David Einhorn Short PXD Sohn Conference 

See David Einhorn notes here.

I’m not going to talk about St. Joe. But I do want to draw parallels between St. Joe and today’s idea.

During the last housing boom, St. Joe, a Florida?based real estate company, invested heavily in land development but destroyed value. It had a million acres ? practically an infinite supply ? that aside from a few premium spots on the beach could not be developed profitably.

What is an infinite supply of negative return investment opportunities worth? Not much. By 2007, St. Joe’s best option was to halt development and gradually liquidate its land. And that’s what it did. By ceasing investment, the company avoided bankruptcy.

Today I’m going to describe a similar situation with certain energy companies. These companies have negative development economics, meaning that aside from a few choice locations, they don’t earn a positive return on capital, but have a nearly infinite supply of negative return opportunities.

What should such a supply be worth? Not much. Yet, the share prices are very high and we believe are poised for a fall.

Whether oil fracking uses immense amounts of scarce water, contaminates the groundwater, emits carcinogenic chemicals, or causes earthquakes is beyond the scope of this presentation.

……………..

In some places, the rocks hold oil. Lots and lots of oil.

The frackers have found significant amounts in 3 major basins: the Bakken in North Dakota, the Eagle Ford in South Texas, and the Permian in West Texas.

Fracking is expensive. Buying the land, setting up infrastructure and drilling the holes costs money. Lots and lots of money.

So the frackers took their story to Wall Street, explaining how fracking is a new way to get rich in oil.

The large oil frackers have spent $80 billion more than they have received from selling oil. Wall Street greased those skids by underwriting debt and equity securities that allowed them to garner billions in fees.

The banks are clearly incentivized to enable the frack addicts. What’s less obvious is whether investors are furnished a clear analysis of the returns these companies actually generate.

David Einhorn

Full David Einhorn slides below

David Einhorn slides Sohn 2015

The post David Einhorn Short PXD Sohn Conference [SLIDES] appeared first on ValueWalk.

David Einhorn, the famous billionaire hedge fund manager, just found his next target: U.S. onshore E&Ps or the oil fracking companies. He laid out his short thesis during the annual Sohn Investment Conference in New York. The share price of Pioneer Natural Resources (PXD), EOG Resources (EOG), Concho Resources (CXO), Continental Resources (CLR) and Whiting Petroleum (WLL) dropped just as he mentioned them in his speech at the conference .

He called shale oil fracking a “business that burns cash and doesn’t grow anything.” “The banks are clearly incentivized to help the frac-addicts” by financing “The most expensive method of extracting oil, the industry simply can’t withstand lower oil prices”. He specifically cited Pioneer Natural Resources as the ‘Mother Fracker’ (and EOG Resources, the ‘Father Fracker’, if you are wondering).

Read: So David Einhorn is the Dumb Money on Apple

He thinks PXD should trade closer to $78 a share, instead of the near $170 current levels.  PXD stock suffered an almost 2% loss on the day, and continued to drift lower in after hours.  EOG stock was able to roll off Einhorn and managed to end the day flat (EOG has relatively stronger balance sheet with 2014 Debt-to-EBITDA ratio at  0.6 vs. PXD at 0.9).

Source: Yahoo Finance, May 4, 2015 4:18pm US CST

We think in general Einhorn’s view may be justified as many smaller E&Ps have outspent their cashflow in the past few years with poor balance sheet positions.  This is also confirmed by Moody’s,

[The oil and gas sector] liquidity-stress index (LSI) more than doubled to 9.8% in March from 4.4% in December as negative cash flow, borrowing-base redeterminations, and increased potential for covenant breaches pressured liquidity.

One better news is that Moody’s noted,

.. the [LSI] index is still well below its 26% peak in March 2009 during the last oil price slump.

Another piece of better news is that Moody’s also indicated the energy sector’s liquidity pressures are not spreading to other sectors. The composite LSI excluding oil and gas hit a record low 2.6% in February before finishing the quarter slightly higher at 2.7%.

Meanwhile, despite the success in his Lehman call, Einhorn’s track record this year is not that impressive.  According to CNBC, Einhorn’s main main fund fell 1.7% for Q1, net of fees, vs. a gain of 1.92% for the average U.S. stock-focused hedge fund. CNBC also said the fund’s short bets against stocks and a long stake in Micron Technology lost money (perhaps that’s why he is switching to energy).

So should you follow Einhorn?  Our advise is to be very selective in long or short positions of E&P stocks. Not every E&P company is as Einhorn described.  But with 110+ publicly traded E&P companies in North America (excluding the integrated oil companies like ExxonMobil), the sector is long overdue for a shakeup.  Quite a few highly leveraged and poorly managed frackers have been able to hide under the cloak of high oil prices in the past few years.  The new lower-for-longer oil price environment is putting all of the E&Ps to a harsh reality test.

The post Einhorn Slams Mother Frackers appeared first on ValueWalk.

At the Ira Sohn Conference Monday Greenlight Capital’s David Einhorn, known for memorable snarky one liners to communicate a sometimes complex investment thesis, didn’t disappoint. But this morning Stifel is disputing Einhorn ripping into “the Mother Fracker” yesterday, Pioneer Natural Resources, a $27 billion oil fracking concern based in the land of big hats, Irving, Texas.

David Einhorn: Pioneer and other frackers producing oil at a loss

In yesterday’s presentation, David Einhorn said Pioneer Natural Resources (PXD), the second largest pure play in oil fracking, amounted to a company that had “all hat but no cattle.” His primary short thesis is the oil frackers have been spending more money to extract oil than they receive, even during the best of times. “It’s like using $50 bills to counterfeit $20 bills,” he said to what was perhaps the most audience laughter of any presenter. When he wasn’t engaged in a stand-up act, David Einhorn made the point that oil fracking is a general industry that didn’t make money even when oil was trading near $100 per barrel. (Gas frackers, it should be noted, are profitable, and Einhorn pointed out that important distinguishing characteristic.)

The large frackers have spent $80 billion more than they have received selling oil, David Einhorn noted, as the industry has gone on a spending spree, sinking money into new wells that generate oil and lose money with every gallon they drill. Thus, this might seem the perfect environment from which Wall Street could come in and offer securities with fuzzy disclosures to investors on the product.

Wall Street sold securities lending oil patch producers money, but David Einhorn charges they lack proper earnings disclosure

Like any red-blooded businessperson, with interest rates near zero and Wall Street saying it was ready to pile on cash, the Texas drillers, true to form, grabbed the money and proceeded to drill holes regardless of the profitability of those holes, is the charge.

“Wall Street greased the skids by underwriting debt and equity securities that allowed (the banks) to garner billions in fees,” David Einhorn said. “The banks are clearly incentivized to enable the frack addicts.”

Einhorn key point: “EBITDAX” depletion isn’t properly accounted

From here, David Einhorn launches into his primary investment thesis: “What is less obvious is whether the investor is furnished a clear analysis of the returns these companies actually generate.”

When analyzing the investment case David Einhorn is making, and comparing it to Stifel’s rebuttal, this is where to focus. Any information not related to the actual profitability of the company’s oil drilling activities is secondary noise.

David Einhorn says pioneer “Trades at a fancy multiple” on last year’s oil prices before oil fell and the method upon which profits are calculated to sell the company’s value to investors is not an SEC reported measure.  Because frackers say they are “investing for growth,” investors are asked to ignore traditional metrics, Einhorn said.

‘EBITDAX stands for “earnings before a lot of stuff,” David Einhorn said, a play on traditional revenue analysis which considers earnings before tax and depreciation. The traditional EBITDA formula is designed to provide an investors a picture into the “real” profitability of a company because sometimes tax and depreciation on capital expenses is taken off the tax burden and can be adjusted in such a way to intentionally mask profits.

Bulk of fracking drilling expenses occur up front

The bulk of expenses in an oil well occurs up front. Once the oil comes out, it’s a revenue generation stream for the most part over many years.  When the oil is sold, the producers expense the up-front capital costs of production, which David Einhorn called “depletion,” which represents the “d” in EBITDAX shorthand.

“Investing for growth is a fiction” with the oil frackers as the value in the wells has a diminishing value which is not captured in the earnings formula. At some point the oil in the well runs out, “poof, its gone,” and the value of the well, which might have a value on the books, is now worthless, no longer producing oil.

“The mantra from the frackers and the bankers who profiteer from funding them is ‘energy investors do not look at gap earnings’ and depletion gets ignored because it is not a cash item and CAPEX gets ignored because it is funding future growth,” David Einhorn said, which he then related to a “Wizard of Oz” like fairy tale where it was important not to look behind the curtain and see how the loose disclosure and accounting slight of hand operated, particularly as it relates to the diminishing value of an oil well no longer producing oil as it runs dry.

“When someone doesn’t want you to look at traditional metrics,” David Einhorn said, using some old school analytics methods, “it’s a good time to look at traditional metrics.”

Stifel strikes back, says PXD generating solid returns and disagrees “on all accounts”

This morning Stifel analysts rebuffed David Einhorn, challenging his investment thesis by saying “Einhorn claimed most sell-side analyst valuations are done using inaccurate short-hand math focusing solely on EBITDA multiples. We disagree on all accounts.”

