Capital Markets
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IEP $36
15 May 2023 |
The hunter becomes the prey: Icahn Enterprises falls 44% on short seller attack
We typically are about as much fans of short sellers as we are those bums who walk up to the “don’t come/don’t pass” line on the craps table. Get the pitchforks out. But now that Nathan Anderson has launched blistering attacks against both Jack Dorsey and Carl Icahn, we are quickly becoming admirers of his Hindenburg “forensic financial research firm.” The attack on Icahn is poetic. Here is a man who bled TWA dry in the early 1990s, often attacks companies we love, and seemingly ignores the ones in true need of an overhaul. He doesn’t make companies better; he strips them of their value and leaves them for dead—along with their investors’ capital (in our humble opinion). As for the Hindenburg attack, it is epic. The company’s report, entitled “The corporate raider throwing stones from his glass house,” likened Ichan’s company to a Ponzi scheme, able to survive only by getting new dupes, er, investors in at the bottom of the pyramid. Gutsy accusations against a man who has countless attack dog lawyers on speed dial. Icahn Enterprises LP (IEP $36) suffered its worst-ever day following the report, falling 20%. Icahn and his son own around 85% of the firm, which is now valued at $12 billion. One particular focus of the report was a margin loan taken out by Icahn and backed by his ownership of IEP. This loan—or the lack of accounting for it—seemingly inflated the raider’s wealth by over $7 billion. When the loan and the market drop of IEP were taken into account, Icahn dropped from the 58th-wealthiest person in the world to the 119th. Icahn’s response to the Hindenburg attack was two-pronged. He called the report “self-serving” and “generated simply to allow the company to profit from its short position on IEP shares.” He also changed his questionable practice of issuing dividends in the form of additional shares of stock, with 85% going to him and his son. The company declared a dividend distribution of $2 per unit for the first quarter of the year, giving holders the right to elect either a cash option or additional units. IEP gives investors exposure to Icahn’s personal portfolio of public and private companies in a wide range of industries, from energy to automotive to real estate. Over the past decade, an investment in IEP would have resulted in a 57% unrealized loss for shareholders. Icahn isn’t about making companies better; he is about financial engineering. Wise investors would steer clear of this limited partnership. |
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IPO $29
28 Sep 2022 |
2021 was a banner year for IPOs, but most are not faring so well
There were some 400 companies that went public last year via the traditional route, with capital raised coming close to $300 billion. Add SPACs (special purpose acquisition companies) to the mix, and the number hits 1,000 new listings. So, how have these newly-publicly-traded entities been doing lately? The answer isn’t pretty. The Renaissance IPO Index is a basket of the largest, most liquid, newly-listed US public companies. Names like Snowflake (SNOW), Rivian (RIVN), Roblox (RBLX), and Coinbase Global (COIN) top the list. This index has an exchange traded fund, the Renaissance IPO ETF (IPO $29), which allows investors to buy into this basket with ease. Year to date, the fund’s value has been slashed in half, with the shares dropping from $60 to $30 in price. That represents more than twice the S&P 500’s plunge over the same time period. Here’s another staggering statistic: only about one in ten of the class of 2021 are trading above their IPO price. Market volatility due to inflation, rate hikes, supply chain issues, and fear of recession has pounded this group and dissuaded a lot of would-be players from going public this year. According to StockAnalysis.com, only 159 companies have gone public on US exchanges so far this year, or 79% less than the 767 IPOs which had taken place by the same time in 2021. As could be expected, this group has faced a similar fate. For anyone interested in scanning the list for possible value plays, the companies and their “since-IPO” returns are listed on the page. What about getting into the IPO ETF with the fund sitting down at $30 per share? We wouldn’t recommend it—there are too many wildcards on the list. Some holdings do look promising going forward, however. Names like Palantir (PLTR), Snowflake (SNOW), Airbnb (ABNB), and DoorDash (DASH) have all seen their share prices pummeled, and these are companies which will still be around when the markets regain lost ground. |
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Crypto
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Fidelity plans to bring cryptocurrencies to your 401(k) plan; we applaud the move
(26 Apr 2022) Whatever you may think of Bitcoin, cryptocurrency is now its own asset class and it is here to stay. While this digital money has certainly not shown itself to be a hedge against inflation, nor an inversely correlated (to equities) asset class, it will be of growing importance to the capital markets. That is why we were happy to see Fidelity Investments, a major retirement plan provider, announce plans to include Bitcoin as a core option within its 401(k) plans. It won't be offered as a mutual fund or ETF, such as the Grayscale Bitcoin Trust (GBTC $29), but rather a dedicated asset account just like a plan's money market option. Fidelity would custody the assets on its own digital assets platform, charging between 75 and 90 basis points for administration. Employees' allocation to the crypto portion of their retirement plan would be limited to 20%, though individual employers could place further limitations on that percentage. How big is this move? Of a roughly $8 trillion 401(k) plan market, Fidelity controls approximately $3 trillion of that amount. Expect others to follow the company's lead. We imagine Jack Bogle, the curmudgeonly old founder of Vanguard, is rolling over in his grave at this news. We recall him once arguing that employees were given too many options in their retirement plans, and that more controls (i.e., limitations) needed to be put in place by the government. Of course, that would have meant more assets under management for his company's less-than-stellar target-date funds. |
