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Weekend Edition

What we learned this week from the world's best investors
Saturday, October 16, 2010

We spent most of this week at the sixth annual Value Investing Congress (VIC) in New York, listening to speakers like David Einhorn, Bill Ackman, and Lee Ainslie (a "Tiger Cub," or Julian Robertson protégé) presenting their thoughts on the economy and favorite stocks.
 
Here are some highlights...
 
Workshop co-host Whitney Tilson said now is a great time to be an investor. You can find lots of high-quality companies on the long side (a theme I've built upon over the last few years), and lots of overvalued, poor-quality businesses on the short side.
 
Among longs, Tilson likes World Dominating franchises like Microsoft (MSFT), Anheuser-Busch InBev (BUD), and Automatic Data Processing (ADP). Tilson's partner, Glenn Tongue, showed us how ADP could afford to sell low-yielding debt and buy back its higher-yielding stock.
 
Finding high-quality businesses with great balance sheets is a strong theme among smart investors right now. (Of course, I say they're smart... I've been beating this drum for a couple years!)
 
Even John Burbank of Passport Capital, the macro investor's macro investor, says he owns shares of Microsoft, ExxonMobil, Nestle, and Kraft. Burbank said something I've heard many times from seasoned money managers: "I always know I'm onto something when my investors say I'm doing something wrong."
 
Lee Ainslee of Maverick Capital also likes high-quality companies, but he's more partial to technology stocks. He says technology is the only sector of the S&P 500 that gets more than half its revenue from overseas. CommScope (CTV) is his favorite right now. It makes hardware for wireless and cable communications markets.
 
Ainslee said stocks in general are attractive because free cash flow yields on equities are higher compared to corporate bonds than they've been since 1957. Ainslee said Maverick owns Dell (DELL), Amdocs (DOX), Hewlett-Packard (HPQ), and Marvell Technology Group (MRVL).
 
David Einhorn of Greenlight Capital gave by far the best presentation I've ever seen at the Value Investing Congress. Einhorn put up 139 slides. He presented before lunch, knowing his presentation would run longer than his allotted time.
 
He showed us photographs and videos he shot while on site inspecting his target company's property. He showed us slide after slide that tore the company's financials apart and put them back together again. The presentation was as much an education on a great investor's thinking process as it was a brilliant investment idea.
 
The idea was a short sale recommendation. Einhorn painted a vivid picture of a company destined for the corporate scrap heap. He made a compelling case that management needed to take write-downs to assets. The company may also be capitalizing costs that might not be retrievable – like the cost of changing the direction of a road through its property. As Einhorn spoke, investors sold short, and the stock price dropped 8%. He drew a straight line "from something to nothing," as a friend of mine put it later. It was, as more than one conference attendee put it, a "tour de force." It's what every professional investor should aspire to.
 
Einhorn's presentation inspired me. It made me want to work harder, learn more, dig deeper, and be better. It was energizing...
 
But it started out terrifying. Einhorn's brilliant short sale recommendation is a buy recommendation we've been writing about for years, St. Joe Company (JOE). St. Joe owns more than half a million acres of land in northwest Florida, much of it within a few minutes' drive of the Gulf of Mexico, including a five-mile strip of pristine beachfront.
 
Not everyone sold St. Joe shares as Einhorn spoke. One man bought, and bought big.
 
The company's largest shareholder, Fairholme Capital Management, filed a document with the SEC saying it had increased its stake in St. Joe from 24% of the company to 29% of it. Morningstar's "Fund Manager of the Decade," Bruce Berkowitz, runs Fairholme Capital Management. With about $18 billion under management, Berkowitz is one of the most successful investors in the world.
 
The filing indicates that, as Einhorn's tour de force speech drove down the price of St. Joe, Berkowitz stepped in and bought another 135,600 shares between $22.01 per share and $22.21 per share.
 
Carlo Cannell of Cannell Capital is a smart investor and a colorful and entertaining speaker. He delivered an updated version of a presentation he's given before. He discussed extinct animals like Steller's Sea Cow and the Irish Elk. He compared them to industries with poor track records, like computer hardware, semiconductor equipment, and (perhaps his least favorite) restaurants. On the long side, Cannell likes businesses like pest control and funeral homes. In past presentations, he's named Roto Rooter, owned by Chemed (CHE), as a favorite.
 
Regards,
 
S&A Research




This Week's Winners
S&P 500 Symbol Change
CF Industries CF +18.4%
Wynn Resorts WYNN +13.8%
Yahoo YHOO +12.0%

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Date Range:10/7/2010 to 10/14/2010
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Apollo Group APOL -23.8%
Motorola Solutions Inc MSI -7.3%
First Horizon National FHN -6.4%

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Homebuilding ITB -0.5%
Financial IYF +0.0%
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Lean Hogs -4.6%
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Nickel -1.5%
Date Range:10/7/2010 to 10/14/2010