David Einhorn didn’t exactly say those selling Pioneer investments focused “solely on EBITA multiples.” What Einhorn said somewhat humorously used to make the point was that “EBITDAX” was the formula, and it did not properly consider the depreciation of oil reserves over time.

Another somewhat troubling point is that Stifel disagrees “on all accounts.” Typically when an investment thesis is made by a hedge fund there is some primary truth they uncovered. Rarely are the issues they raise “all wrong.” To ignore the shades of grey in arguments can over simplify a response.

Stifel doesn’t address primary charge regarding depletion, but instead points to lowered production costs on new wells and a $71 oil price hedge

In regards to the primary charge David Einhorn made regarding “depletion,” Stifel doesn’t directly address this key charge in their analysis. The word “depletion” was not mentioned in the entire document but the concept was lightly addressed in its NAV analysis, but a specific formula for how depletion plays into the loss of value was not provided in the analysis.  “Because we are heavily risking PXD’s acreage, we believe near-term high-grading will not lead to diminishing returns over time…”

What Stifel did say is that the cost of production is declining, the company has hedges in place at $71 to manage drops in oil prices, something Einhorn didn’t address, although it might not matter if David Einhorn is correct that Pioneer can’t make money near the $100 per barrel level.

Stifel reiterates buy on Pioneer, $195 price target, while banks express concern over oil patch loans

Stifel, for its part, reiterates a buy recommendation and points to a $195 price target. The stock is currently trading at $165, after taking a nose dive from $172 yesterday afternoon after David Einhorn’s short was announced. Meanwhile, banks are worried about their oil patch investments, a Federal Reserve survey released Monday and reported in MarketWatch shows. Einhorn has these same worries.

Who won this fight? Its early, but many of David Einhorn’s key points appear unaddressed. That said, if Stifel is correct that costs of production are dropping and they can deliver profits near their $71 oil price hedge, which appears a difficult call, this could turn the tide. What Stifel didn’t address in its lowered cost of production assessment is the cost of production is sunk upfront and thus wells drilled to date are still pulling out expensive oil. Further, derivatives hedges fade over time as well, as it is impossible to drill new wells and currently hedge oil at $71 per barrell.

When asked to point out where in their analysis Stifel specifically addressed Einhorn’s depletion point, the report authors did not respond by publication time. Greenlight Capital did not respond to a request to comment.

If I were grading this on a fight card, David Einhorn would receive 7 out of 10 points while Stifel might receive just 2 or 3 points, based on initial discretionary analysis.

The post David Einhorn Attacks “Mother Fracker,” Stifel Fires Back appeared first on ValueWalk.

Although the top 25 hedge fund managers saw 45 percent drop in total earnings in 2014, they generated some other noteworthy numbers. Here are just a few.

Institutional Investor’s Alpha’s 2015 Rich List: Hedge Fund Managers

Infographic source: Institutional Investor’s Alpha

The post Institutional Investor’s Alpha’s 2015 Rich List: Hedge Fund Managers [INFOGRAPHIC] appeared first on ValueWalk.

Many have pointed out that Einhorn has had some tough luck on his shorts lately, and it is fair to disagree. But GARTMAN and using the phrase “terribly terribly wrong?” Well let the readers decide – enjoy the humor…
Fracking stocks fell hard for the second-straight day after hedge fund titan David Einhorn slammed the group for spending too much money and not making enough profits.

But according to Dennis Gartman of “The Gartman Letter,” who is sometimes referred to as the commodities” king or other four letter words,one part of Einhorn’s interpretation is “terribly, terribly wrong.”

Dennis Gartman: Einhorn Is ‘Terribly, Terribly’ Wrong On Oil

The post Dennis Gartman: Einhorn Is ‘Terribly, Terribly’ Wrong On Oil appeared first on ValueWalk.

BP Capital Chairman and CEO T. Boone Pickens discusses the oil industry and Greenlight Capital’s David Einhorn’s negative comments on fracking. Boone Pickens speaks on “Market Makers” from the 2015 Las Vegas Skybridge Alternatives Conference. (Source: Bloomberg)

T. Boone Pickens: ‘I Saw My First Frack Job in 1952′

The post T. Boone Pickens: ‘I Saw My First Frack Job in 1952′ appeared first on ValueWalk.

Seth Klarman’s Baupost Group acquired a huge stake in Pioneer Natural Resources in the first quarter based on its 13F filing with the Securities and Exchanges Commission (SEC).

Baupost Group bought 3,166,937 shares of Pioneer Natural Resources worth around $517.82 million during the quarter. Its stake in the energy company accounts 8.7% of its equity portfolio for the first quarter.

Baupost Group initiated a position in Pioneer Natural Resources before David Einhorn, hedge fund manager of Green Light Capital blasted oil fracking companies earlier this month.

Also see Baupost 2014 Letter: A Tale Of Two Halves

David Einhorn

Einhorn called Pioneer Natural Resources “mother fracker”

During the Sohn Investment Conference, Einhorn presented his short thesis on oil fracking companies including Pioneer Natural Resources, EOG Resources (EOG) Concho Resources (CXO), Continental Resources (CLR) and Whiting Petroleum (WLL).

He criticized oil fracking as a “business that burns cash and doesn’t grow anything.” According called Pioneer Natural Resources as the “Mother Fracker” and EOG Resources as the “Father Fracker.”

Einhorn said, “Pioneer burns cash and isn’t growing. Why is the market paying $27 billion for this company?”

Baupost other energy stockholding

Baupost also owns 13,807,230 shares of Cheniere Energy. Its stake in the company is worth $1,068 billion, which accounts 19.09% of its equity portfolio—its largest stockholding. Cheniere Energy is engaged in liquid natural gas or LNG-related businesses.

Baupost also owns 8,663,114 shares of PBF Energy, an independent refiner and supplier of unbranded transportation fuels, heating oils, petrochemical feedstocks, lubricants and other petroleum products in the United States. Its stake in PBF Energy has a market value of around $293.85 million.

In addition, Baupost also owns 7,242,354 shares of Kosmos Energy, an oil and gas exploration and production company. Its stake in the energy company is worth around $57.28 million.

Bloomberg noted that Baupost’s stake in Pioneer Natural Resources increased the value of its publicly-disclosed energy stockholdings by $678 million.

Aside from Baupost, Stan Druckenmiller, the chairman and CEO of Duquesne Family Office acquired 224,500 share Pioneer Natural Resources worth approximately $36.70 million in the first quarter.

Druckenmiller also bought 258,700 shares of Cheniere Energy worth around $20.023 million and 561,600 shares of EOG Resources worth around $51.49 million.

The post Baupost, Druckenmiller Buy Pioneer Natural As Einhorn Blasts The Frackers appeared first on ValueWalk.

Early Insights From 13F Day: Qualcomm, Yum, Pioneer Natural by Stock Pucker

It’s here, 13F day that is; in working up the suite of activist investor focused newsletters to go out in a few days, it’s hard not to get distracted by the various other 13Fs from value investors like Seth Klarman coming across the wire. If you want to get a look at last quarter’s major activist newsletter, drop us a line, but here are some things that have caught my eye thus far…

• There’s a Seth Klarman vs. David Einhorn battle brewing. Einhorn pitched a “short the frackers” thesis at Sohn last week. His main target was the mother fracker, Pioneer Natural Resources. Klarman revealed that he has it as a top 5 position.

• Dan Loeb and Third Point blew out of their Alibaba position, which was a top 4 position that it had just initiated last quarter. We got to see just how big his Yum! ($YUM) position was, and it’s not all that huge – coming in at its 14th largest position. Recall, Loeb and Corvex have talked about Yum over the last few weeks – Corvex wants to split it up.
• We got to see just how big a position Qualcomm is for JANA Partners and as expected, it’s the fund’s top equity holdings. Although, JANA did quadruple its put position on the SPY.

The post Early Insights From 13F Day: Qualcomm, Yum, Pioneer Natural appeared first on ValueWalk.

David Winters of Wintergreen Advisers has thrown in the towel on a Berkshire Hathaway “company” Coca-Cola while David Einhorn has significantly reduced his stake in Apple, 13F filings show.

Winters frustrated with Coke, adds CSX exposure, 13F shows

After fighting a David and Goliath battle against what he said was excessive management compensation and lackluster oversight, Wintergreen cut is holdings from 2,508,827 shares at December 31, 2014 to 788,233 shares as of March 31, 2015.

“Our research highlighted weaknesses in Coca-Cola’s strategy that are now routinely cited by brokerage analysts and other investors,” Winters said in a statement emailed to ValueWalk. “But Coca-Cola’s entrenched board and, in our view, still-overcompensated management show no signs of stepping aside or taking on the hard work of restoring this iconic brand.”

The aggressive battle, which began March of 2014, also noted the difficult market environment that Coke faces. “Across the food and beverage industry, competitors are facing up to market realities and boldly restructuring.  These developments suggest to us that conditions at Coca-Cola may have to get worse before they get better.”

Wintergreen also reduced exposure to Reynolds American, Franklin Resources, Altria Group and Lorillard.

Other major hedge funds alter exposures from 13F filings

David Einhorn has reduced Greenlight Capital’s stake in its largest holding, Apple, while also significantly cutting the fund’s stake in Marvell Technology, Lam Research and EMC.  At the same time Greenlight upped its stakes in Micron Technology, Consol Energy, Citizens Financial Group and Chicago Bridge and Iron.

