My Notes from the Sohn Investment Conference, Part I
Courtesy of Joshua Brown, The Reformed Broker
Welcome to my notes from the 22nd annual Sohn Investment Conference, live from Lincoln Center on the west side of Manhattan. My coverage picks up at the start of the 2:15pm session. Prior to this, we heard from Keith Meister (Corvex Capital) on how we wants to see the CenturyLink – Level 3 deal progress as well as Bill Ackman (Pershing Square) making a time share pitch or something related to his holdings in the Howard Hughes Corporation.
Ackman played it safe, talking up a non-controversial holding that he is the charman of and has been involved with for eight years now. I think he did the right thing in terms of Pershing Square and its stakeholders – the less controversy the better after the Valeant debacle.
Now, we begin with the guy who called Amazon as the best stock to own in the market one year ago – “a multi-trillion dollar monopoly hiding in plain sight.” It’s up 40% since then. A reminder that I am paraphrasing, unless you see a remark in quotes, in which case it is verbatim.
Chamath Palihapitiya, Founder and CEO, Social Capital LP
He’s still long Amazon and it remains a high conviction long. But he’s here to talk about Tesla. “There’s good and there’s bad here – but the good is unbelievably good.”
They’ve managed to capture 10% of the luxury electric SUV market, one third of the electric car market.
Solar City – “Many of the people here in this room would say that acquisition defied any shred of industrial logic.”
The bad – all of the things Tesla is working on are extremely capital intensive. Management thinks it’s $10 billion in investor capital needed, we think it’s about $20.
“It’s absolutely unmodel-able.”
He looks like Tesla as Apple-esque. Selling something revolutionary like the iPhone into a fragmented market, creating your own tailwind of demand. Apple redefined the market, and then branched out into new markets, “moved up the stack” from the device to the high value-added services with big margins.
“Is Tesla running the same playbook?”
“If you have a Model S, it is impossible to go back to a combustion engine car.”
Tesla is building, but it’s not clear that they are redefining the market yet. “What we do know is that the early stages of Tesla is closely tracking the iPhone.” The iPhone didn’t break through until the iPhone 3. He thinks the Tesla III could be the product that busts through and redefines the market.
He notes that Tesla’s costs look nothing like a traditional car maker – few humans, no dealer network, very little advertising, etc.
He’s pitching the 2020 convertible bonds for Tesla, not the stock! He says you are guaranteed not to lose money in the convertible bonds unless Tesla somehow becomes worth less than $15 billion ($50 billion currently).
Now he’s talking about Elon Musk and some of his recent projects (Boring underground in LA, mind-melding with a computer so it can transcribe his thoughts, etc). He’s in the cult for sure. He’s in love with him, just as he was with Bezos last year.
“The convertible bonds give us a way to stand shoulder to should with a guy who we think is our generation’s Thomas Edison.”
Jesus.
Davide Serra, Founder and CEO, Algebris Investments LLP
This dude is from France. Hot accent.
He’s here to talk about Brexit and Europe in general.
Realize that the UK is not a United Kingdom but a divided one. Both the US and the UK have some of the highest inequality in the world. His trade is to be short Gilts (UK sovereign bonds). 10-year gilt yield is >200bps below 10-year inflation expectations.
He makes the case that there is no trade deal for UK post-Brexit. UK has half of its exports going to EU, EU only exports 15% to UK – meaning UK needs them more.
Top 1% of UK citizens pay 27% of all tax. UK has terrible household leverage – 146% of income in 2017. Public sector finances also weak. Stagnant productivity.
He thinks Brexit cost will cost UK 7% of GDP (!) over the next 8 years, “a staggering number.”
He also explains that the world is overweight the gilt and the pound sterling relative to what it should be given UK’s weighting in the global economy. “Totally unjustified.”
Now he’s talking about European stocks – an 80% gap between S&P 500 vs Europe stocks in the last 8 years. “We think this is about to change, and is at a key inflection point.”
