Practical analysis for investment professionals
04 October 2012

Value Investing Congress Recap: Einhorn, Ackman, and Mauldin’s “Trade of the Decade”

Posted In: Equity Investments

Professional investors gathered in New York City earlier this week to hear their peers, including Bill Ackman and David Einhorn, share long and short ideas at the 8th Annual New York Value Investing Congress. While most attendees were no doubt looking for an idea or two for their portfolios, Einhorn provided perhaps the best advice at the conference when he told listeners to exercise due diligence and not to follow recommendations blindly. “You have to do your homework and kick the tires,” he said.

With that caveat in mind here’s a brief recap of the presentations:

Guy Gottfried, Rational Investment Group

Gottfried pitched two small-cap Canadian asset plays. The first, ClubLink Enterprises (CLK), is an operator of golf clubs in Canada and the United States, and a tourism business in Alaska. Gottfried considers management, which owns about two-thirds of the company’s shares, to be savvy capital allocators who have a significant opportunity to expand their golf business in a distressed Florida market. The tourism business, he contends, is a highly profitable but hidden asset that investors are essentially getting for free.

Gottfried also recommended shares of Canam Group (CAM), a diversified manufacturer of construction products. The firm’s management has been opportunistic in deploying cash for acquisitions and share repurchases. The sale of non-core assets or a rebound in their slumping US operations could prove to be a catalyst for the shares.

Kian Ghazi, Hawkshaw Capital Management

Ghazi recommended shares of Layne Christensen (LAYN), a water well driller and mineral exploration company. With the shares trading at close to tangible book value, due primarily to concerns about its water segment’s municipal exposure, Ghazi expects to see margins rebound under a new CEO and sees strong downside support from the firm’s mineral exploration business.

Whitney Tilson, T2 Partners

Tilson, CEO of T2 Partners and a founder of the Value Investing Congress, is still bullish on Netflix (NFLX) after shorting it successfully last year. He considers the shares cheap at less than $100 per subscriber and, dismissing concerns about competition, sees the firm well-positioned to capitalize on strong industry growth and international expansion. Tilson compared Netflix favorably to Amazon (AMZN), noting that Netflix has a cleaner balance sheet and is considerably less capital intensive.

Tilson is a self-described disciple of Warren Buffett and a longtime holder of Berkshire Hathaway (BRKA). He provided an update on his Berkshire thesis, noting that the core operating businesses were going “gangbusters” and that the shares remained at least 24% below their intrinsic value. Addressing concerns about Buffett’s age, he pointed to Apple (AAPL) as an example of a company that can continue to perform well after the recognized leader was gone.

Tilson recently increased his stake in Howard Hughes Corporation (HHC) and summarized  his due diligence visits to four of its properties: Summerlin in Las Vegas, The Woodlands in Houston, Ward Centers in Honolulu, and South Street Seaport in New York. With the exception of Summerlin, Tilson estimates that these properties are being carried at well below fair value. A spin-off from General Growth Properties (GGP), HHC’s chairman is Pershing Square Capital Management’s Bill Ackman, and this is undoubtedly a drawing card for Tilson.

Zach Buckley, Buckley Capital Partners

Buckley has had past success shorting fraudulent companies in China, and his sights are now set on Splunk (SPLK), a data analytics software firm, but for reasons other than fraud. He sees fierce competition from industry giants like Oracle and Microsoft and, given the company’s undifferentiated product, Buckley expects it to get “squeezed between value and price.” Trading at over 28 times sales, he described Splunk as a “business model short with a valuation kicker.”

Barry Rosenstein, JANA Partners

Rosenstein, an activist investor, described his firm’s approach as “value and catalyst driven.” Rosenstein called on Agrium (AGU) to spin off its farming supply stores as a way to separate them from the firm’s wholesale business. According to Rosenstein, Agrium management has delivered poor returns on capital, and the stock has received a “conglomerate discount” with no benefits or synergies. With a spin-off of its retail operation, improved cost controls, and share repurchases, the company will see approximately $50 a share (or approximately 50%) upside in the shares, Rosenstein predicted. With amusement, he also noted that the same investment banking team from Morgan Stanley that is currently defending Agrium’s business model had previously argued against it on behalf of CF Industries.

