A MarketFolly reader recently reached out to Aquamarine Capital's Guy Spier about his new book, The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment. Guy graciously agreed to answer the reader's questions and to host it on MarketFolly so everyone can learn from his experiences.
Simply put, this book is Guy's look at his life and his investing evolution. He candidly showcases his shortcomings and highlights the great attributes of other investors he's met with and learned from, such as Warren Buffett and Mohnish Pabrai.
One of our favorite sayings is that investing is a continual education.
The Education of a Value Investor exemplifies just that. As you ride alongside Guy on his journey, you'll learn from his experiences and undoubtedly reflect on your own path and how you can further improve yourself.
Video: Q&A With Guy Spier About His New Book
Embedded below is the video of Guy's responses (email subscribers will need to come to the site to view it):
Here are the questions Guy answered along with a brief summary of his responses. Be sure to watch the video for his full, in-depth answers to each topic.
1. Going Out of Your Comfort Zone (at 0:12 in the video) What other activities do you participate in that would have once been out of your comfort zone? What lessons have you learned from those and how have they shaped you as a person and an investor? Guy did an Ironman triathlon and has looked into meditation. He says listen to your gut instinct and if it's pushing you towards something, go for it.
2. On Mentors (at 3:35) Mentorship played a key role in your success. How do you suggest young people seek out mentors? And since mentees often have little to offer in return, how do you think the mentee can show appreciation and/or give back in the relationship? Guy says, "Don't seek the masters, but seek what they sought." The key here is since you're probably not going to get access to the likes of Warren Buffett, instead look at who those people have learned from and seek out their mistakes/successes. If you do have the opportunity to meet with someone influential, send them a handwritten note expressing your gratitude.
3. Avoiding Bad Influences (at 7:38) What advice would you pass on for people looking to create healthy, encouraging environments? Guy says it's important to make decisions that make you happy and not necessarily what's expected of you. He says to give your children choices/control early on to pursue interests.
4. Buying When the Market is Crashing (at 12:50) How do you decide the right time to buy and who are the worthy candidates? Guy found this difficult at first (especially due to not having longer-term lockups at his fund). He says, "I think that the nature of one's liabilities is inextricably linked with one's ability to buy. And the answer is I don't know how to run my emotions very well, but I do know how to modify my environment."
5. Advice on Selling (at 15:26) When do you decide to sell? Have you received any advice on this from your mentors? Guy admits that he doesn't have a great answer to this, but shared wisdom he received from Li Lu, who manages money for Charlie Munger. Li Lu said that the time to sell is when you no longer want to buy it. There is no 'hold', it's either buy or sell.
6. His Relationship With Mohnish Pabrai (at 18:21) Has being close friends with Mohnish Pabrai slowly made you less risk averse in investing? Guy says there's a distinction between risk and uncertainty. Uncertainty is where you don't know the outcome while risk is that there's potential it goes to zero. Everyone has their own tolerance level for dealing with 'hairy' situations so you have to find out what you're comfortable with.
7. Gaining an Edge on the Competition (at 20:40) How do you think you gain an edge in a world filled with intelligent, driven individuals all looking to generate alpha? Guy says to get a structural advantage (permanent capital or as close to it as possible, which allows you to act while others are handcuffed). He also says to build a network of smart individuals over time.
8. On Macro (at 24:06) How do macroeconomic considerations factor into your investment analysis? Guy says that he doesn't think his brain is big enough to do both top-down and bottom-up investing at the same time but different investors have different approaches. While some investors may provide commentary on the macro environment, it might not ultimately influence their investment decisions directly.
9. Sectors & Geographies For Value Investors (at 25:55) Are there any sectors or geographies that fundamentally do not work with value investing? Guy thinks the most important thing is having an idea where the business will be in 5, 10, or 15 years; he wants predictability. He highlights the tech sector as one rife with change and avoids countries where he doesn't understand the rules (specifically mentioning Russia and the natural resources sector). He also notes that he's made money in the Philippines before.
10. On Activism (at 31:07) Why do you think more value fund managers do not become activist investors? Guy doesn't have any intention of being an activist and says you always hear about the successes but there's also failures you don't necessarily hear of.
11. Evaluating Management Teams (at 35:15) How do you learn about the character of management teams without sitting down to lunch with them? Guy says the best way to evaluate a management team is to look at their actions based on publicly available information. Look at their capital allocation, what kind of debt they've issued, etc. Every decision reveals something about the people making those decisions. He avoids meeting with management because it can lead to biases.
12. Executive Compensation (at 37:22) What's your take on executive remuneration? Are most CEOs overpaid? Guy says there are some 'superstars' out there that should be paid what they're worth. At the same time, some are overpaid, some are underpaid. He says the real question is: what to do about it?
13. Analyst vs. Portfolio Manager (at 42:10) How does an analyst know whether they'd make a good portfolio manager? Guy says you'll never know until you go ahead and do it. In the mean time, he says to obviously manage your PA (personal account) or start one if you haven't already. They are really two separate skillsets.
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Our thanks to a reader for organizing this and thanks to Mr. Spier for taking the time out to further comment on his experiences.
Be sure to check out Guy Spier's book, The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment. Everyone in the investment world takes their own path that defines who they are as an investor. And more often than not, learning from others' journeys is an integral part of the process. This book is a fantastic opportunity to do just that.
P.S. As an added bonus, the book is a quick read so you can easily absorb it without taking a ton of time out of your schedule.
Saturday, November 8, 2014
Q&A With Guy Spier About His New Book: The Education of a Value Investor
Friday, November 7, 2014
Notes From Invest For Kids Chicago 2014: Ackman, Zell, Robbins & More
The sixth annual Invest For Kids Chicago just took place and featured hedge fund managers sharing their latest investment ideas to benefit local children's charities (100% of the money raised goes directly to the charities). Below are links to notes from each speaker's presentation. Enjoy!