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SCHW $76
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Schwab gaps down nearly 9% on earnings miss
(19 Apr 2022) Retail financial services firm Charles Schwab (SCHW $76) lost nearly 9% of its value on Monday following a first quarter miss on both revenue and earnings. Analysts were looking for $4.83 billion in revenue and earnings per share of $0.84; instead, they got $4.67 billion in revenue and $0.77 in EPS. While retail activity has surged in recent years on the back of commission-free trading, daily trading volume at the firm actually dropped 22% from the same period last year. Increased volatility, new competition, and a return to normal activities following the pandemic all played a role in the company's challenges for the quarter. As for the earnings miss, the high costs associated with the TD Ameritrade acquisition and higher general expenses helped explain the lackluster quarter. Expenses for the three-month period came in $56 million above what Piper Sandler had projected, and 4% above last year's figures. Monday's drop represents the largest one-day decline in SCHW shares since March of 2020. The company won't admit it, but the TD Ameritrade acquisition has brought about a good deal of unexpected headaches. These will eventually be worked through, but with its P/E ratio of 27 and its rather high price-to-sales ratio of 8, investors shouldn't be in a hurry to take advantage of this most recent drop in the share price. |
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HOOD $35
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After quickly doubling in price, Robinhood shares come tumbling back to earth on earnings, forward guidance
(28 Oct 2021) The "trading platform for the masses," Robinhood (HOOD $35), has been on quite the ride since its summer IPO. After immediately falling 12% from its $38 IPO price, it ended up hitting an intra-day high (not reflected in the graph, which represents closing prices) of $85 per share on the 4th of August. It has been pretty much been of a downhill slide since then. The latest negative catalyst, which resulted in shares once again falling below their IPO price, was a brutal Q3 earnings report and dark forward guidance from management. Consider these headline numbers representing the difference between Q2 and Q3: Revenues fell from $565M to $365M; crypto-based revenues fell from $233M to $51M; net losses were $2.06/sh versus estimates of -$1.37/sh; monthly active users (MAU) fell from 21.3M to 18.9M. The icing on this rather ugly cake came in the form of forward guidance from management: "...factors may result in quarterly revenues no greater than $325M in the fourth quarter." As if the numbers weren't bad enough, there are other potential negative surprises waiting in the wings. A full 73% of the company's revenues emanated from payment for order flow (PFOF) in Q3, something the SEC is seriously considering placing a ban on. Only seven cryptos are available on the platform, as opposed to 50+ (and growing) on the Coinbase platform. On the first of December the lock-up period will expire for all shares, meaning insiders will be able to sell at will. At least management took a conservative approach on the conference call, giving a refreshingly sober review of the company's outlook—as opposed to using the typical hyperbole so common in many quarterly earnings releases. Management freely admitted that two major events, the meme stock craze and the explosion in cryptos, helped fuel the company's success in the first two quarters of the year, and that it is virtually impossible to predict the next big event that will drive trading. Again, points for being honest, but we would stick with Coinbase (COIN $319) for anyone wishing to invest in a new exchange platform. Shares of the company are up 40% since we added it to the Intrepid Trading Platform—with a target price of $300. |
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IPOs
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Renaissance Capital: Get ready for a record number of new IPOs this fall
(07 Sep 2021) If a new report issued by Renaissance Capital is correct, investors are going to have a dream autumn as the IPO market will see its busiest season since the peak of the Internet craze of 2000. Around 100 public offerings are expected to take place over the coming months, to include the likes of: Warby Parker, Allbirds, Authentic Brands (Nautica, Eddie Bauer), Impossible Foods, Chobani, Flipkart, Instacart, mobile payments processor Stripe, and social media darling Reddit. When the dust settles on 2021, Renaissance believes we will be looking back on 375 deals raising roughly $125 billion. There is no doubt the appetite is there, with new investors on the Robinhood platform willing to buy into companies not showing even a modicum of profits and, in a number of instances, scant revenue. As opposed to most of the names brought to market via the recent SPAC craze, however, we do like most of the companies anticipated to go public this fall. One, Warby Parker, will go the direct listing route due to its name recognition. While SPACs have been on a horrendous downturn throughout the summer due to their excessively-overpriced debuts (just because an IPO launches at $10 per share doesn't make it a good deal), expect some relatively reasonable valuations with this new crop. In fact, investors will be chasing so many new tickers that a few golden opportunities are bound to present themselves in a number of these new issues. Get ready for a whirlwind season. Our advice? Prepare to make a few additions to the portfolio by looking at current sector weightings to identify underweight sectors and industries. Other than Stripe and Reddit, the names we mentioned above are outside of the recent new-tech-stock craze. And that is a good thing. |
