NOTE: These are the much more informal and indepth notes. If you want to read a short clean summary click on the following link to see what I posted earlier-https://www.valuewalk.com/2011/11/leon-cooperman-tom-russo-sam-zell-others-favorite-stocks-invest-kids-conference/
Invest for Kids – conference notes
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No specific predictions or recommendations – 25 mins instead of 15.
General outlook – “when the situation was manageable it was neglected…” – Churchill
There’s nothing new in finance; today is no difference. EMU is a flightless bird today known as the European Monetary Union. Unit labor costs in Europe could have predicted what happened – German labor costs so much lower in Greece or Ireland so of course unemployment is higher in those countries. Europe holds the answer to its own problem. It’s too dispersed. Most countries least susceptible to problems are in n Europe; most susceptible in S Europe. N Europe could subsidize S but difficult challenge from within.
Talking about 1) perception v reality 2) capital markets
Start w one of most impt questions in history: which came first chicken or egg, c impossible to know – most hands c, b, a – answer is b. Didn’t say chicken egg; reptiles were laying eggs long before chickens existed; and, first chicken was born from two birds that weren’t quite chickens.
Asking the wrong questions
What country has increased oil production the most? A: USA
Commodities have not been a good inv’t relative to inflation … energy … ?
Real estate – mobile / internet, not physical.
Manaus, Brazil – based on 1960s – set-up trade zone, 35% cheaper to produce than elsewhere in Brazil. Foxconn wants to invest 12bn and 100K new jobs. Tax policy works.
Likelihood of change in exotic cities – Shanghai and Beijing will bypass Munich and London. Center of econimic activity moving east. 60% World share of 20-34 year olds will be living in Asia by 2030. Middle class in growing in Asia. China Malaysia Thailand Philippines and India will have growing shares of population in Asia’s middle class.
Capital markets: what is the American dream? Outside US dream is alive and well – equal opportunity, not based on background – and access to capital based on ability.
Prosperity is a function of access to financial capital which multiplies human capital, social capital, and real assets (on balance sheets).
Raw materials were 60% of cost of car but 2% cost of microchip. Rest reflects human capital. Can be increased by –, — and education.
E.g. Elias Zarhouni born poor in Algeria, became director of NIH, now head of global R&D for Sanofi. Importance of immigration.
Of 20 leading science uni’s for science and medicine 5 are foreign, 2 in Canada (u of t, u of BC) – Asians are going there instead of US; 2 in Australia, Melbourne and Sydney; and u Singapore, country built on human capital. 5 in UK, all these ppl would have gone to US if they could.
Warsaw could have been capital of entertainment industry –founders of all major entertainment company was born w/in 500 miles of warsaw but came to US. Viacom, Comcast,, etc predecessors.
½ of all econ growth of last 50 yrs can be traced to medical advances (?) – ½ of all costs related to how you live your life. In us 42% of women and 36% of men are obese, much higher than other countries. Change in Us population weight from 1991/1998 and today costs more than $1 trillion annually à a major part of our deficits. Milekn Inst (?) went to state fairs – for next year choc covered bacon will come out. French fries cooked in bacon fat coming out next year. Deep fried butter can be eaten off a stick, dipped in bacon fat for a little extra taste. [David wanted to be sent to Us but would be returned looking fat.]
Future of US human capital lies in education. US 50%+ of income of housing and education, 2% on tutoring / supplemental education. In 11 asian countries after food @23%, supplemental education is 15% of budget.
Touch on credit for a moment; 6 elements. Over a long time they repeat, we’ve learned very little
- Not leveraged and leverage is not the answer, answer is finding a better way to run a business. Today many of the top banks are leveraged 50-100 to 1 (assets to value of equity)
- Loans to real estate – not every RE loan is good – Woody Allen ”carried it with him wherever he went” … “it has a house on it” – not one Texas bank survived the 80s, even residential prices have gone down in 63 of last 120 years. Focus on owning RE should shift to family health and education. 4 companies are AAA but S&P rates 16,000 securities AAA. History has shown sovereign debt to be one of the worst inv’ts Adama Smith: :When national debts have been accumulated … never fairly paid” Greece – temple of delos in 4th century took 80% haircuts on loans to 13 cities. Greece has frequently defaulted before.