Warren Buffett’s Berkshire Hathaway upped its stake in Wells Fargo, IBM, U.S. Bancorp, Deere & Co., Twenty Century Fox, Cass Parts and energy concern Phillips 66. Charter Communications saw a cut in exposure, along with financial exposure through Bank of New York, Visa Inc,, Mastercard.

Dan Loeb’s Third Point increased exposure in part to Activas, Mohawk Industries, Delta Airlines Inc., while reducing exposure to eBay, Ally Financial, Phillips 66, Anheuser-Busch InBev, SunEdison,

Seth Klarman’s Baupost Group established a new position in Pioneer Natural Resources, while added exposure to names such as Antero Resources, Keryx Biopharmaceuticals, SunEdison Semiconductor, Altara Biotherapeutics, while reducing exposure to Veritiv Corp.

Jeffrey Ubben’s ValueAct Capital increased exposure to Halliburton, Baker Hughes while reducing the fund’s stake in Agrium Inc.

Perhaps the most active hedge fund was David Tepper and Appaloosa Management. He reduced stakes in major names such as HCA, Priceline Group, Goodyear Tire & Rubber, Whirlpool, Google, while adding to General Motors, Delta Airlines, Huntsman Corp and Owens Corning.

Stay tuned as we will have a lot more 13F coverage over the next few days and weeks!

The post 13F Filings For Q1: Einhorn, Klarman, Buffett, Loeb, Ubben, Tepper and More appeared first on ValueWalk.

Barron’s Best 100 Hedge Funds for 2015 list came out over the weekend, and equity-focused funds outperformed for the second year in a row. Eric Uhlfelder of Barron’s notes that equity hedge funds rode the wave of a record-setting bull market moving into its seventh year. Moreover, in a repeat of last year’s results, Glenview Offshore Opportunity fund took the No. 1 spot on the list, with an eye-popping three-year annualized gain of 57.05%.

Glenview Offshore is run by legendary value investor Larry Robbins.

Larry Robbins

Robbins still bullish on stocks

Despite equity markets recently reaching new highs, Larry Robbins remains bullish on stocks.

“The market continues to show favorable conditions, including valuations that remain attractive, excessive corporate cash balances, and underlevered balance sheets,” Robbins notes.

He also says he expects executives and BoDs to be open to additional share repurchases, capital improvements, and acquisitions over the next few quarters.

Robbins also anticipates the U.S. economy growing at a reasonable rate, and argues that systemic risk has been reduced by central bank and regulatory policies.

More on Glenview’s 2014 performance

Robbins tells Barrons that he continues to find opportunities in equities, pointing out that 40% of his top 20 positions in 2014 were new. As one example, Glenview took a 14% stake in the largest operator of animal hospitals in the U.S. — VCA.

Vets are a “defensive stock” which won’t get too hammered in a downturn, and Robbins says shares are quite inexpensive at 14.5 times 2015 earnings, and expects top-line expansion of at least 5% after several years of low growth following the financial crisis. Furthermore, VCA is undertaking a $400 million share buyback, the firm is looking at acquisitions.

Of note, the stock has moved up smartly from $32 to $53 since Robbins first established a position six months ago..

More on Barron’s Best 100 Hedge Funds for 2015

Senvest Partners came in second place on Barron’s Best Hedge Funds list, with a three year average annualized return of 43.54%, moving all the way up from 37th place in 2013. Marlin LP ended up in third place for 2014, with a three year average annualized return of 41.63%. See more about Senvest here.

Uhlfelder highlights that the the impressive returns of Robbins and other top hedge funds stand out in a year when oil prices crashed, the U.S. dollar surged and the Cold War sparked up again in Ukraine. These difficult conditions resulted in fewer big winners this year. In fact, quite a number of well-known funds did not make the Barron’s Best Hedge Fund list this year, including Ray Dalio’s Bridgewater Associates, David Einhorn’s Greenlight Capital, Chase Coleman’s Tiger Global and Paul Singer’s Elliott Management.

Also of interest and reflecting the difficult conditions, quite a few notable hedge funds closed in 2014, such as Dan Arbess’ Perella Weinberg Xerion fund, and Brevan Howard’s iconic commodity fund. A number of macro funds closed down as well, (Josh Berkowitz’s Woodbine Capital Advisors, Keith Anderson’s Anderson Global Macro and Kingsguard Advisors). Everest Capital also shut down six of its seven funds after the surprise move in the Swiss franc late in the year. Hedge fund research firm HFR reports that 864 funds closed their doors last year, slightly fewer than the 904 that called it quits in 2013.

The post Equity Funds Dominate Barron’s 2015 Best 100 Hedge Funds List appeared first on ValueWalk.

13F day came and went in a fury. We’ve been working up the suite of activist newsletters to go out later this week but did find time to put together this week’s edition of This Week In Activism. Before the TWIA action – here’s a sample from the major activist newsletter last quarter and of course the details can be found here.

THIS WEEK IN ACTIVISM VOL. 15

News—

• JANA Partners sold off its Ashland stake, of which, it had taken a an activist stake in the company back in 2013.
• Engaged Capital has upped its stake in Jamba to 10.2%, up from around 8%.
• Marathon Partners is waging a proxy battle at its long-time activist target Shutterfly.
• H Partners managed to overthrow the Tempur CEO and two board members.

New campaigns—

• Elliott Associates is now active in CDK Global, alongside Fir Tree and Sachem Head Capital, owning a 7.6% stake.
• Armistice Capital has gone active on Spectrum Pharma with a 5.2% stake.

Interesting activist reads around the web—

• Adidas takes step to defend against activist investors, Oregonlive
• DuPont wins board battle with activist investor, Plastic News
• Hedge fund activists buy McDonald’s, but are they lovin’ it?, Reuters

Most read posts from stockpucker this week—

• Early insights from 13F day, There’s a Seth Klarman vs. David Einhorn battle brewing. Einhorn pitched a “short the frackers” thesis at Sohn last week. His main target was the mother fracker, Pioneer Natural Resources ($PXD). Klarman revealed that he has it as a top 5 position.
• More 13F Insights: Kyle Bass, Jeff Smith and David Winters, Precision Castparts got a lot of attention from big name investors. This includes SQ, Soroban Capital, 3G, Tyrus, Farallon, Weitz Investment, Berkshire, Third Point and Eminence.
• Tempur Pedic: H Partners’ Unlikely Win, Last week, Tempur Sealy revealed that shareholders had voted to oust three board members. It accepted their resignation and essentially forced out the CEO.
• Closer to the Yum! Brands Spinoff?, J.P. Morgan said that it got the impression that a spinoff of Yum China was now more a “probability” than a “possibility.” They upped their target from $83 to $108.

In case you missed our last activist update, here it is.

Have feedback, or questions about certain activist campaigns, email us at stockpucker@gmail.com. Or drop us a line if there’s a campaign you want us to cover.

Until next week—stockpucker

The post Activist Stocks: 13F Day; Ashland; Jamba; Shutterfly; Tempur appeared first on ValueWalk.

The post This Week In Activism Vol. 16: Aligning Board Interests With Shareholders appeared first on ValueWalk.

Teach for America New York held its fifth annual Learning from Leaders series yesterday.The breakfast featured David Einhorn as moderator and Dan Loeb as one of the speakers. ValueWalk has notes that were taken at the event - they were typed up afterwards and are not direct quotations.

See the entertaining dialogue between Dan Loeb below.

Also see David Einhorn on how to nab a job at Greenlight Capital

[munger]

We’ve know each other for 19 years now. Remember the first time we met?

Dan Loeb: David was on an investor call asking a lot of good questions and my boss asked me to figure out who this guy was asking all these questions ruining our deal. That was when I decided to leave the sellside and join the buyside.

How do you manage to look so good?

Dan Loeb: I should ask you the same, David.

Dan, you are known for focusing on yoga or meditation to help you become a better investor.  Can you tell us why you do these things and how they impact you as an investor?

How did the Mr. Pink name come about?

Dan Loeb: There’s a not so well-hidden secret that I used to comment on online message boards under the name Mr. Pink. It was around the time the movie Reservoir Dogs came out. When I was on the sell-side, there were a couple of different bond traders with different nicknames like Mr. Blue, Mr. White, Mr. Pink. I don’t remember how name came about specifically. But my compliance department doesn’t allow me to do that anymore.

There was an insurance company in the US where the founder was involved in a fraud in Israel and banned from doing business in Israel. Back then, there was no Google. I found the information on Lexis Nexus and pieced it together. I wrote about this under the Mr. Pink alias, among other things like that.

Your letters to management are less harsh now. Are you growing softer with old age? Or are you channeling it somewhere else?

Dan Loeb: Our compliance team doesn’t allow me to write some of the things we use to. Some of the things I use to write, there were words that were never before used in SEC filings.

Another part of it is that as we’ve grown we’re going after bigger businesses. Bigger companies usually tend to be better run and have fewer issues that would require those things.

What types of situations do you look for when you go activist?

Usually falls under categories of capital allocation, margin opportunities, and sometimes leadership change. Generally companies that haven’t done much in a while.