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HOOD $44
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Robinhood investors should be concerned about recent comments made by the new SEC chairman
(01 Sep 2021) I recall would-be clients, early in my career, telling me that "we own American Century no-load mutual funds, so we don't pay any fees." My retort was always the same: "I wonder how they paid for those two beautiful towers where their headquarters is located, or how they pay their staff?" In reality, despite the flowery ads designed to make us think that a company's sole existence is to help others, it's always about the money. I thought of those comments, made to me in the late 1990s, as I read about the latest threat to newly-public Robinhood Markets (HOOD $44). As the financial services platform offers customers commission-free trading, where does the revenue come from? Overwhelmingly, the answer lies in something called payments for order flow (PFOF). When a customer wishes to buy or sell shares of a company or to trade options, the broker—be it Robinhood, Schwab, or a host of others—forwards the trade to a market maker. Historically, these intermediaries were at the major exchanges, such as the New York Stock Exchange. More recently, however, a slew of off-exchange market makers have popped up and are now responsible for over half of all retail trades placed. They make their money off of the difference between what they pay to buy the requested shares and what they sell them for seconds later—the spread. Understandably, the higher the volume of orders flowing through a market maker, the more profit to be made. Since companies like Robinhood can choose who handles a given trade, these third-party market makers have been offering to share a percentage of the spread with the brokers; hence, payments for order flow. In one month alone, Robinhood reportedly generated $100 million in revenue via this practice. Many of the larger brokerages, such as Fidelity and Interactive Brokers, generally refuse to accept PFOF. In fact, countries like Canada, Australia, and the U.K. have gone so far as to ban the practice altogether. Enter SEC Chairman Gary Gensler. In a Barron's interview, Gensler said that a ban on PFOF is "on the table." Transparency seems to be the term du jour in the financial services world, which means an ultimate U.S. ban is quite possible. For Robinhood, which makes a majority of its revenue from PFOF, this would be a disastrous course of events. With HOOD shares trading nearly 50% off of their August high of $85, investors might be tempted to jump in. We are sticking by our previous comments, however, and would wait to see a price in the mid-$20s range before considering a stake. |
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HOOD $55
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04. HOOD's wild ride: platform for the meme stocks turns into one itself
(06 Aug 2021) By most accounts, it was a lackluster debut. The much-anticipated IPO of financial services platform Robinhood (HOOD $55) finally occurred last week, but shares ended up tumbling 12% from their $38 initial offering price almost immediately. Considering the platform boasts some 20 million accounts, one would have expected fireworks out of the gate, akin to an Airbnb ($145) or a DoorDash (DASH $176). But, alas, the WallStreetBets/reddit monster ended up harming the very company which fomented the movement, with some on the social media sites even calling on members to short the stock on day one. That is rich, considering users' raison d'être seemed to be destroying the shorts. ARK Investment's Cathie Wood, someone whom we respect a lot, may have played a part in the turnaround which occurred after day one by buying 1.85 million shares below the IPO price. Despite Wood's buy, we tend to agree with Morningstar's fair value of $30 on the shares, meaning they have some additional falling to do before we are interested. When the reckoning does hit the markets, and it will, expect HOOD to get pounded. The world where an AMC, which is worth $5 per share, trades at $38 per share will eventually come crumbling down, and some semblance of sanity will return. At that point, there will be a lot of formerly-overvalued stocks worth picking up, and plenty we still wouldn't touch. As for HOOD, if the $30 fair value is accurate that means $25 per share might be a good point to jump in. |
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CS
NMR |
We knew several major media and entertainment stocks fell sharply, now we begin to see the formerly-unknown fallout
