Whitney Tilson in his email discusses his two favorite long ideas: Howard Hughes & Fannie Mae; Why is the Obama Administration trying to keep 11,000 docs dealed?; “Li Lu’s reflections on reaching fifty”; ‘customers first’ to become the law in retirement investing; Zillow’s defense: executive was erasing porn and Of Permanent Value.
Whitney Tilson: 2 favorite long ideas: Howard Hughes & Fannie Mae
1) A friend asked me this past weekend what my favorite long idea is right now and I struggled to answer, which really struck me because I almost always have a few pound-the-table buys at the top of my mind. What a sign of how much the markets have rallied in the past couple of months – I had a ton of favorites amidst the market sell-off earlier this year. In fact, I went back and found an email that I sent to this list on Jan. 18th, in which I wrote:
After a nearly seven-year bull market, a ~10% pullback doesn’t mean stocks in general are cheap. For example, I went to a CJS Securities conference last Wednesday at which 48 mostly small- to mid-cap companies presented and, other than PAH (which I own), I didn’t find any other companies whose stocks looked interesting. This is consistent with the fact that I haven’t added any new positions to my portfolio since Spirit Airlines a few months ago.
That said, though they could fall further still, I’m happy to add to a few of my favorites: HHC at half of its intrinsic value (even if you value its Houston properties at zero; see Todd Sullivan’s excellent presentation a year ago, posted here), Berkshire at nearly 30% below IV (see my slides here), Spirit Airlines at 9x earnings (with a huge tailwind from low fuel prices), Canadian Pacific at 10x earnings, etc.
Since then, here’s how these five stocks have done relative to the S&P 500:
All but one have outperformed the S&P 500’s ~11% gain, with CP and Spirit up the most (which is why I’ve trimmed both a bit, for risk/portfolio management reasons only). And the only laggard is HHC, which is one reason why it’s my current favorite “normal” stock idea (see below for my “abnormal” stock idea). Here’s what I wrote about it recently in my Q1 letter to investors:
The Howard Hughes Corp.
When General Growth Properties, our most successful investment ever, emerged from bankruptcy in early November 2010, it did so as two companies: General Growth Properties (GGP), which had all of the best malls, and Howard Hughes (HHC), a collection of 34 master planned communities, operating properties, and development opportunities in 18 states. Soon thereafter I sold GGP, but held onto HHC (thank goodness, as the stock has tripled since then) in the belief that while most of its properties are generating few if any cash flows and are thus very hard to value, the company has undervalued, high-quality assets in premier locations and that there are many value-creating opportunities that can be tapped.
In July and August 2012 I visited four of Howard Hughes’s properties that account for two-thirds of the company’s book value: Summerlin (Las Vegas), The Woodlands (Houston), Ward Centers (Honolulu), and South Street Seaport (NYC). In all cases, I was extremely impressed with the properties, the managers running them, and the development plans underway. I also got to know HHC’s CEO, David Weinreb, who’s a brilliant entrepreneur with a long, highly successful track record in real estate development.
At that time, when the stock was in the $65 range, I estimated (see this slide presentation) that HHC’s intrinsic value was ~$125/share and loaded up on the stock. It was a great call, as the stock steadily rose to above $150 in mid-2014, where it stayed for most of the subsequent year. Since then, however, the stock has sold off hard, falling to a low around $80 in mid-February before rallying today’s level of $103.56.
The primary reason for the stock’s decline is the collapse in the price of oil, which hits Houston hard, which in turn has caused investors to fear the impact on two of HHC’s major assets, master planned communities The Woodlands and Bridgeland, which are located just outside of the city. This concern has merit: as HHC noted in its Q4 earnings release a couple of weeks ago, “Our Houston MPCs are experiencing lower land sale volumes than in prior years due to the impact that the severe decline in oil prices has had on the Houston economy…land sales decreased (44.4%), or $(60.3) million in our Houston MPCs [in Q4].”
That said, I believe the stock’s selloff is hugely overdone for a number of reasons:
- The Houston economy is no longer as dependent on oil as it once was, so its economy is holding up reasonably well so far;
- The Woodlands and Bridgeland are located in Houston’s thriving suburbs and cater to a higher-income demographic, so they should do better than Houston as a whole;
- HHC carefully controls all development and sales in its MPCs, so there’s low risk of overbuilding and distressed sales;
- The Houston MPCs account for only ~25% of HHC’s total value, so the stock is cheap even if you value them at zero;
- The rest of HHC’s portfolio is doing very well thanks to the company’s superb execution. Development continues apace at Ward Center in Honolulu, Downtown Summerlin in Las Vegas is booming, the new Pier 17 at South Street Seaport is opening in just over a year, and the company just sold one asset there for $390 million.
HHC is very difficult to value with precision, so I hesitate to give a precise number, but I’m highly confident that it’s worth at least $150 and probably more than $200 – and rising at a solid clip – so this is a stock I hope to own for many more years.
Whitney Tilson: Fannie Mae – Why Is the Obama Admin Trying to Keep 11,000 Docs Sealed?
2) Fannie Mae (or Freddie) is my other favorite stock idea, albeit an “abnormal” one because it’s a mispriced option – I think there’s a decent chance it could be a 10-bigger, but the single most likely scenario is still a zero, so size it appropriately. This is what I wrote about it in my last email:
Fannie Mae (in which I have a ~3% position) was up 34% yesterday and is up another 12% today because, at long last, the truth is coming out: the government seized all future profits of the GSEs (via the 2012 “net worth sweep”; note that this was not the original bailout, which nobody is challenging) not because they feared ongoing losses, but precisely the opposite: because they realized Fannie and Freddie were about to become massively profitable.
The testimony by the former CFO of Fannie is so damning to the government’s case:
In a deposition taken last July, for example, Susan McFarland, Fannie’s former chief financial officer, said she told high-level officials at the Treasury on Aug. 9, 2012, that the company was, in fact,