I’m sure like many other people I get pretty excited just after quarter end, because that is when I get to peek into the regulatory filings of the great value investors that I admire. In these filings, I’m always hoping to find a great investment idea.
One investor that I follow closely is Whitney Tilson of T2 Partners. Of course, following Tilson is not terribly difficult because he is a marketing machine and makes sure that the investing world is well aware of what he is up to. There is no better way to attract new investors than to tell them what you are investing in and then let them watch it increase in value. And Tilson should have some confidence in his ability to deliver. Since inception in early 1999, his T2 accredited fund is up 170% while the S&P 500 is only up 34.1% (see the presentation link later).
It isn’t unusual for a hedge fund manager to talk about his long book. What is
unusual is for a hedge fund manager to openly discuss what he is shorting. Not Tilson, though. In his most recent public presentation, he disclosed the 10 largest short positions in his fund. See page 67 in this link
Here are his top 10 shorts in alphabetical order:
- Boyd Gaming (NYSE:BYD)
- Ethan Allen (NYSE:ETH)
- Green Coffee Mountain Roasters (NASDAQ:GMCR)
- Interoil (NYSE:IOC)
- MBIA (NYSE:MBI)
- Phillips Van-Heusen (NYSE:PVH)
- Polo Ralph Lauren (NYSE:RL)
- SalesForce.com (NYSE:CRM)
- Simon Properties (NYSE:SPG)
- St. Joe (NYSE:JOE)
What I thought was interesting was that on three of these shorts there is a very well-respected investor who has taken a large long position. And these long investors are more well known and experienced than Tilson. Tilson is undoubtedly aware of these positions and is confident that in these cases he understands the company better than someone who is a shareholder.
The short argument on MBIA is not a new one. In fact, it is the subject of an entire book called Confidence Game and deals with Bill Ackman’s long short position on MBIA. Ackman had a long (six years) and tumultuous experience being short this company and eventually he was proven correct. Tilson is friends with Ackman and often follows him into investments, which is obviously the case here.
There is no question that MBIA was a great short at $70. The company was hugely leveraged and exposed to all kinds of things that it shouldn’t have been. But is shorting MBIA today at $10 a good idea? Tilson clearly thinks the company is a zero and is prepared to hold on until that happens.
An accomplished investor who has made a long bet on MBIA is Bruce Berkowitz
of the Fairholme Fund. Berkowitz made his bet on MBIA after the 2008-09 financial collapse and now owns 20% of the company. Berkowitz made his name investing successfully in the financial sector in the early '90s after the last banking crisis, so taking the other side to him should give someone reason to think twice.
Berkowitz made the following comments
last year on MBIA when he appeared on Wealthtrack:
Consuelo Mack: The other, you know, company that I'm really intrigued with, for two reasons, MBIA, which a cousin of mine actually co-founded and left many years ago. I'm not a shareholder. But MBIA has now been split up into two companies. It's in litigation over that decision to have two different companies. I mean, why MBIA? You know, what's the attraction? What's the value there, first of all?
Berkowitz: Well, the value, if you ask the individuals and institutions who have probably received between four and five billion dollars of proceeds from MBIA, for guaranteeing the bonds ...
Mack: Municipal bonds, right.
Berkowitz: ... they'll tell you that MBIA's had tremendous value, and they have kept their word to all of their insureds. They continue to keep their word. And, unlike a rating agency, what I like about MBIA is, besides giving the investor the good housekeeping seal, they're also putting their money where their mouth is. And as they continue to pay, and I believe be the advocate for individual investors, how can an individual investor claim, if they have to follow or they're unhappy about something, they just don't have the scale to talk with counterparties, where MBIA is going to be their advocate. So when all is said and done, we expect MBIA to regain their franchise value.
Mack: In the municipal bond insurance business?
Berkowitz: In the municipal bond area, and in other areas also, where it makes sense for them to do business. Granted, all the financial institutions made the mistake of starting out with a very good idea and slowly changing it to the point where you've reached an illogical extreme.
Now, with hindsight, you can actually say, well, how could the banks and insurers, how could they have gone from A to B to C to D? It makes no sense now. But, there were slow changes. So I think everyone realizes mistakes of the past, and they're going to get back down to their basic business. And, with a little bit of luck, they'll be able to get the right price for the product, the insurance. And they've clearly shown that the insurance is worthwhile, and they've clearly kept their word about paying the insureds. So, it's now just a question of working through it. And even if they don't write another bit of business, which I believe they will, the runoff value alone of the institution is such that I don't see how our shareholders lose money.
IOC might be Tilson’s most controversial short position, as he has essentially called out InterOil as being nothing more than a hype job. You can read via Seeking Alpha Tilson’s investment thesis, with this part from Tilson himself being my favorite part:
We added to our bearish bet (yesterday), as InterOil reported Q2 earnings yesterday that reinforced our investment thesis. The earnings and EBITDA (driven by the refinery operation) are irrelevant for a company that has a $2.9 billion (not a typo) market cap; what really matters if whether there is, in fact, the Sierra Madre of oil and gas in the areas being explored by InterOil and, if so, whether they have the cash to find it, develop it commercially, etc.
Re: the former, there continues to be no proven or even probable reserves – just more hype and gibberish like this from the earnings release:
The Antelope 2 horizontal well confirmed a higher condensate-to-natural gas ratio of 20.4 barrels per million cubic feet of natural gas, 27% higher than observed at the top of the reservoir. The horizontal well also demonstrated dolomitization and higher porosity deeper in the reservoir than previously modeled.
On the other side of the trade is legendary investor George Soros, who as of the end of March 2011 owned
8.4% of InterOil. It seems impossible to believe that Soros and his team would not have contracted someone with natural gas expertise to actually look at InterOil's assets and determine what they are likely worth. How could someone who has been in the business for as long as Soros fall for something that is nothing more than a hype job ? But we have recently seen John Paulson, who had a large ownership position in Sino-Forest (OTC:SNOFF
) seemingly duped by a scam, so it is possible.
And then there was JOE. Tilson has piggybacked on the investment idea of David Einhorn in shorting St. Joe. By this point in time, you have likely come across Einhorn’s presentation on why JOE is overvalued. You can find the details through this Seeking Alpha article.
Einhorn/Tilson basically think that St. Joe needs to take some dramatic write-downs on real estate assets that it currently shows on its balance sheet, and that fair value of its net assets is well below the current share price. And again, in this case it is Tilson/Einhorn taking a short position against
Berkowitz. Berkowitz owns a lot of St. Joe (30%) and now controls it through his position on the board of directors.
I’ve watched Berkowitz speak on St. Joe several times and he basically can’t dispute much of what Tilson/Einhorn believe about St. Joe today. I think Berkowitz has a much longer time horizon in mind and thinks that over time, values of currently unwanted land can increase exponentially as properties are developed.
This one is going to be fascinating to watch play out, as both sides obviously have a high degree of conviction, with Einhorn especially having a lot of data to support the short position but Berkowitz now having control of the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.