(29 Mar 2021) In the matter of a week, former high-flying media darlings Discovery (DISCA $42) and ViacomCBS (VIAC $46) saw there share prices slashed roughly in half, without any clear-cut catalyst. Investors saw that bloodbath unfold in real time, but something else was going on behind the scenes which was neither clear nor transparent. One family office group (FOG), Archegos Capital, founded by former Tiger Management analyst Bill Hwang, had amassed major stakes in both of these firms and a number of Chinese Internet ADRs. As the shares began to crater, margin calls began rolling in from Archegos lenders, primarily Credit Suisse and Nomura, forcing the FOG to sell shares—thus exacerbating the initial drop. Both of these foreign lenders warned of big losses after announcing that "a significant US-based hedge fund had defaulted on margin calls," causing the shares of each to drop around 13%. It is too early to tell just how much Archegos and its lenders have lost in this nightmarish downward spiral, but it will certainly be in the billions of dollars for each of the players. Of interesting note: Goldman Sachs, Morgan Stanley, and Deutsche Bank rapidly unloaded big blocks of shares last week which were tied to Archegos. In other words, they got out before incurring the losses felt by Credit Suisse and Nomura. The incident is especially troubling for Credit Suisse, which already faced massive losses from the collapse of UK investment partner Greensill Capital, and a reported February loss of over $1 billion stemming from a US court case over questionable securities. Here is what's most disturbing about this case: Neither Credit Suisse nor Nomura shareholders were wise to the banks' dealings with Archegos or the extent to which the hedge fund had leveraged its media holdings. This is due to an exclusion made for family office groups in Dodd-Frank legislation, exempting them from the the same level of SEC reporting with which non-FOGs must comply. Odds are extremely high that by the time the dust settles on this saga these rules will have been "amended." |
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Robinhood
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Robinhood users miss out on largest one-day point gain ever in Dow after system-wide failure. (03 Mar 2020) Robinhood, a trading platform we have called "Stock Candy Crush Saga," just suffered a major malfunction, and users want more than answers. On a day when the Dow rose 1,294 points, the largest one-day point gain in history, the platform suffered a system-wide outage which prevented any buy or sell orders from being placed. As could be imagined, users took to Twitter and other social media outlets to voice their outrage. More than venting anger, many are calling for a class-action lawsuit to recoup what they lost due to their inability to trade. That would be a hard case to win, as the system wouldn't even let users access their accounts, meaning no evidence exists of any trades that would have taken place. Something tells us there are more than a few lawyers out there ready to take the case, however. Obviously, Robinhood didn't exist back in 1999, but it sure would have fit in with the zeitgeist of the late '90s. And that is not a compliment.
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MS
ETFC |
Morgan Stanley to buy E*Trade in all-stock deal valued at $13 billion. (21 Feb 2020) Just three months after the major announcement that discount brokerage firm Charles Schwab (SCHW) would buy TD Ameritrade (AMTD) for $26 billion, Morgan Stanley (MS $39-$52-$58) decided it had better get in the game—the $83 billion financial services giant will buy online brokerage firm E*Trade (ETFC $35-$53-$57) for $13 billion in an all-stock deal. With the acquisition, MS will pick up around five million retail customers, over $350 million in new assets, and—most importantly—get in the lucrative and growing online banking marketplace. The company had rolled out an online tool for smaller customers last year, which will be cobbled together with the E*Trade system. Clearly, CEO James Gorman aims to take on Schwab and Fidelity by making this move, but will it work? As could be expected, shares of E*Trade spiked nearly 28% immediately after the announcement, but they proceeded to fall about ten percent from the peak as investors began to digest the news. As for the acquirer, shares of MS were off about 6% in the two days following the release. Many larger shareholders were clearly underwhelmed by the move, especially with E*Trade retaining its name. Time will tell, but with the advent of fintech, it did feel as though Morgan Stanley needed to make a bold move. This leaves Goldman Sachs (GS) on the big banking side, and Interactive Brokers (IBKR) as the last major online discount brokerage not going through some type of recent or planned merger. Interestingly, it appears that management teams at both of these companies considered their own play for E*Trade, with both deciding against a move. We love Interactive's fiery founder and CEO, Hungarian-born Thomas Peterffy, and would like to see that company remain independent—and profitable.
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SCHW
AMTD |
Charles Schwab announces plans to buy TD Ameritrade for $26 billion. (21 Nov 2019) Three years ago, $15 billion (at the time) brokerage firm TD Ameritrade (AMTD $33-$51-$58) gobbled up St. Louis-based Scottrade for $4 billion. Now, just a few short weeks after Charles Schwab (SCHW $35-$50-$50) jolted the industry by reducing commissions to zero—forcing everyone to follow, it appears that TD will be gobbled up by that firm. Going into the day, Schwab had a market cap of roughly $60 billion, with TD about one-third that size. This deal, which sent shares of TD up 25% at the open and Schwab shares up over 12%, makes a lot of sense. The zero commission proposition certainly hurt TD Ameritrade more than it did Schwab, and consolidation seems to be the norm in an industry being disrupted by new web-based entrants. Once combined, the new entity will hold about $5 trillion in assets, giving it tremendous leverage. This begs the question: what will now happen to $10 billion E*Trade (ETFC) and and $20 billion Interactive Brokers Group (IBKR)? Interestingly, the one loser in the industry on the morning of this news was E*Trade, which was down over 6% at the open. This is because most analysts expected that firm to be the target company for the next acquisition. It might make sense for Interactive to buy E*Trade, assuming the former doesn't wish to be a takeover target itself. Want to play the entire industry? There's an ETF for that: the iShares US Broker-Dealers & Securities Exchanges ETF (IAI $52-$68-$68).
