Notes from the Ira Sohn Conference, 2014
- Joshua M Brown
- May 5th, 2014
I’m here at the 19th annual Ira Sohn conference at Avery Fisher Hall in Lincoln Center. I’ll be covering the afternoon and evening sessions here, including presentations from the following speakers:
2:05: Larry Robbins
2:20: Zach Schreiber
2:50: James Grant
3:05: William Ackman
4:10: Paul Tudor Jones
4:40: Mariko Gordon
4:55: David Einhorn
In the interest of brevity, I’ll leave out the slides but will link to full slide presentations where they pop up online if possible.
Larry Robbins is the Founder, Portfolio Manager and CEO of Glenview Capital Management, a $7.5B hedge fund in its 14th year of operation. He crushed it in 2013 with a healthcare theme that allowed him to own all the beneficiaries of Obamacare – from hospitals to insurance plays.
Does not believe the environment for investors has materially changed in 2014 from the 2013 playbook. The one change is that now you need companies to do the heavy lifting for outsized gains versus the entire market. As we get into a” lift-up” market – where corporations need to lift themselves up, you need to go beyond the popular stocks.
Managed care and HMOs. The pain is in the rear view mirror and the sunny days are in the front windshield. All of the headwinds now turning to neutral or even tailwinds. Wave of new management – fresh blood at the top of the industry.
Humana – a Medicare advantage company. Private version of Medicare. “There’s an alarming outbreak of old people in America now, I’m not sure if you’ve noticed this.” Has been able to withstand pricing decreases. In 2016 and beyond there will be pricing growth. Profits have been flat for four years, now they’ll start to lift. Earn’s more than $10 bucks next year, $13 beyond depending on what strategic moves they make.
WellPoint – traditional managed care play. Big options for strategic value unlock as well. Plenty of room to lever up the balance sheet just like Humana.
Monsanto – has a $1 billion investment in Monsanto. “We simply cannot solve world hunger on an organic basis.” GMOs here to stay, it’s our only option to feed the world. 19x this year’s earnings, 15x next year’s. Within seed & trade business – 90% market share – “Oligopoly”. Earnings grow 15%. New products in the pipeline that will come to market and add meaningful earnings. Intacta – a LatAm soy product is one example, “like a biotech.”
Has suggested to Monsanto to leverage its billion dollars in cash similar to other specialty chemical companies to grow faster. Earnings per share growth could go from 15% up to as high as 30%.
Monsanto has an ability to do precision farming – a business that does nothing today, could generate as much as $24 in earnings per share over the next ten years (off a base of $6 in earnings currently).
Zach Schreiber is the founder and PM at PointState Capital LP, but he’s known for having worked under Stanley Druckenmiller at Duquesne for six years.
Druckenmiller comes out to introduce Zach. Schreiber wants to be net short crude oil, “It’s going lower, much lower.” He wants to play advantaged refiner stocks for upside.
“US crude is being drilled for by the same cast of characters who oversupplied the natural gas market. Ladies and gentlemen, the song remains the same.” Crude is demand-capped at the Gulf Coast because policy forbids it being shipped for export as a raw commodity.
$33 billion net long WTI crude. “If you’re long, I’m sorry for you.” Then he shows a clown car slide! He sees a boom in inventory in the second half of this year. “What’s your risk reward? With crude at $100 a barrel, you’re picking up 25 cents in front of an oncoming truck.”
Believes that crude is saturating demand and there’s nowhere to put all the oil. “These barrels have nowhere else to go.” Imports present a similar problem – Saudi Arabia and Kuwait continues to sell to us because they must.
Does not believe Washington will act to allow wholesale lifting of the crude export ban this year. Gulf Coast refiners are also tapped out on capacity – they’re running at 98%.
He doesn’t see production will slow meaningfully until we’re below 80-85 bucks a barrel.
Substantially lower crude prices are the only answer to the puzzle.