Invest For Kids Chicago 2014 Notes
- Fireside Chat with Bill Ackman (Pershing Square)
- Larry Robbins (Glenview Capital): 4 long ideas
- Sam Zell's Fireside Chat
- Mason Hawkins (Southeastern Asset Management): long Level 3 Communications
- Wally Weitz (Weitz Investment Management): long Liberty Media
- Steve Kuhn (Pine River Capital): On Japan
- Nehal Chopra (Tiger Ratan Capital): long Actavis and Charter Communications
- Jonathan Kolatch (Redwood Capital): Puerto Rico Power Authority
- Mike Wilkins (Kingsford Capital): On Short Selling
- Emerging Managers: Nancy Prial (Essex) long iCAD
- Emerging Managers: Tim Hurd (Blue Spruce) long BlackRock
Bill Ackman's Fireside Chat at Invest For Kids Chicago
We're posting up notes from Invest For Kids Chicago 2014. Next up is a fireside chat that Mick McGuire of Marcato Capital had with Bill Ackman of Pershing Square. McGuire worked at Pershing before launching his own fund.
Bill Ackman's Fireside Chat at Invest For Kids Chicago
• Pershing Square up over 30% this year. Benefiting from a Jim Bean sale, Platform Specialty, Air Products, Burger King, Herbalife continue to play out, Pershing Square Holdings and other newsworthy items.
• Allergan (AGN) – revised their disclosure to include they are in active merger discussions with what Bill thinks is Actavis.
• Ackman believes VRX can offer the most value versus Actavis. VRX has demonstrated track record for material acquisitions. More comfort with VRX vs. Acatvis. Actavis could be the white knight perhaps.
• Either party will have to offer stock in the deal. Allergan has put themselves up for sale.
• Thinks the best thing is that AGN asks for bids from VRX/Actavis and take the best/highest bid. December meeting is relevant. Co did everything they can to stop shareholders from voicing their views.
• Incentive to negotiate before directors get thrown off.
• AGN – essentially a management change with many synergies if VRX acquires.
• Fannie and Freddie (FNMA / FMCC) now. They were short when Mick was at Pershing. Increased exposure in light of the case.
• Fannie/Freddie two of the best businesses in the world.
• Very safe business. Allows banks to sell/offload 30 yr mortgage which isn’t a good instrument for banks yet is very helpful to homeowners.
• They di-worisified their business by buying fixed income securities (subprime, etc.). That is why Pershing was originally short before the US government recapitalized the company.
• Became profitable in late FY11, when housing markets recovered. Over-reserved during the crisis. Heading back to their core mission/business. Bought them on that basis.
• USA government took 100% of future profits of both entities, excuse was that they could never pay the government back. That was false, on their way to pay back the government.
• Largest taking of a private asset by the government. Thankfully, it’s illegal. 5th amendment.
• Judge Lamberth decision wasn’t about the takings claim which matters the most.
• His best argument (for a hostile judge) is that shareholders can still trade the stock and make a profit. This could ultimately go to the Supreme Court.
• Maybe Republicans want to get this solved and recapitalized. Very interesting risk reward, stock went from a dollar on the lost. Think it’s worth $40 - $50.
• Reminds him of GGP when it was bankrupt.
• “Always bet on America”
• How do you size an opportunity on Fannie/Freddie? AGN hard to lose money but make 2x, make it bigger. Fannie could lose a lot but make a ton, hence for Pershing its 2% position.
• Canadian Pacific (CP) next topic. Started buying September 2011. June 2012 gained control. One of the best industrial turnarounds.
• Canadian Pacific approached CSX about a potential transaction, was rebuffed.
• Investment business – learned a lot over time. Started out buying cheap companies, now really emphasizes quality of business. Didn’t emphasize management at first, but Hunter at Canadian Pacific really shows the power of a strong management team.
• Air Products (APD): Thinks the company could improve with the new CEO.
• Howard Hughes (HHC) – brought on a strong management team that developed the assets and created a lot of value.
• Platform Specialty Products (PAH) was a cash shell, great example of management. Raised $900MM, Pershing brought $300MM. Martin the CEO made an acquisition, the stock doubled. Bought a business in an auction. Starting to consolidate the specialty chemical industry.
• On Executive Compensation: When you are going into these situations how do you think about the ideal CEO compensation structure? Bill’s response: S&P 500 co usually pays $10MM - $12MM, mix of cash options, restricted stock. Doesn’t align mgmt as they continually want lower priced options, especially if an acquisition occurs (more upside to them ~ not exact wording)
• Sold a warrant of 4% of the outstanding shares with sale restriction at FMV to the CEO (did this for Howard Hughes). Warrant went from $15MM to $250MM, 6 yr holding period, alignment and good upside for the CEO.
• With Hunter who was 67, his incentives was also reputational. Gave him options upfront.
• Thinking of Philanthropy: Always viewed as business as a way to make money in order to do good. A lot of good is created by capitalism.
• One philanthropy investment in Mexico giving iPads to store owners to run their stores better. Pepsi/ Nestle tracking data and the small store owners become more profitable through better management.
• No cure – medical device to solve certain cancers. Prefers to invest in for profit to solve good as people are economically incentivized.
• For things that there is no for profit solution, will do big grants (cultural, etc.). Never invest in a not for profit if there is a for profit competitor/solution.
For more from Ackman, he recently talked at the Great Investors' Best Ideas Dallas conference as well.
Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.
Larry Robbins' 4 Long Ideas at Invest For Kids Chicago
We're posting up notes from Invest For Kids Chicago 2014. Next up is Larry Robbins of Glenview Capital who pitched Tenet Healthcare (THC), eBay (EBAY), Teradyne (TER), and Cadence (CDNS).
Larry Robbins' Invest For Kids Chicago Presentation
• More constructive than average on the long side. Portfolio trading at ~13x PE.
• Excess cash at corporates remain high. Akin to Michael Jordan sitting on the bench looking to put up points.
• Avg HY company can borrow at 6.4% pre-tax. Never been as cheaper or deeper.
• Shareholder engagement at all time high. Notes Jeff Ubben at MSFT. Ideas: Tenet, EBay, Teradyne, Cadence
• Tenet Healthcare (THC) – hospital stocks traded down 10% recently. Strong core growth, operating leverage, Vanguard health M&A, reforms provide multi-year growth tailwind, hidden undervalued conifer asset, forward year capital deployment opportunity, industry consolidation all adds up.
