I ventured to NY last week, to partake in the Ira Sohn Conference. Put on by my old boss Dan Nir and his colleague Doug Hirsch, its a great buyside event with a dozen or so top quality hedge fund presenters. Carl Icahn, David Einhorn and a dozen other moguls presented, including Marc Faber who is always one of my favorites too. The format is that these normally secretive hedge fund gazillionaires discuss their favorite stock idea, all for a great kids charity. The event has become so big, that within seconds of a hedge fund presentor identifying which stock he likes, it immediately pops in the open market. So, read this. These ideas cost $4,000 a ticket.
Erez Kalir, Sabretooth
Very smart speaker, Kalir discussed the macroeconomic environment in the US under the heading "Economic Death." It was a nice way to jump start things. His focus was how investors tended to overestimate, or underestimate probabilities of binary events. Ie, the market is currently underestimating the chance of US financial death, by which he means default, or defacto default via hyperinflation. In 2002, Argentina defaulted on $132BB in bonds, at the time the largest in history. The dollar peg was removed, investors got scorched not only in the bonds, but also in Argentine stocks because of the currency devaluation.
However, today Argentina is still "widely hated" and "uninvestable." That makes it attractive, as default is unlikely to re-occur, and its in the early stages of a land grab, improved infrastructure and energy deregulation. He specifically likes Argentine E&P companies, as energy deregulation likely will drive oil & gas prices back to market levels. His top idea here was YPF SA (YPF), also mentioning CWV CN, BOE CN, MVN CN, RPT CN.
As for the US, he says that the US fiscal situation is heading "toward an accident." Gold can be confiscated, even internationally owned gold, which happened in 1961. He recommended not shorting treasuries either, however. History suggests that the best assets to own in a financial system meltdown is farmland. Namely, INTERNATIONAL farmland. Good luck buying acreage in Tuscany was all I could think. Stocks with pricing power also could provide inflation protection, which clearly the Fed is indicating it intends to create.
Finally, he also recommended buying MBIA, which is another name "left for dead." Its humongous legacy structure product liabilities have been separated legally from the remaining business (which challenges will fail he believes). That means its remaining muni guarantee business is undervalued; its trading 1/3 of book today. This was a huge hedge fund short throughout the crisis in 2007-2009. Ticker is MBI, personally I would be careful owning this, its a total spec. I loved the YPF idea though.
Dinaker Singh, TPG-Axon Capital
Dinaker Singh recommended 3 stocks:
ORKLA, a Norwegian holding company with solar assets, aluminum assets, and cash & investments. Stock trades in Oslo, around 50 Kroner per share, and is worth 65-79 a share he believes. With anticipated special dividends on the way, and high likelihood of it splitting into several pieces, he believes you could realize this value soon. Without any restructuring however, you are still holding a nice stock with a >5% dividend yield, at 9-10x earnings, indicating that the downside is low.
Zhongpin, US ticker HOGS. This Chinese pork processing company has underperformed the market by 15-30% in the last 6 months. Asia has been de-rated (ie multiple compression), inflation has hurt earnings, and there are fears that the Chinese government will not let Zhongpin raise prices to offset higher input costs. However, it trades at 7-8x forward earnings, they continue to gain market share, and he expects earnings to grow by 50% by 2013, to $3.00 a share. At $15, he thinks it could be a double.
Sprint Nextel, ticker S. Also a recent name purchased by David Einhorn, Singh believes that the tide is finally turning for Sprint. Churn, net subscriber adds, customer service, ARPU, are all finally trending in the right direction. The merger of AT&T and T-Mobile is a good thing for the industry. His research shows that fewer players in an industry equates to better margins. Sprint needs to spend $2BB to consolidate its Nextel legacy network, but in a couple years he thinks the stock could be worth $8 to $13 a share. Today its at $5.75. My take: a long term play, wait for a better entry point, chart is extended.
Jeff Aronson, Centerbridge
Formerly the head of distressed at Angelo Gordon, Jeff pitched CIT Corp. A name that I consider a somewhat old distressed name, its still owned by a pile of hedge funds, and is somewhat a hedge fund hotel. That said, he gave a compelling pitch. He listed its various finance businesses (aircraft, office equipment, factory equipment, etc), and suggested that real book value needs to be adjusted from its stated $45/share value. Accounting adjustments and deferred tax assets on top of its stated book gets you $59/share. With the stock at $41 today, its trading at a mere 0.7x book.
