Yesterday we posted notes from the Invest for Kids Conference. Today, we post the favorite ideas of some of the other famous speakers who attended the event. Below are their favorite investments (notes are from Charlie Bossart, an analyst at Grizzly Rock Capital).
Sam Zell – Equity Group Investments
Given the readily apparent headwinds in the current investment environment—fiscal cliff, European debt crisis, slowing growth in China, etc.—Zell would expect assets to be much cheaper than they currently are. He notes that credit is cheap—but only to those that don’t need it. Assets are artificially high due to the massive amount of quantitative easing produced by the Fed. Zell gave no specific investment idea other than to consider investing in Black Swan type events. There is more uncertainty in the current market than he can ever remember and would not be surprised if unanticipated, long-tail probability events played out in the coming years.
Steve Romick – First Pacific Advisors
Romick is cautious at this time. He notes that over the last 50-60 years there has been a diminishing marginal productivity of debt as the US economy has become steadily more levered. Real GDP has been steadily trending lowing over this same time period. He is nervous that quantitative easing has been overdone and that this money could have been spent on real investments in the economy with longer lasting benefits. Ben Bernake has been wrong about many things during his tenure—e.g. wrong in his projections of housing risk on the economy, wrong about recession odds, wrong in his proclamation that the US would not monetize its debt, etc. He notes that large cap stocks are inexpensive relative to small cap stocks on a P/E basis relative to historical norms.
Idea: Renault SA (EPA:RNO) (French car company)
Renault SA (EPA:RNO) has generated over $4 billion in FCF since 2004 excluding dividends received from the firm’s equity positions in other companies. It is a better business than people think: entry level cars are more profitable than other segments for the company and this segment is growing relative to others. The firm has significantly lower SG&A expenses than Nissan as a percentage of revenue. The company has virtually no net debt. The value of the company’s publicly traded equity interests (including Nissan Motor Co., Ltd. (TYO:7201) (PINK:NSANY) and AB Volvo (PINK:VOLVY) (PINK:VOLAF)) justify its current price and you get Renault CarCo for free. Romick plays this scenario by being long Renault and short Nissan Motor Co., Ltd. (TYO:7201) (PINK:NSANY) and AB Volvo (PINK:VOLVY) (PINK:VOLAF)
Kelly Cardwell – Central Square Management
Idea: Nexstar Broadcasting Group, Inc. (NASDAQ:NXST). Broadcast television is still attracting advertising despite growth of digital advertising. Nexstar is one of the largest pure play TV broadcast companies. Retransmission fees of the company are growing at a 20+% CAGR. FCF yield to equity is currently 26%. 80% of revenue is driven by cyclical advertising. Their biggest risk is recession.
Ari Levy – Lakeview Investment Group
Idea: Short InterOil Corporation (NYSE:IOC). Intentional misstatements by management to investors have caused the stock to be overvalued. This is a simple case of outright stock promotion on the part of management. The company operates as an integrated energy company with its assets located in Papua New Guinea—a place where no fewer than six energy companies have tried to drill in the last half century and all have failed. The company has no proven or measured reserves and has never produced or proven natural gas can be developed on its land. The company claims it is unable to do extended well tests on its claimed energy discoveries because government agencies have thus far denied them permits. Upon investigation, the firm has never applied for permits. Why lie? Furthermore the company has been unable to find an operating partner to bring its product to market. InterOil Corporation (NYSE:IOC) again claims this is due to government red tape, something government agencies are oblivious to upon simply asking them. Despite a $3 billion plus enterprise value, Levy thinks the true realities of the company’s assets are grossly misstated, and in the most extreme case may have no economic value.
Kyle Bass – Hayman Capital Management
Hayman Capital Management focuses on global, asymmetrically priced tail risk opportunities. Bass argues that there is an enormous amount of convexity in asset prices today, especially in regards to sovereign debt. There has been 10.7% annual growth in global debt over the last ten years. One should not believe what central banks or governments are saying—when things are bad they have no choice but to lie in order to create confidence where there otherwise would be none. Many sovereign balance sheets are so heavily indebted that they are irreversible. We as humans choose not to recognize obvious facts sometimes because the consequences of doing so would be too detrimental. Focus will soon be on Japan, where debt as a percentage of GDP is over 225%.
Idea: short Japanese Government Bonds. They can’t pay this debt burden back. Why don’t people realize this?
Three false axioms:
1. Japan’s current account allows it to self-finance the deficit—FALSE. Prediction: Japan will have a capital account deficit by October 2013. This will be a major surprise.
2. The Bank of Japan is not monetizing its debt—FALSE. They are.
3. Retail investors will always support the JGB market—FALSE. More people in Japan are spending rather than saving and population is in decline. This is a Ponzi scheme.
This Japanese debt crisis is one of the most obvious Bass has ever seen. Trade recommendation: short JGBs or bet on their decline through options. Convexity will be enormous.
James Grant – Grant’s Interest Rate Observer
Grant was also very critical of Bernanke and the Fed—a common theme from the second half speakers. He says we used to have a gold standard, now we have a PhD standard. At Jackson Hole, Bernanke admitted he was “learning by doing”. Grant notes that interest rates usually move in generation-long cycles. The current bull market in bonds has been 31 years long, resulting on consistently falling rates. First investment idea: Gold—what he calls the “legacy monetary asset”. Despite being in a bull market for 13 years, one can invest in gold and still be contrarian. This is highly unusual. Second idea: Metlife Inc (NYSE:MET). As with other life insurers, Metlife Inc (NYSE:MET) has been one of the losers of the great bond bull market. Management at Metlife is very good: they hedged interest rate exposure before the market crash; they sold Stuyvesant Town real estate assets at market peak; they purchased American International Group, Inc. (NYSE:AIG) life insurance assets after American International Group, Inc. (NYSE:AIG) collapse. Stock currently selling for less than tangible book.
Steve Mandel – Lone Pine Capital
Idea: Verisign, Inc. (NASDAQ:VRSN)
Lone Pine currently owns 9% of the company. Verisign, Inc. (NASDAQ:VRSN) has no net debt and about a $6 billion market cap. The company currently receives about $7.85 for each registered domain name annually. Thesis: the combination of 7-8% domain name growth and 7% annual pricing growth combined with the firm’s operating leverage will lead to a 25% annual return over the next four years at current prices. The pricing on many of the firm’s domain name fees are allowed to be raised up to four times over the next six years, each time by 7-8%, per the Department of Commerce. Furthermore, the US Department of Defense has come to view Verisign, Inc. (NASDAQ:VRSN)’s internet infrastructure services as critical to national security, which will likely result in a favorable negotiation relationship with the Department of Commerce going forward. The firm provides a service essential to the internet and charges a relatively low toll for this service. This is an attractive market position. Operating margin should expand for years to come.