• Unemployment is down and insurance is up which helps. M&A synergies are ramping and achievable for the Vangaurd transaction.
• Only 7MM Americans have signed up for exchanges, half already had insurance. Vast majority in front.
• Most hospitals are not for profit. Not just charter, but also income statement.
• 11 hospitals for every person in the house of rep. They are not going to bankrupt the hospital operators (big employers).
• #1 self-pay/uninsured has gone down. #2 amount of Medicare coverage has increased around 11%. Some cases mid twenties. More people can pay their builds = more profits and revenues for hospitals.
• Why is the health care bill insulated?? Repeal would take 60 votes from senate and a signature from the President. Want to go after the medical device tax, individual mandate (doesn’t affect hospitals). They are going after the parts not the whole.
• Public approval for ACA growing.
• Stocks traded down, provided entry point.
• Tenet has a 90% + return on repurchases.
• As they digest vanguard, instead of de-levering, should take advantage of the credit markets to maintain 5x leverage. Could buyback all of the company all else equal (won’t happen, since the share price wouldn’t stay still).
• Companies who consistently repurchased shares have created value, not a short-term play.
• Hidden gem is a RCM. Generates $200MM in EBITDA, RCM companies garner higher multiples. Conifer has higher growth than comps on both revenue and EBITDA. Peers trade at 16x EBITDA, versus Tenet at 8x for the whole.
• If you took every publicly operated hospital operator and combined them, that would be only a 13% market share, so further consolidation is possible, especially considering synergies.
• Thinks the monetization of Conifer and consolidation are possible catalysts.
• eBay (EBAY) is the next idea.
• 2/3 of Ebay is the market place and 1/3 is Paypal. Third business is hoarding cash ($15b).
• Doing the spin-off after shareholder pressure.
• Growing revenue at 14%, EPS at a higher clip at 15x earnings give or take.
• Like Ebay as it grows twice as fast as everything else. Higher margins.
• Back out Paypal at 16x FY16E earnings, creating marketplace at ~12x.
• People are scared of Paypal competition. It is like being scared of the 12th edition of the Halloween movie.
• Opportunity to buy two great businesses at a cheap price. Once they separate businesses, marketplace will lever up to 2x net debt. Allow for them to buy ~22% of the PF company.
• Thinks they can handle higher leverage of 3x – 4x.
• Event-driven guys left eBay due to other problems (Shire/Fannie/Ebola). Allowed for Glenview to do time arbitrage.
• Doing everything ppl want them to do. Just have to wait for the actual event to happen. Time arbitrage.
• Ebay is like a divorce. One is focused on a lifetime of shopping, the other focused on a lifetime of payments.
• Might be attractive to other players. May want to do a SA/JV or acquisition.
• Acquirers could pay 22x earnings or more and be hugely accretive.
• Teradyne (TER) – semiconductor test equipment, lots of cash.
• High market share (although shrinking), their share has grown at 47% share. They love oligopolies due to smart pricing.
• Need to fix the lazy balance sheet.
• Victim of their own success. Buy rates troughed and are now peaking up. 18% is the wireless test business, does have cyclical components.
• Has $1.2B of cash, don’t need that much cash,
• Cadence Design (CDNS) is the next name. Same opportunity as above. Revenue growth is accelerating. Months away from launching a new hardware emulation platform.
• Overcapitalized balance sheet.
For more from this hedge fund manager, Robbins recently shared other investment ideas at Capitalize For Kids Sohn Canada as well as the Robin Hood Investors' Conference.
Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.
Wally Weitz Long Liberty Media: Invest For Kids Chicago
We're posting up notes from Invest For Kids Chicago 2014. Next up is Wally Weitz of Weitz Investment Management who pitched long Liberty Media.
Wally Weitz's Invest For Kids Chicago Presentation
Idea: Liberty Media
• Split up yesterday when split into two parts. Liked them together or separate. Cheap due to the complexity of Liberty.
• Weitz are value investors in the Buffett mold, think like business owner, IV is the discounted value of cash flow.
• Think of it as an investment company built to evolve over time.
• All Liberty companies follow the same game plan. Generate FCF, maintain appropriate leverage, buyback shares and sell in a tax efficient manner.
• Like the main components of Liberty Media/Broadband (Siri/CHTR). Both are subscription businesses.
• Liberty Broadband (LBRDA / K) owns ~26% of Charter and is doing a rights offering to raise cash. Trades for $50, think Broadband is worth $58 per share. If you like CHTR, this is a cheap way to own it.
• Liberty Media you get extra bonuses (hidden assets/options). They won a court case with Vivendi and Vivendi owns them roughly ~$3 per share (might take time), and the Atlanta Braves. Thinks it could be worth more than the ~$600MM current price.
• Own 27% of Live Nation, which owns ticketmaster which spent years going over a tech overhaul that improves margins.
• Broadband owns Charter shares, cash and Time Warner Cable shares. Also the opportunity for Malone to buy other cable subscribers outside of CHTR and then sell it into a parent company through a reverse Morris trust (did this with Direct TV). Always optionality. Malone always has multiple plans.
Weitz was also recently interviewed in the latest issue of Graham & Doddsville.
Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.
Steve Kuhn's Presentation on Japan at Invest For Kids Chicago
We're posting up notes from Invest For Kids Chicago 2014. Next up is Steve Kuhn of Pine River Capital who talked about Japan.
Steve Kuhn's Invest For Kids Chicago Presentation
• Talk about Japan.
• Heard a comment – “a land alpha goes to die”.
• Traded it for 3 yrs on a night desk trading Japanese convertible bonds until 4am at Citadel.
• #3 economy in the world.
• Japan is interesting as Japanese stocks are still cheap relative to bonds.
• Japanese corporate governance: the sun is rising. It is improving and the trend is your friend.
• “Boring is beautiful”.
• Pension funds are increasing their equity allocations, especially GPIF, which is material.
• Long cheap, low volume, higher quality companies with strong track records. Short expensive, high volume, high beta companies with poor track record in return on capital and shareholder friendliness.
• Their long portfolio trades for 12.2x PE, 8.1x EBITDA, 5% FCF yield, 11% ROE and has returned capital. Short portfolio trades for 23x PE, 11.4x EBITDA and lower returns on capital.