[question on Japan]

Dan Loeb: Japanese companies don’t have a lot of corporate governance standards that we do. There aren’t outside directors, stuff like that. Sony management wasn’t going to do what we wanted and announced a particularly bad quarter—the stock actually didn’t even go down that much—and we sold. We left a billion dollars and counting on the table.

We were involved with [another Japanese company] that had 8B of cash on the balance sheet and they weren’t doing anything with it. We pursued an unconventional strategy. We actually lobbied the Japanese government to add corporate governance standards to its Third Arrow of reforms, and it’s had some success in that Japanese companies are now starting to conform to these standards like adding outside directors, etc.

Third Point has had 20 successful year now. How have you done it?

We’ve been around for 20 years, but we have been successful for 18 years.

Neglected business side earlier on, had some turnover in personnel. Was naïve in thinking that if we put up great numbers, we would be successful. Many funds fail because of something on the business/operations side, rather than the investing side. Issues on the non-investing side can limit the growth of a business, even if numbers are good.

Did you vote support Obama the 1st time?

Dan Loeb: Yes.

And did you support Obama the 2nd time?

Dan Loeb: No.

How do you change your mind 180 degrees? What makes you do it and how do you evaluate the decision?

Dan Loeb: Obama vilified hedge fund industry during the election. I understood that to be part of the politicking process during the election, but it continued after the election, vilifying hedge funds and businesses.

Obama abused government powers and processes, like in credit proceedings (GM), and Fannie and Freddie. It’s easy to rally against hedge funds, but that’s not the point; the point is about the rule of law and process. That is what makes America great.

Being able to change your mind in investing is also important. In 2008, Third Point was down 30%, had gone from $7B to $1.6B (redemptions) with another $400mm of redemptions in upcoming months. In March 2009 a few days from market trough, wrote year-end letter warning of further downside in the markets.

However, I went down to (the Fed?) to see bank stress tests. I realized that there wasn’t a single cliff when banks would fail tests, they would be allowed many years to remedy issues, shore up balance sheets. Failure of financial institutions drove fears about the overall market. I saw that banks will survive and thus the market would rally. Immediately changed position, started covering shorts and going very long. Some would find this difficult to do since they just wrote letter to investors predicting further declines in the market.

Very important to differentiate between process and outcome. There’s a matrix of four possible combos:

1) Good process, good outcome

2) Good process, bad outcome

3) Bad process, good outcome

4) Bad process, bad outcome

Sometimes, it’s returns that lead you to re-evaluate something you missed, could be misevaluating risks or having wrong assumptions.

The worst is bad process, good outcome. For example, fraud or insider trading.

Your investment style has changed a lot over the years. Do you think you’ll continue to pursue activism?

Dan Loeb: It tends to go in cycles, just like credit cycles. I certainly think this is a great time for activism. I think it’s important to look at different things at different point of the investment cycle. It’s good for investors to look at credit and equities.

Thoughts on philanthropy?

Dan Loeb: Philanthropy is incredibly fun. It’s important to be involved in causes that you’re passionate about.

To me, it doesn’t make sense for someone to compound their net worth over their lifetime and sign some pledge to donate it and when they die, giving stock to some charity and have no involvement in it.

If this philanthropist hypothetically existed, I’m not saying it’s wrong, I just don’t see the point of waiting until you die.

Say we don’t want to wait until we die and want to donate today. What should we buy when the market opens in 30 minutes and hold until the end of the year so we can donate the most amount of money to charity?
Dan Loeb: I think you have a lot of great investments in your portfolio, I would tell people to look at Greenlight’s 13-F. There are some things we like that haven’t been disclosed yet, but we really like Amgen and Yum.

The post Third Point Compliance Not Happy With Dan Loeb’s Aggressive Letters appeared first on ValueWalk.

Hedge fund moguls have avoided paying taxes on profits for a number of years now through a tax loophole involving setting setting up a reinsurance firm. This tax loophole has cost the U.S. government hundreds of millions if not billions in uncollected taxes as hedge funds claim to be reinsurers so they can park their profits tax free.

Democrat Ron Wyden unveiled his plan to stop what many consider to be this unfair tax loophole in the Senate Finance Committee last week.

A few years ago, hedge funds learned how to minimize taxes and delay payment indefinitely by routing investments through reinsurers in offshore locations such as Bermuda. John Paulson, David Einhorn and Dan Loeb are just a few of the hedge fund managers who have established foreign reinsurance firms. The funds claims these are legitimate businesses that do actually take on on risks from primary insurers, and not merely tax scams.

Statement from Democratic Senator Ron Wyden

“For over 10 years now this loophole has allowed some hedge fund investors to avoid paying hundreds of millions of tax dollars,” Wyden note in a statement last Thursday. “It’s time we shut it down for good."

Hedge fund reinsurance tax loophole: Details on Wyden's proposal

Wyden’s bill calls for reinsurers to only be recognized as a legitimate business if insurance liabilities are more than 10% of the firm’s assets. The bill says that if the ratio of insurance is between 10% and 25% of assets, the determination for tax purposes will be based on "facts and circumstances," according to the proposed legislation.

The overview of the Senate bill noted: "Legitimate insurance companies will be able to meet the 25 percent test."

The IRS has also recently clamped down on the tax benefits enjoyed by hedge fund reinsurance firms. Back in April, the agency published a notice of proposed (Exception From Passive Income for Certain Foreign Insurance Companies). The proposed rules separate truly "active" reinsurance companies from those that just operate as vehicles for U.S. hedge fund investors to protect investment income from taxes.

Warren Buffett explains the tax dodge

Legendary investor Warren Buffett recently warned that the reinsurance industry was in a down cycle.

In his comments at the annual meeting of Berkshire Hathaway, Buffett explained that over the next decade, the reinsurance industry "will not be as good as it has been in the last 30." He continued to say, "It’s a business whose prospects have turned for the worse and there’s not much we can do about it."

Buffett noted that hedge funds have launched reinsurance companies registered abroad to take advantage of tax benefits over the last several years, and in most cases just underwrite a small amount of insurance as a "façade." He also pointed out that tougher competition in the reinsurance sector has hurt pricing and low interest rates have weighed on the firms' bond portfolios.

The post Senate Looks To Close Hedge Fund Reinsurance Tax Loophole appeared first on ValueWalk.

Excerpted from an email which Whitney Tilson sent to investors

Whitney Tilson talks about the 6^th annual Take ‘Em to School Poker Tournament, shorting Lumber Liquidators, tech visionaries, Berkshire Hathaway trading cheap and cybercrime.

[buffett]

Whitney Tilson on the 6^th annual Take 'Em to School Poker Tournament

1) The 6^th annual Take ‘Em to School Poker Tournament, which I’m co-chairing, is coming up three weeks from today on Wednesday, July 22^nd. It benefits Education Reform Now, a non-partisan 501c3 organization committed to ensuring that all children can access a high-quality public education regardless of race, gender, geography or socioeconomic status.

It’s always a great night for players, spectators, and education reformers alike. The poker tournament will feature 260 players battling for prizes that last year included a seat at the WSOP Main Event, a table at Rao's and power lunches with David Einhorn, Seth Klarman and Leon Cooperman. For those attending as cocktail guests, there will be a variety of casino games including blackjack, craps and roulette. This year’s event also features a silent auction and a full swing golf simulator, which will host Long Drive and Closest to the Pin contests.

The evening will be emceed by poker legend Phil Hellmuth, and others participating include poker legends Phil Ivey, Erik Seidel and Layne Flack; sports icons James Blake, Allan Houston, Alex Kovalev, Apolo Ohno and John Starks; and award-winning actors Hank Azaria, Billy Crudup and Seth Gilliam.

The event is almost sold out, so reserve your seat/table today at: www.TakeEmToSchool.org. I hope to see you there!

Whitney Tilson on Lumber Liquidators

2) Below are comments I sent around two days ago to my Lumber Liquidators email list  regarding an article by “The Specialist” about why he covered his Lumber Liquidators short. Here’s an excerpt:

I wonder if this article is why Lumber Liquidators is basically flat today on a big down day? This guy has written some sensible things about Lumber Liquidators in past articles – and, who knows, maybe his trading call here may prove to be right. I never have any opinion on the short-term gyrations of stocks or markets.

But if I had to guess, I think he’s wrong because I totally disagree with his assertion that “Fundamentals may not matter for years to come.” I think the next earnings report, for the quarter ending tomorrow, which the company will report out on or about July 29^th, will matter a huge amount. Longs are counting on at least a stabilization, if not recovery, of sales/same-store sales and margins, while shorts foresee more terrible numbers, as customers abandon the company in droves. My best source, someone within the industry, thinks it will be the latter.

In addition, I think there’s likely to be bad news in the not-too-distant future from regulators, relating to both the illegal sourcing of hardwoods from Russia (Lacey Act violations) and the formaldehyde-drenched laminate, so the simple reason that the company is clearly guilty of both and it shouldn’t take regulators too much longer to figure this out.