Further, it has a 2010 asset yield of 8.0%, vs banks asset yields of 4.6%. Its cost of funds is very high, at 7.2%. That means its only earning 0.8% (80bps) in spread. Commercial banks have a cost of funds of 1.0%, implying that there is massive synergy to CIT either acquiring commercial deposits via a bank acquisition, or similarly huge synergy for a bank to buy CIT. Its tier one capital ratio is also very high at 20%, better than the bank average of 12% today.
While Aronson thinks EPS standalone will be $1.76 in 2012, (making the stock look expensive), a CIT merger with a commercial bank could equate to a combined $5.83 in EPS. Hypothetically speaking. Net net, CIT at $41 today could be worth $58-65 a share. My take: expensive on current earnings which clearly are impossible to predict, book value adjustments that I question, but sure lots of upside if they get bought.
Bob Howard, head of KKR Equity Strategies Group
Howard liked 2 stocks:
Wabco, ticker WBC. Wabco is a $4.5BB market cap auto supplier, including electronic and mechanical components. WBC invented anti-lock brakes. The stock has been penalized for potential litigation overhangs, which now are behind them. While the market feared a $1BB fine, it turned out to be $400mm, which they reserved for in Q4 2010. 60% of revenue in western Europe also scares investors, however he noted that 1/2 of this is Germany, and the other half is exported outside of Europe.
With the stock at $67 today, Howard believed it should be worth $100 a share today. 40% of the business is cyclical, 40% a secular growth story. Using appropriate multiples for each, he finds that the stock trades on par with industry peers, but is a far better company. ROE's are top notch at 22%, EPS has grown 38% in the last 5 years, and finally the CEO owns $200mm of stock. I liked this one.
HSNI, Home Shopping Network. 32% owned by Liberty Interactive, HSNI competes against QVC in home shopping. Its a $1.8BB market cap company, with debt of 1.2x EBITDA. At $32/share, its important to note that 1/3 of HSN sales are online, the company has only 1% retail market share, and sales are up 6% CAGR since 1994. At 5.7x EBITDA, it's worth 7.0x, in line with comps. Its ROE is huge at 29%, and you can buy it for only a 12.0x P/E multiple on 2012 numbers. Other retailers generate 15-17% ROEs. Since Liberty also owns QVC, there is merger potential here. I liked this pitch, but stock jumped to $35 in 3 days of trading since.
Phil Falcone, Harbinger
The famously successful, then famously unsuccessful hedge fund investor pitched his biggest investment, LightSquared. Which isn't even public. He believes their spectrum is worth a fortune, despite the fact that he needs some $5 or 10 BB in additional capital to deploy the network. He insists it's a terrestrial network, not a satellite network.
Phil also pitched Crosstex, XTXI. A classic distressed guy, he outlined the legal structure, showed how you were buying 100% of 3 different assets, including the GP of XTEX as well as LP units in XTEX. XTEX owns natgas pipelines and processing facilities. The GP entitles you to incentive distribution rights, or IDRs. Any hedge fund employee knows the value and leverage that IDR's provide you. Given the XTEX stock that XTXI owns, and its GP structure of XTEX, a 30% increase in dividends at XTEX imply a 90% increase in dividends at XTXI. With XTEX organically growing 10-15%, net net XTXI could be an $18-20 stock in a couple years, from $9.50 today.
Note that XTEX (and XTXI) is essentially a long oil/short gas trades. As a processor, XTEX makes money buying natgas, then processing and selling a spread of that in the form of NGLs and gas. Natgas volume is also very important. So, make sure you know which way both oil and gas are going. (hopefully, oil up, gas down.). Stock has spiked to $11.30 since last week.
Jim Chanos, Kynikos
Chanos is perhaps the best known shortseller out there, famously calling Enron a short back in 2001. His theme was the overvaluation of green energy stocks, titled "Solar + Wind = Hot Air". Solar and wind energy are highly unreliable, need backup, and pose major grid issues. They could never be a sub for baseload power. Both require huge subsidies to work, they are not efficient, with wind 50% more expensive than natgas, and solar 4x more expensive.
2010 wind installations were down 40% vs 2009, while at the same time competition is heating up with new Chinese entrants. Particularly, he likes shorting Vestas (VWS DC). Business is down, 3000 layoffs were recently announced, it changed its accounting recently, pulling forward revenue and deferring costs, and it lost 600mm Euros in FCF.