• Looking to fix corporate governance such as a stewardship code, cross shareholding reduction and adding external directors.
• GPIF looking to boost share allocation to about ~25%.
• Japan companies have increased their share repurchases which is up 49% YoY. Dividends also increasing.
• Cash holdings are still at near record highs – a positive for share repurchases and dividends.
• 62% of companies now have outside directors, up from 32% in FY04. Still in last place when compared to other major economies.
• Takeover defenses peaked in FY08 and are steadily declining.
• Easy way just to buy the JPNK index.
Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.
Sam Zell's Talk at Invest For Kids Chicago
We're posting up notes from Invest For Kids Chicago 2014. Next up is the fireside chat that Michael Sacks had with Sam Zell of Equity Group Investments.
Sam Zell's Talk at Invest For Kids Chicago
• Comment on the election (Zell): I don’t know if America is better but there is a God.
• Zell thinks yesterday was a big day. Big day from a number of different perspectives. (1) if results different, serious risks that the President legislates his way through edicts; (2) creates an opportunity for Obama to compromise and get something done through mutual agreement.
• Everyone is excited that the stock market is at an all-time high. Experience is that USA can’t do well if Japan/Europe/Russia in trouble.
• “Best looking gal in the whore house – it’s still a whorehouse” On USA and the rest of the countries
• America needs growth. Whatever happens, need to refocus on growing company, which will begin to solve the trouble of inequality.
• Where is Zell finding opportunities today to deploy capital? Some markets outside of the USA which are interesting - #1 country is Colombia. Major benefactor of the free trade agreement. Because of the reduction of FARC, Colombia production of oil increased due to access. Investing significantly in Colombia.
• Optimistic on India. Difficult environment to operate in, many burned. Modi is doing good things.
• Real estate is where it was a couple years back, very attractive from a price point.
• Always opportunities, look at individual situations. That is what they do.
• Any common investment principles? They have always been industry agnostic. You get business or you don’t.
• In the 80’s consolidated rail cars. No one liked it, but loadings where flat and they scrapped 65% of the cars – lots of money was made when those lines crossed.
• Up until the 80s only did real estate, pivoted to opportunity.
• When you commoditize trust, you dramatically increase risk.
• If Zell was in his twenties to thirties what would he do? His response was the generations often thought the older generation had it easier. Zell and Lure’s success tied to the fact they didn’t know what they couldn’t do.
• Current environment smells a lot like the dotcom boom in regards to valuations. Amazon is one example.
• On philanthropy, approach from the perspective that anyone can put their name on the building by just giving money. They don’t want to do that. They support topics across colleges such as entrepreneurship and creative writing.
• Talked energy briefly – noted cost of production in Saudi Arabia is cheaper than the USA and that the market went bananas on US oil for a bit.
Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.
Mason Hawkins Long Level 3 Communications: Invest For Kids Chicago
We're posting up notes from Invest For Kids Chicago 2014. Next up is Mason Hawkins of Southeastern Asset Management who pitched long Level 3 Communications (LVLT).
Mason Hawkins' Invest For Kids Chicago Presentation
• Founded 1975, 40 years ago. $35 billion AUM
• Run the Longleaf Partner Funds with a long term value orientation.
• Purchase companies at deep discounts to intrinsic value, under three appraisal methodologies (NAV, FCF, private market comps). Generally engaged with the investees and boards in order to build IV per share. They are not passive investors.
• “Business, People, Price” is their operating method.
Idea: Level 3 Communications (LVLT)
• Global telecom company which provides infrastructure to connect consumers and businesses onto the internet.
• One of the largest fiber networks with a reproduction value in excess of $45B.
• Rapidly growing FCF per share with modest additional capex as demand for broadband triples over next five years.
• 118K intercity route miles, 60K metro route miles in 170 major metro markets, 33K sub-seas miles. 38K buildings on market. 400K enterprise businesses within 500 ft of fiber network.
• Large salesforce and 10 billion in NOLs which should shield pre-tax profits.
• Street is overlooking the NOLs and extra assets overlooking after-tax FCF.
• Have a low single digit market share but offer the most comprehensive portfolio of secure, managed network based enterprise solutions should allow for faster growth than the competition.
• Most compelling investment due to the critical nature of their service offerings, and the fact that large customers in growing industries rely on the company. It’s the backbone.
• CEO focused on building intrinsic value. Transformed from long-haul into an enterprise solutions company.
• Since Jeff Storey took over as CEO, gross margins, EBITDA, FCF and other metrics have increased. Making attractive acquisitions such as Tw Telecom.
• Share price increased 116% vs S&P at 31%.
• Two long-term shareholders: Southeastern (17%) and Temasek (17%).
• Significant enterprise revenue growth in conjunction with operating/financial leverage will lead to dramatic FCF growth.
• Mid to single rev growth will lead to 60% EBITDA contribution margins.
• Maintenance CapEx is ~12% of revenues. NOLs offset cash taxes until 2021.
• FCF should triple from $2 per share to $6 over the next 5 years.
• DCF leads to a $61 per share value or $21.5B of value. Excludes the value of non-earning assets such as dark fiber and 10 empty conduits. These are extremely valuable as well. Dark fiber worth “billions”.
• Historical Gross PP&E w/ Tw Telecom worth over $45B.
• Timing? Now as they think growing shortage of broadband capacity and upside from non-earning assets should lead to FCF growth.
• Benefit from shift to cloud.
• Routes the most valuable commodity: information.
Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.
Nehal Chopra Long Actavis & Charter Communications: Invest For Kids Chicago
We're posting up notes from Invest For Kids Chicago 2014. Next up is Nehal Chopra of Tiger Ratan Capital. She pitched two ideas: Actavis (ACT) and Charter Communications (CHTR).
Nehal Chopra's Invest For Kids Chicago Presentation
• Started in FY09. Worked at Balyasny beforehand. Was seeded by Julian Robertson/Tiger.
• Best ideas follow similar pattern: great management teams, high quality businesses. The power of compounding. Secret sauce is operational improvement and capital deployment.
Idea: Actavis (ACT)
• Owned Forest Labs beforehand.
