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Gundlach, Einhorn, Ackman: What the Smart Money Is Buying Now

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The 19th annual Sohn Investment Conference last Monday in Manhattan featured a slew of stock picks and a handful of pans from some famous investment managers, including headliner David Einhorn of Greenlight Capital, who took a shot at athenahealth (ticker: ATHN), a highflying electronic medical-records company that he thinks could fall as much as 80% from its recent high. Given his strong record of Sohn short recommendations, including Lehman Brothers in 2008, Einhorn's critique sent shares of athena down 15% on Wednesday, to $108; they finished the week at around $113.

Bill Ackman of Pershing Square recommended Fannie Mae (FNMA), while Larry Robbins of top-performing Glenview Capital was bullish on managed-care operators Humana (HUM) and WellPoint (WLP). Philippe Laffont of Coatue Management talked up Liberty Global (LBTYA), the European cable-TV giant controlled by John Malone, while Zach Schreiber of PointState Capital was bearish on domestic oil but bullish on a pair of refiners, Valero Energy (VLO) and Marathon Petroleum (MPC), that would benefit from cheaper feedstock.


Bill Ackman of Pershing Square Photo: Eduardo Munoz/Landov
Bond maven Jeffrey Gundlach of DoubleLine Capital argued that demographic and income trends don't support U.S. housing bulls. He recommended that investors short a basket of housing stocks. Longtime hedge fund manager Paul Tudor Jones lamented the plight of "macro" investors like himself, who depend on volatile stock, bond, and currency markets at a time of unusual global calm. There was even a plug for Gazprom (OGZPY), Russia's natural-gas giant, from Jim Grant of Grant's Interest Rate Observer.

THE SOHN CONFERENCE, which raises money for pediatric cancer research, attracts strong support from New York's hedge fund community. Einhorn, a regular presenter at Sohn, said that athenahealth is representative of "bubble stocks" in technology that have become untethered from fundamentals. The company is unprofitable based on GAAP accounting (generally accepted accounting principles), and yet had a market value of $8 billion at its peak in February, when the stock topped $200.

Bulls, Einhorn said, justify athena's valuation by using outlandish growth projections stretching out a decade or more, and by comparing it with other stocks that trade at rich multiples, based on revenue. Operating in a highly competitive market, athena has weak margins and "falling earnings estimates," Einhorn said. He added that the company amounts to a "service business, not a software business," as bulls maintain, and thus lacks any meaningful operating leverage.

Robbins, in prefacing his bullish comments on Humana, joked that "there's an alarming outbreak of old people in the U.S." One of Humana's major businesses is providing managed care to the elderly through the increasingly popular Medicare Advantage program. He said that Humana, then trading around $110, was valued around 11 times his 2015 earnings projection of $10 per share, adding that his estimate could turn out to be $1 too low. Robbins said that Humana, WellPoint, and other managed-care companies "have weathered the storms" and should benefit from new members coming from Obamacare, as well as programs to enroll more dual-eligible Medicare/Medicaid recipients. WellPoint, he added, should get a boost from regaining control of its pharmacy-benefit management business in 2019, which could add $2 a share to earnings. The business was sold to Express Scripts under a 10-year deal in 2009. Robbins also recommended Monsanto (MON), arguing the company's genetically modified seeds will continue to take market share.

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David Einhorn of Greenlight Photo: Eduardo Munoz/Landov
Ackman, one of Fannie Mae's largest holders, said the mortgage giant, which was put into conservatorship by the U.S. government in 2008, along with Freddie Mac (FMCC), could rise to $23 or more from a recent price of $4. The fate of Fannie Mae and Freddie Mac is mired in politics amid congressional proposals to wind them down and develop alternative ways to backstop the American mortgage market.

Ackman argues that Fannie Mae has a great low-risk business in guaranteeing home mortgages and that the best alternative for Uncle Sam is to allow Fannie and Freddie to survive and build their capital, to avoid a repeat of their collapse during the financial crisis. He maintains that the government would benefit from such an approach because it owns almost 80% of both Fannie and Freddie through warrants. "We're prepared to sit down and make a deal tomorrow," Ackman added.

LIBERTY GLOBAL WAS LAUDED by Coatue's Laffont because of its strong position in the European cable-TV market; its shareholder-friendly management, led by Malone; and its takeover appeal to a host of potential buyers, including Vodafone (VOD) and perhaps even Comcast (CMCSA). Laffont contended that the shares, now at about $42, could hit $100. European cable providers have a lot of room to grow because they're less dominant in providing video and broadband services than their U.S. counterparts.

Liberty Global should benefit from the rollout of bandwidth-heavy services such as streaming video, as companies like Netflix expand in Europe. Laffont said Liberty trades for just 11 times free cash flow, and that the company is likely to aggressively repurchase shares in coming years. "We have incredible confidence in management," he added.

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Jeffrey Gundlach of DoubleLine Photo: Eduardo Munoz/Landov
Gundlach called the single-family housing market "overrated." He said that it had gotten artificial support from cash buyers, including companies formed by the likes of Blackstone Group (BX), but that those purchasers are pulling back. "The argument for pent-up demand is dubious," Gundlach argued, pooh-poohing the theory that young people who put off buying homes in the wake of the 2008-'09 financial crisis will storm into the market. "Where are the first-time buyers?" he asked. Amid weak incomes and higher apartment rents, it's tough for young adults to save for a down payment. It's no wonder that sales of new single-family homes have been persistently weak. Pressure on the housing market could come from sales by aging baby boomers, too. Gundlach is also skeptical of the widespread view that annual housing starts, now running below one million units, will rebound. "For the rest of my career, we may never see a year of 1.5 million starts again," he said. Starts topped two million in 2006. He suggested that investors short the SPDR S&P Homebuilders ETF (XHB).