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3G
Buffett KHC |
Buffett denies tension with 3G Capital, which is unfortunate for his legacy. (25 Jun 2019) Precisely four years ago, Warren Buffett teamed up with Brazilian private equity firm 3G Capital to take control of American icon Kraft and force it into a nebulous food products blob with Heinz, another company it gobbled up. The combined entity, The Kraft Heinz Co (KHC $27-$30-$65), has now lost 60% of its value since the draconian 3G rebranded it for investor consumption. This has led to stories of a growing tension between Buffett and his friends at 3G, though he strongly denies these reports. Time will tell—let's see if these "good friends" do another deal together anytime soon. It is hard to fathom that Berkshire didn't know the modus operandi of 3G: slash and burn costs at the expense of the human equation. That process may look good on a spreadsheet, but the unintended consequences of moving in like a bull in a china shop often doom the strategy.
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MS
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A broker would have to be nuts to join Morgan Stanley (in our humble opinion). (01 Apr 2019) It is known as the Protocol for Broker Recruiting, and it effectively allows brokers to leave one firm for another, taking basic information on their clients with them so that they can let investors know where they have gone. In 2017, Morgan Stanley (MS $37-$43-$56) sent shockwaves through the brokerage industry when it abruptly pulled out of the Protocol, sending a shot across the bow to brokers who were thinking of changing firms. The harsh legal filings against brokers leaving Morgan Stanley since the company exited the agreement, however, have been met with skepticism by judges. Most recently, MS attempted to get a temporary restraining order (TRO) issued against a two-person team who bolted for another firm. The duo managed nearly $300 million in client assets. Texas state district judge Bridgett Whitmore, however, wasn't buying the company's argument, and shot down the request. MS has since filed another claim with FINRA, the national regulatory body, to stop the team from contacting clients. Based on our experience, here's the real question to ask: would a broker or team of brokers have been able to build up the same book of client business had they been at a competing firm, or was it Morgan Stanley's unique corporate culture that allowed these brokers to build their book? To us, the answer is obvious: it was the brokers, NOT Morgan Stanley, that built the book of business. Morgan Stanley, in our opinion, should be ashamed of its draconian behavior. Then again, as a broker myself I might be a bit biased. I only hope that other brokerage firms fervently attack Morgan Stanley when that company entices brokers to join with them. Which would beg the question, why the hell would a broker willingly enter that kind of environment?
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BX
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Penn member Blackstone made a brilliant deal with Crocs investment. (03 Dec 2018) We talk a lot about corporate management—how a great CEO can allow a company to excel while a lousy CEO can drown a previously-strong company. In the asset management arena, few do it better than Stephen Schwarzman, the longtime CEO of Blackstone Group, LP (BX $30-$35-$41). A case in point is the company's $200 million investment four years ago in a struggling footwear company called Crocs (CROX). Back in early 2014, the maker of those ubiquitous, multi-colored rubber shoes needed some cash. Blackstone stepped in, making a $200 million investment in exchange for a 13% stake in the company, two board seats, and preferred stock which could be converted to common after three years at a price of $14.50/share. At the time, CROX was selling at $13 per share. Now, with Crocs selling at $29 per share, the company will buy back about half of those preferreds from Blackstone for $183.7 million—nearly equal to the asset manager's entire investment. Crocs CEO Andrew Rees praised the work of the Blackstone-positioned board members, saying that their strategic guidance had helped put them in the financial position to execute the buyback. Private equity deals take place every day, typically outside of the purview of the common investor. Owning shares of a company like Blackstone can give investors of every size a chance to see the inner-workings (or at least as much is required by the SEC) of a private equity firm. We own Blackstone Group in the Penn Strategic Income Portfolio. The company, by the way, has a 7% dividend yield.
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Greenlight
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David Einhorn's Greenlight Capital is floundering—and losing assets. One of the most useful habits an investor can develop is the study of the strategies and tactics of major hedge fund managers—both the ones they like and the ones they despise. While these individuals are typically reclusive, holding information close to their vest, securities laws and talkative clients almost always force a certain amount of useful disclosure. Take Greenlight Capital's founder David Einhorn, for example. When we think of the 49-year-old Einhorn, two images come to mind: seeing him seated at the World Series of Poker, and his famous shorting of Lehman Brothers stock in 2007 as he lambasted the company's "dubious" accounting practices. Einhorn is a deep value investor, searching out companies with squeaky-clean balance sheets and low multiples. Unfortunately for Greenlight, high-multiple growth companies have been strongly outperforming their undervalued cousins. The Wall Street Journal, along with a number of other news outlets, have been talking with Greenlight investors to get a sense of what is happening at the fund. While markets are flat year-to-date, Greenlight is apparently off nearly 19% thus far in 2018, losing almost 8% in June alone. The precise figures are unknown, but the fund has reportedly dropped from around $12 billion in assets under management in 2014 to under $6 billion today. That 50% drop reflects both investment losses and clients pulling their money from the fund. One of Greenlight's biggest holdings is General Motors (down 4% ytd), and one of its biggest shorts has been Netflix (NFLX, up 107% ytd). Bold moves, but unfortunately the wrong ones.
