Paulson & Co Trims Extended Stay America Stake

John Paulson's hedge fund firm Paulson & Co has filed a couple of SEC filings regarding its paired shares in Extended Stay America (STAY) and ESH Hospitality.

The Form 4 filed indicates that Paulson & Co sold 4,983,333 paired shares in total, at a price of $14.16 per share on October 4th.

After these sales, Paulson still owned 37.67 million shares of STAY, or 19% of the company.

A press release from Extended Stay America indicates that they recently announced a secondary offering of paired shares, each paired share consisting of a share of common stock of STAY and a share of class B stock of ESH Hospitality.  Paulson & Co, Centerbridge Partners, and Blackstone Group were the selling stockholders. 

The company also announced a share repurchase agreement where they repurchased 1.95 million paired shares from the sellers.

We've also posted other recent portfolio activity from Paulson & Co here.

Per Google Finance, Extended Stay America is "an integrated owner/operator of company-branded hotels in North America. The Company operates in hotel operations segment. Its business operates in the extended stay lodging industry. It owns and operates approximately 630 hotels comprising over 69,400 rooms located in approximately 40 states across the United States and in Canada. It owns and operates its hotels under its core brand, Extended Stay America, which serves the mid-price extended stay segment. In addition, it owns and operates over three Extended Stay Canada hotels. It operates its hotels owned by ESH Hospitality, Inc. (ESH REIT). The hotels are operated by the Operating Lessees, subsidiaries of the Company and are managed by ESA Management LLC (ESA Management), a subsidiary of the Company. ESH Strategies, a subsidiary of the Company, owns the brands related to its business. The Company's extended stay hotels are designed to provide lodging or apartment accommodations."

SPO Advisory Reduces Oasis Petroleum Position

John Scully's investment firm SPO Advisory has filed a Form 4 with the SEC regarding its position in Oasis Petroleum (OAS).  Per the filing, SPO now owns 16.97 million shares of OAS.

They sold over 2.97 million shares in total on October 4th and 5th, with the bulk of the transaction coming at $11.65 per share.

We've highlighted previous SPO Advisory portfolio activity here.

Per Google Finance, Oasis Petroleum is "an independent exploration and production company. The Company is focused on the acquisition and development of unconventional oil and natural gas resources in the North Dakota and Montana regions of the Williston Basin. Its segments include Exploration and Production, which is engaged in the acquisition and development of oil and natural gas properties; Well Services, which performs completion services for the Company's oil and natural gas wells operated by Oasis Petroleum North America LLC (OPNA), and Midstream Services, which performs salt water gathering and disposal and other midstream services for the Company's oil and natural gas wells operated by OPNA. The Company's projects include Williston Basin, West Williston and East Nesson. It also operates a well services business through Oasis Well Services LLC (OWS) and a midstream services business through Oasis Midstream Services LLC (OMS)."

Hedge Fund Links ~ 10/7/16

How to improve the alternative asset management industry [A Wealth of Common Sense]

Hedge fund marketing tips for the initial sales meeting [FINalternatives]

Largest hedge funds bleed assets [Reuters]

The Smithsonian is not giving up on hedge funds [ii alpha]

Dan Och's $37 billion question: will investors stand by him? [Bloomberg]

Hedge funds' ballooning bet on sugar [Bloomberg]

Deutsche Bank: hedge funds back away [Bloomberg]

Elliott said to be in talks to invest $3 billion into Brazil's Oi [Bloomberg]

Activists restore Sotheby's splendor [Forager Funds]

Notes From Sohn San Francisco 2016: Morfit, McGuire, Palihapitiya & More

Below are notes from the 2016 Sohn San Francisco investment conference where investment managers presented their latest ideas to benefit charities.  We also posted up notes from the Next Wave Sohn San Francisco conference as well that featured emerging managers.