He thinks Brexit is the catalyst. “Because of what is happening, there is a new phase in Europe where we are going to spend a lot more money on defense and infrastructure.” – driven by Russia concerns perhaps? Islamic terror? Went unsaid.
He believes the problem of bad loans on bank balance sheets is finally clearing up.
He thinks the currency will strengthen too. As will inflation expectations. He pitches Unicredit, an Italian bank, as a way to play this improvement.
“JPMorgan has a bigger market cap than the largest European banks in each country.” Which makes no sense considering the EU is bigger than the US. “Germany is poised to capitalize on what needs to happen here.
ECB stress tests are as tough as the US version (CCAR). He thinks their banks don’t get enough credit for how well they’re getting through everything. .
Okay, Michael J. Fox just walked out on stage. Give me a second to flip the f*** out. He is here to introduce Jeff Gordon of Nascar fame, who has done a lot of philanthropy in the children’s oncology arena.
Clifton S. Robbins, Founder and Chief Executive Officer, Blue Harbour Group, L.P.
Cliff Robbins runs “a friendly activist strategy” – has been in the game for 30 years, since doing private equity at KKR in the 1980’s. He’s been on 15 boards of directors for public companies.
“A private equity approach to public equities.”
A concept for smarter investing – this is an ESG pitch. He points out that caring about environmental, social and governance issues is not “conceding returns” – it is supportive of returns and a good risk management tool. (At RWM, we agree! – Josh)
His stock pitch is Investors Bancorp (ISBC).
1.3 times book at $13 and change per share. “Fortress balance sheet, pristine credit quality, excellent management team, significant discount to peers, strong ESG profile.”
$23 billion assets, $15 billion deposits. Growing fast in NY, NJ. (They just opened one in my town, had never heard of it before – Josh)
Consistently outperforms its peers on credit quality, “sailed through the financial crisis, doing smart, non-dilutive m&a.”
“They are a full taxpayer – 36%” so they will be a significant beneficiary on tax reform. Regulatory reform as well.
Catalyst is that they’ll have a chance to deploy excess capital.
Blue Harbour is a 9.9% stockholder and “we will represent all stockholders. We intend to be working with this board to explore the highest use of this excess capital.” He also says its a takeover target.
He points out that EPS growth and loan growth is outpacing Northeast rival banks, and yet it sells at a big discount. He thinks its worth more like $17-$19 per share.
Who could buy it? The company went from a mutually owned holding company to full stock ownership three years ago. Typically, these companies get bought five years later after these sorts of transformations.
Management team has been in place for 7 or 8 years. CEO and COO own a lot of stock themselves. Cliff says there’s probably max 10% downside for the stock, but possibly 30-40% upside.
David Einhorn, President, Greenlight Capital, Inc.
Greenlight Capital has returned 16% per year since inception, double the S&P 500 in the same span, but with less than half of the market exposure.
David gets right into it. Core Labs (CLB), on the NYSE. The company sells chemicals and equipment to the oil and gas sector that makes drilling more efficient – “production enhancement”.
“Core Labs is not cheap” and “it trades at a massive premium” to its peers.
“The great thing about high returns businesses is that you can compound your reinvested profits at a high return.”
Einhorn is skeptical about the company and the way the bulls are valuing it. “There is a false impression that Core Labs is a secular growth story.” Analysts think it is not susceptible to the commodity price cycle.
Analysts were wrong about the company as estimates did not pan out as oil prices fell. But analysts have kept their enthusiasm and the stock has kept its high multiple.
“Reading Core’s annual reports” is like taking a time machine through each year’s biggest energy market hype (LNG, etc). He thinks the CEO is highly promotional. But in the end, deepwater drilling internationally is its biggest business and most important exposure. He doesn’t see offshore drilling / spending coming back.