1974 most imp’t year is US financial history, interest rates doubled, stock market, different types of credit. What event occurred in 1974? Creation of hedge funds. Nifty fifty pe multiple went from 66 in 72 to 11 in 81. Investors lost a lot, then moved money to money managers incl hedge funds seeking a return.
Milken family is focused on human capital, education and moving cancer to the history books.
Margaret Mead: never doubt that a group of thoughtful, committed citizens can change the world, in fact it’s the only thing that does.
“Robin” — One of most successful hotel and RE investors in US via Starwood capital in 1991. Structured over 400 transactions with asset values over $40bn. CEO of starwood hotel chain for over 10 yrs, bought westin, formed W brand. Retired from starwood 2005 and now full time private investment funds plus chairman of starwood property trust, large publicly trade commercial REIT (the largest?).
Starwood has bought a lot of residential land. Recovery is a when, not if, question. Now, lowest housing starts in 50 years even with 50 million for ppl than in 1960, even with record affordability of mortgages. Renting vs buying cost lines are crossing. Rents will go up with demand, yet housing market looks moribund. Ppl have been doubling up in residences, highest multigenerational living since the ‘40s.
Around 1.3 million households are formed a year, recently slowed down. 2.1 ppl per household. Need about 1-1.2 mn new homes for years at equilibrium accounting for renting, but now numbers are sub-500,000. B/c of ppl moving in with each other there is 1.5 million in pent up demand that will be unleashed with consumer confidence.
Foreclosure rates differ widely among states – TX always did fine – and foreclosures nationally are trending down. Funds own “Independence” community in Orlando. Appraisals are hard b/c of comps with distress sales. Projects growth in housing based on population growth.
Not gonna recommend a housing stock but stocks to avoid. Hovnanian or Beazer are high-beta, leveraged. He chose 4 horsemen, Toll (top choice), Horton, Lennar, NVR – equity market caps close, Toll top b/c haves/have-nots divide and caters to higher end customers, see Neiman sales up Walmart down. NVR has better inventory turns.
Also likes Lowe’s though stock is up in past week. Reduced shs outstanding, dividend, reasonable multiple (15 v 17.7 historical), enterprise value is 6.5x ebitda v 8.4 historical.
Management committed to repurchase – 70% in next 4 years.
Richard Perry, founder of Perry Capital – NY event-driven. Speaking on 26th wedding anniversary, going to phoenix tonight.
RBS Tier 1 securities, FNMA Freddie Mac second. But if Barry is right this will have assymetric risk/reward. Us has put $170bn into FNMA and Freddie Mac. GSE Junior Preferred Securities. Conservatorship for these co’s is unusual. Preferreds trade for 8 cents on the dollar, so lose 8 cents or make 12x.
FNMA / Freddie Mac could create value by changing guarantee fee from .23 bps by about 10 bps. Gov’t may realize it needs healthy fannie and Freddie b4 gov’t turns around. Mostly owned by community banks, hurt by conservatorship. Preferreds could become equity in privatized, healthy biz over next 2-3 years, if housing turns around fannie and Freddie will be at the center.
Ideas 2: RBS Tier 1 Securities. Healthy banks are going to call the securities at call date or exchange at a discount, to create equity. 10bn sterling outstanding, balance sheet restructuring story. Reduced assets almost 50% by $1trillion sterling, core teir 1 at 11.3% vs European regulatory guidance (EBA?)of 9%. EBa was comfortable with capital cushion for this and all UK banks.
Loans to deposits: RBS, loans are 96% of deposits, so deposits are funding loans. May need to raise 10bn sterling in 2012 (?) and not need to raise in 2013. Has strong liquidity and market has remained open to them. Low net peripheral sovereign bond exposure, 170mn, 1.6% of core teir 1. Also UK gov in 2008-9 put in 50bn sterling; dividends are not payable unless tier 1 coupons are paid, so coupons should be turned on in april as planned.
Also gov has taken the risk of some of their losses (asset protection scheme) on a 156bn troubled portfolio, taking 90% of losses after 60bn of losses. UK gov is all in, and it is a systematically important bank. … Assuming yields turned on, should be at 80 cents on the dollar, 60% higher than currently.
Both not for faint of heart, neither most senior, both offer strong risk reward.