Notes From Sohn San Francisco 2016 Conference


Mason Morfit, ValueAct Capital

• Idea: Long Morgan Stanley (MS)
• Try to find businesses with enduring franchise value
• 3 defined business units
• 7 defined revenue types
• Did a lot of work to understand the unit economics
• 75% of the revenue and 85% of the profit come from asset light fee based businesses (not capital intensive businesses)
• Long term trend is very positive
• MS has maintained and in some cases grown its share in wealth management and investment banking advisory 
• Risk factors: earnings decline, principal loss, liquidity/access to capital

Mick McGuire, Marcato Capital Management

• Idea: Long Buffalo Wild Wings (BWLD)
• Owns 5% of the company
• Differentiated concept focused on wings, beers, sports
• ~1,200 units with potential to grow to 1,700 units
• Long history of industry leading same store sales (SSS) growth
• Central component of investment thesis:
• Differentiated concept with long runway for growth
• SSS declines and capital allocation missteps have hurt shares
• Opportunity to create shareholder value by: transitioning to a 90%+ franchised model by 2020, improve 4 wall margins (several hundred bps opportunity), and optimize capital structure
• Multiple has compressed as traffic has slowed and costs continue to rise
• When growth slowed, BWLD acquired franchised stores for high multiples
• Average replacement cost is ~$2.3mm per unit but in 2015, spent $3.5mm per unit - overpaid; bad use of capital
• Incentives are weighted singularly towards growth, not ROI
• While unit volumes have increased significantly since IPO, ROI has decreased because the cost to build a unit has increased
• Franchised businesses command higher multiples; higher franchise mix correlated with higher multiples
• BWLD is 50/50 today but recommending that they go to 90% franchised model by refranchising units at multiple of 6.0x EBITDA
• Valuation: if they can move to a higher franchised model range of value from $218 to $311 (versus ~$141 today)

Chamath Palihapitiya, Social Capital

•  Primarily invests in fast growing private tech companies
• Multi-trillion dollar opportunity hiding in plain sight
• Retail will be a $1T business by 2025
• Every company succeeds based on three factors: build a great product with great market fit, develops adjacent products in deep verticals, invests in features to drive ARPU
• Amazon (AMZN) thesis based on AWS and outsourcing infrastructure spending and moving it to the cloud; reshaping economics by taking out costs
• Similar concept for software that will move to the cloud

• Idea: Long Workday (WDAY) 
• $100bn opportunity in 10 years; 20% IRR
• Workday is the system of record for HR and is viewed as the best in class product among CIOs
• Leading market share supporting the largest global employee bases including Samsung, McDonalds, IBM
• HCM product manages 19mm employees on behalf of its employers
• Adjacent products in deep verticals: Workday Financials - system of record to manage financials; now manages financials for global companies
• Invest in features to drive ARPU (payroll and many other features)
• Rapid pace of innovation
• Workday competes against Oracle (ORCL) and SAP (SAP)
• Lowest spend on M7A over the last 5 years
• "M&A is what you do when what you do doesn't work anymore."
• Done< $0.3bn over last 5 years, SAP and Oracle have had a lot of M&A
• Netflix ability to close the books and file with the SEC went down significantly with Workday versus Oracle
• Workday is an enterprise product company
• Best management team in software
• Fully aligned, long term oriented
• 97% customer satisfaction; very high consistent with consumer tech like Facebook, Google, Apple but this is enterprise tech
• Following the Salesforce playbook but doing it better
• $100bn company in 10 years

Carson Block, Muddy Waters Capital

• Idea: Short Tutor Perini (TPC)
• Construction company
• Nearly all analysts have the stock as a buy
• FCF is the Achilles heel - the company bleeds cash in working capital driven by growing accounts receivable
• Loan agreement has been amended 6 times in 5 years and there is a chance that banks could pull RC facility; Business has $94mm of cash on BS but 79% of cash sits in JV so it could run into a major liquidity problem
• 4 CFOs over 9 years
• Summary: business can't consistently generate cash, projected earnings growth highly questionable, lack of management credibility, and liquidity could become challenged

Mihir Wohra, PIMCO

• Idea #1: Rates trade - Hawkish Fed
• Market is currently underpricing the possibility of a Fed hike or that there will just be one hike
• Buy a pair: buy a put on the 1 year rate

• Idea #2: Dovish Fed - Buy REITs
• REIT prices tend to be correlated to equities over the short-term but underlying economic factors prevail over the long term
• Will do well if Fed doesn't raise rates or cuts

