NOTE: These are the much more formal and shorter notes. If you want to read a much longer and informal summary, click on the following link-https://www.valuewalk.com/2011/11/indepth-notes-tom-russo-leon-cooperman-marc-lasry-invest-kinds-conference/#ixzz1dJvP7228
The Milken Institute
The ACAP Strategic Fund's managers see a "significant scarcity of attractive asset allocation choices globally," but also a strong environment for fundamental stock picking. Q2 2021 hedge fund letters, conferences and more According to a copy of the fund's second-quarter investor update, which ValueWalk has been able to review, its managers currently hold a balanced Read More
Milken did not present an investment pick but rather gave his thoughts on Capital Markets – past, present and future. He said the world’s economies have gotten into the mess they’re in today by not paying attention to the past. He asked the obvious question: Will the EMU bailout fly? He said today’s developments in the EU were predictable since you have one currency representing several countries with varying labor costs between them. He did note that coordinated tax policy does create jobs.
Milken said Asia will continue to grow as a global force. By 2025, 20 of the Top 50 Cities in the world will be in Asia. He showed how Asia is growing as a leader of human capital. Three ways to improve human capital: immigration, lengthening life and education. Asians’ top income spending goes to a food and education whereas Americans spend on housing and transportation.
Milken also discussed rising obesity rates in the US. He said if Americans decided to get healthier, we’d have $1T to spend on other things in this country annually.
In discussing credit, Milken pointed out that its credit that counts, not leverage. Most loans to real estate are not investment grade
Starwood Capital Group
Barry began his presentation by asking in a volatile world, what themes are there to invest in? Sternlicht is making a contrarian investment in betting on a return of housing and buying residential land. While everyone else is talking about apartment REITs with explosive rents, Barry is going one step further and recommending housing.
He says housing is just a question of “when” it will return as opposed to “if.” Housing starts are the lowest in 50 years despite record affordability. Even the cost of owning vs. renting graph has crossed for the first time.
Housing starts have historically averaged at 1.3M a year and we’re currently down to 300k. We’re seeing less households formed and more multi-generational living, though there will be pent up demand that will require 1M -1.5M new homes, eventually. When? Well Barry says that depends on when people feel more comfortable about the economy and Washington DC. He thinks it could be 2015 and maybe even sooner with a new Administration. Barry mentioned that foreclosures and delinquencies are trending downward. Interestingly, he said prices are rising if the owner is selling and has time to sell the house. However, prices still falling if the bank is selling.
Sternlicht recommended home builders as way to play a recovery in housing. His top two picks are TOL and NVR. He likes TOL because it’s a case of the haves/have nots. Just as WMT sales are down and Neiman Marcus sales are up, TOL is in a sweet spot because they cater to the $600k+ housing market with prospective buyers who are more credit worthy. TOL has $1.1B in cash and a strong land bank. Sternlicht also liked NVR which has a big inventory of homes, sales far greater than peers and is good at turning inventory.
Sternlicht suggested buying LOW as another way to play a recovery in housing. They own 90% of their stores and distribution facilities so they’ll benefit from real estate as well. They also benefit from the current “renter nation” as renters are hitting their stores to improve what they’re renting. LOW has a 2.5% dividend yield, diverse revenue stream and improved capital deployment. Since 2000, they’ve cut 13% shares outstanding and have a huge buyback in place. Historically, its cheap at 15x vs 17.7x historically.
Perry recommended buying Fannie and Freddie junior preferreds. These are asymmetrical investments as they trade around $.08 on the dollar and you can either lose your money or make up to 12x.
Perry also recommended RBS as his top pick. Perry mentioned how the bank has restructured its assets and is highly liquid. Due to UK government’s implementation of an “asset protection scheme” RBS is protected from major future losses.
Gardner, Russo & Gardner
Russo is buy and hold investor and said he hopes his pick pays off over several years. He focuses on global value equity investing. 70% of his fund are in non-US companies. His fund finds opportunities when the world is currently looking elsewhere. He mentioned Europe as a current opportunity for him. As a value investor he is looking for 50c dollar bills and likes companies that have the capacity to reinvest and who have the capacity to suffer. Market volatility is a friend of the long term global value investor.
He listed the benefits of global value equity investing in leading multinational companies as: capacity to continue to re-invest in pursuit of corporate-wide ROIC, freedom from dividend burdens, corporate ethics/cultural knowledge, corporate governance, global talent pool, global best practices, lower valuation available (European-based companies loathed), and reducing translation risk.
One of his favorite names are Nestle which has 7.1% organic global growth and is increasing their developing/emerging market budget. Another is Pernod Ricard and SAB Miller.
Cooperman, a very successful long/short investor gave a quick and entertaining presentation. Traditionally, he said he’s been a bottom-up stock picker but that’s been tough with the record correlation and with everyone investing now in a risk on/risk off mode.
His outlook for the US is that it will avoid recession and be in slow growth. He mentioned that he recently met with GE’s Jeff Immelt who said they don’t see a double dip either. He said European’s weakness is not indicative that we’ll be weak though we won’t be in a “feel good” situation due to low labor growth and low productivity growth. As unemployment remains high so will social unrest.
Cooperman is positive on stocks, calling them the best house in the financial neighborhood – though acknowledged in may be a bad neighborhood. Said he wouldn’t own US government bonds. He said there’s more cheap stocks out there than he has money. He mentioned 3. He likes CHRS which has Lane Bryant as the crown jewel. He mentioned the average women’s size is ~14 today up from ~8 in 1986. CHRS could be a go-private candidate as the idea here is to get out of Fashion Bug business, fix up the rest and sell it.