“Only North American shale investing is growing.” Shale doesn’t need the ultra-high tech services that Core Labs offers to the global deepwater drilling market. CLB are tiny in shale, it’s only 10-15% of their total revenue. He thinks the sell-side is wrong.
“Core’s business is not a secular growth story.” Like every other oil related company, it is cyclical. The CEO was calling for $150 a share in 2013. He’s been wrong about his price calls all along. He’s been calling for a “v-shaped recovery” since early 2015. “If he’s right this time, he will have called seven of the last one bottoms.”
The company has been paying a dividend by selling stock. Einhorn insinuates that this obviously cannot continue.
Bottom line, he thinks the stock is worth $60’s and it sells for $110.
***
Okay, stay tuned for Part II – featuring Jeff Gundlach and Larry Robbins – coming later today!
[We’ve got it already, below…]
Notes from the Sohn Investment Conference, Part II
Okay, the second half of my notes from the 2017 Sohn Investment Conference are below. You can catch Part I right here. As a reminder, if it’s in quotes, it’s verbatim. If not, I am paraphrasing.
Cheers!
Jeffrey Gundlach, Chief Executive Officer and Chief Investment Officer, DoubleLine Capital LP
Jeff wants to talk about indexing. He think’s it’s a false messiah. Gotta be honest, I wasn’t able to take notes during most of this because my friend Linette Lopez lost her phone and I got deputized to help her find it, somewhere in this enormous opera hall. No luck yet. But I heard the gist of Jeff’s point. I agree with a lot of what he is saying, even if I don’t necessary agree with his conclusion (coming up…).
Anyway, Jeff mentions that the S&P 500 is not quite rules based, there is a committee! And he’s saying that all the institutions chasing the index are now de facto hiring this committee (outsourcing to it) without having met them. (I’ve been making this point for awhile now – Josh)
Jeff also announced that he opened a Twitter account on the way over to the conference. He thinks there is a lot of false information about him and DoubleLine in the media, so he will use that account to counteract it. Here is his first tweet:
“EM equities and active managers tend to correlate” – active management tends to outperform when EM indices are doing better than US stocks. He notes that EM stocks are only now starting to outperform.
“Let’s go long the EEM ETF, let’s go short the S&P 500 ETF, and let’s leverage it one time” as a pairs trade.
Sohn Idea Contest Winner
A 20 year old kid from Minnesota gets his chance to pitch a stock before the Sohn audience and be introduced by David Einhorn. He is pitching Ebay as a long (he is bullish on StubHub subsidiary). He is also pitching PayPal as a short (PayPal was spun out of Ebay – they have an arrangement where Ebay has to use PayPal for the next few years until 2020. PayPal would be in trouble without Ebay’s volume of transactions).
He thinks Ebay core biz has a monopoly in 10 countries, 280 million users, under-penetrated total addressable market, recession-proof.
He says the market is under-appreciating this cash cow, probably because it isn’t growing that fast.
He was really good. I give any college kid a ton of credit for having the guts and the chops to get up on this stage and pitch this crowd. Very impressive.
And then they cut to a video of Bobby Axelrod (Damien Lewis in character) saying hello to the conference attendees. “I’m working on making my next billion, race you for it.” lol
Brad Gerstner, Founder and CEO, Altimeter Capital
I like this guy, he came on our show at lunchtime and he’s got a lot of interesting things to say about technology, airline stocks, the Nasdaq giants, etc.
“To win, you’ve got to bet against consensus – and be right.”
He wants to talk about the airline stocks, which he has made a lot of money on. His fund is one of the largest holders of United Airlines. Three generations of investors have been trained to be skeptical about these stocks. This has led to multiples that are half of what investors are willing to pay for stocks in different industries.
In 2005, the industry lost almost $30 billion. In 2015, the airlines made almost $20 billion. “A $50 billion profit swing in the world’s worst industry.”
