Whitney Tilson, the CEO of T2 Partners, is speaking now. Whitney Tilson is the organizer of the value investing congress, and runs a value oriented hedge fund and mutual fund. Tilson is known for his shorts on stocks with extreme valuations, and his frequent media appearances. At the Value Investing Congress in May, Tilson presented the bull case for American International Group, Inc. (NYSE:AIG). The stock is up a few percentage points since the recommendation.
Below are notes from Whitney Tilson’s presentation (For our full coverage on Value Investing Congress 2012 – click here)
Whitney flipped spots with Mick McGuire from Marcato. He will be pitching a few of his favorite ideas
Whitney spends about 80% of his time on bottom up research, but has learned over time to pay more attention to macro. With that in mind he is starting off with a brief macro overview. He sees tepid GDP growth, but not very strong considering the extent of the downturn. It requires about 150,000 jobs a month to keep employment steady given the population growth. So despite 30 straight months of job gains, employment remains high. Additionally unemployment only counts individuals who have actively looked for work in the last 4 weeks. Overall he thinks the U.S. lost about ~3.5% of all job growth from the peak and it is taking longer than normal to get them back. Over the last 30 years the U.S. is running chronic deficits, and he thinks its an unsustainable long-term trend that will require some grand compromise.
Historically the housing market has been a driver of recoveries, and in the first year or two since the crisis that has not been the case. He thinks the story is not weakness in the private sector, but weakness in the housing sector and with government spending and hiring
Whitney thinks everyone is projecting a straight up and to the right housing recovery, and he is not so sure of that. He is short a few hombuilders and housing related stocks at 2x – 3x book value. He also thinks big money is flowing to low yielding treasuries, most of which will have a negative real rate of return. His view is a diversified portfolio of blue chip stocks purchased at attractive prices will far outperform treasuries in the long-term.
Whitney believes equities in general are out of favor, and he believes investors are driving with their rear view mirror. Over the last 30 years bonds have done great as interest rates continually fell. In fact Fidelity currently has more money under management in bonds than in stocks.
Whitney is presenting 3 ideas. First up: Long Netflix: NFLX
He is giving a quick overview of his thesis, but insists that he has published extensively on it and refers everyone at the conference to his more detailed pitches. NFLX is currently valued at ~$100 per subscriber, and is almost universally hated by investors right now due to concerns over competition. He thinks there is enormous optionality on the upside, and is cheap on a revenue and subscriber valuation basis. Tilson concedes the future is uncertain, but likes the risk/reward profile.
Tilson is comparing NFLX today to a “Company A” in 2001. Across the financial metrics the two companies are very similar, except NFLX has 1/2 as much debt and is a less capital intensive business. Tilson then reveals that “Company A” is Amazon and turned out to be a 20x stock in the last decade. He thinks NFLX delivers great customer satisfaction at an unbeatable price of ~$.20 a day. Both companies are willing to sacrifice near term profitability in order to reinvest in global growth opportunities. He sees many similarities between the two, but fundamentally believes NFLX is a better business with higher margins and a capital light operation.
Tilson idea #2: Berkshire Hathaway: BRK.A
Again a well circulated Tilson pitch
He values the current business operations at 8x EBIT, which is roughly 12x P/E. In the past Tilson valued those operations at 10x – 12x EBIT, but believes with Buffett getting older he is being conservative with his valuation.Using that metric along with cash and stock holding he values the A shares at ~$175,000.
Buffett is getting older, but Tilson cites an actuarial table to explain that Buffett is projected to live 11 more years and Tilson believes he will run BRK for at least five more years. Additionally he cites AAPL stock as an example that the enterprise can continue to thrive once the leader is gone.
Tilson idea #3: Howard Hughes Company: HHC
A stock he pitched at last year’s Value Investing Congress, and an idea he just said: “came from Bill Ackman”
Ackman is Chairman, the CEO spent $15mm personally on at-the-money options and is heavily invested in the business.
Recently Tilson visited 4 properties, one of which is the Summerlin master planned development in Las Vegas. He explains that the market is very weak, but there actually new homes being built in a few areas around Vegas.
Other than Summerlin, Tilson believes most assets are held below fair value on the HHC balance sheet. When HHC came out of bankruptcy they marked all assets down. He believes many assets have fair value so far in excess of carrying value that “you could drive a truck through the difference”.
Tilson also visited The Woodlands in the Houston, TX area; another HHC master planned community. There is some raw land that is undeveloped, but there is building going on commercially and residentially in the community. Overall Woodlands is doing very well and is a total contrast to Summerlin in Vegas.
Tilson went to Hawaii to visit an HHC property in Honolulu, which he says is thriving real estate market right now. HHC is planning 5-8 class A condo towers right now the beach along with retail developments. Factoring in current apartment valuations in Honolulu, the HHC development begins to look like a goldmine. At the peak of the market, 1 acre oceanfront in that district of Honolulu cost $18mm.
Finally Whitney also visited South Street Seaport where HHC is planning a significant development scheduled for ~2015. This site has incredible potential, and is currently carried on the books for only $6mm.
Overall HHC is trading for roughly 1.25x book, which he views as very cheap. He can’t say exactly what its worth, but he knows enough to believe its worth much more than the current share price. Across the company there is optionality with the real estate assets and it provides a decent inflation hedge as well.
11:50 EST: Q&A
There is some concern over larger competitors entering NFLX’s space. Tilson insists that Blockbuster, WalMart, and other tried unsuccessfully in the past. He thinks Apple isn’t interested in their business, but NFLX could make a good acquisition for a larger company looking to enter.
Another attendee asked about Tilson’s fund performance YTD. Tilson said they are “about flat” despite a really strong first quarter. He said they had a tough positions in Q2 which are “longer stories” and he should have taken more off the table in Q1. Overall he said the last few years have been tough, and after a few years of beating the market he is getting kicked in the butt by the market.