He likes the refiners who benefit from a wider spread between WTI and Brent, which is going to be substantially bigger and more durable than the markets foresee. He likes Valero and Marathon. He sees a cashflow windfall that’s coming right back to shareholders.
“Crude strength has led to complacency, and complacency is a killer. The oversupply of North American crude has yet to be felt.” He leaves us with a classic quote from Rudiger Dornbusch: “In economics, crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”
James Grant needs no introduction, but here’s one anyway – he’s a financial journalist and historian and the founder and editor of Grant’s Interest Rate Observer, one of the most widely read economics and market newsletters in the world. He’s been doing this for forty years.
“Successful investing is about having people agree with you…later” – a quote from Joe Robillard.
He’s bullish on Russian oil giant Gazprom. He thinks we’re at maximum pessimism and there are all kinds of reasons not to invest. It’s been spectacularly mismanaged. Russian state owns 50% of shares – which means capital allocation and governance are awful.
The bear case is very obvious. “If it’s obvious, it’s obviously wrong, the traders say.”
“Good things happen to cheap stocks.”
Gazprom trades at 2.6X trailing net income – that is after taxes, and also, after stealing. LOL
Gazprom trades and a dollar and change per barrel, vs Exxon Mobil at $17 per barrel.
“As recently as 2006, Gazprom changed hands at 10X earnings. If it traded at half that multiple again, you would double your money.”
“What could go right? I don’t know.” Crowd loves it.
William Ackman from Pershing Square, I’ll assume that will suffice for most readers. Ackman’s one of the speakers I was most excited to hear from today.
He kicks it off with a pitch for Fannie Mae at four bucks. “First, a quick history lesson…” You can see eyelids drooping around the auditorium. He says the 30-year fixed-rate mortgage didn’t and wouldn’t exist without Fannie.
He likes the core business – “It’s like owning a royalty interest on the US housing market.” He likes the low liquidity risk. Very diversified, not exposed to regional housing downturns and national downturns are very rare. He also thinks it’s got a counter-cyclical quality. When recession hits, rates come down and Fannie starts writing new business at lower loan-to-value rates. The quality of their portfolio improves as they write loans in bad markets.
Both Fannie and Freddie back to profitability, the FHFA has forced them to raise prices, which is a good thing. So too is the decline in loan loss reserves, which become profits.
He doesn’t think there’s a replacement for the two agencies. No one has the will or the capital to replace them. Standalone mortgage insurers don’t have enough capital, low likelihood that a new company can raise the required capital. Explains why the business tends toward “oligopolistic” behavior.
Ackman says taxpayers will make a lot of money based on his proposal for re-capitalizing. “No one wants to make a hedge fund manager money, but taxpayers own 79% of these companies.”
“Owning a royalty on every mortgage that’s written in America is a fantastic business.”
We get a post-Ackman break to vape an e-cig or whatever.
Paul Tudor Jones, legendary trader and hedge fund manager at Tudor Investments, runs almost $14 billion. This is actually his first appearance at Sohn.
He’s psyched to watch 24 tonight.
“Macro trading has probably been as difficult as I have ever seen it in my career.” He began almost forty years ago.
He’s using a manic depression analogy to describe a Monday morning going out and buying option premiums. After five days of option premium decay, that of course sets the tone for the weekend.” He’s depressed. He blames the behavior of the central banks over the last three years. Highlights the lack of discount rate changes – “about as boring as a Joe Biden speech.”
“We need a macro doctor to prescribe central bank viagra.”
He blames lack of interest rate volatility, globally, for the current environment. “I depend on price movement to make a living, and there is none.”
“The message to all bond bears is wait, until you see the whites of their eyes, before you sell fixed income.”
He says the first implied rate hike in US rates in July 2015, June 2016 for Europe. You wouldn’t want to be short bonds until 3 months before each. “We’re patiently waiting.”