• Brent Saunders joined from Forest Labs. Previous CEO of Bausch and Lomb. Brent Saunders turned it around and sold it.
• At Forest over six months Brent executed a cost cutting program ($500MM), accretive transactions and then sold it for a 25% premium to Actavis. Made 100% return for shareholders. Now runs Actavis.
• Rolled all of his stock ($100MM) into Actavis.
• Chairman of Actavis (former CEO) not a slouch as well. 7.3x return.
• Actavis is a diversified pharma company. Scale of large pharma with cost culture of a generics co. No looming patent cliff.
• New breed of specialty pharma. Strong platform and distribution. Strong balance sheet strength and FCF generation. Benefits from a low tax rate.
• Thesis is simple – strongly positioned across all markets which should drive substantial revenue growth. Cost cutting opportunities and debt to EBITDA at 3.5x allows for optionality. Lots of opportunities to deploy FCF into M&A and buybacks.
• Everytime they buy a product, can drop it into the sales force bag, leads to higher margins.
• $20+ earnings in FY16/FY17. Number could be closer to 22 to 23. 15x multiple leads to $350 plus target.
• Actavis rumored to be in the running for Allergan or sold to Pfizer.
Idea: Charter Communications (CHTR)
• Owned by Paul Allen, balance sheet/ op issues declared bankruptcy. Emerged in 09. Tom Rutledge joined as CEO. Excellent operator.
• What is Charter today? Two man band, Operator: Tom Rutledge and savvy deal making of John Malone.
• Malone owns 25.5% through Liberty Media (Liberty Broadband).
• Rutledge has led CHTR to increase rev per customer, digital penetration, Video ARPU and Products per User. Poured lots of cash into maintenance capex to upgrade/fix network which wasn’t maintained in bankruptcy.
• April entered into a series of transactions with Comcast. Bought former TWC assets including 1.5MM subs for $7.7B, swapping 1.7MM subs with Comcast, and will also managed Greatland (33% stake) with 2.5MM subs. Receives a mgmt fee for Greatland.
• Charter is going from 4MM subs to 8MM subs. Many which were undermanaged, allowing Tom Rutledge to manage.
• Bull case is operational improvements, cash flow generation and capital deployment (buyback/M&A). Levered equity returns and favorable tax position.
• EBITDA going from $3.5MM in EBITDFA/ $8 - $9MM in FCF and 4.4x net debt, to $5.5B in EBITDA, $18 - $22 in FCF per share, net debt at 4.5x and trades at an implied 7x FCF.
• Risks are leverage, Google fiber, timing uncertain.
Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.
Jonathan Kolatch Long Puerto Rico Power Authority: Invest For Kids Chicago
We're posting up notes from Invest For Kids Chicago 2014. Next up is Jonathan Kolatch of Redwood Capital who likes Puerto Rico Power Authority ("PREPA").
Jonathan Kolatch's Invest For Kids Chicago Presentation
• Manages $7B, focus on stress/distress and high yield credit.
Idea: Puerto Rico Power Authority (“PREPA”)
• Overview of Puerto Rico – a territory of the United States, GDP of $70B.
• Has problems – recession since 2006. Slow demographic decline. Piling up debt over years.
• $71B of debt in Puerto Rico. 2/3 is related to central government (general obligation), 1/3 public corporations such as water company, highway authority, etc.
• PREPA is the Power Authority. Largest municipal electric utility in the USA. Only electric utility in Puerto Rico. 18% of their revenue is not collected. i.e. people stealing electricity.
• Doesn’t look particularly different vis-Ã -vis other utilities. 8.8 cents per kilowatt, in the middle of the pack. At a 4.6% ROA, not far out of line. Reasonable well run utility.
• PREPA bonds went from above par in FY12 to around ~50, huge divergence and lower than GO bonds.
• Why does the market hate PREPA? All of their electricity is generated from oil.
• Politicians target PREPA. Rates at 27 cents per kilowatt hour, pretty high versus the 11 cent avg. Yet it isn’t expensive relative to other islands that use oil.
• Puerto Rico passed a law allowing entities like PREPA to undergo bankruptcy.
• Running negative cash flow for many years. Losses plugged by transfers from the state or debt offerings. People bought bonds off the credit quality of Puerto Rico.
• PRASA and Highway/Transport also burning cash.
• In regards to the water utility – implemented a 60% rate increase. $400MM increase in revenues. • Highway – increased gas tax increase from $3 per barrel to $15.3 per barrel or $350MM of increased revenue.
• Generates currently $750MM in EBITDA, need to raise EBITDA to $1,075MM or a 7% rate increase.
• 1989 was the last time they did a rate increase. No other utility has gone that long without a rate increase.
• Debt covenants say rates need to be set to keep 1.2x of EBITDA to debt coverage. Contribution in lieu of taxes and capex is subordinated to P&I for PREPA bonds.
• Thinks an Article I contracts clause will be used/broken.
• A lot of problems are subsidies to entities like hotels and theft of power.
• PREPA has four levers to cut cost. (1) convert to natural gas which is a 3 to 7 cent per kilowatt saving; (2) restructure the CILT which has a 0.3 to 1 cent per kilowatt savings; (3) reduce energy theft which is a 1.5 to 2 cent per kilowatt savings and (4) realign the labor force which is a 0.2 to 0.5 cents per kilowatt savings potential. Every 1 cent per kilowatt is worth ~$175MM of EBITDA.
• Thinks there are gross savings of 4 to 7 cents. Only need half to stay solvent.
• Recent oil sell-off should lower costs by 2.9 cents per KWh. Only need 1.8 cents per KWh to keep the entity solvent.
• Timeline – forbearance agreement, next coupon in January and there is a reserve program to pay it. Hard deadline in July 15 when coupon payment is due.
• Mistreating PREPAs bondholders will severely compromise creditors willingness to believe Puerto Rico’s other promises to creditors.
• 50 cents on the dollar does not leave much downside.
Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.
Tim Hurd Long Blackrock: Invest For Kids Chicago
We're posting up notes from Invest For Kids Chicago 2014. Next up is the emerging manager panel featuring Tim Hurd of Blue Spruce Capital who pitched long Blackrock (BLK).