Mick McGuire, Marcato Capital Management

McGuire focused on three real estate plays, noting that long-held land can be significantly undervalued on corporate balance sheets. Alexander & Baldwin (ALEX), a Hawaiian real estate firm, owns about 20% of the land in Maui and 15% of Kauai. A significant portion of their real estate holdings date back to the 1800s and are carried at original cost. According to McGuire, fair valuation of these holdings could add roughly 50% to ALEX’s share price.

GenCorp (GY) is an aerospace and defense company with a real estate segment that is the focus of McGuire’s attention. The company owns approximately 6,000 acres of land near Sacramento, California, which they will be developing.

McGuire’s final idea was Brookfield Residential Properties (BRP), a developer with significant land holdings, much of it held at very low carrying costs. With housing starts depressed, he sees opportunity for upside when the market rebounds.

John Mauldin, Millennium Wave Advisors

Mauldin is an economist whose newsletter, Thoughts from the Frontline, is widely read. His presentation was a departure from the steady stream of stock pitches from hedge fund managers. Mauldin spoke of the difference between risk and uncertainty. While risk represents the “known unknowns” and is something we think we can model and quantify, uncertainty is what former US Defense Secretary Donald Rumsfeld called the “unknown unknowns.” According to Mauldin, it is uncertainty that drives investors’ portfolios.

Turning to the current environment, he described Europe as a disaster and a depression there as a near certainty. And he sees political compromise as the only way to solve the problems facing the United States. As for long-term trends, he sees ends to both the “debt supercycle” and the secular bear market (in the next 3–5 years), and the rise of Asia and the diminishment of Europe. Mauldin expects energy, health care, and technology to be growth sectors. Closing with his “trade of the decade,” he recommended shorting the Japanese yen and going long on Japanese technology companies.

Bill Ackman, Pershing Square Capital Management

Ackman focused on his holding in General Growth Properties (GGP), a company that is currently in the crosshairs of Brookfield Asset Management (BAM). He thinks GGP shareholders would be better served if GGP remained independent, or better yet, if it were to merge with Simon Property Group (SPG), which Ackman thinks is a better operator than BAM. BAM presently owns 42% of GGP, and Ackman considers five of the nine GGP directors as “conflicted,” so his sense of urgency was clearly apparent. His fear is that BAM will acquire GGP on the cheap. According to Ackman, SPG would offer better management, less leverage, and more operating synergies. For its part, SPG has indicated that the company is not interested in GGP, though Ackman views this as mere posturing.

Ackman drew a laugh after reading a letter from BAM CEO Bruce Flatt in which Flatt compared BAM to Berkshire Hathaway. Ackman’s punchline? “I know Berkshire Hathaway,” he said, playing off of a famous line from a late-1980s US vice-presidential debate, “and Brookfield Asset Management is no Berkshire Hathaway.” 

Lloyd Khaner, Khaner Capital 

Khaner focused on turnaround stories and channeled Baseball Hall of Famer Ted Williams in likening successful investing to “swinging at good pitches.” Bad pitches include companies with excessive leverage, management inexperienced with turning companies around, or companies in unattractive industries. Khaner sees Jamba Juice (JMBA) as a potential home run. Missteps by previous management led to margin declines and disappointing results. New management with turnaround experience has closed underperforming stores, improved the quality of the food, focused on improving margins, and established a consumer packaged goods line. The changes leave JMBA well positioned in a fast-growing restaurant category.

Alex Roepers, Atlantic Investment Management

Roepers had a constructive outlook for equities, citing low interest rates, strong corporate balance sheets, and generally attractive valuations. He expects merger and acquisition activity to pick up, because the slow-growth environment will likely prompt companies to “buy” growth. Targeting ownership stakes of 2%–7%, Roeper seeks companies with strong strategic franchises in industries with high barriers to entry. Strong balance sheets, predictable cash flows, and valuation are equally important, he believes.