First Solar (FSLR) was his favorite short here. Spain in 2008 represented 40% of total solar demand worldwide, Germany was 50% in 2009, and Italy was 25% in 2010. [unsaid was how unstable govt subsidized demand would be in these countries]. Demand will likely decline while competition increases. FSLR also uses thin film technology, which is inferior to poly technology. They will be negative FCF in 2011, spending more and more capex to generate less and less earnings. The balance sheet is deteriorating, they pay no taxes, management is selling stock, and the former CEO sold 75% of his shares. The new CEO and CFO are inexperienced in solar.
Michael Price, MFP Investments
The famous value investor introduced a contest winner. Before the winner presented his stock however, Price mentioned that GS and C and BAC are all trading below tangible book, at low multiples, and reminds him of the environment in 1991, when financials were beaten up back then and trading cheaply. He also threw out ITT, JCP, and Becton Dickenson (BDX). All good stocks to own in the face of a weak dollar. Goldman, GS, he suggested was worth $100 more than today ($135 now). "Tremendous businesses, honest people, a good value."
Then Sunjay Gorawara, a student at the U of Indiana, presented Bridgepoint Education (BPI). GM's are 74%, revenue has been growing 30%, 31% of the stocks market cap is in cash, and it trades at 4.3x earnings. 58% of the earnings float is short the stock, despite its low valuation. Education stocks were presented as a short last year by Steve Eisman (Apollo, Strayer, et al). Perhaps its time to get long?
Steve Feinberg, Cerberus
Perhaps a guy I have admired more than anyone in the last 10 years, I was honestly disappointed by his presentation. Lacking slides, a coherent presentation, or anything interesting to say about the world at all, Steve discussed in a rambling way why he liked non-agency mortgage bonds. I swear at one point he said, "Loan size is now more important than it used to be. Large balance pools are performing better than smaller sized pools of mortgages." or "Regional differences are important to loan pools." Awesome. Next.
Peter May, Trian Fund Management
Peter made a compelling pitch why retail analysts in the US inappropriately value Tiffany's. TIF should be likened to global luxury conglomerate brands, not department retailer in the US. Margins are higher, growth is continuing via 1) new stores, 2) increases in same store sales, and 3) vertical integration like offering Tiffany brand watches to other retailers. They have 233 stores today, up from 167 stores five years ago. Its trading at 17.5x 2012 EPS, and international growth will continue to drive earnings growth. One acquisition was for over 30x earnings (I think it was Bulgari).
The day after the conference, TIF reported earnings, which were fantastic, and the stock was up $6, to $76 per share. Guess I should have bought some during his pitch.
Steve Eisman, Frontpoint Partners
Eisman was one of the guys profiled in Michael Lewis' The Big Short. A very astute financials analyst, Eisman discussed financials and banks in the US. He outlined why the bullish case on banks was likely not to work out by 2012. That is, Fed Funds will likely stay low, pressuring net interest margins (NIM). Credit quality is perhaps improving some, but loan growth is nil. Without topline growth, there is little reason to buy the banks.
So, Eisman outlined why he likes the P&C sector, particularly on the commercial side. Trading at similar multiples to book value and P/E as banks, insurers aren't burdened with residential mortgages on their balance sheets. Most importantly, he likes property & casualty stocks because the soft pricing environment is about to end. Tragedies in New Zealand, Japan, the US (tornadoes), have created lots of losses this year (85BB), that insurers now need to compensate for. He expects prices to be up 5-10% for 2011, and this "hard" pricing environment to last for some time. Stocks to buy: ACE, ARCH, AXS, ENH, MRH, PRE, PTP, RE, RNR, XL. These trade at 9.3x 2012 EPS on average. Brokers to buy: AON, MMC, WSH.
Jeff Gundlach, Double Line
Jeff is a well known fixed income mutual fund manager, sometimes likened as a young Bill Gross. His sordid breakup from TCW has hurt his reputation and ability to raise capital, but he's not lacking smarts. He discussed the bleakness of our macro environment, particularly the US' Debt/GDP ratio at 353%. He described our fiscal policy as one of "hope and pray", suggesting that we are doomed even if we somehow froze gov't spending and grew GDP at 6% a year for 10 years. Housing also he was bearish on, suggesting supply is very high, as is home ownership rates. He does not like gold, preferring instead gems, which you can fit $25mm of gems in your shoe and still wear it. Gold & silver present storage difficulties, but perhaps only if you have $25mm of it worry about.
His fund, DLTNX, hasn't been around very long, but I think its worth a buy. Especially vs Pimco's Total Return Fund, which is 250BB. Double Line is running a "mere" 7BB, far easier to generate better returns.