Tim Hurd's Invest For Kids Chicago Presentation
Idea: BlackRock (BLK)
• They pursue a private equity approach to public markets.
• Background is Madison Dearborn. Concentrated fashion, no more than 15 stocks with 3 year or more holding period.
• Grinder – a company with high FCF that can do well over time.
• Thesis – highly diversified company across clients, product, style and regions.
• BlackRock wins regardless of what happens in the capital markets.
• Mostly passive.
• iShares franchise is the gem. Grown 20% - 30% range, thinks it can grow 11% or more. ETF business is an oligopoly. Return/scale business hard to break into.
• BLK’s ETF franchise includes equity and fixed income ETFs.
• Retail AUM growing.
• Fee growth leads AUM growth. iShares and retail generate margin accretive growth.
• FCF share has historically exceeded net income (excluding changes in trading investments).
• Myths about BlackRock : too big to grow, ETF are low fee/low margin business, great rotation fears.
• PIMCO is the gift that keeps on giving to BLK and other competitors. Pimco Total Return lost another $25B +, BLK and others benefiting.
• ETFs gain incremental margins of 80% - 90%. Some ETF products like HY carry 50 bps fee.
Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.
Nancy Prial Long iCAD: Invest For Kids Chicago
We're posting up notes from Invest For Kids Chicago 2014. Next up is the emerging manager panel featuring Nancy Prial of Essex Investment Management who pitched long iCAD (ICAD).
Nancy Prial's Invest For Kids Chicago Presentation
Small and Micro-cap growth investor.
Idea: iCAD (ICAD)
• Down 50% since FY04. Believes there are catalysts in place to return to growth.
• Innovative cancer detection and radiation therapy solutions.
• Disruptive platform technology to enable early detection, faster treatment and better outcomes.
• Catalysts for growth: shift from 2D to 3D for mammography.
• Radiation business growing 50% + over the next few years.
• Potential market opportunity of $1B. Favorable results from Hologics and GE. Got into the business through an acquisition.
• Opportunities to expand outside of the USA.
•
Penetration of technology is 1% - 2%. Thinks they can grow from $30MM a
year in business to 25% penetration, which equals a bllion dollar +
opportunity
• Operating income turned positive.
• Trades for less than 3x revenue, below peers with high gross margin products selling into large under-penetrated markets.
•
beat 8 out of the last 8 quarters for revenue and 5 out of the last 8
EPS estimates. Note only one analyst covering the name on the
sell-side.
• $170MM market cap, thinks the SOTP value is $16. Trades for $11.
Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.
Mike Wilkins on Short Selling: Invest For Kids Chicago
We're posting up notes from Invest For Kids Chicago 2014. Next up is Mike Wilkins of Kingsford Capital who talked about short selling.
Mike Wilkins' Invest For Kids Chicago Presentation
• Short focused firm with $250MM in AUM
• Focused on small and micro-cap US listed equities, Founded in FY01.
• Topic is “benefitting from persistent fraud”
• Fraud is persistent because fraudsters are persistent. Fraud is a people business.
• Find a stock promotion and build a network form there.
• To find a promotion, look for a tell.
• Step 1: Look for a tell. Look for money losing companies in south Florida/Nevada. Sometimes the CEO looks like a crook!
• David Brooks – DHB Industries – sold defective body armor to the army. Ended up going to prison.
• Sometimes the tell is in the SEC filings. The OCZ filings had suspect filings. IPO is a lawyer document. CEO was convicted in a felony (wrote as youthful discretions in the IPO prospectus).
• Focus on the investor relation firms, transfer agents, lawyers, accountants, etc. Some of them similar.
• Interoil (IOC): No production but has over a $2B market cap – look at the networks once again (not a short selling recommendation but a potential stock promotion he saw).
• Look for the stock promoters.
• Persistent fraud lets them create a history of the company. Sell-side or money managers never really look into the history of managers and companies.
• Star Scientific is one short than played out. Formed in 98. Burned through $290MM in multiple offerings. Promoted multiple times over the years. Jonnie Williams was one of the people involved. Became chief ethics officer and on the board.
• Pumped one of their products that was a chemical found in cigarettes that could supposedly cure inflation, a driver of Alzheimer’s.
• Patrick Cox was one of the promoters. Called it the last stock you ever need, could cure Alzheimer’s. And makes a great face cream.
• Came into light that Jonnie Williams gave $11MM in bribes to the former VA governor. Was investigated and Williams worked with authorities gaining a blanket immunity from stock pump and dumps.
• John Stewart couldn’t believe that Jonnie Williams got away with it.
• John Isner was sponsored by the company
• John Isner was also sponsored by Ebix another potential promote.
• Paid promoters: Red Chip, Dave Gentry – involved with L&L Energy. Talks about many of the Chinese frauds. L&L claimed to have coal mines, but did not.
• Dave Gentry went on CNBC to talk about the company. In FY13, went back up to 5 after new promoters where hired.
• This March LLEN was charged with fraud and the CEO plead guilty.
• Tobin Smith was a former Fox contributor on business. Fox fired him for a pump and dump scam. Must be bad if Fox fires you.
• The DreamTeam Group is another stock promoter group that pays writers to write positive investments. Galena Biopharma was one company that was pumped by the DreamTeam.
• Lightdingo is one promote.
• GALT is one idea. Who is GALT?
• Galectin Therapeutics – went from $2 to $19 since FY13. Zero revenue and more board members than employees. Working for a cure for liver disease.
• History goes back to another name and founded in FY98. Sold an orange derived product and a home cleaning product. No miracle ingredients – used the same chemicals of that everyone else had, just used more water. Pumped as a safe cleaner, while all it had was watered down chemicals.
• Then went to pitch a cancer cure. Didn’t work. Brought in new money and directors in FY09. Brought in John Mauldin to the board.
• Added Dave Gentry, John Fugler, Tobin Smith, and other promoters.
• Liver drug flopped – was safe (just pectin) but didn’t work (not a surprise).
Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.
