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Tilson Up 16% In 2014; Still Bearish On Herbalife Ltd. (HLF)

Whitney Tilson of Kase Capital is having a fantastic 2014, now up 16% YTD – it now appears that Tilson has a short position in Twitter, which has not previously been disclosed; below is an email which Tilson sent to investors today.

Also see Tilson Has Strong H1 Led By Quicksilver, NQ Mobile Shorts

Whitney Tilson

Here is the July update I sent to my investors last week:

 

Dear Partner,

 

Our fund rose 2.0% in July vs. -1.4% for the S&P 500. Year to date, our fund is up 15.5% vs. 5.7% for the S&P 500.

 

Our fund was down about half the market on the long side thanks to winners such as Hyundai preferred (13.3%), United Continental Holdings (one in my basket of airline stocks) (12.9%), Canadian Pacific (NYSE:CP) (4.9%) and Spark Networks (4.9%), offset by Platform Specialty Products (NYSE:PPH) (-11.8%), Howard Hughes (NYSE:HHC) (-7.8%) and Micron Technology (NASDAQ:MU) (-7.3%).

 

Our fund’s positive returns were driven by a great month on the short side, with numerous winners including Tile Shop (-33.9%), Lumber Liquidators (-28.6%), Herbalife (-18.8%), 3D Systems (-16.2%) and Unilife (-14.9%), partially offset by Twitter (10.4%).

 

Speaking of Herbalife Ltd. (NYSE:HLF), I published two articles about the company in July:

 

1) Why I’m More Confident Of My Herbalife Short Position Today, July 22nd,http://seekingalpha.com/article/2331565-why-im-more-confident-of-my-herbalife-short-position-today

 

2) How Has Herbalife Kept The Game Going For So Long?, July 26thhttp://seekingalpha.com/article/2345145-how-has-herbalife-kept-the-game-going-for-so-long

 

As always, thank you for your support and please let me know if you have any questions.

 

Sincerely yours,

 

Whitney

———————–

Past performance is not indicative of future results. Please refer to additional disclosures at the end of each investor letter.

 

2) Here is an additional update I just sent today about my investments in Korea:

 

Lumber Liquidators LL Tesla Whitney Tilson K12 Questcor Pharmaceuticals QCOR
Whitney Tilson picture courtesy of Kase Capital

Dear Partner,

 

In the monthly update I sent you last week, I mentioned that Hyundai preferred shares were our top performer in July, rising 13.3%.

 

I haven’t written about this investment since my Q3 2013 letter last October (see excerpt below), which I wrote shortly after I purchased it last August and September at an average cost of 90,392 won. Since then, it’s risen 66.5% to today’s closing price of 150,500 won and is now just over a 3% position.

 

In my May update, I wrote:

 

I also visited Korea for the first time in mid-May. Over six days, I visited a Hyundai auto factory, which was a model of efficiency (our preferred shares were up 9.4% during the month and are up 16.6% YTD, incidentally), the headquarters of a semiconductor materials company I’m considering investing in, and attended an investment conference where I met with numerous other companies. Overall, I was very impressed with the people, the country, the companies I saw, and the rule of law as it applies to investors like myself, so I am considering adding a few more Korean stocks to our fund (though I don’t expect the total to exceed 5% of our capital). To that end, during the month I purchased a small new position in Samsung Electronics [both the common and preferred stock] because, among high-quality global businesses (it has a 13% net margin, 11% ROA, 22% ROE, and is drowning in cash), its stock is the cheapest I’m aware of, at 2.7x EV/EBITDA and 7x earnings.

 

In the past week, I’ve rounded out our basket of Korean stocks by investing in two tire companies, Nexen and Hankook. I don’t like the global tire industry any more than I like the auto industry but, similar to Hyundai, I think that Nexen and Hankook are exceptional companies that can continue to grow and take market share while maintaining high profit margins and returns on capital – and their stocks are very cheap, especially their preferred and holding company stocks.

 

We now own six securities in four companies: Hyundai preferred; Samsung common and preferred; Nexen preferred and holding company; and Hankook holding company. All are 1% positions except for the Hyundai preferred so, in total, Korean securities represent ~8% of our capital. This is a bit more than the 5% I initially estimated for three reasons:

 

  1. The attractiveness of these investments;
  2. Our fund has more cash than I’d like (even with these investments, it’s at the low end of the 90-100% range of long exposure I target); and
  3. The dearth of investment ideas in the U.S. It’s really getting ridiculous: I am finding a great new short idea every day (no exaggeration – it’s all I can do to restrain myself), whereas I’m lucky to find one good (not great) long idea every month.

 

For more color on Korea, Korean preferred stocks, and Hyundai, I’ve attached an excerpt from the annual letter of the Weiss Korea Opportunity Fund, which only invests in Korean preferreds (the entire letter is posted here).

 

Please let me know if you have any questions.

 

Sincerely yours,

 

Whitney

 

My funds are open to new investors on the first of every month. If you are an accredited or qualified investor and would like further information, simply reply to this email.

 

3) The 10th Annual New York Value Investing Congress is only a month away on Sept. 8-9. Speakers include investing legend Lee Cooperman of Omega Advisors, renowned short sellers Carson Block of Muddy Waters, Sahm Adrangi of Kerrisdale Capital Management and Andrew Left of Citron Research, top activists Jeff Smith of Starboard Value and Alexander Roepers of Atlantic Investment Management, and many more.