Four companies that fit the bill for Roepers include: Rockwood Holdings (ROC), a specialty chemical firm with a lithium division that stands to benefit from growth in the electric and hybrid car markets; Clariant AG (CLN), based in Switzerland, which is another specialty chemical company and is divesting itself of low-margin businesses and deleveraging; FLSmidth (FLS), a mining and engineering services firm that is making strategic acquisitions that leave it well-positioned to grow, particularly in emerging markets; and finally, Roeper expects Joy Global (JOY) to overcome recent weakness in the coal sector and take advantage of its dominant industry position.

David Einhorn, Greenlight Capital 

Einhorn drew the biggest crowd and he didn’t disappoint. After noting with amusement the attention he gets and the speculation surrounding his trading, he proceeded to skewer management of one of his most well-known short ideas, Green Mountain Coffee Roasters (GMCR). Einhorn criticized the firm’s capital expenditures as “either inappropriate accounting or unconscionably wasteful.” Noting the competition entering GMCR’s space, he said price wars were just getting started, and GMCR’s cost structure leave it poorly positioned.

Einhorn took a more positive stance towards General Motors (GM). He noted that fixed costs have been rationalized, the balance sheet is on the mend, and brand quality has improved significantly. Given its strong cash position, he expects the company to repurchase the US government’s ownership stake after the upcoming election and future earnings to surprise on the upside.

Negative sentiment surrounding how HMOs will fare under the Patient Protection and Affordable Care Act has likewise presented an opportunity in shares of Cigna (CI), according to Einhorn. He thinks the industry concerns are overblown, and instead sees solid secular growth, high barriers to entry, and better than average profitability. Plus Cigna offers higher returns and faster growth than its peers, he says. 

Einhorn drew a lot of buzz with his decidedly negative outlook on Chipotle Mexican Grill (CMG). With growth decelerating, he considers the stock’s valuation to be extended, and CMG is facing competition from a resurgent Taco Bell — owned by Yum Brands (YUM) — and its new Cantina Bell menu. He also pointed to heavy insider selling as validation of his thesis.

Bob Robotti, Robotti & Company Advisors

Robotti focuses on special situations and, in doing so, looks for companies facing temporal headwinds but with prospects for “long runways” of growth. He sees just such a turnaround opportunity in the oil services firm Calfrac Well Services (CFW). The firm has been hit by a slowdown in drilling due to weak natural gas prices, but Robotti is focused on the firm’s high returns on capital, significant insider ownership, and 4% dividend as reasons to like the stock.

Glenn Tongue, T2 Partners

Tongue described his patient investing style as “time arbitrage,” and he thinks his patience will be rewarded when it comes to American International Group (AIG). He sees the company benefiting from a hardening property and casualty market, and as a result, strong cash flows that will allow for the repurchase of the remaining 16% interest owned by the US government. Tongue believes that once this overhang is eliminated, AIG’s shares will approach book value — about double where they stand today.

Jeffrey W. Ubben, ValueAct Capital

Ubben is an activist investor who manages a concentrated portfolio. He has a bias for quality firms with proven management teams. And while he generally avoids financial firms he is long Moody’s (MCO) due to the firm’s dominant industry position, pricing power, and recurring revenue stream, as well as the likelihood of a pickup in merger-and-acquisition activity. Scale and recurring revenues are also behind Ubben’s interest in CBRE Group (CBG).

Ryan Fusaro, LionEye Capital Management

Fusaro was selected the winner of the Value Investing Challenge with his recommendation of Jack in the Box (JACK). Fusaro believes that the company’s transition from a low-margin, capital-intensive restaurant operator to a high-margin franchisor and real estate firm has gone unappreciated by investors. In addition, he sees further upside coming from increased recognition of its fast-growing Qdoba Mexican Grill restaurant segment.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

2 thoughts on “Value Investing Congress Recap: Einhorn, Ackman, and Mauldin’s “Trade of the Decade””

  1. Einhorn criticized the firm’s capital expenditures as “either inappropriate accounting or unconscionably wasteful

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