Grant made a case for what he called a "reviled business," Gazprom, the Russian behemoth that controls about 17% of global natural-gas reserves. The risks, he said, are "too obvious" for a company that "is an instrument of Vladimir Putin's not universally popular foreign policy." Gazprom's appeal is a superlow valuation—less than three times projected 2014 and 2015 net income—and profits that, Grant joked, come "after stealing." Noting that "good things happen to cheap stocks," Grant said positive developments could include a long-term deal to supply gas to energy-hungry China. Based on reserves, Gazprom is valued at less than 10% of ExxonMobil (XOM), and has a dividend yield of about 5%.

PointState Capital's Schreiber said U.S. crude prices, now around $100 per barrel, "are going lower, much lower." With the nation's production projected to rise by one million barrels a day in both 2014 and 2015, "an ocean" of oil could form in the middle of the country, depressing the price of the U.S. benchmark, West Texas Intermediate. It could drop as low as $80 a barrel without prompting drilling cutbacks, Schreiber predicted. Refiners like Valero and Marathon Petroleum could benefit because they purchase U.S. crude and sell petroleum products based on higher global prices. They have free-cash yields of about 11%; shareholder-friendly managers who are returning cash to holders through dividends and buybacks; and opportunities to sell assets, at attractive prices, to master limited partnerships that they control, he concluded.

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Larry Robbins of Glenview Capital Photo: Eduardo Munoz/Landov
Paul Tudor Jones said that times are tough for macro investors. "This is as difficult a year as I have ever seen in my career," he lamented. His fund is down about 4% in 2014, The Wall Street Journal reported. A key reason is low volatility as the Federal Reserve and other major central banks keep short rates near zero. Tudor Jones said the Treasury market's recent reaction to strong April employment data was a big surprise. "You had everything you wanted for fixed income to get killed, and yet at the end of the day bonds closed up."

CHRIS SHUMWAY of Shumway Capital recommended Moody's (MCO) because of its high returns; good growth prospects; and duopolistic market position with rival Standard & Poor's, which is owned by McGraw-Hill Financial (MHFI). "We focus on long-term after-tax returns, and Moody's fits that to a T," he said. He maintains that Moody's can turn mid-single-digit revenue growth into a 20% annual total return on its stock through operating leverage and share buybacks. In his view, Moody's, now trading at about $80, could have 80% upside.

Mariko Gordon of Daruma Capital recommended a trio of stocks. Electronics for Imaging (EFII) is a play on the shift to digital printing, she said, adding that its shares, recently around $38, could hit $60. H.B. Fuller (FUL), a maker of specialty adhesives, is getting a lift from a management team that has stabilized margins in the face of volatility in raw-materials prices. Gordon sees upside to $70 for the stock, recently around $47. Her third pick, Pacira Pharmaceuticals (PCRX), is a play on its postoperative pain killer, Exparel, a longer-acting form of a generic drug. Gordon sees increasing use of Exparel leading to a potential doubling in the stock from a recent $75.

The Sohn conference sponsors an annual investment-presentation contest judged by Einhorn, Ackman, and others. The winner this year was a Columbia University M.B.A. candidate, Michael Guichon, who pitched Fiat (FIATY), arguing that the Italian auto maker, which owns Chrysler, is significantly undervalued. "It's the cheapest auto manufacturer in the world," he said, trading for about three times earnings before interest, taxes, depreciation, and amortization. Guichon says Fiat is inexpensive, based on potential profits and a sum-of-the-parts analysis that reflects its valuable high-end Ferrari, Alfa Romeo, and Maserati franchises, as well as Chrysler. Guichon likes management, led by Sergio Marchionne, and says profits could hit 2.5 euros a share by 2016, versus 74 European cents last year. His price target is €16.50 ($22.83), just over double the recent quote of €8.

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Michael Novogratz of Fortress Investment Group recommended Brazilian stocks, which have fallen from favor in recent years amid an economic slowdown, stubbornly high inflation, and problems at state-controlled Petrobras (PBR). Though he didn't offer specific stock picks, he said the market looks appealing and could get a lift if Brazil's President Dilma Rousseff loses her re-election bid this year.

EVEN THE BEST INVESTORS make bad calls— something to keep in mind when assessing the Sohn speakers' selections. Many of last year's picks and pans were unexceptional, as the table on this page shows.

Several of the bullish recommendations trailed the Standard & Poor's 500, which rose 16% in the past year. Notable winners were Level 3 Communications (LVLT), up 90%, and Google (GOOGL), 25%. The biggest loser was Dex Media (DXM), the Yellow Pages company, which fell 44%.

Jim Chanos' idea of shorting disk-drive makers Seagate Technology (STX) and Western Digital (WDC) didn't pan out; they rose 19% and 43%, respectively. Nor did Gundlach's short recommendation for Chipotle Mexican Grill (CMG), up 42%. But Jon Jacobson of Highfields Capital was on target with his bearish call on Digital Realty Trust (DLR), an owner of buildings that house server farms for cloud-based computing and other services. It fell 21%.