…it’s possible to make money bottom fishing the stocks of troubled companies – and make a ton of money if the fundamentals actually improve. And, yes, there may be a time to bottom fish Lumber Liquidators (at which point, hopefully I’ll be clever enough to cover most or all of my short; I doubt I’ll ever be long this stock) – but as I’ve been saying over and over again, it is MUCH too early to be trying to bottom fish it here, for two reasons:

3) I’m mentioned briefly in this article in the NYT, The Loneliness of the Short-Seller (what a great contra-indicator!):

The other short-sellers who remain, meanwhile, have also been proved right on occasion. Whitney Tilson reaped a windfall this year when Lumber Liquidators, a flooring company he attacked for more than a year, accusing it of selling an unsafe product, came under pressure after a report by “60 Minutes” in March. Shares of Lumber Liquidators tumbled 25 percent the day after the broadcast, which accused it of selling a type of Chinese laminate flooring that contained dangerous levels of formaldehyde.

Whitney Tilson's books make in Wall Street's Must-Read Books of the Summer list

4) Two of my books made this list: These Are Wall Street's Must-Read Books of the Summer:

As  things slow down a bit on Wall Street during the summer months, many of its best and brightest will find more time in their schedules to read. We asked a few of them what books were on their lists, and here are some of those must-reads. Participants were asked to give one recent book that they enjoyed as well as an all-time favorite, although some of them had so many recommendations that they couldn't narrow it down to just two.

5) A very interesting article about the culture in the tech sector in US – but not in Europe – that leads to tremendous innovation here, not there:

“They’re trying to recreate Silicon Valley in places like Munich, so far with little success,” she said. “The institutional and cultural differences are still too great.”

There are institutional and structural barriers to innovation in Europe, like smaller pools of venture capital and rigid employment laws that restrict growth. But both Mr. Kirkegaard and Professor Moser, while noting that there are always individual exceptions to sweeping generalities about Europeans and Americans, said that the major barriers were cultural.

Often overlooked in the success of American start-ups is the even greater number of failures. “Fail fast, fail often” is a Silicon Valley mantra, and the freedom to innovate is inextricably linked to the freedom to fail. In Europe, failure carries a much greater stigma than it does in the United States. Bankruptcy codes are far more punitive, in contrast to the United States, where bankruptcy is simply a rite of passage for many successful entrepreneurs.

Whitney Tilson on tech visionaries

6) Funny – I had the EXACT same response when I read these three books – it was shocking to read how these three visionaries/geniuses could be so “unnecessarily cruel and demeaning” to their employees:

As I was reading Ashlee Vance’s “Elon Musk: Tesla, Space X and the Quest for a Fantastic Future,” I was alternately awed and disheartened, almost exactly the same ambivalence I felt after reading Walter Isaacson’s “Steve Jobs” and Brad Stone’s “The Everything Store: Jeff Bezos and the Age of Amazon.”

The three leaders are arguably the most extraordinary business visionaries of our times. Each of them has introduced unique products that changed – or in Mr. Musk’s case, have huge potential to change – the way we live.

I was awed by the innovative, courageous, persistent and creative ways all three built their businesses. I also love their products. I own a Mac Pro and an iPhone, and I have been a loyal customer of Apple for 20 years. I buy many books and other products on Amazon, lured by a blend of low prices, ease of purchase and reliably quick delivery. The Tesla Model S is hands down the best car I have ever driven, and it’s all electric, rechargeable in your garage.

Plainly, I have bought in to what these guys are selling.

What disheartens me is how little care and appreciation any of them give (or in Mr. Jobs’s case, gave) to hard-working and loyal employees, and how unnecessarily cruel and demeaning they could be to the people who helped make their dreams come true.

…Why would otherwise brilliant men behave in such destructive ways?

The first answer is that they can. Genius covers a lot of sins. A great product is a great product, and you don’t have to do everything right to be successful. Most customers don’t care how the sausage gets made, as long as it tastes good.

Employees, in turn, are willing to sacrifice a lot to work for a visionary. Much as Mr. Jobs was, Mr. Musk and Mr. Bezos are passionate, inspiring and charismatic leaders.

“Numerous people interviewed for this book decried the work hours, Musk’s blunt style and his sometimes ludicrous expectations,” Mr. Vance wrote. “Yet almost every person – even those who had been fired – still worshiped Musk and talked about him in terms usually reserved for superheroes or deities.

Finally, a certain level of financial success and the resulting power effectively excuse those who achieve it from the ordinary rules of civility and even humanity.

Whitney Tilson on Berkshire Hathaway looking cheap

7) Good to see, as this will likely benefit Berkshire Hathaway over time (BTW, BRK is looking pretty cheap these days, trading more than 21% below my latest estimate of intrinsic value of $261,000/A share – see www.tilsonfunds.com/BRK.pdf for my updated slides):

Warren Buffett has long been a fan of China, admiring its rapid growth and global influence. What is also becoming clear is that China is a big fan of his.

A Chinese online-game developer last week bid $2.35 million in a charity auction for the privilege of dining with Mr. Buffett. Zhu Ye, the chairman of Dalian Zeus Entertainment Co., is expected to bring up to seven guests to the U.S. to

The post Whitney Tilson On Lumber Liquidators; Berkshire; Tech Visionaries appeared first on ValueWalk.

No the Greek poker player is not John Paulson, but the story is still interesting.

Brevan Howard Asset Management, one of the largest hedge funds in the United Kingdom hired Alexios Zervos, a former professional poker player from Greece. Zervos will be working at the London office of the hedge fund, according to report from Giles Turner of the WSJ Money Beat.

The report indicated that Mr. Zervos admitted that he was a former professional player. He refused to provide further comments regarding the matter. A spokesman for Brevan Howard also declined to provide details regarding Mr. Zervos’ appointment.

Currently, Mr. Zervos ranked 18th in Greece All Time Money List. He is 3,234th in the Global Poker Index Ranking. During the 2014 World Series, Mr. Zervos ranked 55th and collected $124,447.

Three partners left Brevan Howard

Brevan Howard has approximately $27 billion of assets under management. Last April, the hedge fund disclosed the departure of its three partners, Mathew James, Fillippo Cipriani and Stephanie Nicolas.

Mr. James served as senior credit strategist at Brevan Howard. Mr. Nicolas served as manager of the firm’s commodities strategies fund, and Mr. Nichols was a senior trader, emerging markets local fixed income strategy at Brevan Howard.

In 2014, Brevan Howard recorded its first losing year since its inception in 2003. Its Master Fund posted a total loss of 0.8% last year.

[buffett]

Some hedge fund managers play poker

It is not surprising for hedge funds to hire poker players. Some hedge fund managers play poker such as David Einhorn of Greenlight Capital Management. Einhorn is a serious poker player at the World Series of Poker.

Last year, Einhorn played during the Big One for One Drop poker tournament, which was hosted by the World Series of Poker. He participates in large poker events for charity.

Other hedge fund managers who play poker include Steve Kuhn of Pine River Investments, John Rogers of Ariel Investments, Jim Chanos of Kynikos Associates, and Steven Cohen of SAC Capital.

Mr. Cohen previously told the Wall Street Journal that he learned to take risks from playing poker. He changed the name of SAC Capital to Point72 Asset Management. SAC Capital and its former portfolio managers became the center of insider trading charges over the past few years.

The post Brevan Howard Hires Greek Poker Player Alexios Zervos appeared first on ValueWalk.

Monthly returns for June are out for Greenlight Capital Re, Pershing Square and Third Point Re. Both investment funds had a shaky run in the last month of the second quarter. Greenlight Capital is now down 3.2% for the year whereas Third Point is up 4.9%, and Pershing is up 4.6% in the first half of 2015.

Greenlight Capital down 4.4% in June

According to returns that were updated on the fund's website, David Einhorn's reinvestment vehicle took in a loss of 4.4% in the month of June. The poor performance in the previous month has pushed Greenlight's total return for the first half in the negative territory.

Greenlight's top holding, Apple Inc, where the fund owns 7.43 million shares, suffered a loss of 3.7% in trading in June. The bigger loser, however, was CONSOL Energy, the fund's second largest holding. The oil and gas explorer and coal miner was down 22% last month, thus putting a dent in Greenlight's performance.

In a note seen by WSJ that was sent to Greenlight's clients, Einhorn said that major losses came from a position in Micron Tech, whereas CONSOL Energy contributed slightly lesser to the net loss.

General Motors, Einhorn's longtime holding, also slipped nearly 7% in intra-month trading. Greenlight holds 9.5 million shares of the company. The semiconductor company, Micron Technology further made matters worse for the hedge fund, as its stock ended June with a 32.5% loss. Greenlight holds 33.55 million shares of Micron Tech.

According to the fund's stats, Greenlight's top holdings are Apple, CONSOL Energy, General Motors, gold, Micron Technology and SunEdison. At the end of June, the fund's portfolio was split in 104% long and 83% short exposure.

Third Point and Greenlight's investments in Greece

Both Greenlight Capital and Third Point have exposure in Greece as well. Third Point has a separate fund for investments in Greece, the Third Point Hellenic Recovery Fund. At the beginning of the year, Third Point initiated a 20% stake in Greek online auto insurer Hellas Direct.

While there was no update on how Third Point's Greece-focused fund did during the recent pressures on the Greek economy, Greenlight did say that it lost money in Greek banks over the last few months. However, it was not a major detractor as its total exposure in the sector was reduced to less than 1% of AUM at the end of June.