 

In addition, on the day before the Congress I will co-teach an intensive full-day Workshop, “How to Find Hidden Value,” in which I will discuss in depth many of my current best investment ideas as well as concepts like intrinsic value, margin of safety, value traps and more.

 

Here’s a 10th Anniversary Special, good until August 29th: you can register for the Congress for $2,995, a $3,000 discount off the regular price of $5,995, or for both the Congress and Workshop for $3,995, a $3,500 discount off the regular price of $7,495. Just register at:www.valueinvestingcongress.com/congress/register-now-partners and use discount code: VALUEWALK or VALUEWALK, respectively. I hope to see you there!

 

4) As you (I hope!) take some vacation this month, if you’re looking for a summer read with both substance and style, I can think of no better recommendation than The Art of Value Investing: How the World’s Best Investors Beat the Market, which John Heins and I published last year. Tapping a treasure trove of insight from nearly a decade of in-depth interviews with the best investors in the business, our goal was to offer a comprehensive set of answers to the questions all equity investors should address before putting a dime of their own or their clients’ money to work in the stock market. It’s available in hardcover and on the Kindle here:

The Art of Value Investing: How the World’s Best Investors Beat the Market

Excerpt from Q3 2013 Letter to Investors, 10/10/13

 

Hyundai Motors preferred stock

I recently established a nearly 2% position in the preferred stock of Hyundai Motors. I can hear you thinking: “A Korean automaker? What are you thinking???” The simple answer is that this is an excellent company with bright future prospects, and I was able to purchase it – through the preferred stock – at a ridiculously cheap price: 3.4x trailing earnings (not EBITDA, but real earnings).

 

Over the past 15 years, Hyundai, under the leadership of M. K. Chung (whose family owns more than 20% of the company), has transformed itself from a third?tier industry laggard into the world’s third largest automaker, and has been steadily gaining share, as this chart shows:

 

Hyundai’s Global Market Share

 

 

 

Remarkably, the company hasn’t gained share by sacrificing profits – in fact, it has consistently had the highest profit margins among the largest global automakers, as this chart shows:

 

Consolidated Operating Margin, 2009-Q2 2013

 

Ah, but it’s an automaker, so the balance sheet must be a mess, right? Nope. The company has $20.7 billion in cash (43% of the company’s market cap of $48.3 billion), its debt is tied to its finance arm and more than offset by associated assets, and there are no long-tailed pension and healthcare liabilities that crippled the U.S. automakers (“net defined benefit liabilities” are a mere $906 million).

 

Even without adjusting for the excess cash, the company has generated a high-teens to low-20% return on equity for a number of years.

 

To summarize, this is a good business (albeit in an admittedly lousy industry) that has done very well in recent years – and the stock has responded, rising more than 6x from its late-2008 lows. Nevertheless, today it trades at a mere 8.4x trailing earnings – and pays a small 0.8% dividend to boot. That’s cheap and I might be tempted to buy it – but not when I can instead own it through Hyundai’s Series 3 preferred shares, which trade at a 59% discount to the common stock, meaning we own it today at 3.4x earnings (and will receive a 2% dividend as well).

 

Korean preferred shares

Korean preferred shares came into existence in the mid-1980s thanks to a favorable law that allowed Korean companies, many of which are run by families that didn’t wish to dilute their control, to issue equity in the form of preferred shares, which typically had the same economic rights as the common stock, but few or no voting rights. Nearly 150 companies issued preferred shares before the law was changed long ago.

 

For many years, the preferred shares traded at around a 20% discount to their associated common stocks, but during the panic of the Asian financial crisis in 1997, they traded down to more than a 70% discount and, since then, have traded at a 40-70% discount. The current discount is around 60%.

 

I can find no good reason for such a large discount, especially in light of the fact that the Korean market is steadily becoming more shareholder friendly. Obviously, some discount is warranted, but as this chart shows, the preferred stock discount in Korea far exceeds that of other countries:

 

Preferred Stock’s Discount By Country

 

I believe that this is one of those market anomalies in which something is mispriced primarily because it’s always been mispriced. I have no idea when this discount will close, but my experience, to paraphrase Ben Graham, is that while in the short run the market is a voting machine, in the long run it’s a weighing machine. As Korea continues to become more investor friendly, I think the preferred share discount is likely to close over time, which gives me a second way to win on this investment (the first being that Hyundai continues to do well and its common stock rises over time).

 

A final thought: I take some comfort investing in Korea after reading this transcript of a Q&A Buffett did in April 2009 with University of Kansas students:

 

[Buffett then pulled out the 2004 Korean Stock Guide compiled by Citigroup]. My broker at Citigroup told me to look through this Korean version of the Moody’s guide. He said it would look just like 1951. He was right. I began flipping through the pages and found a lot of good companies trading at very low multiples. In 5-6 hours I put together a small portfolio of 20-25 stocks – about $100 million total. One example was DaeHan Flour Mills. It has a 25% market share in wheat flour in South Korea . Book value was 206,000 Won and the company had 201,000 Won in marketable securities and was trading at 2x earnings. The market is clearly not efficient all the time. There are certain opportunities that can make you fabulously rich.

EXCERP~1 (1)