• Idea #3: Commodities trade: Long call options on 2018 Natural Gas - No Fed correlation
• In the midst of global price convergence that will pull US natural gas prices higher while lowering global prices; US is opening new LNG export terminals and US nat gas is the cheapest in the world so there are buyers
• Buying 2018 at a discount to 2017 is attractive given US LNG exports are only increasing over the next few years

• Idea #4: Bonus trade: sell puts / buy calls on October VIX Futures
• Volatility should rise towards long term averages if election stays close
• Volatility could rise more if Trump probability of winning increases

• Idea #5: Bonus trade: Currencies - works if Trump win probability decreases
• Mexican peso has significantly underperformed other EM and commodity currencies in 2016 due to possibility of Trump victory and tougher US policies toward Mexico

Jeff Osher, Harvest Capital Strategies

• Idea: Long Echostar (SATS)
• Global provider of satellite services, video, delivery solutions and broadband satellite technologies
• Echostar Technologies: set top box business with $1.3bn revenue; $100mm EBITDA, 7.6% EBITDA margins
• Satellite services: $445mm revenue; 84% EBITDA margins; very good business with long dated contracts
• HughesNet: $1/4bn revenue; provide consumer broadband for households that can't get wired broadband
• Duopoly: Hughes and Viasat
• Hughes has 1mm subscribers with 30% EBITDA margin
• Business is capacity constrained
• 2016 launches will drive 50% revenue growth for Hughes within 3 years.  Given higher incremental margins, EBITDA should nearly double
• Sum of the parts valuation results in target price of $71.76 (versus today at ~$44)
• Other actions could result in homerun scenarios: Echostar Technologies divestiture, Echo Mobile, Dish Mexico, Sling TV, Brazil orbital slot, Pay TV, positioning for opportunistic M&A

Joseph Lawler MD, JFL Capital Management

• Idea: Short IP Group (IPO.LSE)
• Publicly traded fund that invests in healthcare companies
• Most publicly traded investment firms trade at a discount to NAV but IPO trades at a premium
• Adverse selection process - they seem to invest in companies that other VCs have passed on
• Investments are overvalued especially investment in Oxford Nanopore.  It's a DNA sequencing company; the cost of DNA sequencing has gone down significantly and has become commoditized

Arjun Divecha, Grantham May Van Otterloo & Co

• Idea: Investing in Indian financials (non state-owned banks)
• Never think of an emerging market as a place to permanently put capital
• India from a long term point of view looks pretty good as a place to invest - well positioned for economic growth over next 5 years
• Private sector financials are taking market share away from state owned banks
• Dependency ratio looks pretty good in the future versus other countries like US, Japan, and China.  Dependency ratio = ratio of non-working to working people
• India looks good because of improving fiscal discipline, improving inflation, current account benefiting from oil windfall (big importer of oil), capacity utilization is very low
• India is massively under-urbanized
• Household debt to GDP is 9% versus US where it is ~100%
• Huge scope for increase in consumer loans
• Pitch was about investing in non state-owned banks, like publicly traded ones such as HDFC Bank, Axis Bank, IndusInd Bank and Yes Bank; State owned banks can't make loans anymore due to loan issues
• The private banks are very well run; 3-6-3 banks
• Not easy for foreign investors - must have access to local market
• HDFC Bank (HDB) and ICICI Bank (IBN) are listed on the NYSE 
• 4-5% net interest margins
• Valuations are high but earnings growth has historically justified high valuation
• HDFC trading at 4.5x price to book
• 26.7% earnings growth over 20 years
• Thesis summary: well positioned for economic growth, low penetration of financial sector, well run financials are taking market share from well run banks

Peter Palmedo, Sun Valley Gold

• Idea: Gold: data and dogma
• Discovered Summers-Barsky Gold Thesis: price of gold is driven by the real return in capital markets
• From 2002 to 2015 gold real return was 7.9% versus a blended real return of 4.5%
• China gold demand in excess of domestic supply
• Most PMs hold unsubstantiated beliefs about gold but the algorithmic, data driven models will get it
• Own gold in the simplest form
• Cheap, safe and stable; think about gold in the context of portfolio insurance and risk diversification 
• Buy gold if you think we are in a low real return world

Be sure to also check out the presentations from the Next Wave Sohn San Francisco conference as well, which featured emerging fund managers.

