Notes from the Ira Sohn Conference, Spring 2013
- Joshua M Brown
- May 8th, 2013
I’m up in the far back balcony of Avery Fisher Hall at Lincoln Center. It’s a who’s who of establishment Wall Street and the hedge fund complex, but I am with the media
The format this year is that every speaker gets 15 minutes, which I love. The pacing is Twitter-esque and probably designed to avoid another three-hour Bill Ackman marathon of 300+ slides.
Before I say anything else, I want to link to the Ira Sohn Foundation’s site. The managers who appear today to talk about their investing ideas are doing so to raise money for research into treating and defeating pediatric cancer. The work this foundation does is important and deserves our support and attention.
I’m here for the afternoon presentations. I’ll be missing Greenblatt, Einhorn and Gundlach tonight but will link to the best coverage later.
With no further ado, my notes:
Paul Singer (Elliott Management)
Paul’s trades cannot be replicated – he primarily buys the non-performing debt of foreign governments and then sues them in world courts for years until they cry uncle and pay. So his opening remarks contain nothing actionable other than a diatribe against QE and the Fed.
He is not ranting, but genuinely concerned and the crowd is sobered.
Kyle Bass (Hayman Capital)
“The majority of what we do at our firm is event driven – the ‘macro’ is the event right now.”
Kyle doesn’t want to rehash his bear case for Japan, he wants to talk about an idea involving the debt of just-emerging-from-bankrupcy company comprised of Dex One and Super Pages. He thinks the bank debt is undervalued and will be refi’d shortly. But the equity is more interesting. The equity stub is SPMD or DXM (I think). I have no idea what this is about, a tiny bankrupt company that hired new salespeople? Bass has 9.9% of the equity stub ($140 million worth) as his investment.
Okay, now he wants to talk Japan. His firm has developed an index to test the acuity of the situation – puts up a slide showing 10 Japanese finance ministers in the last five years, five in the last three years, crowd laughs. ”Japan starts with the answer as far as what they want to do, then backfills to get there, like China’s economy does.” (His “index” slide is here)
“You have to be shitting me,” Bass says about Japanese bond issuance, “they’re adding a ponzi scheme to a ponzi scheme.”
Japan is on tilt, completely insolvent and their policy is now more than twice as aggressive as ours 70% of the amounts that the Fed is using in an economy that is a third of the size).
He points to some anecdotal evidence where counterparties with Japanese debt issuers are starting to rethink their forward assumptions. He says as these episodes start piling up. ”This is the end of the beginning.”
Next up, Li Lu of Himalaya Capital (founded 1997) who once managed money for Charlie Munger. Li Lu wants to talk about South Korea, many preferred stocks there are trading at 40% to 88% discounts to what they’re worth.
It’s a very non-linear discussion, difficult to follow. He seems to prefer the preferred securities to the common shares of many companies. Much discussion about the legal rights of preferred shareholders in the event of changes in control.
Keith Meister, founder, managing partner and CIO of Corvex (begun 2010), formerly of Icahn Enterprises. He is introduced as a rising star. Keith introduces himself as a value oriented investor, focused on investing in good companies going through positive changes. He wants to be involved in these changes.
Likes pipelines, cell towers, alternative carriers (infrastructure assets). Also prefers secular growth stories and companies that can capitalize on the spread between debt funding and cost of equity. re: low rates, “This is not going to last forever, we want to take advantage of it now.”
Alternative carrier space, facilites – the growth of mobile data is “up and to the right.”
“Carl taught me to keep things simple.”
Likes TW Telecom – TWTC – (will be bought) and Level 3 – LVLT – (will end up as a winner). TW Telecom is a predictable story with low risk returns. Level 3 is a high risk security with a high beta. Both have great assets.
His thesis is that TWTC is taking share, have balance sheet “optionality” – meaning buybacks and dividends. Consistent and undervalued ongoing business. For 34 quarters they’ve grown revenue, churn is less than 1%.
On LVLT, he thinks net operating losses and refinancing are key to the story. Low expectations for the company like Sprint.
Alternative carriers have data and enterprise growth that multiples do not reflect. Returns on invested capital are growing rapidly. “These are network businesses.”
There are no shortage of potential acquirers for these companies, from strategics to PE. Synergies are obvious (historically the synergy savings are like 22% for this industry).
Meister says he is not telling TWTC to sell itself, he is saying they should use the balance sheet to return capital to shareholders and sell itself in the future at the right time. “We are happy to wait.”
On LVLT, his target is 34 (24 now), he sees the risk-reward as being asymmetrical now that the balance sheet is no longer a question mark.
Okay, here’s William Ackman of Pershing Square.
He wants to talk about Procter & Gamble today. “One of the great businesses in the world.” 25 “Billion dollar brands”, they’re the number one player in almost all their businesses. Ackman mentions that Pershing Square is a top ten holder of the stock. “It’s a culture of winning” around the world.