Thursday, November 6, 2014
InvestPitch 2014: Summary of Stock Picks From Emerging Hedge Fund Managers
While most investment conferences feature big names that manage large sums of money, the recent InvestPitch competition put on by Institutional Investor and SumZero highlighted up and coming smaller hedge fund managers. Videos of the pitches will be available at II in a few weeks, but in the mean time here's a quick summary:
Summary of InvestPitch 2014 Stock Picks
Sahm Adrangi (Kerrisdale Capital): long Savills (LSE:SVS)
Kyle Mowery (GrizzlyRock Capital): long Leucadia National (LUK)
Daniel Lawrence (Elmrox Investment Group): long Realogy (RLGY)
Spencer Grimes (Twinleaf Management): long E.W. Scripps (SSP)
Travis Cocke (Voss Capital): Short GW Pharmaceuticals (GWPH)
Ian Clark (Dichotomy Capital): Short Transocean (RIG)
Michael Zapata (Sententia Capital): Long Aaron's (AAN)
Keith Rosenbloom (Cruiser Caiptal): long Ferro (FOE)
Brian Pitkin (URI Capital): long JPMorgan Chase TARP Warrants (JPM/WS)
Sam Hendel (Levin Capital): long Newcastle Investment (NCT)
Nicholas Snyder (Snyder Brown Capital): long Sears Holdings (SHLD)
David Hanson (Hanson Wells Partners): long Alleghany (Y)
Josh Young (Young Capital): long Stone Energy (SGY)
Donald Marchiony (Westpark Capital): long Tower Semi (TSEM)
Vad Yazvinski (Jordan Capital): long American Capital (ACAS)
(ValueTree Investments): long Kohl's (KSS)
Terry Lally (Spotlight Funds): long Staples (SPLS)
Mike Winston (Sutton View Capital): long Starz (STRZA)
Charles Goldblum (Hurley Capital): long Lifepoint Hospitals (LPNT)
There have been a ton of investment conferences lately and if you missed any of them, we've got you covered with notes below:
- Notes from Sohn San Francisco (Ubben, McGuire, Billick etc)
- Notes from Capitalize for Kids Sohn Canada (Ainslie, Dinan, Robbins)
- Robin Hood Investors' Conference: Summary of stock picks (Tepper, Loeb, Einhorn, etc)
- Great Investors' Best Ideas Dallas (Ackman, Einhorn, Perry & more)
- Check back for Invest For Kids Chicago notes later this week as well
Tiger Global Reduces MakeMyTrip Stake
Chase Coleman and Feroz Dewan's hedge fund Tiger Global has filed an amended 13G with the SEC regarding their position in MakeMyTrip (MMYT). Per the filing, Tiger Global now owns 12.2% of the company with over 5 million shares.
This means they've reduced their position size by over 2 million shares since the end of the second quarter. The filing was required due to activity on October 31st.
We've highlighted other recent portfolio activity from Tiger Global here.
Per Google Finance, MakeMyTrip is "an online travel company in India. The Company conducts its business principally through its Indian subsidiary, MakeMyTrip (India) Private Limited (MMT India). Through its primary Website, www.makemytrip.com, or MakeMyTrip.com, its subsidiaries’ websites, such as www.hoteltravel.com, www.makemytrip.ae, www.makemytrip.com.sg, and other technology-enhanced distribution channels in India, including its call centers, travel stores and travel agents’ network, travelers can research, plan and book a wide range of travel services and products in India as well as overseas. Its services and products include air tickets, hotels, packages, rail tickets, bus tickets, car hire and ancillary travel requirements, such as facilitating access to travel insurance."
Sequoia Fund Investor Day Transcript 2014
Today we wanted to highlight the transcript from Sequoia Fund's investor day earlier this year. This is old (6 months ago) but is still worth reading due to the in-depth color they provide on their investments and the fact that they're long-term shareholders so most of the positions still remain in their portfolio.
Positions they talk about include Valeant Pharmaceutical (VRX), Allergan (AGN), Google (GOOGL/GOOG), Mastercard (MA), TJ Maxx (TJX), Omnicom (OMC), IBM (IBM), Ritchie Brothers (RBA), Fastenal (FAST), Costco (COST), Berkshire Hathaway (BRK.A/B), O'Reilly Auto (ORLY), Rolls Royce (LON:RR), Precision Castparts (PCP), and more.
Embedded below is the Sequoia Fund's Investor Day Transcript:
You can download a .pdf copy here.
And given their long-term focus, we'd also point you to Sequoia Fund's 2013 investor day transcript as well as Sequoia Fund's 2012 annual letter if you haven't read those either.
Wednesday, November 5, 2014
What We're Reading ~ Analytical Links 11/5/14
The Misbehavior of Markets: A Fractal View of Financial Turbulence [Benoit Mandelbrot]
What's your investing edge? [Clear Eyes Investing]
Building a personal margin of safety [Abnormal Returns]
Managing someone else's emotions [A Wealth of Common Sense]
On taking losses and the value of survival [Long Short Trader]
A look at Ocwen Financial & Altisource Portfolio Solutions [Doug Kass]
A look at C.H. Robinson [Punch Card Investing]
On Hewlett Packard's break-up [Aswath Damodaran]
First time homebuyers hit lowest in nearly 30 years [CNBC]
On Japan and business vs economics [Paul Krugman]
Underwriting the next housing crisis [NYTimes]
An interview with Google's Larry Page [FT]
How confirmation bias can lead to spinning wheels [NYTimes]
Sears has a deal to offer its shareholders [Bloomberg View]
John Maynard Keynes is the economist the world needs now [BusinessWeek]
The way to make solar energy a hot investment? Make it a boring one [Slate]
Julian Robertson's 3 Most Important Things To Look For in a Stock
Tiger Management's Julian Robertson made his rare yearly media appearance recently on Bloomberg. There, he talked about what the most important things are that he looks for in a stock:
Julian Robertson's 3 Things To Look For in a Stock
1) Good management: This was the first thing he mentioned and is something you'll see strongly emphasized at most of the Tiger Cub hedge funds these days.
2) Good product line: This one is kind of obvious as you need to sell a product/service that people/companies need or desire.
3) Shareholder oriented: This kind of ties back-in with #1, but he wants a company that's very stockholder friendly (presumably returning capital to shareholders, etc).