Cooperman also likes ETFC which Chicagoan Ken Griffen put in play. He mentioned the company has $1.5B in cash in excess capital and is just waiting for the Fed to give them the greenlight to use it and it will add 40c to earnings. He also was positive on KFN which has a 9% dividend yield and has a 2x coverage ratio. The stock is at 8 and book value is $10. KFN also has substantial insider ownership.
Avenue Capital Management
Mark is known for his success in distressed debt investing. His first pick was GM equity as he thinks it’s a cheap stock. GM trades at 1.0x EV/EBITDA. EV is $12B and EBITDA is $13B this year and likely next. So the S&P is trading at 12x earnings and GM is trading at 1x. Lasry said many investors are shocked to discover that GM only has $5B in debt. He says it’s trading at 1x because the US government owns 1/3 of the company and investors are trying to time the government’s position. He thinks its not wise to try and time this and says the biggest risk to GM is recession. Though at 1x, you’re getting paid for the risk. Ford is trading at 3x. People are also scared because it is out of bankruptcy and they’re unfamiliar with management.
Lasry also recommended Hovnanian debt. Hovnanian is the 7th largest homebuilder. The question, he says, is will people want to buy a house 2-3 years? Again, housing is an investment everyone is trying to time. He can’t say when the right time is, but now is a good time. Hovnanian has $1B NOL, trades at 3x adjusted BV vs industry comps of 6x. Hovnanian has $1B of inventory. If I got this right, they have no debt for the next three years. With notes at 35 the coupon of 6 or 7.5% gives a current yield of 20%. Whereas Cooperman called equities the best house, Lasry thinks credit is the best house because you’re getting paid for waiting for a return in housing.
GEM Realty Capital
Elrad is a successful REIT investor. He began his presentation by asking if you can invest with conviction in a volatile environment? Elrad believes despite noise, fundamentals always win. Their process at GEM comes in 3 stages: Top down – identify unique real estate themes, Bottom up – individual security selection, Hedging – identifying the risks
Elrad is positive on Class A Malls. The US Mall Industry has matured after four decades of supply growth. Now, its projected there will be just 10 malls built over the next decade in the US. The Big 5 Mall REITs – SPG, Westfield, GGP, MAC and TCO – own 80% of US Class A malls. Elrad said Class A mall tenants pay more in rent and have better credit. Class A malls can also boast a more diverse tenant base. Retailer sales are volatile but NOI less volatile for Class A malls. Private market transactions imply that Class A malls are 20% below fair value.
Elrad’s pick was a three year investment in MAC which trades a 10% discount to its peers – a discount he doesn’t feel is justified. MAC has a 4.4% dividend yield and NOI growth should be 3% in 2012. Elrad says MAC hasn’t received credit for reducing their leverage from 75% to 45%. He thinks the stock has free upside relative to its peers. MAC has a $7B market cap which could make it one of the next REITs to be added to the S&P500. MAC is also a logical Class A takeout candidate.
Rosenstein joked that his track record at the Ira Sohn Conference has been mixed. We’ll either hit a home run or strike out with him. He got his start in the 1980’s doing hostile takeovers.
His pick is MHP. He called a classic sleepy company with a collection of companies with nothing in common. He cited 3 reasons MHP is underperforming: capital allocation issues due to conglomerate structures, bloated conglomerate cost structure; and investors can’t value the company properly and value it at the lowest applicable multiple – the education business.
After buying 6% of the company, he said JANA called the company with their ideas to cut costs and the company has begun to take steps but he feels they can do more. He thinks the $100M in cost cuts can actually be $200 and he’d like to see them buyback $1B of stock this year and another $1B next year. He thinks that with the right changes, MHO could be worth above $60/share.
Keeley Asset Management Corp.
Keeley’s focus is value investing with a focus on spinoffs and savings & loans. He looks for stocks emerging from bankruptcy; those trading below book value; savings/loan conversion; and distressed and wayward utilities.
Keeley mentioned how corporate spinoffs often drift initially because since they’re not in and indexes, institution selling, individual selling, and no Street support. This presents opportunities. He highlighted the ITT spinoffs of XYL and XLS. He believes the parent company is fully valued. He believes the defense company, XLS, is undervalued. He said more defense spending cuts could lead to more consolidation in the M&A space.
Keeley also focuses on S&L conversions. He said Dodd Frank legislation could cause small S&L’s to run into the arms of the regionals. He mentioned CFFN, ORIT, CPFG, RCKB and TBNK as potentials. He also said takeovers are typically 1.5x-2.0x book value.
Equity Group Investments
Zell did not present any specific investments, but rather discussed the boom of emerging markets. He said the GDP of developed and emerging markets is now equal. In fact, emerging markets may be slightly higher – a trend that is just beginning.
Zell said you need population growth for a productive investment. Several countries like Russia and Japan are experiencing population declines. On the flip side, places like Brazil are seeing population growth. Not just that, but the middle class is growing as well. Zell couldn’t say if we lost our mojo, but said its definitely in Brazil. There’s 180M people in Brazil, they’re growing at 5-6% annually, they’re self-sustaining in water, food, and energy and can scale to grow and become more efficient. They’re the 7th largest economy and have an educated workforce and executive talent available. They’re also mindful of destructive hyperinflation. Zell says as an investor you look for where there’s demand – in Brazil, you have pent-up demand.
Big H/T to Nomad Fund