He says Friday was a great day for macro trading – you had all the data you wanted for fixed income to get killed. And then bonds closed up at the end of the day. “Goes to show that in macro, what is obvious is obviously wrong.”
Sometime late summer, he sees British gilts (bonds) are a decent sale as the British rate hike cycle gets underway this winter. His overarching message is not to jump the gun, wait til just before rate hikes before getting short the bond markets of various countries.
Mariko Gordon is the Founder, CEO and CIO of Daruma Capital, and a new name for me…
She likes Electronics for Imaging ($EFII). “At the center of analog-to-digital printing.”
The market wants the ability to do mass-customization. Inkjet printing makes no contact with what it’s printing. The reason she’s so bullish is the razor – razorblade possibility. EFI is going to begin selling ink for their new acquisition this year, Gordon sees a huge jump in earnings.
She also liked HP Fuller ($FUL) – “a specialty adhesives company that’s been making things stick for over a hundred years.” She says the opportunity is a better push at efficiency and globalization. Also sees the company as beginning to realize how special it is, starting to “act less like a troop of spider monkeys and more like the 800 pound gorilla it is.” Company is refocused on innovation in the adhesives market, new specialty glue is vegetable-based, not based on any petroleum product. She thinks it gets to the 70′s from the 40′s where it is now.
She rushed through a pharma play in the last couple of minutes, missed the name.
David Einhorn, President of Greenlight Capital and my personal favorite, closes out the show.
“I’m the last speaker, I’m gonna go way over time, if you’re bored, go home.”
He’s going to talk about his Cool Kids stock shorts. He’ll only disclose one of his shorts to illustrate the the whole basket.
He wants to talk about athenahealth, which he says is a great company with a well-meaning CEO – but he believes it’s “caught up in a bubble” and while he’s not rooting against the company itself, he says its stock trades at the wrong price.
Athena missed organic revenue growth target for 2013, analysts have cut their estimates for 2014 and 2015. “As if fashionable with bubble stocks these days,” he tears into the stock-based compensation costs being removed from earnings calculations.
The company got a pass again for missing both top and bottom line estimates ahead of its analyst day.
David Einhorn believes that the CEO, Jonathan Bush – “yes, that Bush family” – is a promotional lunatic. Plays a video clip of the dopey guy talking about his company as if its Amazon, and “a cloud software play” and a social network for healthcare and it’s “like Amazon” etc. Every buzzword imaginable in one sentence, you almost can’t believe the clip is real (but it is).
Einhorn throws Cramer under the bus for good measure, playing a clip of him praising the company’s business model.
Then Einhorn takes Morgan Stanley’s analyst to task for using weird metrics to come up with the current valuation. The stock is down a quick nine bucks in the after-hours as Einhorn speaks.
“Jonathan Bush likes to compare Athena Health to Amazon because they both have websites.” Einhorn is like “Guy, you’re not a fusion of SaaS, mobile cloud and software. You’re a BPO (business process outsourcing) company.”
There’s a competitor called Epic that has a near-100% retention rate for cloud-based IT in hospitals. This is the business $ATHN is trying to get into.
Jonathan Bush clip is played in which he claims athenahealth is the “only national healthcare information backbone.”
“By adjusting implausible expectations, we think the stock is worth $50 – and that’s the bull case.” LOL because it’s at $120 a share right now.
The bear case is that athena not only fails to get into the new markets they’re bragging about, but they actually end up losing some of their key customers.
“We believe there are serious risks to the business that bullish investors are ignoring.” His bear case is that the stock is worth more like $14. Again, it’s $120!
Einhorn concludes with this important point: “The reason people like bubble stocks is because they are going up. But when they reverse, they become falling knives. The gap between a bubble price for these stocks and the price at which a growth investor will step in and pay for them is very large.”
And that’s a wrap from me, hope this was helpful and interesting for you. If you want any of the slide presentations from today’s speakers, visit Jacob’s site, ValueWalk.
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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.