Large cap value based in Lancaster w/4bn AUM. Manages Semper Vic fund, 15% compounded since 1994, 500 bps above S&P, with only 3 down years. Started picking stocks at age 10. Focuses on small number of industries and global companies.
n Global value investing is not girly-man investing. Russo prefers parents to local subs, in part b/c you can invest for highest ROICs when you have no geographic constraint. E.g. ceo of richemont in 2008 could look across the world and decide where to invest. Not japan b/c of deteriorating demographics and being closed to immigration; rather redirect to regions with better prospects. Also subs have dividend burdens – to get $ out must pay taxable dividends or make intercompany loan at unfavorable interest rate. Corporate ethics is also better in global co’s; e.g. Nestle acts consistently with corporate values. They’ve been in China for 30 years. Other companies may add melamine to their milk which kills kids, Nestle can’t; so global co’s better than local. Also avoid self-dealing pervasive in local markets. They can also draw from a global talent pool. E.g. SABMiller, had challenges in south Africa, turned rolling rock around in the US (quietly), then went to other markets; learned how to profile consumers and succeed in markets, improve financial performance. So those are benefits of multinationals.
Also there are lower valuations for the European companies especially, even though their earnings are international currencies and from co’s with faster growth.
Wants 50 cent dollar bills but ones that can grow – capacity to reinvest and capacity to suffer. So e.g. Kraft hasn’t been able to grow its business domestically or internationally. To grow, management must be able to suffer by investing in the growth of the business.
Nestle multiple global billion dollar brands, just waiting for global consumer income to drive demand. Capacity to suffer- e.g. stayed in Russia through the ruble crisis, waited 12 difficult years to develop nespresso into $4bn business, growing in china and india. As losses from past investment spending bear fruit the income statement will benefit.
Pernod Ricard has good global trademarks and is riding growth in the Chinese market. Competitors abandoned the market in the early 2000s, Pernod saw 500m case market w only 2m imported. Now they get 15% of their profits there but Chinese still only import 5million cases. India is also a growing profitable market.
SABMiller. Also a growing consumer company. Now going in sub-Saharan Africa, convetrting homemade beer consumption into bottled beer. Just bought Fosters, Effes in Turkey with no competition – taking advantage of volatility.
(did not discuss valuation … 3 yr time frame)
Leon Cooperman – Omega, long short, started in 1991, before that 25yrs at GS. Ranked #1 srategist in Inst’l Investor for 9 years. Frequent guest on CNBC. 9 point plan to fix the country. Signatory of Giving Pledge.
Permission to make slides available.
Traditionally was bottom up but now e/t is risk-on, risk-off. Record correlations will change in time. Need to have opinions on US Economy, China, Global financial system (check)
US – inclination is we will avoid a recession and low in current cycle is 1100 on S&P. Immelt says they didn’t see a double dip 10 days ago. US economy is growing slowly but growing. Us led Europe to recession so unsurpirising that Europe is still sluggish.
Europe: position 1, what’s going on is so complex, let’s stay out. Position 2, anytime an event will be super catastrophic it doesn’t hit. Countries will work to avoid a crisis now. Banks will have to shed assets, raise cost of capital, put assets onto ECB. ECB will do what it has to do.
Obama is not moving to the center, it’s not working. “when the president is in trouble the market is in trouble”
Middle east – if it’s about democracy, great, if not, look out; watch the price of oil.
View of the market depends on what’s being discounted. Market is discounting conservative expectations. S&P multiple is now 12 despite low interest rates. Equity risk premium (v bonds) is near a record high.
Wouldn’t own a US gov’t bond.
Stock market was discounting a recession at 1100, at 1225 it’s discounting a lot of uncertainty and unrest – appropriately. Thinks market is fairly to undervalued, best choice on financial assets “in the neighborhood” – better than cash, Us gov’t, does like some credit.
3 stocks he likes (“below 1200 on the S&P”):
first is a beneficiary of the world we’re in, Charming shoppes, avg woman size used to be 8 now it’s 16. Owns Lane Bryant, fashion bug? … lane Bryant is prob worth about 700m, twice the price of the stock.
Etrade. Got asses kicked in the mortgage business. Mortgage portfolio is 13.8bn amortizing at 700m/quarter w loss provision of 100m/quarter. Earning 80 cents, stock at $10. Two drags will go away: the 100m loan loss provision and cash they can’t pay out b/c fed won’t let. When fed says they can pay off the debt they add 40 cents to earnings. In 3 years (?) they earn $1.50 share plus maybe acquisition.