“So what changed?” – dramatic consolidation, obviously. Airplanes are full. Load factors driven by supply consolidation and pricing power. Pricing for everything from baseball games to movies – airlines only now getting their inflation-adjusted pricing growth increase in-line with everything else.
He argues that airlines are also able to pass along higher oil prices to ticket buyers for the first time. “Pricing power is the lynchpin that separates good businesses from bad ones.”
There is still a lot of skepticism that airlines will be able to pass along cost increases like oil prices to consumers.
“Airlines are actually secular growers – millennials travel more than their parents.”
Berkshire has made an industry bet. Buffett thinks they look more like railroads now. Gerstner says they look better. Rails could actually decline in use. Airlines will not.
He is very bullish on United Airlines (UAL) and its management team. He thinks they have room to take back share, increase margins and double earnings by 2020. At current multiples, he thinks the stock can almost double in his base case (135 per share). Going by management’s numbers, as high as 168 per share.
Josh Resnick, Founder and Managing Partner, Jericho Capital Asset Management L.P.
Josh has a very varied background, from VC to investment banking to public equity management.
He is here to pitch a short on a stock that is a $1.50 that he thinks goes to zero. It is Frontier Communications (FTR). He plays a video of the local news shows fielding complaints about service going dead. People are saying the company keeps making excuses for people not able to get a dial tone.
It has an enterprise value of $20 billion on a $2 billion market cap (that’s a lot of debt). Josh has been shorting it for five years. Last week, the company had to do a major dividend cut. He thinks Frontier cannot refinance it’s debt and will have to cut its dividend completely.
There is a huge reverse stock split coming that will take FTR’s share price into the low 20’s.
FTR makes $45 a month for voice calling (non-mobile). “This is not sustainable, and declining double digits.”
FTR also cannot keep up with wireless router investment. DSL cannot handle these data loads and is now bleeding market share to cable. FTR’s web service is DSL, which has become obsolete.
$18 billion “monstrous debt load.” He thinks net debt to cashflow will balloon to six times as cash flow continues “to shrink and shrink and shrink.”
Then he starts accusing Frontier’s management of dressing up costs as something else, “you practically need to be an accounting professor to be able to decipher their income statements.”
Basically, this company sounds like a black hole of lying, manipulation, etc.
He says Charter and Comcast – the biggest competitors – “will be feasting on Frontier’s carcass for years to come.” Jesus dude. Charter and Comcast are investing $8 billion, while Capex at Frontier is less than $800 million.
“The company is milking its network and leaving its customers to suffer.” The Better Business Bureau has given FTR’s service an “F”.
Larry Robbins, Founder, Portfolio Manager and CEO, Glenview Capital Management LLC
Robbins is a certified OG. He probably had the biggest called shot in hedge fund history when he laid out the extravaganza for health care stocks that ensue after Obamacare became the law of the land. He made billions from owning the managed care stocks, hospital stocks, etc.
Robbins comes out in a hockey jersey and makes fun of Bill Ackman for doing the Howard Hughes Conference for the third time. He talks fast and I’m tired so this will be some shit…
He’s saying active investing will redeem itself again. He said it last year too. He thinks M&A is going to come back also. You can still find undiscovered value in the markets.
“Start with the easier questions, not the hard questions.” – his best investment advice.
FTC has been very tough on mergers. Review time has gotten longer. “Deals are in regulatory purgatory.”
He’s talking about DXC Tech, FMC and QuintilesIMS. “Today I’m pitching three stocks are their highs.” These winners are farther to run. These are all very special situations, there isn’t any grand, connective theme here.
FMC bought the businesses that Dow and DuPont had to divest. They were the only buyer, so he thinks they got great deals. FMC ended up buying $1.5 billion in revenues for only $3 billion to satisfy regulators. Robbins says those businesses were probably worth $6 billion.
***
Okay, that’s it from me. If anyone needs anything, I’ll be at the PJ Clarke’s across the street eating a Cadillac Burger and drinking something cold.
Good night!