2015-06-June-Monthly-Report-TPOI (2)

Third Point slips by 0.8% in June

After making a decent return through most of the year, Third Point was down 0.8% in June. According to the fund's 13f filings, the fund's top holdings are in Amgen, Actavis, Dow Chemical Co, Ally Financial and eBay Inc. However, this is most likely not the full picture of Third Point's top exposure since Dan Loeb has many investments in foreign countries as well.

In the first quarter letter, Loeb discussed his positions in Japan, including Fanuc and IHI. While Dan Loeb had good things to say about Fanuc, which it called the Apple of Japan, he was less than enthusiastic about IHI. The latter manufactures and sells engine platforms and spare parts to the Aerospace and Defence industry. Loeb said that the company has failed to protect shareholders and has a habit of spending capital irresponsibly.

In U.S, Third Point discussed holdings in Yum Brands and Devon Energy Corp.Yum's stock is up 25% for the year whereas Devon Energy is down 5% YTD, losing 9% in June alone.

Ackman also had a rough June and was down nearly 4%. However, he still has strong returns for the year, up 4.6%. See his June stat sheet below.

[buffett]

Performance-Report-June-2015-PSH

The post Greenlight, Third Point, Pershing Square All Down In June appeared first on ValueWalk.

The 20^th annual Sohn Conference is in the books, and as always, some of Wall Street's biggest investors took to the podium to share their investment ideas. The folks at Activist Insight noted that this year was an especially big year for activist investors at the conference, calling it "probably the most activist-heavy" in its history.

Sohn Conference

Activists needed to turn a profit?

Bill Ackman reportedly told Activist Insight that with the markets being what they are now, activists are pretty much a necessity. He believes that there will continue to be demand for activist investors for quite some time.

"Where are a lot of situations where the stocks are not cheap enough, as is—you have to buy them with the hope that change can take place," he told the magazine. "So it is somewhat of an indicator that to make real profits, you need activists."

Sohn Conference highlights: Ackman talks Valeant

One of the biggest activist stories of late is Valeant Pharmaceuticals, which Ackman teamed up with in a hostile takeover attempt of Allergan, which ultimately failed. He continues to like Valeant, however, as he reportedly has about one-fifth of Pershing Square's portfolio in the drug maker.

Ackman classifies Valeant as a "platform company," which he says is understood better through their ability to effectively deploy capital rather than multiples of earnings, according to Activist Insight. His presentation at Sohn was aimed at some recent comments made by short-seller Jim Chanos, who has been suspicious of Valeant for some time.

The drug maker is known for its strategy of gobbling up other pharmaceutical companies in order to sustain growth, and Ackman focused on the 2013 acquisition of Bausch and Lomb. Some have claimed that Valeant must continue its serial acquisition strategy in order to maintain growth, but Ackman believes 70% of its revenue is durable through 2020 and beyond.

Sohn Conference highlights: Einhorn goes short on oil fracking

In David Einhorn's presentation, he recommended that investors sell shares of oil fracking companies in the U.S. short. He stated that oil companies were spending more on capital expenditures as a result of the higher oil prices. Further, Activist Insight reported in this month's issue that the markets were ignoring the capital depletion in most valuations because they see those expenditures as a benefit but do not discount the short lifespan of the wells.

Einhorn sees Pioneer Natural Resources as being the worst-off, and he suggested that the company's shares could be worth as little as $78 apiece. The company's stock has declined significantly since he gave his speech at the Sohn conference, especially over the last couple of trading days. As of this writing, the stock was down 1.43% at $138 a share.

Sohn Conference highlights: Barry Rosenstein on activism

The third investor whose ideas Activist Insight showcased this month was Barry Rosenstein of JANA Partners. Ackman, Carl Icahn and others have recently been airing their thoughts on activism in general, and this year Rosenstein used his Sohn conference presentation to share his thoughts on the topic. He doesn't think the media understands activist investing.

JANA isn't known for picking huge PR fights with the companies it targets. One company the firm is currently interested in is Qualcomm. Rosenstein compared their investment in Qualcomm with their investment in Walgreens, which he said was "crying out for an actively engaged shareholder."

It took time for Walgreens stock to move due to JANA's involvement, but after putting Rosenstein and another JANA-recommended director on its board, shares have returned nearly 13% so far this year. Rosenstein expects a similar outcome with Qualcomm, and he gave a number of suggestions for the chip maker's management, like cost-cutting measures, changes to its "non-rigorous" research and development spending, and lack of insider ownership of the stock.

Rosenstein claims that they have already made headway with Qualcomm, although it has yet to be reflected in the company's stock price.

The post Sohn Conference Highlights: Ackman, Einhorn, JANA appeared first on ValueWalk.

David Einhorn's Greenlight Capital discloses material changes in holdings in 13F filing in his Q2 letter and thinks MU is more valuable than Netflix. 

Stay tuned for further analysis.

See Greenlight Capital -1.7% In Q1 2015 [FULL LETTER]

[buffett]

• Initiates
  • Bank New York Mellon (BK) 331K
  • General Motors (GM) 9.5M
  • Ingram Micro (IM) 1.1M
  • Macys (M) 1.7M
  • Santander Consumer USA (SC) 2.2M
  • Scientific Games (SGMS) 2.0M
  • Sunedison Semiconductor (SEMI) 2.7M
• Increases
  • CBI 6.8M, +130% vs prior 2.9M
  • KS 1.4M, +61% vs prior 875K
  • CNX 20.6M, +55% vs prior 13.3M
  • AER 5.6M, +49% vs prior 3.7M
  • CFG 12.6M, +25% vs prior 10.1M
• Decreases
  • TIME 740K, -81% vs prior 3.9M
  • HYH 715K, -70% vs prior 2.4M
  • MRVL 9.0M, -63% vs prior 24.7M
  • FCB 550K, -59% vs prior 1.3M
  • EMC 4.2M, -47% vs prior 8.0M
  • LRCX 1.7M, -33% vs prior 2.5M
  • NSAM 3.2M, -30% vs prior 4.5M
  • NOK 6.5M, -18% vs prior 7.8M
  • IACI 2.5M, -15% vs prior 3.0M
  • AAPL 7.4M, -14% vs prior 8.6M
• Liquidates
  • AET 1.3M
  • DOX 1.3M
  • CRC 2.0M
  • GDOT 1.3M
  • KMT 2.2M

David Einhorn's Greenlight Capital 2Q15 Letter

Dear Partner:

The Greenlight Capital funds (the “Partnerships”) returned (1.5)%,1 net of fees and expenses, in the second quarter of 2015, bringing the year-to-date net return to (3.3)%. During the second quarter, the S&P 500 index returned 0.3%, bringing the index year-to-date return to 1.2%.

On April 15 after the close, Netflix (NFLX) announced its results for the first quarter and conducted a conference call. NFLX shares had already risen 39% in 2015 and were trading at more than 100x 2016 estimates with analysts expecting adjusted earnings for the quarter of $0.63. NFLX achieved just $0.36. Prior to the call, the June quarter consensus stood at $0.86; by the next morning consensus was $0.30. All told, analysts slashed estimates for the next three years. Further, we had just finished watching season three of NFLX’s leading original content show, House of Cards, which appeared to be scripted to compete with Ambien.

If you’d told us the news in advance, we’d have guessed it was going to be a bad day for NFLX holders, but apparently Red Ink is the New Black. The shares opened the next morning 12% higher and never looked back. By the end of the quarter, the shares had almost doubled for the year, making NFLX the best performing stock in the S&P 500 by far.

Why did the stock react that way? Cynically: if it soared on bad news, imagine what it would do with good news. Practically: NFLX changed its story and pushed its promises into the distant future, with grand hopes for the decade starting in 2020. It transitioned from being a company judged by how much it earns into a company judged by how much it spends. Whether the spending proves successful won’t be known during the investment horizon of most NFLX shareholders. In today’s market, the best performing stocks are companies with exciting stories where accountability is in the distant future.

Most companies are still held accountable to current performance. Micron Technology (MU), which fell from $27.13 to $18.84 during the quarter, was our biggest loser. It’s a cyclical business and, regrettably, we missed the turn of the cycle. Long production lead times make it difficult to match supply with demand, and when demand falls short (as it has recently), shortages can turn into surpluses. Prices (and profits) fell, and MU disappointed. MU also had manufacturing problems that will impact earnings for the next couple of quarters.

With only three remaining players, the industry is behaving more rationally. Manufacturers are redirecting capacity away from computer DRAM to other segments, and we believe that the excess computer DRAM inventory created earlier this year is now being absorbed. Our assessment is that MU shares have fallen too far. Peak quarterly earnings last year were $1.04 and we expect the cyclical trough to be around $0.40 in the August quarter. At $18.84, the company trades at less than 12x annualized trough earnings and less than 5x prior peak earnings. We expect future cycles will have higher peaks and higher troughs, as the technology story for both DRAM and NAND (including 3D memory) is bright for the next several years.

Our long-term outlook is that sometime in the next few years, MU (currently valued at $20 billion with $3.7 billion of trailing net income) will be worth more than NFLX (currently valued at $40 billion with $240 million of trailing net income). It’s a contrarian view, but we don’t think the movie is over.