Notes From Next Wave Sohn San Francisco 2016: Rende, Kaufman, Drescher, Melsom

Today we're posting up notes from the Next Wave Sohn San Francisco 2016 investment conference that just took place.  This features emerging fund managers presenting investment ideas to benefit charities.  We've also posted notes from the main Sohn San Francisco 2016 conference as well.


Notes From Next Wave Sohn San Francisco 2016

John Rende, Copernicus Capital Management

• Focused on life sciences and services
• Manages $85mm AUM
• Positive performance 15 out of 16 years

• Idea: Biomarin Pharmaceuticals (BMRN)
• Enzyme replacement therapies for rare diseases 
• $16bn market cap
• 5 commercialized drugs = $1.1bn in product sales in 2016
• Thearpeutics category
• Leader in orphan drugs (affecting less than 200k people in the US)
• Why we like orphan drugs?
• Expedited regulatory path
• Limited competition
• Small sales force needs
• Motivated patient population
• Business model advantage
• 7 year marketing exclusivity 
• Tax credits
• FDA motivated to approve these drugs
• 2014-2020 CAGR of ~17%
• Biomarin makes 5 orphan drugs; Strength in Vimizim and Kuvan - raised revenue guidance recently
• Sustainability of revenues for rare diseases
• Vimizim - treats Morquio A disease - impacts population of 3,000 in the developed world with 20 births/year in the US
• Annual price/patient = ~$350k
• Kuvan - Phenylketonuria - inherited disorder which caused the buildup of the amino acid
• Works in conjunction with a low phe diet
• Annual price/patient =~$150k 
• Three near term pipeline products expected to add $400mm in product revenue by 2020
• Corporate pricing strategy has always been conservative; they've been kept out of the crosshairs because they don't represent a large portion of a given insurance company's costs given low number of patients impacted; also FDA understands that orphan drug companies need a financial incentive to continue to develop orphan drugs
• Over $4bn invested in R&D over past decade
• Base case = $130 price target; Upside case = $170 price target; Downside case = $80 price target

Neal Kaufman, Hillair Capital Management

• From a non-traditional background - formerly operated businesses - CEO of publicly traded small cap company - a supplier to the railroad industry
• Invests in publicly traded small companies

•  Idea: Sysorex (SYRX)
• Value added reseller transitioning into a product company 
• Moving to Saas/recurring revenue business model
• Hillair has $5mm invested in fixed price convertible debenture with preferred share equity kicker 
• Convertible at price significantly above current market
• Technologies
• Airpatrol: Detects cellular, Wifi, RFID, and Bluetooth deices, applications
• Lightminer: World's fastest analytics platform
• VAR business comprises the lionshare of revenue
• Announcement on contract with Top US mall operator and Airpatrol installations
• Valuation
• VAR business worth $14bn based on comps
• Security business is worth $26mm based on comps
• Value per share of $0.89 versus current price of $0.31

Joel Drescher, Drescher Capital

• Focused on TMT and consumer
• BA from Stanford and MBA from Cal Berkeley

• Idea: Signet Jewelers (SIG) 
• 15% ROE, 7 year of double
• Owns Kay, Jared and Pagoda and Zales store brands
• Three divisions
• Market for wedding and engagement rings is very stable
• 15% market share in the mass jewelry category; no competitor has more than 1%
• Zales had 3% operating margin before it was purchased versus Kay and Jared at 17%
• Stock beaten down due to a diamond swap scandal that was published on Buzzfeed, concerns around rising charge-offs
• Credit is an asset not a liability; can be sold off
• 62% of sales done on credit at an average FICO score of 660
• Mid-teens yield on credit portfolio
• Signet could get $1.1bn for the sale of their credit portfolio; could sell it with a minimal impact to EPS, proceeds can be used to buy back stock
• Third party would have more stringent credit standards but would result in minimal loss of sales
• Company announced that it is exploring the sale of its receivables
• $139 per share fair value; 85% increase from current market price based on $7.40 EPS x 10% growth, +1.13 EPS from credit sale portfolio x 15 P/E multiple

