Whitney Tilson, T2 Partners, discusses his winning strategies in the first quarter and top stock picks.
Full COMPUTER generated transcript and video below:
a number of the world’s leading funds including tilson’s winning q 1. the fortunate thing for a lot of stock-picking orienting funds is that correlations came off for the first was that mainly it? partly correlations coming off. look, all our financials correlated last year to the downside. we were a little early on them. hung in there, had conviction and bought more of them, citigroup, goldman sachs as they fell and they all correlated to the upside this year. at least in some cases the correlations were there, but as the european sovereign debt crisis faded, our bet on u.s. financials really took off, but, you know, it seemed like everything our portfolio was correlating, you wouldn’t think something like netflix would correlate with something like citigroup but they were correlating. both were rocking in the first quarter, so i think the real lesson for us is if — if you’re certain something is cheap and it gets cheaper, don’t lose your conviction. hang in there, and you’ll be rewarded if you’re right on the fundamentals. we’ve been teasing the audience with you bringing your top pick at this point. it’s an interesting one. right. well, i should say — it’s our newest addition to our portfolio. it’s our sixth or seventh largest position, aig, and it’s certainly playing the theme of the rebound of the u.s. financials. we stayed away from the european financials and still are staying away from there. we don’t think they have gone through their valley of death financials went through a few years ago but we financials are — the big ones are on pretty firm footing, and we’ve been following aig for a while, similar investments to citigroup. aig has lagged, and we still think it’s really cheap. what is aig’s business? actually don’t know what they do. it’s a very complex business sort of, again, like citigroup. you’ve got to study it a long time to really get comfortable with it,ut it’s a global insurance company. a lot of different lines of business, but we think it’s one of the premiere global financial companies, but they made a lot of mistakes in the downturn, and they are still trying to run off — either run off or selloff some bad businesses. we think there are unlikely to be any big negative surprises to the downside and when they finish with the bad business they are left with a fabulous global franchise and today the franchise is changing at 40% to tangible book value and we think that is likely good. not hurt by the low rates and the flow of the yield rate. i think all insurance companies are sort of in the short term, that’s a head wind, but we think when you’re buying franchise business at a 40% discount to book you’re getting compensated to wait until that improves. does aig have a lot of exposure to some of the things that are going to take place with dodd/frank or some of the european or more global regulations? that a big concern with an insurer or not really? that’s not — i wouldn’t put that at the top of the risk factors. i think the single biggest risk factor is there’s some — another horrible negative surprise buried in their balance sheet somewhere which is what basically took them to bankrupts’ few years ago, but we think the passage of time has mitigated that risk. secondly, if the whole — if europe tips over again, if there’s a huge financial crisis, that would take them down along with everybody else, and then you’re asking about the government. i — the big negative on aig relative to the other financials is the government still owns a huge stake, and people view that is an overhang on the stock. our view on it is twofold. aig is generating a lot of cash and buying back a lot of stock and think they could regain a third of their outstanding shares in the next month if the government gives them per mig. they have the financial wherewithal to do that. so we win either way. either the stock goes up, and it’s hard to complain about that, or the stock stays depressed, in which case they can buy back a ton of stock and we win two years from now. where do you think this can get to in either scenario? back value is in the high 50s. if they buy back a ton of stock, that takes the book value by itself. book value per share into the $70 range. we think it’s worth at least book value. we think it’s a double in one to two years. wow. in terms of going to the second quarter, whitney, has your philosophies changed at all in how you approach stocks or what your view on the world is? well, our view on the world is probably the most cautiously optimistic. since the financial crisis we actually think there’s a reasonable chance that we start to get into a virtuous cycle here so the hiring is picking up. that means consumers spend a little more and you get this virtuous psych. i’m not super bullish but for a bearish value guy i’m more cautiously optimistic than i’ve been in a while so we’re still hanging in there on a lot of these stocks. they have run quite a bit but started at such a cheap price. citigroup with $50 a share of tangible book, we started buying at 30 and had the opportunity to buy a lot more at 23 but high 30s is trading 25% discount to tangible book. not selling that either, but we’re adding more to aig because we think they have similar risk factors. what abouprices? very easy — maybe not easy to find a value stock, but certainly probably harder to say how do i get out of this? well, yeah. the problem — we have the high class problem this year which is when do we harvest gains because virtually everything our portfolio on the long side anyway, short side is — we don’t want to talk about the short side this year, but — but — you know, when do you harvest gains with netflix, for example, up 80% this year and it hard to put an exact target price on that, so that one we managed the position side as it runs up. we trim a little bit, but, you know, our largest position berkshire hasn’t run that much and still super cheap so we’ve actually been adding to that this week as well. great to see you. thanks so much. my pleasure. all looking forward to the value of investing congress coming up may 6th and 7th. the two days after the berkshire hathaway annual meeting. thanks, whitney. send your tweets in. we might answer them next. be right back.
