Tuesday, we posted up a collection of notes from the first day of the Value Investing Congress where we detailed investment ideas from David Einhorn, Julian Robertson, and more. Today we're back with notes from the second day [Wednesday] of the conference with picks from Pershing Square's Bill Ackman, Eric Sprott of Sprott Asset Management, and Whitney Tilson's hedge fund T2 Partners. Let's get to the ideas:
Bill Ackman, Pershing Square Capital Management
Ackman has been focused a lot on REITs lately. Readers are well aware of his position in General Growth Properties (GGWPQ.PK) and just recently he presented his short position in Realty Income (O).
This time around, Ackman presented the long case for private prison operator Corrections Corp of America (CXW) as 'one of the best real estate businesses around.' And while he didn't structure it this way initially, he said that going long Corrections Corp and short Realty Income sets up as a good pairs trade. He likes CXW because there is strong demand for prison space coupled with limited supply. Not to mention, having the government as a major customer is always a good thing. Humorously, Ackman also said,
It's also a hedge against your hedge fund business, because as the SEC ramps up... *laughter* we shouldn't joke about that.
Delving into specifics, Ackman's presentation highlighted numerous points. Ackman says that private prison companies are able to build their jails cheaper than the state and federal governments, making them the more popular choice. "As long as people commit crimes and as long as we punish them" CXW should be just fine.
Obviously then, the catalysts for this play include higher crimes in a recession as well as the fact that governments are strained budget-wise and cannot build new facilities. Further catalysts include stock buybacks and the fact that gaining incremental prisoners leads to high operating leverage.
Occupancy is currently high in the industry as new facilities can't be built and the number of prisoners continues to increase. The supply/demand equation certainly seems to be in their favor with current industry occupancy at 94%. Ackman noted that only a slim margin of inmates are in private prisons (7.8% of the nation). This leaves them plenty of room for growth. Furthermore, the trend is in their favor as that has already started to occur-- private prisons took 50% of the industry expansion in 2007. Other positives in the investment highlighted by Ackman include the fact that 5% of the equity is held by the Board, there is long-term secular growth, the government is a huge customer, it is basically an oligopoly, it has low maintenance capital expenditures, and there is a high return on invested capital.
In the end, Pershing Square thinks that the supply/demand equation outweighs any regulatory risk and they own 9.5% of the company at around $24.50 per share. Lastly, while Ackman can't trade in General Growth due to his position on the board, he did comment that he would be a buyer here, not a seller (obviously). For more ideas from Ackman, make sure to check out his recent presentation on Realty Income as well.
Eric Sprott, Sprott Asset Management
In the past, we've seen that Sprott likes gold and has taken a defensive portfolio posture. He continued on that meme at the congress as he presented Norseman Gold Plc ((ASX: NGX)) as his investment idea. Also, on a macro level, Sprott made interesting comments on the notion that if there is no tax credit extension we could see a 30% drop in home sales in January of next year.
Sprott also warned that once quantitative easing ends, the world could be in for further trouble. He cited previous government programs like cash for clunkers that had a temporary positive impact but upon expiration led to further declines. Sprott then hypothesized that a similar outcome would arise once quantitative easing disappears. Like many of his other hedge fund manager colleagues, Sprott warned against the implications of the Federal Reserve's actions, particularly as it relates to Treasury bonds.
He also shifted his focus to banks as he pointed out that if they are leveraged 20:1, they have about 5% of equity supporting merely paper assets. If those assets were to fall in price even by the slightest bit, that would create a huge problem for these institutions. He proclaims that these banks should not be running such high leverage. He also cited the recent large bank failures of Colonial (CNB), Guaranty (GBNK), and Corus (CORS) which involved writedowns ranging from 11-25%. Clearly he has retained his pessimistic view and defensive portfolio positioning.
And while Sprott did not make these next specific comments at the Value Investing Congress, we thought they were worth mentioning. A few weeks ago in a speech at a University in Canada, Sprott said he was short Research in Motion (RIMM) due to increased competition in the smartphone industry and thinks it will be difficult for them to maintain and grow current profit levels. Also, Sprott said that he thought gold could reach $2,000 having recently breached the $1,000 level. Since inception, Sprott's hedge fund is up over 400%. For more from Sprott, check out their September commentary as well as their presentation on how gold is the ultimate triple-A asset.
Whitney Tilson/Glenn Tongue, T2 Partners
The presentation from T2 Partners centered on its extensive research on the housing crisis. The duo said another wave of losses is coming down the pipeline in the form of prime, jumbo prime, HELOCs, second lien, and commercial real estate as well. They noted that the giant wave of defaults has already occurred and so the worst is over.
However, it will still be a painful process to work off the rest of the losses and they likened it to 'drip torture.' Most other loans are still defaulting and they see this taking place for the next 5 years or so. They said to be wary of the near-term stabilization as it is nothing more than a head fake. As such, their recommendation was to short homebuilders through the exchange traded fund ITB, the US Home Construction Index. For more insight from T2, you can check out one of their recent investor letters, as well as a recent interview Whitney Tilson did.
We also wanted to quickly mention that fellow value player Zeke Ashton of Centaur Capital Partners had three ideas: Allegheny, Lab Corp of America, and MVC (MVC). Make sure to also check out notes from day one of the Value Investing Congress as well where you can get investment ideas from David Einhorn, Julian Robertson and more.
Lastly, we also wanted to highlight excellent coverage on Wall Street Media from Todd Sullivan of ValuePlays.net where he sits down and talks about the various speeches from the congress. Here are some of the videos summarizing Joel Greenblatt's presentation, the speech from David Einhorn, as well as the powerful real estate presentation from Amherst Securities. Thanks to those guys for their added coverage.