Notes from the Sohn Investment Conference, Part II

Okay, the second half of my notes from the 2017 Sohn Investment Conference are below. You can catch Part I right here. As a reminder, if it’s in quotes, it’s verbatim. If not, I am paraphrasing. 


Jeffrey Gundlach, Chief Executive Officer and Chief Investment Officer, DoubleLine Capital LP

Jeff wants to talk about indexing. He think’s it’s a false messiah. Gotta be honest, I wasn’t able to take notes during most of this because my friend Linette Lopez lost her phone and I got deputized to help her find it, somewhere in this enormous opera hall. No luck yet. But I heard the gist of Jeff’s point. I agree with a lot of what he is saying, even if I don’t necessary agree with his conclusion (coming up…).

Anyway, Jeff mentions that the S&P 500 is not quite rules based, there is a committee! And he’s saying that all the institutions chasing the index are now de facto hiring this committee (outsourcing to it) without having met them. (I’ve been making this point for awhile now – Josh)

Jeff also announced that he opened a Twitter account on the way over to the conference. He thinks there is a lot of false information about him and DoubleLine in the media, so he will use that account to counteract it. Here is his first tweet:

“EM equities and active managers tend to correlate” – active management tends to outperform when EM indices are doing better than US stocks. He notes that EM stocks are only now starting to outperform.

“Let’s go long the EEM ETF, let’s go short the S&P 500 ETF, and let’s leverage it one time” as a pairs trade.

Sohn Idea Contest Winner

A 20 year old kid from Minnesota gets his chance to pitch a stock before the Sohn audience and be introduced by David Einhorn. He is pitching Ebay as a long (he is bullish on StubHub subsidiary). He is also pitching PayPal as a short (PayPal was spun out of Ebay – they have an arrangement where Ebay has to use PayPal for the next few years until 2020. PayPal would be in trouble without Ebay’s volume of transactions).

He thinks Ebay core biz has a monopoly in 10 countries, 280 million users, under-penetrated total addressable market, recession-proof.

He says the market is under-appreciating this cash cow, probably because it isn’t growing that fast.

He was really good. I give any college kid a ton of credit for having the guts and the chops to get up on this stage and pitch this crowd. Very impressive.

And then they cut to a video of Bobby Axelrod (Damien Lewis in character) saying hello to the conference attendees. “I’m working on making my next billion, race you for it.” lol

Brad Gerstner, Founder and CEO, Altimeter Capital

I like this guy, he came on our show at lunchtime and he’s got a lot of interesting things to say about technology, airline stocks, the Nasdaq giants, etc.

“To win, you’ve got to bet against consensus – and be right.”

He wants to talk about the airline stocks, which he has made a lot of money on. His fund is one of the largest holders of United Airlines. Three generations of investors have been trained to be skeptical about these stocks. This has led to multiples that are half of what investors are willing to pay for stocks in different industries.

In 2005, the industry lost almost $30 billion. In 2015, the airlines made almost $20 billion. “A $50 billion profit swing in the world’s worst industry.”

“So what changed?” – dramatic consolidation, obviously. Airplanes are full. Load factors driven by supply consolidation and pricing power. Pricing for everything from baseball games to movies – airlines only now getting their inflation-adjusted pricing growth increase in-line with everything else.

He argues that airlines are also able to pass along higher oil prices to ticket buyers for the first time. “Pricing power is the lynchpin that separates good businesses from bad ones.”

There is still a lot of skepticism that airlines will be able to pass along cost increases like oil prices to consumers.

“Airlines are actually secular growers – millennials travel more than their parents.”

Berkshire has made an industry bet. Buffett thinks they look more like railroads now. Gerstner says they look better. Rails could actually decline in use. Airlines will not.

He is very bullish on United Airlines (UAL) and its management team. He thinks they have room to take back share, increase margins and double earnings by 2020. At current multiples, he thinks the stock can almost double in his base case (135 per share). Going by management’s numbers, as high as 168 per share.

Josh Resnick, Founder and Managing Partner, Jericho Capital Asset Management L.P.

Josh has a very varied background, from VC to investment banking to public equity management.

He is here to pitch a short on a stock that is a $1.50 that he thinks goes to zero. It is Frontier Communications (FTR). He plays a video of the local news shows fielding complaints about service going dead. People are saying the company keeps making excuses for people not able to get a dial tone.

It has an enterprise value of $20 billion on a $2 billion market cap (that’s a lot of debt). Josh has been shorting it for five years. Last week, the company had to do a major dividend cut. He thinks Frontier cannot refinance it’s debt and will have to cut its dividend completely.

There is a huge reverse stock split coming that will take FTR’s share price into the low 20’s.

FTR makes $45 a month for voice calling (non-mobile). “This is not sustainable, and declining double digits.”

FTR also cannot keep up with wireless router investment. DSL cannot handle these data loads and is now bleeding market share to cable. FTR’s web service is DSL, which has become obsolete.

$18 billion “monstrous debt load.” He thinks net debt to cashflow will balloon to six times as cash flow continues “to shrink and shrink and shrink.”

Then he starts accusing Frontier’s management of dressing up costs as something else, “you practically need to be an accounting professor to be able to decipher their income statements.”

Basically, this company sounds like a black hole of lying, manipulation, etc.

He says Charter and Comcast – the biggest competitors – “will be feasting on Frontier’s carcass for years to come.” Jesus dude. Charter and Comcast are investing $8 billion, while Capex at Frontier is less than $800 million.

“The company is milking its network and leaving its customers to suffer.” The Better Business Bureau has given FTR’s service an “F”.

Larry Robbins, Founder, Portfolio Manager and CEO, Glenview Capital Management LLC

Robbins is a certified OG. He probably had the biggest called shot in hedge fund history when he laid out the extravaganza for health care stocks that ensue after Obamacare became the law of the land. He made billions from owning the managed care stocks, hospital stocks, etc.

Robbins comes out in a hockey jersey and makes fun of Bill Ackman for doing the Howard Hughes Conference for the third time. He talks fast and I’m tired so this will be some shit…

He’s saying active investing will redeem itself again. He said it last year too. He thinks M&A is going to come back also. You can still find undiscovered value in the markets.

“Start with the easier questions, not the hard questions.” – his best investment advice.

FTC has been very tough on mergers. Review time has gotten longer. “Deals are in regulatory purgatory.”

He’s talking about DXC Tech, FMC and QuintilesIMS. “Today I’m pitching three stocks are their highs.” These winners are farther to run. These are all very special situations, there isn’t any grand, connective theme here.

FMC bought the businesses that Dow and DuPont had to divest. They were the only buyer, so he thinks they got great deals. FMC ended up buying $1.5 billion in revenues for only $3 billion to satisfy regulators. Robbins says those businesses were probably worth $6 billion.


Okay, that’s it from me. If anyone needs anything, I’ll be at the PJ Clarke’s across the street eating a Cadillac Burger and drinking something cold. 

Good night!


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