Our other significant loser in the quarter was CONSOL Energy (CNX), which fell from $27.89 to $21.74. While natural gas prices were stable during the quarter, coal prices fell about 10%. Near-term this is not a significant concern, as CNX prices are locked in under long-term contracts for almost all of 2015 and about half of 2016-2018 production.

Assuming unhedged forward pricing for coal and natural gas, our long-term resource runoff model values CNX at about $35 per share. This is based on depressed commodity prices and does not give credit for the company’s implementation of zero-based budgeting, which should further improve its position as the low-cost supplier.

From a strategic perspective, the company recently completed an IPO of a master limited partnership for its coal business. Because investor appetite for coal is exceptionally small at the moment, the offering was met with tepid demand. We were able to purchase shares at a 25% discount to the proposed range. The new entity, CNX Coal Resources (CNXC), has an initial dividend yield of over 13.5% and a free cash flow yield of over 17%. At that value, distress is priced in, though it is far from evident that distress actually exists.

On the sunnier side, SunEdison (SUNE) was our only significant winner, as the shares advanced from $24.00 to $29.91. SUNE recently filed for TerraForm Global (GLBL) to go public. GLBL is a renewable energy yieldco located in emerging markets including Brazil, China, India and South Africa. GLBL will provide a new stream of cash flow to SUNE in the form of dividends and incentive distributions, similar to the structure of the existing yieldco TerraForm Power (TERP). Further, earlier this year SUNE acquired First Wind, the largest wind power development company in the United States. GLBL and First Wind add $10-$11 to our sum of the parts valuation.

Greece has been anything but sun-kissed. We continue to hold a small position in Greek bank stocks and warrants. The best we can say is that from the outset we recognized this to be a high-risk, high-reward proposition and sized the position accordingly. Neither our losses nor remaining downside exposure are significant.

Last year, it appeared that Greece had finally turned the corner after years of suffering through imposed austerity and the resultant 25% collapse in GDP. Much like the Seahawks’ ill-fated decision to pass the ball at the end of Superbowl XLIX, instead of giving it to monster running back Marshawn Lynch, Greece snatched defeat from the jaws of victory by electing the populist anti-austerity, pro-debt-writedown, Syriza coalition.

Puerto Rico’s governor recently said of its own debt, “This is not about politics; it’s about math.” The math for Greece is easy: austerity hasn’t improved the economy and its debts are unsustainable. Knowing this, Syriza no longer wanted to play the “extend and pretend” game. Further, Greece’s recently resigned finance minister Yanis Varoufakis believed they wouldn’t have to. Mr. Varoufakis, who kept reminding everyone that he is a professor of game theory, believed that the European leaders would prefer to make concessions now rather than manage the disruption of a Greek default. He must not be familiar with the Tyler Durden school of negotiation: the first rule of using game theory is you do not talk about using game theory. What’s more obvious is that Syriza didn’t understand what the game is.

This is not about math; it’s about politics. Consider that the main difference between Greece and France is that France is a big fan of extend and pretend. And as long as France says it will pay, its bonds might yield just a bit more than Germany’s. Though Greece has a superficially unmanageable ratio of debt to GDP, the debt had been restructured so that there is little debt service burden for the next several years. Politically, European leaders prefer to leave the future problems in the future. Syriza’s refusal to play along is a problem not just for bondholders but also for those holding seats of power. The European leaders fear that if Syriza can claim even a moral victory, it will inspire other European countries to oust their current leaders in favor of populist governments who campaign on the promise of debt repudiation.

Though Mario Draghi promised he would do whatever it takes to save the euro, that doesn’t include lifting a finger to assist Greece financially or in any way signal that the ECB has Greece’s back. Just days prior to the January elections, Mr. Draghi announced that the ECB would exclude Greece from quantitative easing for at least six months. Doing whatever it takes is proving to be a conditional promise, as denying Greece access to the capital markets is a key tenet of the European strategy to pressure Syriza.

For anyone still missing the joke, Bank of Japan Governor Haruhiko Kuroda summarized the view of the global central planners when he said, “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.’ Yes, what we need is a positive attitude and conviction.” Perception supplants reality. The moment leaders (or markets) start making it about the math, gravity comes into play.

The result is that Europe is unwilling to allow Syriza a face-saving compromise, even if that means Greece collapses and the rest of Europe suffers. At this writing, Syriza has capitulated by proposing a deal which leaves Greece with even more austerity than when negotiations began and no actual debt forgiveness. This might not be enough, as the grand populists. The short and macro portfolios had minimal impact on our quarterly result. We presented our new short thesis on oil frackers at the Sohn Investment Conference in May (https://www.greenlightcapital.com/926698.pdf). The response was encouraging as many market participants engaged in the substance of the analysis. However, one sell-side analyst came up with a novel discounted cash flow (DCF) analysis that shows Pioneer Natural Resources (PXD) to be worth $300 per share. Notably, the projections he used to create the DCF are dramatically higher than the projections he used in his earnings model. Talk about keeping two sets of books.

As we were putting this letter to bed, another bulge bracket investment bank upgraded PXD, again with discrepancies between the DCF analysis and the earnings forecast contained in the same report. Perhaps the analysis is colored by this key sentence in the upgrade: “Unless commodity prices rebound sharply we believe PXD will need help from the capital markets to bridge [the] near-term funding gap.”

It was a challenging quarter for finding new long ideas. We managed to find a couple of small long investments in Applied Materials (AMAT) and Bank of New York Mellon (BK).

AMAT manufactures semiconductor capital equipment. AMAT shares fell when it canceled plans to merge with Tokyo Electron over anti-trust concerns. We find standalone AMAT attractive because its core segments of etch and deposition will grow faster than the semiconductor capital equipment market due to the increased use of “multi-patterning” to produce chips at geometries below 20 nanometers. This means semiconductor material must be deposited and etched multiple times to make the devices work, requiring more tools from AMAT and its competitor, Lam Research, in each fab. We expect results to improve, as management turns its attention from the proposed merger to growth and cost savings opportunities. We purchased shares at an average of $20.31, representing less than 12x our fiscal 2016 earnings estimate.

BK is a trust bank with substantial investment services and investment management operations generating stable fee-based earnings. The trust sector has consolidated, leaving BK as one of four global players across most investment services verticals. Following a couple years of poor performance, we believe BK will begin to deliver organic revenue growth and cut expenses significantly. Moreover, a 0.5% increase in short-term rates would substantially increase earnings that currently reflect depressed net interest margins and money market fund fee waivers. In the interim, we expect BK to continue to allocate 100% of its net income to shareholder return with a heavy weighting toward stock buybacks. We bought our position at an average price of $40.61, less than 10x forward earnings (excluding non-cash intangible amortization), assuming the Federal Reserve begins to normalize short-term interest rates.

We have several portfolio exits to report:

We sold the last of our successful long investment in Altice, a European telecom company. Altice did what we expected (acquired SFR, cut costs significantly) and much more (acquired Portugal Telecom for an attractive price, expanded into the U.S.). The market rewarded the over-achievement generously and we were rewarded with a triple digit return in a shorter time frame than we expected.

We sold our long position in Conn’s at a small loss. We entered believing a few bad loans would wash out of the business and leave a healthy, growing retailer. The loan book was harder for the company to control than we anticipated, and for a period the shares declined significantly. The stock recovered when the company announced its intention to sell its loan book. We sold because we weren’t convinced that the company could execute a true exit from the finance business.

We exited our long position in EMC Corp. with a small profit given the reduced odds of any favorable change to the corporate structure and increasing concerns about a lack of growth in the storage business.

We covered our short position in Intuitive Surgical with a small gain. Given its lofty valuation, we were surprised that the market shrugged off repeated earnings misses and weak gross margins. Though we are skeptical of the utility and cost effectiveness of robotics in key surgical procedures where the company expects to deliver growth, near-term expectations have been reduced to achievable levels and we decided to watch from the sidelines.

We sold our long position in Marvell Technology Group. The stock performed well this spring as investors finally began to credit the company for a likely successful outcome in its legal battle with Carnegie Mellon and for a potential monetization of its wireless handset chip business. Given declining demand in the PC market, we didn’t see as much earnings power in the core storage and networking business and decided to sell. By adding to the position in late 2012, when the stock practically collapsed in response to the initial Carnegie Mellon verdict, we achieved a 15% compounded return over several years even though the company repeatedly fell short of expectations.

We acquired our Nokia shares in 2014 after the company sold its handset business to Microsoft. The stock appreciated nicely during 2014 in response to better earnings in its network business and increased optimism around the company’s IP position. When the company announced a confusing merger with Alcatel-Lucent in April this year and the stock rose, we used the opportunity to exit with a healthy gain.

We exited a long-held position in Playtech with a 23% compounded return. The company’s core business in online gaming software remains strong, but a recent acquisition made us question its capital allocation discipline and ability to grow going forward. It seemed better to move on satisfied rather than try to achieve a higher score.

When we shorted Vale in early 2013, it was based on extensive research, but we could have saved ourselves the work by just translating its name from Portuguese into English: Valley. Indeed, both iron ore and Vale have tumbled off their peaks and we covered with the stock down almost 50%.

One of our analysts, Jeremy Weisstub, left the firm during the quarter. He and his wife are moving back to their hometown of Toronto where he will pursue other interests. We thank him for his contributions and wish him success in his future endeavors.