(editor’s note: The normally “brash” Ackman is extremely subdued in his speaking manner. Combined with his inoffensive stock idea, one gets the impression that he is looking to avoid attention and wants this to be controversy-free.)
Ackman thinks an improvement in manufacturing efficiency is an opportunity for the company to unlock value. He mentions a $10 billion cost reduction plan already underway. He thinks P&G should be earning more like $6 (as opposed to current $4 per share) and says 5% organic growth rate is achievable.
There is much discussion about SG&A ratios. People are looking around, they’re not accustomed to this from Bill.
He reveals that he has spoken with senior leadership and the board of the company. He’d like more clear plans for succession, more aggressive share repurchase and a shake-up of management. He notes that CEO Bob MacDonald is currently serving on 21 boards in addition to Procter’s.
Also notes that Procter’s growth lags its peers in growth rate. Ackman believes that the CEO has a couple of quarters to prove that he can drive top-line growth, global market share, improvement in margins.
“If we’re right, the company should earn $6 a share and trade at a 20X multiple, gets it to $125 per share. Including dividends that gets you a 60% return from here.”
Stanley Druckenmiller is the first speaker after the intermission. Druckenmiller is a legend, had managed $22 billion for George Soros at the Quantum Fund back in the day. He also founded Duquesne Capital Management until his retirement in 2010.
“The Commodities Conundrum”
“The standard talking head on CNBC says they like the market long-term but think there’s a correction short-term. My view is I like the market short-term and I hate it long-term.” He hates QE2 and everything after it. “Gun to my head, I’d guess melt-up rather than melt-down. No correction until a change in Fed policy.
He is, however, in favor of what Japan is doing given the bear market for 22 years and decades of deflation. He believes it to be much more appropriate than what Bernanke is doing. “Mr. Kuroda will not waver, will increase the juice if he’s not getting results.” Japan is just getting warmed up, “You’re going to get an 18 month run out of this, beginning of a new secular bull market.”
Commodities – Druckenmiller sees a potential problem here reminiscent of 2005 – 2008. He is worrying about Chinese social financing speeding ahead as GDP growth collapses, reminds him of subprime.
He thinks Chinese demand dropping leaves commodities highly vulnerable. The Chinese stimulus of $4 trillion in 2008 will haunt us. Commodity producers went crazy with ramping up production capacity in Australia, Brazil, etc.
He believes that Australia and Canada are in big trouble. 2011 and 2012 were not abberational, 2002-2011 were. Technology gains me lower prices for commodities.
His best idea is Japanese domestic companies that benefit from reflation, not Japanese exporters that are China dependent. He loves Google – “at 16 times earnings it’s a steal, and no China exposure.” – Huge laugh from the crowd.
Stanley was awesome.
Mitchell Julis, co-manager of Canyon Partners in Los Angeles.
Mitchell Julius likes Clear Channel Outdoor, which trades as a stub under ticker CCO. It is a depressed multiple. He walks us through an interesting explanation of Warren Buffett’s genius is setting up the insurance structure to align his investing habits with his cash funding. He notes that many hedge funds are trying to do the same now.
Steven Eisman, founder and PM of Emrys Partners, has been managing money for two decades, formerly of FrontPoint.
He is bullish on US real estate and thinks Canadian banks and real estate are in big trouble.
In the US homebuilders are still cheap, also likes land-rich companies, mortgage servicers. Buys: American Woodmark, Colony Financial. Lennar, Pulte Homes, Standard Pacific, Forestar Group and Ocwen Financial which he believes to be mispriced. “Ocwen is the single most powerful play on US housing and the most misunderstood.”
Eisman shows how dangerous the Canadian banks are. Says the Canadian version of Fannie Mae has been a catalyst for risk-taking by the banks. He says banks are simply not prepared for a down cycle in housing.
Short idea: Home Capital Group (HCG), a monoline real estate lender which trades in Canada. “It trades at two times book value, if housing rolls over, this company is going to have serious problems.”
David Stemerman of Conatus Capital Management, a global long-short equity manager. Formerly worked at Lone Pine under Stephen Mandel. The fund is a “Cub of a Tiger Cub” (trained by Julian Robertson). This is David’s first appearance at Sohn.
He is shorting South Africa, a boom on the verge of a bust. He says he’s found that half of the frontline lending employees in South African banks are in their jobs for less than one year. Huge parallels between what happened here with exotic loans and subprime.
he also believes that lending fraud is widespread. Borrowers are falsifying their income and lenders are playing along.
The cycle is now turning, retailers are the canaries in the coal mine. Loan receivables at big SA retailers are shooting up. Mainstream lenders are starting to pull back, large banks are restricting new credit.
Short idea: African Bank. Big lender of unsecured credit, lending has grown at compound annual growth rate of 30%, now has 27% of market share.
That’s it for me, headed to Times Square for Fast Money at 5. Will link to the best coverage I can find from the speakers I’ve missed below.
Links from around the web with the latest:
Billionaire investors take aim at Fed’s policies at Sohn event (Reuters)
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.