Wednesday, November 7, 2012

Invest for Kids Conference 2012


Investors,

    I had the privilege of attending the “Invest for Kids 2012” conference today, where a dozen of the most talented hedge fund managers and financial analysts discussed their macro views and their favorite investments.  My thoughts in italics.

Frank Brosens of Taconic Capital Advisors
  Favorite Investment: GM.  Sales are up 40% over the last 2 years, with stock price stagnant.  With the election out of the way, the treasury will now sell their 32% stake, at which point management will pay out $20 billion of stale cash to shareholders.  Fantastic new management recently took the reigns.  Next year is the peak of the "refresh" cycle with many new products coming to market, which boosts sales and margins.  And, they're introducing many new trucks, which are particularly high margin.  There's general pent up demand for autos, with the average car age now at 11 years, vs 9 in 2008.  Even with valuation at current low levels, the stock price could rise 200% based purely on growing revenues, higher margins, and better cash allocation.
   Last year Marc Lasry pitched GM at the Invest for Kids conference; I was interested but skeptical and didn't pull the trigger.  Now I'm convinced.  I like the near-term catalysts and GM's sales in the last year are very supportive of a higher valuation.

Nelson Peltz of Trian Fund
  Focus on the income statement - if you find $1 on the balance sheet, it's worth $1, but that same $1 on the income statement is recurring so it's worth $10+.  
  Favorite Investment: Danone.  Food companies are currently trading at a 15% premium to the S&P 500 instead of their traditional 30%.  Danone is a health and wellness food company with most of its revenue from yogurt, water, and infant nutrition.  50% of revenue from emerging markets.  Free cash flow yield of 7%.  Trading at 9x forward looking.  Forecast 50% stock price appreciation over 2 years.  

Kyle Bass of Hayman Capital Management
   The US is monetizing our entire fiscal deficit every year.  Japan is monetizing 2/3 of theirs.  It's kind of a joke listening to central bankers talk monetary policy.  They're monetizing all the debt, plain and simple.
   Favorite Thesis:  Japan is on the brink of collapse.  We've passed the Rubicon. They sell more adult diapers than children's diapers.  The ultra rich are starting to pull their money out.  Starting to see net redemptions from Japanese pensions.  The currency will collapse.
   I fully believe in this thesis, but timing has always been the issue.  I think we've likely crossed the tipping point and collapse is likely any time now, but it's unlikely to take more than 3 years.

Ari Levy of Lakeview Investment Group
  Favorite short:  IOC interoil company is a fraud.  They've somehow gained an enterprise value of $3 billion through an incredible marketing effort, despite having basically nothing of value.  They own land in Papua New Guinea that probably does not produce meaningful oil or gas.  They routinely lie to investors about those assets.  6 companies have explored and given up on the exact same land.  
  This is a good short in theory, but the short interest is 23%.  That's a recipe for a short squeeze.
   
Steven Romick of First Pacific Advisors
  Real GDP growth has been collapsing for 40 years.  It was 5.5% in the 1940s, 3.5% in the 80s, and now it's 2%, and to get the shrinking growth, we're having to use more and more debt.  
   Favorite Pick:  Renault - cyclical exposure to unpopular Europe, but 50% of sales outside of western europe.  Buy Renault and sell Nissan and Volvo against it and you're getting a free stub.  Renault could sell off its assets and buy back all its stock and you'd be getting the core operating business for free.

Alex Klabin of Senator Investment Group
   Favorite pick: Rayonier.  It's a big timber player in the US and also makes high end fiber products.  They produce 35% of the global supply of certain fiber products; great margins.  Because of growth, the company will soon have to end their REIT structure for regulatory reasons, which will likely entail spinning off the fiber business.  The whole business is being priced as commodity timber with a low valuation, so spinoff should unlock value.  He expected EBITDA will go up 50% over 2 years.  Sees 30-60% stock upside over that time period.

Steve Mandel of Lone Pine Capital
  Favorite Pick:  Verisign (VRSN).  Registry operator.  Gets paid $8 per domain name.  6% annual growth in domain names.  They sign a contract with ICANN that gets confirmed by the department of commerce that dictates the prices they can charge.  Likely to continue being able to hike prices by 40% every 6 years.  Trading cheap given the certainty of cash flows.

Sam Zell, Real Estate Mogul
  Must be a contrarian, and the confidence to do that comes from finding deep value with bottom up analysis.  
   Current macro environment is terrible and uncertain.  Doesn't see value in equities or real estate.
  Volatility is underpriced.  Bet on black swan events.

Kelly Cardwell of Central Square Management
   Favorite Pick:  NXST - broadcaster pure play.  Being unfairly lumped together with newspapers.  They're a major content creator with good asset allocation.  They've cleaned up their balance sheet in the last 2 years and are prepared to make accretive acquisitions.

Jim Grant author of Grant's Interest Rate Observer
   Interest rates are cyclical, and despite the 31 year bull market, it won't last forever.  
   Favorite Picks:  Buy gold.  It's a moratorium on the market's faith in central bankers and fiat money.  Buy Metlife insurance equity.  Smart management (hedged against the falling interest rate yields), trading below tangible book value, powerful brand, diversified sales.

Cheers,
Ari