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AB
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AllianceBernstein says sayonara to high-cost New York, packs bags for Nashville
(02 May 2018) For over two generations, asset management firm AllianceBernstein (AB $20-$27-$28) has called New York its home. Now, citing the high cost of doing business in the city, it is packing up and moving—lock, stock, and barrel—to Nashville, Tennessee. In an open memo to employees, in fact, management cited Nashville's lower state, city, and property taxes as a major reason for the move. Other reasons cited were the shorter commute to work, and the large pool of talent in the area. Thanks to technology, more and more financial firms have been able to escape the shackles of the major metropolitan centers, heading for greener pastures and healthier bottom lines. |
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GS
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Despite big Goldman Sachs beat, shares fall
(17 Apr 2018) Ahh, the good ole days, when an earnings beat meant your stock went higher, and a miss sent shares lower. By all accounts, banking giant Goldman Sachs (GS $210-$253-$275) had a blowout quarter, beating on nearly every metric. Revenue generated from trading soared 31% year-over-year, and revenues overall spiked 25%. Earnings-per-share rose from $5.15 a year ago to $6.62 this past quarter—a 29% increase. So, why were the shares trading lower on Tuesday? A couple of reasons have been posited. First, analysts wonder whether or not this growth can be sustained. A second reason cited is that investors may be upset with the Goldman decision to hold off on stock buybacks over the next quarter, using their cash windfall on corporate growth plans instead. We're not the world's biggest GS fans, but that decision seems pretty reasonable to us. |
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Pershing
Square |
Investors are clipping Bill Ackman's hedge fund wings
(05 Apr 2018) The man who viciously attacked ADP while investing heavily in losers like JC Penney's Ron Johnson and Valeant's J. Michael Pearson is now under attack himself, as investors hit him where it hurts—his wallet. The giant sucking noise coming from Bill Ackman's Pershing Square hedge fund is the sound of money fleeing, and fleeing rapidly. Penn Wealth member Blackstone Group (BX) has been pulling money from the fund, and Jamie Dimon's JP Morgan (JPM) removed the fund from its recommended list for client capital. After so many bad bets and public confrontations, Ackman's fund has now underperformed for three straight years, and 2018 is showing little promise for a turnaround. How bad is it? About two-thirds of the cash that could have been withdrawn by the end of 2017 left the fund. That leaves little on hand for Ackman to play with. Pershing Square Holdings, Ltd. currently holds about $3.9 billion in assets, and Ackman is reportedly cutting staff and not seeking new capital from investors. |
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ADP
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Hedge fund punk Ackman gets embarrassed in ADP board seat vote
(07 Nov 2017) Last month shareholders at Proctor & Gamble (PG $81-$86-$95) told activist bully Nelson Peltz to take a hike. At least that vote was close. On Tuesday, shareholders at paycheck solutions provider ADP (ADP $88-$111-$122) showed activist Bill Ackman the door, and this vote was not close. Despite ADP's respectable performance, Ackman demanded shareholders vote out CEO Carlos Rodriguez and a number of other board members, placing him and a few buddies on the board instead. When the dust settled, Ackman had received less than 20% support from shares outstanding. Talk about an activist on a losing streak. What's your next target Ackman, Apple? |
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Trian
PG |
(14 Aug 2017) Taking a page from ADP's playbook, Proctor & Gamble CEO hits back at activist investor
It is refreshing to finally see. For years, we’ve watched as punk little billionaire activists run roughshod over publicly-traded companies, generally for their own personal gain (not for the general good of stakeholders). Now, the companies are beginning to fight back. Last week it was ADP attacking the smarmy Bill Ackman. Today, Proctor & Gamble (PG $81-$92-$92) set its sights on Nelson Peltz, the activist owner of hedge fund Trian Partners, who has been demanding a board seat. P&G sent a letter to shareholders saying that Peltz wants the seat to “satisfy his own agenda,” and that “change for the sake of change” is not a recipe for success. While Trian owns $3 billion worth of PG shares, keep in mind that this is a $233 billion company, so that amounts to just under 1.3% of shares outstanding. We believe shareholders will shoot down Peltz’ effort at the annual shareholders’ meeting on 10 October. |
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Pershing
Square ADP |
(10 Aug 2017) ADP CEO: Ackman a spoiled brat
Finally, a CEO not afraid to stand up to these punk little hedge fund managers who always claim to know what a target company needs, despite their own dearth of experience in that particular industry. We have written about Bill Ackman enough for readers to know our low opinion of the little blowhard. Now, ADP CEO Carlos Rodriguez is calling him to the carpet. ADP (ADP $85-$110-$122) is a very well-run business solutions firm. As for performance, the company has returned about 100% growth to shareholders over the past five years. Nonetheless, Ackman opened his gaping hole and demanded the replacement of Rodriguez and several board members, nominating himself and two allies to the board (his Pershing Square fund holds an 8% stake). Rodriguez not only asked investors to look at ADP’s performance as compared to Ackman’s Pershing Square (funny), but also called the activist a “spoiled brat.” We love it. For the record, Pershing has been losing assets under management ever since its JC Penney and Valeant debacles. |
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GS
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(18 Jul 2017) After earnings beat, analysts are calling for Lloyd Blankfein's head at Goldman Sachs.