KKR Financial. 9% year, dividend covered twice by earnings. Raised 250m at 8 3/8ths recently, stock at 8, book at 10, insider ownership, biz can grow 5% a year with the dividend.
“equities are the best house in the financial asset neighborhood”
Invest for kids gives impact gifts to 12 (so far) orgs, raised 2m in past years, work with underprivileged difficult circumstances, just need support guidance and $ backing. This year raised $1.1million.
Mark Lasry: Getting paid to wait
Avenue Capital, distressed debt
2 examples – investments
GM. In the 50s it was the largest US company. In 2000 had largest revenue in the US. Now it is at 1x EBITDA. Apple was on the verge of bankruptcy in 1997, 150m investment from MSFt to stay afloat. Now it (almost) is the largest market cap in the world, generates 35bn of EBITDA.
GM’s cap structure: enterprise of 12bn, EBITDA this year and next of around 13bn. So compared to apple 1/3 ebitda, 1/30th market cap. Not going out of business. Debt is 5bn. Trading cheaply b/c US owns 1/3. Investors are avoiding b/c of timing, when is US gonna sell? So now is the time to come in! Risks are: recession. Comps are at 4-6 times.
Hovnanian. People ultimately want to own a house. People will buy b/c both interest rates and prices are at an all time low. Now people are trying to time the housing market. Nervousness in the market means you are getting overpaid for risk.
Senior notes are at 35, coupon 6/7.5% – so effective yield is 20%. Best house is credit house b.c you get paid while you’re waiting. No debt due for 3 years, til 2015. 350mn in cash and 1bn of inventory. For equity you need to believe no recession b/c they may sell equity and dilute sh’s. But in debt you getting paid to wait, even if u don’t know when housing market will turn.
Believes economy will grow around 1% b/c of Europe headline risk. And if Europe is defaulting none of the ideas today are gonna work. If Europe’s not gonna default are you getting paid enough for that risk?
Michael Elrad – GEM Realty, GEM Realty Securities, RE long-short, no market correlation, no down years in 12 years of management
“can you invest with conviction in a volatile environment?”
Invest in public and private RE; believe high quality fundamental investing always wins in the idea. Gem investment process based on 3 stages. 1. Make themes 2. Bottom up due diligence for long and short equity selection 3. Identify potential risks
Fave top-down theme: class A malls. Mall industry grew in recent years, now it is mature and supply growth has halted as existing malls have regional monopolies. Less than 10 malls are estimated to be constructed in the next decade – currently only one being built.
Of those C and D properties are private and not relevant. B are owned by reits, mostly. A are owned by public co’s so you gotta buy the stock of:
Retailer Darwinism – how good is your retailer if your largest tenant is not fit to survive? 15 years ago failing dep’t stores plus books and music were major tenants. Malls have adapted and now tenants pay more, have better credit, and are less concentrated. Class A mall tenants have had growing sales in past 14 years (now above prior peak). This resiliency is important for investing in a volatile market. Store sales have been volatile but net income has been positive every year but one in the last 10. Class A malls lost v little occupancy in last recession. Private market acquisitions have been taking place for Class A malls indicating stock market is undervaluing class a mall reits.
All 5 are good investments, but 3 yr long in Macerich is his investable idea. 4.4% yield, attractive in low rate environment. Same store NOI growth comparable to peers. Healthy balance sheet but perceived as highly leveraged; reduced from 75% during crisis to 45% today but no credit from markets.
Also free upside: Macerish trades at 10% discount and probably will be added to S&P500, stabilizing its institutional equity base; also non-staggerred board and no controlling SH’d making it an appealing takout candidate.
Looking out 3 yrs, 12% IRR on base case; down case 5% (yield); positive 17%. Volatile world so first year will see variance.
For those concerned about a soft economy, you can hedge a weak consumer in 2012 by shorting a basket of weaker REITS – class B / strip centers, more vulnerable to weak consumer and online sales. 50% hedge is appropriate given higher sensitivity of shorted stocks. [Upside 17-> 9.5, downside 10% higher, volatility down.]
Potential risk you don’t need to hedge: online sales. Now 7% of all sales and will grow to 10% over the next decade. But see Apple; they opened stores as showrooms to complement online engines and customer service centers – in Class A malls.
