins of 13%. On this basis Comverse should be worth about $800 million, still a far cry from from the $162 million the market is currently assigning it.


What I Like

- Owning a software company that is cash flow positive with revenue of $700 million and 10% margins for $162 million seems like a no-brainer.

- There are high switching costs, so Comverse is likely to retain its customers. This predictable revenue stream might make it attractive to private equity or a competitor that could squeeze out better margins.

- Given all the distractions, it's very likely that Comverse is being under-managed and there is room for operational improvement.

- The bad actors have been removed from the board and the new board seems to be acting in the best interest of shareholders.

- I believe that Verint shares are undervalued as they trade at 11 times current fiscal year free cash flow estimates and nine times next year's estimate. This is for a fast growing small cap software company. Part of this discount likely has to do with their association with Comverse. A clean split could be a catalyst for a better valuation.


What I Don't Like

- Comverse does not have separate financials for its Comverse unit as a standalone company. One has to trust management on the 10% margin number.

- For years Comverse has seemed one step away from putting the fiasco behind them, yet the end has always been elusive. The spin-off is supposed to happen in the second half of the year, but this is not over until it actually occurs.

- There is a level of complexity to the investment as there are quite a few parts. One cannot simply buy the Comverse operating business.

I recently purchased shares in Comverse, albeit a smaller position than I normally purchase. It is difficult for me to see how one loses at the current valuation, although I'm certain that's what the hedge funds that have fallen before me in this stock thought. The difference is that the financials are now up to date and an end is in sight. The complexity of the situation and the history have me cautious and are the reason I have taken a smaller than usual position.

The above was a contribution by Tsachy Mishal, Portfolio Manager at TAM Capital Management.


Stay tuned for a new stock of the week in seven days. If you missed it, be sure to also check out why Carl Icahn owns WebMD (WBMD).