At quarter-end, the largest disclosed long positions in the Partnerships were Apple, CONSOL Energy, General Motors, gold, Micron Technology and SunEdison. The Partnerships had an average exposure of 103% long and 86% short.

“A diamond is a piece of coal that stuck to the job.”

- Thomas Edison

Best Regards,

Greenlight Capital, Inc.

The information contained herein reflects the opinions and projections of Greenlight Capital, Inc. and its affiliates (collectively “Greenlight”) as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Greenlight does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. Greenlight has an economic interest in the price movement of the securities discussed in this presentation, but Greenlight’s economic interest is subject to change without notice. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented.

GREENLIGHT® and GREENLIGHT CAPITAL, INC. with the star logo are registered trademarks of Greenlight Capital, Inc. or affiliated companies in the United States, European Union and other countries worldwide. All other trade names, trademarks, and service marks herein are the property of their respective owners who retain all proprietary rights over their use. This communication is confidential and may not be reproduced without prior written permission from Greenlight.

Unless otherwise noted, performance returns reflect the dollar-weighted average total returns, net of fees and expenses, for an IPO eligible partner for Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., Greenlight Capital Offshore, Ltd., Greenlight Capital Offshore Qualified, Ltd., and the dollar interest returns of Greenlight Capital (Gold), L.P. and Greenlight Capital Offshore (Gold), Ltd. (collectively, the “Partnerships”). Each Partnership’s returns are net of the standard 20% incentive allocation.

Performance returns are estimated pending the year-end audit. Past performance is not indicative of future results. Actual returns may differ from the returns presented. Each partner will receive individual returns from the Partnerships’ administrator. Reference to an index does not imply that the funds will achieve returns, volatility or other results similar to the index. The total returns for the index do not reflect the deduction of any fees or expenses which would reduce returns.

All exposure information is calculated on a delta adjusted basis and excludes credit default swaps, interest rate swaps, sovereign debt, currencies, commodities, and derivatives on any of these instruments. Weightings, exposure, attribution and performance contribution information reflects estimates of the weighted average of Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., Greenlight Capital Offshore, Ltd., Greenlight Capital Offshore Qualified, Ltd., Greenlight Capital (Gold), L.P., and Greenlight Capital Offshore (Gold), Ltd. and are the result of classifications and assumptions made in the sole judgment of Greenlight.

Positions reflected in this letter do not represent all the positions held, purchased, or sold, and in the aggregate, the information may represent a small percentage of activity. The information presented is intended to provide insight into the noteworthy events, in the sole opinion of Greenlight, affecting the Partnerships.

THIS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY INTERESTS IN ANY FUND MANAGED BY GREENLIGHT OR ANY OF ITS AFFILIATES. SUCH AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY INTERESTS MAY ONLY BE MADE PURSUANT TO DEFINITIVE SUBSCRIPTION DOCUMENTS BETWEEN A FUND AND AN INVESTOR.

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Sign up for our free daily newsletter to stay in the activist investing know. The fall of super-investor and what can be done to right the ship by TMF Deej aka Jason Knapp.

It's whale watching season. That means that famous, successful hedge fund managers must report their holdings to the SEC and send out their quarterly letters to investors. I have found a number of successful investment ideas by looking at moves made by the big boys of the hedge fund industry over the years. I do not blindly follow fund managers into new positions, but fund managers often share compelling write-ups on stocks in their letters to investors that persuades me to initiate a new position.

David Einhorn's Greenlight Capital Q2 Letter to Investors.

ValueWalk had the most complete look at David Einhorn's most recent letter to investors. I need to preface my thoughts on Greenlight Capital's most recent letter to investors by saying that I have the utmost respect for Mr. Einhorn. In fact, for many years he was one of my favorite hedge fund investors to follow. His 2010 book Fooling Some of the People All of the Time remains one of my favorite books of all time.

Having said that, Einhorn really seems to have lost his way. I do not have the exact performance statistics for Greelight Capital, but I'd be willing to bet decent money that it has significantly underperformed over the past several years. Einhorn seems to have gotten away from the special situation-esque type of investments that made him and his fun so successful for so many years. The style-drift at Greenlight Capital is painfully obvious.

Quarter after quarter a massive position in gold has been one of Greenlight's largest holdings. Hedge fund managers who invest in gold have succumbed to the conspiracy theorist gold bug disease that year after year tricks investors into believing that fiat currencies are a joke and that hyper-inflation is right around the corner. I've been a public bear on gold for a number of years now.

[klarman]

I have the same opinion of gold as a massive holding in hedge funds as I have of funds that have 50% cash positions. If you're a fund manager who has a massive percentage of their portfolio in gold or cash, you had better either be right that a massive stock market crash is coming OR you had better absolutely crush the S&P 500 with the money that you actually do have invested. Anyone can purchase gold or hold cash on their own, investors don't need to pay hedge fund managers 2 and 20 to buy gold or hold cash for them.

As an individual investor who is a big fan of reading other investors' thoughts on investing and the market I found Greenlight Capital's recent quarterly letter to be extremely disappointing. It starts off by bashing the stock of Netflix $NFLX. The valuations of stocks often get completely out of whack, leading investors to believe that they can make a lot of money by shorting the stock of overvalued companies. In the long run, the purchase of overvalued stocks typically end poorly for investors and shorting might be profitable.

The problem with shorting them is as the old adage goes..."The market can remain irrational for a lot longer than you can remain solvent." I would never, ever buy Netflix stock...it does not tie in with my value investing principles, but I would never short it either. I certainly hope that Einhorn isn't short Netflix.

Greenlight Capital

Probably the worst part of the recent Greenlight quarterly letter is when Einhorn shares his personal opinion about the most recent season of the Netflix original series House of Cards.

Specifically Einhorn said “Further, we had just finished watching season three of NFLX's leading original content show, House of Cards, which appeared to be scripted to compete with Ambien.” One's personal opinion on a television show has to be one of the weakest arguments for shorting a stock that I've ever heard.

The Greenlight letter goes on to whine about the current political situation in Greece. Anyone who couldn't see that the Greek financial situation was a ticking time bomb waiting to explode doesn't deserve to be investing others' money. My most read article that I have written since I switched my blog over to this new Special Situation Investing Community was titled "Greece is doomed. Avoid investing there"

When the national past time of a country is avoiding paying taxes, a huge percentage of the population works for the public sector and retires on pension at a very early age it doesn't take a rocket scientist to figure out that there is going to eventually be a big problem.

The recent Geenlight letter contains very little color on new investments that the fund has made, going as far as to state "It was a challenging quarter to find new long ideas." Granted, I follow special situation investing more closely today than I ever have in my life, but there has been more spinoffs and other special situation investing opportunities recently than I have ever seen in my life.

Yes, the multi-year market rally that we have experienced coming out of the Great Recession (TM) may be getting a little long in he tooth, but I believe that there remains a huge number of investment opportunities out there today that will outperform the major market indices over the next several years.

I would be remiss without talking about the most newsworthy of Greenlight's holdings Micron Technology MU. Micron's stock is up nearly 10% today after word broke yesterday that Tsinghua Unigroup is considering making a takeover bid for it. China's Tsinghua prepares $23 billion bid for U.S. chip maker Micron.

For the merger arb fans out here, of which I certainly am not one, let me say that I personally would be absolutely shocked is the current buyout offer of Micron was accepted. Even if it is, I would be even more shocked if regulators allowed a state-backed Chinese company to buy Micron. If one has owned Micron stock for the past year and they are bullish on its prospects, why on Earth would they sell out at the rumored offer of $21/share? $MU was trading at nearly $35/share a few short months ago.

The Greenlight quarterly letter also goes briefly into the fund's investment in CONSOL Energy CNX and its newly spun off MLP CNX Coal Resources CNXC. A lot of money can be made by investors who time the bottom of the commodity market properly, however it is very, very difficult to do so and many a fortune has been lost in the process or trying to. Again to me an investment in coal represents at the very least slight style-drift for Greenlight. It's not as if we're trying to time the bottom of a viable commodity here either.

It's no secret that coal as a source of energy is slowly being phased out. Bloomberg published an outstanding article on this very subject yesterday, the subtitle of which is one of the best that I have read in a long time: Coal is a sick dragon, and the bond market wields a heavy sword.

The bottom line is that coal is in big trouble and I personally do not want any part of trying to figure out when or if it will hit bottom.

The one investment in the Greenlight letter that I do find interesting isn't even one that was elaborated on other than to say that the fund increased the size of its position by 130% to 6.8 million shares is its position in Chicago Bridge and Iron CBI. Trading at less than 10 times current and likely forward earnings, CBI is indeed super cheap at this level. I owned a decent position in it for a while that I added to after the selloff in oil caused what I believed is an overreaction in the stock.

I have since liquidated that position to purchase stakes in several other companies that I believe have more immediate catalysts that will cause their shares to rise sooner than CBI will. Chicago Bridge and Iron has the added problem of major cost overruns at a nuclear plant that it is building that have the potential to hurt it going forward.

Regardless of how its bets turned out, it's easy to criticize any investment that didn't work out after the fact, you can see a pattern developing in Greenlight's portfolio...gold, commodities, Greece...Greenlight's portfolio contains a number of macroeconomic bets that do not jibe with what made Greenlight successful in

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