Barry Rosenstein – JANA Partners, event driven fund in NYC. PE style research approach to public markets, compelling valuation and catalyst to realize that value. Also have activist approach- see El Paso, Charles river, cnet, kerr mcgee, Houston exploration (?); most recently mcgraw hill
McGraw Hill – sleepy family run 1980s style conglomerate with a collection of companies that have nothing in common. Ratings business has 800m of EBIT, has moat and pricing power despite headwinds. Financial ___ includes cap IQ and others plus s&p index business, just announced JV with DJ. Generates (&)%?) m/ EBIt; textbook business generates 300m EBIT, faces challenges but iconic brand in consolidating industry with string sales relkationships… _____ biz, includes Platts and others, Platts generates more than 100% of ebit of this business.
Conglomerate structure gives bad capital allocation. Education has lost market share to pearson b/c capital intensive. Bloated cost structure leads to underperformance. And analysts can’t value the biz and just value the whole co. at the lowest (education) multiple.
SO, bought 6% with Ontario pension / teachers plan. Now spinning out education biz, cutting costs, accelerating share repurchase. But there’s more to b done. Ed biz will be better off as standalone co. also tax basis may be higher than undersytood making it appealing to PE.
On the conglomerate, companies are worth higher multiples and theres another 100m of cost cutting. Worth 6-7 per share. Plus stock buyback, 15% of market cap, accretive at current prices. Plus more portfolio optimization is possible: index JV could be spun off. Platts would be of interest to industry buyers and worth a high teens multiple. Re the ratings business, competition would be difficult. Fines should be proportional to size, as with banks. Litigation – most claims aren’t making it into court, courts show actual fraud must be proven, not just bad ratings model, class actions are not being allowed, and, on many of the litigated securities that got past motion to dismiss, investors have gotten significant recoveries so liability is less than headline.
Also rating agency will benefit from lending going off bank balance sheets to rated securities, process further along in Us but just starting in Europe.
More than 60/sh, 40%+ upside, not incl value related to dispositions and other asset plays.
John Keeley – Keeley Asset Management. Value-oriented offbeat ideas. “just an old-time stockpicker with an old office in a small building just under the L tracks”
Will talk about corporate spinoffs and S&L conversions.
[Advantages of spinoff stocks]
ITT – (most recently) split to industrial products, Xylum (water?), and Elexis (defense?). Believesthere will be defense consolidation; hardest to buy. Favor industrial company – no debt, 600m cash, 15m asbestos payments a year, but can do bolt-on acquisitions, reasonable upside.
S&L conversions. (SNL Financial out of Charlottesville VA has info)- 5 names? … s/t about can’t be bought for 3 years.
Viewpoint – texas – w.in 9 mos will be 3 yrs
Territorial – Hawaii – also 9 mos – best credit b/c in HI can’t walk away from a mortgage
View is that dodd frank will cause SnL’s to be acquired by regionals
Sam Zell / Equity Growth Investments
Article in Barrons. Not just US, his co Equity International has 7B around the globe.
Emerging markets. “Globalization has happened.“ GDP of emerging markets is equal / larger than developed markets. Damocles sword hanging over developed world. Japan Russia Italy others are all losing population. w/o population / GDP growth hard to get profitable investments. Japan expects 1:1 ratio of working to retired workers in coming decades, Europe not much better.
Developing world has hunger – no entitlements. Brazil is going from 25-67% middle/upper class. “Have we lost our mojo? I dunno. But I do know where it went.” Brazil is self sufficient in food, energy, water, young, upwardly mobile, 7th largest economy in world, educated workforce, executive talent. [Socially liberal, economically conservative.]
Where’s the demand gonna come from? Brazil has pent up demand. 7m housing units deficiency, working gov’t mortgage finance program that is helping people enter the middle class. Huge capital demands. 60bn capital investment last year, but interest rates and inflation are high. So as an investor you get higher risk-related returns because you are feeding demand. Understands emerging markets, trading growth for rule of law; so choose a good partner. Where is your capital worth the most? Brazil is not the only option but will grow exponentially over the next 25 years. Outside sao paolo and rio, seems like us in the 50s. population is as confident in the future as he is. Many areas are attractice but esp those dealing with growing and aspirational middle class.