This must be why CEOs get the big bucks. After Goldman Sachs (GS) released earnings showing a beat on the top line ($7.89 billion in revenue) and the bottom line ($3.95 per share profit), one would expect a spike in the share price and pats on the back to Lloyd Blankfein, the company's CEO since 2006. Instead, Wall Street is focusing on the 17% drop in trading activity, with many now calling for Blankfein to go. Highly respected (at least by us) analyst Dick Bove said that GS has "stagnated" in the 11 years under current management, underperforming its peer group as a whole. Bove went on, "The stock price is right where it was ten years ago...I don't know how they're getting away with it." We agree—and haven't owned GS in over ten years. |
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(22 May 2017) Blackstone seals $40 billion deal in Saudi Arabia. US aerospace firms weren't the only winners from President Trump's first overseas trip—private equity firm and Penn Strategic Income Portfolio member Blackstone Group (BX $22-$32-$32) also walked away with a whopper of a deal. The US company, along with Saudi Arabia's largest sovereign wealth fund, the Public Investment Fund, announced a new $40 billion vehicle which will be used to invest in, primarily, US infrastructure projects. Blackstone was up nearly 7% today on the news.
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(14 Mar 2017) Ackman ends Valeant bet, losing $4 billion in the process. The hedge fund manager we love to hate, Pershing Square's Bill Ackman, once told us that Valeant (VRX $11-$11-$54), the phony drug company he invested a mint in, could be on its way to $330 per share. Today, shares are sitting at $11 a piece, and he has exited the building. His total loss on the investment? Around $4 billion. He also predicted the Rube Goldberg machine posing as a biotech firm would be the next Berkshire Hathaway. Um, OK.
How Much has Bill Ackman Lost on Valeant Position?
(11 Nov 15) We have well chronicled the dirty cabal between Valeant’s seedy CEO, Michael Pearson, and hedge fund bully Bill Ackman. Now that Citron Research has blown the cover on the WorldCom-like company, our schadenfreude got the better of us: we wanted to figure out how much the goofy Ackman has lost on the trade.
Although Valeant’sVRX stock price has plummeted from $263 per share to $80, a 70% drop in a few months, that doesn’t mean that Ackman owned at the top. His Pershing Square firm does own close to 20 million shares, or a 5.7% stake, but when did he buy them?
The financial engineer (I use that term as a pejorative) disclosed his massive position in Valeant back in March, when the shares were going for about $200. This would equate to a $4 billion position. We know that Ackman didn’t sell, and has vociferously supported his partner in “crime,” which would mean that he now owns about $1.5 billion of Valeant stock; a paper loss of over $2 billion in less than three months.
Before we shed tears for the guy, let’s remember that he pocketed about $2 billion from the hostile takeover bid he and Pearson thrust upon Botox-maker Allergan. On the other hand, his net worth sits at just $2.6 billion, so he is definitely feeling the pain. While his hedge fund, Pershing Square, grew 40% in 2014, it is now down about 10% for 2015. So sad.
(Reprinted from this coming Sunday’s Journal of Wealth & Success, Vol. 3, Issue 44.)
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Blackstone Acquires Three Shopping Centers in Southern Europe
(12 May 15) Penn Strategic Income Portfolio (SIP) member BlackstoneBX announced that it has acquired three new shopping centers in Spain and Portugal.
The Almada Forum, located in Almada, Portugal, is the third largest shopping center on the peninsula, with 262 shops, 35 restaurants, and a jumbo supermarket. Forum Montijo, which is linked to Lisbon by bridges across the Tagus River, boasts 160 shops, 22 restaurants, and a movie theater. The third property is Espacio Leon, located in Northern Spain.