John Melsom, Omni Event Fund

• Risk/merger arbitrage fund; 20-25 names in portfolio
• $350mm AUM; launched three years ago
• Investment criteria: hard catalyst, low correlation to equity markets, liquid
• Focused on N. America, Western Europe and Asia
• Beta to the S&P of 0

• Idea: Syngenta (SYT) ~ $40bn market cap 
• One of the big six agro chemical firms
• Focused on crop protection and seeds
• Agricultural input sector facing headwinds; costs are increasing in R&D and crop prices are in decline
• A lot of consolidation in the sector
• ChemChina has a deal to acquire Syngenta
• ChemChina is China's largest chemical company - state owned 
• Terms of the deal: $465 USD + CHF 5/share special dividend
• Expect broad shareholder support for the deal, need Chinese regulatory approvals - but it is a very strategic deal for China given China's desire to increase agriculture output significantly 
• Swiss government has blessed the deal; CFIUS - US body has approved the deal
• Potential 20% return before CFIUS deal; Post CFIUS approval, there is a 7% spread - annualizes to 28% based on closing date
• Spread driven by concerns of antitrust and Chinese buyer.  Market share issues can be easily solved
• Highly confident that the deal will close

Be sure to also check out the presentations from the main Sohn San Francisco 2016 conference as well.

What We're Reading ~ 10/5/16

Michael Lewis' upcoming book on the decision making process [Amazon]

How interest rates affect stock market returns [A Wealth of Common Sense]

The difference between a bubble and a cycle [Collaborative Fund]

Practicing a 'punch card' approach to investing [Base Hit Investing]

Silicon Valley's secrets are hiding in Marc Andreessen's library [Wired]

This is where your smartphone battery begins [Washington Post]

Some big US cities see apartment rents fall for first time in years [WSJ]

Advertising's century of flat-line growth [Bloomberg]

What the next few years looks like for virtual reality [Medium]

Interview with Benchmark's Bill Gurley [Recode]

The scientists who make apps addictive [1843 magazine]

Moleskine turns paper into big profit for private equity [WSJ]

71 million hogs are crushing US meat prices [WSJ]

When going to college becomes a financial risk [Marketplace]

Marcato Capital Sells Some Sotheby's Shares To Company

Mick McGuire's activist firm Marcato Capital Management has filed an amended 13D on its position on Sotheby's (BID).  Per the filing, Marcato now owns 4.9% of BID with 2.62 million shares.

This is a change from the 5.27 million shares they reported on their 13F filing at the end of the second quarter.

The filing notes that Marcato entered into a share repurchase agreement with Sotheby's where BID agreed to purchase 2.05 million shares of BID from Marcato at $36 per share on October 4th.

For more on this fund, we've highlighted other recent portfolio activity from Marcato.

Per Google Finance, Sotheby's is "a global art business company. The Company operates in two segments: Agency and Finance. The Agency segment earns commissions by matching buyers and sellers of authenticated fine art, decorative art, jewelry, wine and collectibles (collectively, art or works of art or artwork or property) through the auction or private sale process. Agency segment activities also include the sale of artworks that are principally acquired incidental to the auction process and the activities of RM Sotheby's. The Finance segment earns interest income through art-related financing activities by making loans that are secured by works of art. Its activities include Sotheby's retail wine operations, Acquavella Modern Art, an equity investee, and sales of the remaining inventory of Noortman Master Paintings, an art dealer that was owned and operated by Sotheby's are reported within all other segment."

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ValueAct Capital Reduces Baker Hughes Stake

Jeff Ubben's activist firm ValueAct Capital has filed an amended 13D with the SEC regarding its stake in Baker Hughes (BHI).  Per the filing, ValueAct now owns 7% of BHI with over 29.88 million shares.

This is down from the 38.88 million shares they owned at the end of the second quarter.  The filing indicates they sold shares in early August and at the very end of September.  Most of the transactions were at weighted average prices between $49.60 and $50.71.

Ubben's firm has been busy lately and we've highlighted how ValueAct recently filed 13D's on Trinity Industries and CBRE Group as well.