Robertson On Current Markets
Robertson also touched on some other topics during the interview. Interestingly, he said sometimes it's good to move away from stocks and to look at currencies, saying they're "very interesting" to analyze and that there's a lot of volatility in them. He also noted it's a "race to cheapen currencies everywhere."
He also said there's a big bubble with bond yields being so low, causing people who would otherwise be in bonds to be in stocks.
Turning back to stocks, the Tiger man called Apple "awful cheap" and also made similar comments about Google (GOOGL / GOOG).
Robertson went on to say that Asia is the "golden place for hedge funds to be." He says there's a ton of competition among hedge funds in the US this day and he said Asia isn't quite as competitive.
Embedded below are the videos of Robertson's Bloomberg interview:
Video 1
Video 2
Video 3
Lone Pine Capital Starts New Autodesk Stake
Steve Mandel's hedge fund firm Lone Pine Capital has filed a 13G with the SEC regarding shares of Autodesk (ADSK). Per the filing, Lone Pine now owns 5.3% of the company with over 11.96 million shares.
This is a newly disclosed position for the hedge fund firm and the filing was required due to activity on October 24th. We've also posted some additional portfolio activity from Lone Pine here.
Per Google Finance, Autodesk is "a design software and service company, offering business solutions through technology products and services. The Company serves in the 3D design, architecture, engineering and construction; manufacturing; and digital media, consumer and entertainment industries. Autodesk operates in four segments: platform solutions and emerging business (PSEB); architecture, engineering and construction (AEC); manufacturing (MFG), and media and entertainment (M&E). The principal products and services of these segments include flagship products, which include AutoCAD, AutoCAD LT, AutoCAD Civil 3D, AutoCAD Mechanical, AutoCAD Map, AutoCAD Architecture, Maya and 3ds Max; Suites, which includes Autodesk Product Design Suites, Autodesk Building Design Suites, Autodesk Infrastructure Design Suites and AutoCAD Design Suites, and New and Adjacent products, which include Autodesk Creative Finishing products, Autodesk Moldflow products and Autodesk Alias Design products."
Tuesday, November 4, 2014
Final Chance Family Office Super Summit
MarketFolly was able to secure 7 discounted tickets to the 3-Day Family Office Super Summit in Miami, FL on November 11th-13th but these are almost sold out now. There are just a few tickets left which enable you to attend for $797 instead of the regular $1,997 price. To take advantage of this offer please use promo code "Folly" during checkout: http://WilsonConferences.com/Super
Like all of our events we 100% guarantee that you will love the conference and get far more than your money's worth of value from it or we will refund you instantly upon request.
If you are looking for a reason to head south in November, be sure to grab one of these discounted tickets for the Family Office Super Summit. Not only will you hear from more than 50 family office speakers on important investing issues and wealth management strategies, but you will also have three days to network with leading family office and investment executives. Here's a look at some of the family offices and wealth managers who will be presenting during this conference:
Family Office Super Summit Speakers List
• Michael Connor, Consolidated Investment Group
• Matthew McCarthy, Nottingham & Spirk
• Jonathan Bergman, TAG Associates
• Elliot Dornbusch, CV Advisors
• Al Bhatt, Coral Gables Trust
• Paul Vogel, Argos Partners
• Richard Joynt, Bedell Family Office
• John Jonson, Lyrical Partners
• Christian Zabbal, Black Coral Capital
• David Rosen, Pritzker Group
• David Fisher, Bentley Capital
• Gary Domoracki, Ten Mountain Capital
• Jimmy Hickey, RiverRock Capital
• Candice Beaumont, L Investments
• Ronald Macleod, Baciu Family Capital
• Timothy Smith, Petro Lucrum
• Mauricio Gruener, GFG Capital
• Mark Renz, Barclay Breland Family Office
• Cliff Oberlin, Oberlin Wealth Partners
• Roman Khlupin, W Family Office
• Declan Ramsaran, Redwood Wealth Canada
• William Kidd, KIDD & Company
• Camilo Nino, AKRO Group
• James Cassel, Cassel Salpeter & Co.
• Blakely Page, Spouting Rock Capital
• Ira Perlmuter, T5 Equity Partners
• Jorge Carstensen, Helvetica 1890
• Santiago Ulloa, WE Family Office
• Abe Tatar, The Hysek Group
• Michael Weinberg, MOW & AYW
• Stuart Dunn, Holdun Investment Partners
• Christian Jagodzinski, Desdemona Capital
• Gregory Spick, UPS Investments
• Anthony Ritossa, Ritossa Olive Oil & Family Office
• Richard Stone, Stone Family Office
• Scott Freund, Family Office Research
• Henley Smith, Commonwealth Asset Management
• Paul de Sousa, BMG, Inc.
• Rodolfo Paiz, The Guayacan Group
• Christina Dikareva, Single Family Office (Private)
• Logan Powell, Copper Beech Capital
• Daniel Shakhani, RDS Capital
• Sergio Pedro, Private Family Office
• Greg Curtis, Greycourt & Co.
• Andrew Mehalko, AM Global Family Investment Office
• Harris Fried, Fried Family Office
• Peter Marquardt, The Leo Group
• Leah Zveglich, Aster Family Advisors
• Richard C. Wilson, Billionaire Family Office
• Jesse Shemesh, Kite & Key Realty Group
• Thomas Handler, Handler Thayer
Conference Details: http://WilsonConferences.com/Super
Where: JW Marriott of Miami in Brickell ($200 discounted rooms available)
When: November 11-13, 2014
Why: Learn from top family office investors, form new family office relationships, and access three days of family office insights covering a range of institutional investing topics.
Last Chance Discount For Market Folly Readers
This is your last chance to take advantage of these super-discounted admission passes of just $797 for all 3 days, so if you want to attend visit the following link and enter the promo code "Folly" on the form: http://WilsonConferences.com/Super or call us if you have questions or trouble registering at (212) 729-5067.
See you in Miami.
Richard C. Wilson
(212) 729-5067
Wilson Conferences
Family Offices Group Association
3300 NW 185th Avenue Suite #108
Portland, Oregon 97229
Team@WilsonConferences.com
http://WilsonConferences.com/Super