Blackstone, as highlighted in Volume 3, Issue 19 of the Journal, has transformed itself into the world’s largest real estate investment company, overseeing about $85 billion in real estate assets, and quickly closing in on the $100 billion mark in that division alone. Real estate analysts estimate that these three properties may be worth as much as €100 million each.
The Portuguese real estate market has been on fire as of late, with an expected 2015 investment inflow of €1 billion. Portugal had been on the short list (along with Spain, for that matter) of countries nearing financial disaster, but this year’s growth is expected to tick up to 1.7%. Nothing to throw a party over, but certainly not a contraction. Knowing Blackstone, they swooped in at just the right time.
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 20.)
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Dan Loeb Trashes the Oracle of Omaha in Front of a Cheering Crowd in Vegas
(Th, 07 May 15) Daniel Loeb is one of those billionaire investors we always listen to attentively when we see his face on one of the business networks. As the founder and chief executive of Third Point LLC, a New York-based hedge fund, he has amassed a $14 billion portfolio with precision and skill. We find Warren Buffett, on the other hand, to be a holier-than-though blowhard who rambles on incessantly about his own personal and political beliefs (and no, Warren, we don’t believe your secretary is in a higher tax bracket than you) but imparts very little useful investment advice to his listening audience. Unfortunately, to the mainstream press he is untouchable.
That is why we so enjoyed hearing Loeb launch on the self-proclaimed “Oracle of Omaha” while speaking to a thrilled audience in Vegas last Wednesday.
On taxes: “He tells us all that we should pay more in taxes, then he does everything he can to avoid them.” On Buffett’s annual letter to shareholders: “I love reading his letters, and then contrasting everything he wrote with what he actually does.” On hedge funds: “I love how he criticizes hedge funds, yet he really started the first hedge fund (in Berkshire).” The audience loved it.
One of our major problems with Buffett, who finally got peppered with some tough questions at last weekend’s Berkshire Hathaway shareholders’ meeting, is his willingness to help foreign-owned entities gobble up America companies. Most recently, he helped finance the takeover of Kraft foods by Brazilian giant 3G. Previously, he helped the same firm takeover Heinz. 3G is known for its slash-and-burn policy with respect to gutting companies (and jobs) to squeeze every penny out in profits.
The moderator at the Berkshire event read an email to Buffett from a shareholder who questioned “3G’s brutal cost cutting moves,” and went on to ask if Mr. Buffett “no longer aspired to balance capitalism and compassion?” Ouch.
(Reprinted from next Sunday's Journal of Wealth & Success, Vol. 3, Issue 19.)
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When a Bully Becomes a Detriment to Stakeholders
(25 Feb 14) I will admit, there has always been something about Bill Gross, the so-called "bond king," that has rubbed me the wrong way. Having worked for a bully or two in my career, I developed a knack for identifying the "my way or the highway" mindset in executives. Unfortunately, these knuckle-draggers always seem to think that they are the best and brightest in any room they enter, and when they run a profitable enterprise their self-adulation typically runs amuck. Of course, they feign modesty to anyone watching, but that is just to help them rest assured that their rightful throne sits atop Mount Olympus.
Bill Gross founded PIMCO back in 1971, and he has a reputation of being a good fixed income money manager. His PIMCO Total Return Fund, in fact, is still the largest bond fund in the world, despite billions of dollars of liquidations last year. It is easy to be a leader when everything is going swimmingly. One's true mettle, however, is tested and gauged in the arena, when the lions are licking their chops and the buzzards are circling. As Gross' fund began losing value last year, investors began to panic and a record-setting $41 billion was pulled out before 2013 was done.
Mohammed El-Erian, PIMCO's 55-year-old CEO and co-chief investment officer, was slated to take over for the 69-year-old Gross when the latter ultimately retired. The stress of losing the assets, combined with Gross' hubris, changed all that. PIMCO is a tough place to work and, as one could expect, you need a tough skin to succeed at any top firm in the industry. That being said, petulant and bully behavior does not need to be tolerated. As Gross began to get into open arguments with staff members and El-Erian himself, the work environment descended. According to a Wall Street Journal report, at one point Gross quipped to his co-CIO "I have a 41-year track record of investing excellence, what do you have?"
It was also reported that Gross had little tolerance for dissenting views. That is not leadership, it is adolescent behavior. In the midst of the Revolutionary War, facing an outcome that was far from certain, General George Washington was known for intently listening to--and considering--the opinions of the officers under his command, no matter their rank and despite the opposing views. We cannot expect our corporate leaders to be on par with General Washington, but we can expect them to have a modicum of his humility. This story reminds us how important it is to review a firm's governance and corporate culture, in addition to looking at the financials.