Marc Faber, Gloom Boom & Doom
Faber as usual railed against the Fed. His basic thesis was that Federal Reserve monetary policy creates frequent and unintended consequences. Excess credit from the Fed = bubbles. At our current level of Debt/GDP, the US will be able to do nothing except "print and print and print" dollars. Their monetary philosophy is strangely that they cannot identify bubbles, ignoring them at our peril. Commodity prices tend to go ballistic in easy credit regimes, he also defended gold as something that is more likely to be used to pay for goods than gems.
Bill Ackman, Pershing Square
Gave a very concise, quick pitch on FDO, Family Dollar. A $54 stock, he sees 35-70% upside, primarily from improving operations and margins to make it comparable to Dollar General, a KKR owned competitor. For years, both DG and FDO operated at similar margins, similar top line growth rates. After KKR took over DG in July 2007, it began to outperform. Global sourcing of product, providing more private label goods (which are higher margin) would close the gap. EBIT margins at FDO are 7.6% v 10.5% at Dollar General. A buyer could pay $75+ for the stock, and upside could be as high as $95 a share from $54 today.
Mark Hart, Corriente Advisors
Perhaps the most eye-opening presentation of the day, Hart detailed why China is a credit fueled bubble that is very likely to pop. He noted several misconceptions about China: 1) it is not an economic miracle as most believe. Huge increases in Money Supply M2 have fueled credit growth that is unsustainable. M2 there is greater than the M2 of the US, despite the fact that the economy is only 40% as big as the US. Lending has increased by 70% since 2008 alone, and now is 125% of GDP. On top of that, NPL (non-performing loans) are reportedly DOWN since then. Not likely.
Also, look at prior Asian bubbles that blew up, notably Korea, Thailand and Malaysia. These countries' Fixed Asset Investments (FAI) as a % of GDP peaked between 40-45% leading up their busts in 1998. China today is spending 60% of GDP on infrastructure, or FAI. Local government borrowing is also out of control. Only 65% of local spending is affordable with cash inflows, the rest comes from asset sales.
Misconception #2: China's foreign currency reserves are savings. Truth is, there are corresponding liabilities. M2 = 12 TT (liabilities). Compare that to their FX reserves, and the ratio is only 25%. This ratio was 28% in prior Asian crises.
Misconception #3: The yuan will continue to appreciate. Hart believes that devaluation is actually the path of least resistance here. The only bull case for the yuan is capital flows into the country. But as soon as the bubble of infrastructure spending stops, these capital flows will also stop. The exit will lead to outflows and the yuan devaluing.
Trade: Buy 1 year at the money puts on RMB (yuan). Cost is 25bps, upside could be 100x your capital.
David Einhorn, Greenlight Capital
Always the best presenter, Einhorn outlined the bull case for Delta Lloyd, DL NA. Its a Dutch insurer trading at 15.50 Euro / Share with a 2.6BB market cap. Its trading at 6x EPS, with a 6% dividend yield. Its a life and pension company, 80% invested in Fixed Income, 20% equities. Its highly levered to the economy, and a 1% move in stocks equates to 20c in EPS. While TTM EPS is 3.75 (6x P/E), likely they'll do 2.25 EPS in 2010, as market returns decline.
Einhorn then revisited his pitch on Microsoft, MSFT. Five years ago he pitched MSFT at around $25/share, when the stock was doing $1.25 in EPS. Today, its doubled its EPS to $2.50, but the stock is flat. That is, P/E ratio has fallen from 15.6x to 7.3x. He outlined the misses that the company has suffered: social media, search, tablets, phone operating systems, application hosting, etc etc. Its success in office and enterprise software is overcome by its "miserable capital allocation plan." Case in point, trying to buy Yahoo! for $30+ a share. Only managers crazier than MSFT kept them from doing a terrible deal.
Then Einhorn began to systematically take apart Steve Ballmer. He compared him to Charlie Brown trying to kick a field goal with Lucy holding the football. He showed quotes of Ballmer back in 2008 saying things like, "Am I worried about the iPhone? No, maybe they'll get 2% or 3% market share." He listed all of the top senior managers who have left Microsoft under his Windows/Office only culture. Finally, he suggested change is needed, "someone else needs a turn at Quarterback." Great speech, I personally have tried to own MSFT, and not really made money. The cheap get cheaper, but at some point, there is a bottom.
Carl Icahn, Icahn Partners
I left just as Carl began to speak. He always rambles about how he shakes up boards, how his activism enhances shareholder value. He supposedly pitched his own stock, IEP after detailing why he gave back his investors money. The reason? He didnt want to be responsible for the losses that are likely in the market in a year or two. A stellar ending!