Per Google Finance, Baker Hughes is "engaged in the oilfield services industry. The Company is a supplier of oilfield services, products, technology and systems used in the oil and natural gas industry around the world. The Company also provides industrial products and services for other businesses, including downstream chemicals, and process and pipeline services. It conducts its operations through its subsidiaries, affiliates, ventures and alliances. The Company has four geographical operating segments: North America, Latin America, Europe/Africa/Russia Caspian and Middle East/Asia Pacific. The Company also has an Industrial Services segment, which includes the downstream chemicals business and the process and pipeline services business. The Company's oilfield products and services are of approximately two categories, Drilling and Evaluation or Completion and Production. The Company's Industrial Services consists of its downstream chemicals and process, and pipeline services businesses."

Third Point Files Amended 13D on Enphase Energy Holdings

Dan Loeb's hedge fund firm Third Point has filed an amended 13D with the SEC regarding its stake in Enphase Energy (ENPH).  Per the filing, Dan Loeb now has exposure to 11.2% of ENPH with over 6.7 million shares. 

Per the filing, 6.28 million shares are owned by Third Point funds (including 34,101 shares of common stock issuable upon exercise of warrants). and 423,684 shares are owned directly by Loeb. 

Third Point's last 13F filing detailing positions as of the end of the second quarter had them previously owning 6,248,987 shares.

Per Google Finance, Enphase Energy is "a provider of energy management solutions. The Company is engaged in designing, developing, manufacturing and selling microinverter systems for the solar photovoltaic industry. Its semiconductor-based microinverter system converts direct current (DC) electricity to alternating current (AC) electricity. Its microinverter system consists of three components: Enphase microinverters, an Envoy gateway and Enlighten cloud-based software. Its Enphase microinverters provide power conversion at the individual solar module level by a digital architecture that incorporates custom application specific integrated circuits (ASIC), specialized power electronics devices, and an embedded software subsystem. Envoy bi-directional communications gateway provides collecting and sending data to Enlighten software. Enlighten cloud-based software provides the capabilities to remotely monitor, manage, and maintain an individual system or a fleet of systems."

Paulson & Co Trims Trilogy Metals & Synergy Pharma Positions

John Paulson's hedge fund firm Paulson & Co has filed two Form 4's with the SEC.

First, Paulson has reduced his stake in Trilogy Metals (TMQ), formerly known as NovaCopper.  On September 27th and 28th, Paulson sold 11,173 shares at prices of $0.5594 and $0.5503.  After these sales, Paulson still owns over 11.61 million shares.

Per Google Finance, Trilogy Metals is "a Canada-based metals exploration company. The Company is engaged in exploring and developing the Ambler mining district located in northwestern Alaska. The Company's segments are Alaska, USA; Antioquia, Colombia, and Corporate and other. The Company focuses on the Arctic deposit, which is a volcanogenic massive sulfide deposit located approximately 470 kilometers northwest of the City of Fairbanks, Alaska. The Company's Arctic deposit focuses on engineering and environmental site investigation studies. The Company's Bornite deposit is a carbonate-hosted copper deposit located approximately 25 Kilometers southwest of the Company’s Arctic project. The Company's Bornite deposit focuses on exploration, with mineralization and opens to the north, northeast and south."


Second, Paulson & Co also filed another Form 4 regarding its stake in Synergy Pharmaceuticals (SGYP).  On September 27th and 28th, Paulson sold 54,300 shares in total at prices of $5.7458 and $5.6041.  After these transactions, Paulson still owned 24.22 million shares.  We've highlighted how Paulson has been selling SGYP shares recently.

Per Google Finance, Synergy Pharmaceuticals is "a biopharmaceutical company focused on the development and commercialization of gastrointestinal (GI) therapies. The Company's GI platform includes two lead product candidates: plecanatide and dolcanatide. It is engaged in the discovery, research and development involving uroguanylin analogs for the treatment of functional GI disorders and inflammatory bowel disease. Plecanatide is the Company's uroguanylin analog being evaluated for use as a once-daily tablet for two functional GI disorders, chronic idiopathic constipation (CIC) and irritable bowel syndrome with constipation (IBS-C). Plecanatide is a 16-amino acid peptide that is structurally identical to uroguanylin with the exception of a single amino acid change. Dolcanatide is also its uroguanylin analog being explored for inflammatory bowel disease (IBD). Dolcanatide is designed to be an analog of uroguanylin with resistance to standard digestive breakdown by proteases in the intestine."