sii 2014.12
TRANSCRIPT
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SuperInvestorINSIGHT
From the Editors of Value Investor Insight
Sizing Up
There’s a sound argument to be made
that stocks of smaller companies
are more likely to be mispriced,
a result of their being less followed, less
transparent and less actively traded than
their larger brethren. As noted small-cap
expert Carlo Cannell of Cannell Capital
put it in Value Investor Insight : “It’s just
not in the best interest of the vast major-
ity of the investing ecosphere to spend 10
minutes on the companies we spend our
lives looking at.”
While the theoretical appeal may be
there, SuperInvestors find investing in
small-cap stocks difficult in practice.
Competence attracts assets, and it’s hard
to make the math work for small caps
when you’re managing billions of dollars.
Most of the investors we track manage
much more than this, but say you have$5 billion under management and have
set your minimum position size at 2%.
To buy into even a $1 billion market-cap
company you’d need to take a 10% stake
in it, a level likely to limit your flexibility
in both buying and selling. It’s not impos-
sible to manage, but most star investors
don’t consider it worth the trouble.
To put some numbers behind that con-
tention, we looked at all the stocks in
which at least four SuperInvestors owned
a stake at the end of the third quarter.There were 62 such holdings in all and
they sported a mean $66 billion mar-
ket cap, with the median at $34 billion.
In comparison, companies in the Russell
2000 Index – the benchmark for many
small-cap funds – according to the most
recent tally on Russell’s website have a
weighted average market cap of around
$1.7 billion, with a median of nearly $715
million.
In a year in which small-cap stocks are
significantly underperforming large-cap
ones, what types of smaller companies are
currently attracting collective top-investorattention? The smallest companies held
are a varied lot, led – with sub-$3 billion
market caps – by engineering and con-
struction firm KBR, Inc. and mortgage-
servicer Ocwen Financial, both of which
have been dismal performers this year.
Rounding out the “bottom” 10 (all with
$10 billion or less in cap size), in which
multiple top investors appear to see big
things in small packages: solar leader
SunEdison, real-estate broker Realogy,
control and sensor maker Sensata Tech-
nologies, chemicals producer Ashland,
discount retailer Family Dollar, real-estate
services firm Fidelity National Financial,
plane lessor AerCap [see Stock Spotlight,
p. 8] and fashion house PVH.
I N T H I S I S S U E
What They’re Buying
SuperInvestors retained their highinterest in healthcare-related stockslast quarter, while also taking ashine to Alibaba’s IPO. Page 2
Table: In PlayTable: Biggest New Bets
What They’re SellingTop investors are willing to make aquick trade. Two Q3 examples with
likely different motivations: RalphLauren and SeaWorld. Page 4
Table: Diminishing ReturnsTable: Selling Out
What They Own
All firms obviously face threats, butthere’s a solidity and predictabilityunderlying most common Super-Investor favorites. Page 6
Table: Solid GroundTable: Doubling Down
Stock Spotlight: AerCap
Are macroeconomic fears undulymasking the unique competitivestrengths of this new “800-poundgorilla” in its industry? Page 8
The SuperInvestors
SuperInvestor Insight tracks the activityof an elite group of value-orientedhedge-fund managers (plus BerkshireHathaway), based on their holdings asfiled in Forms 13F with the SEC. While
specific investors will be highlighted,the focus is on drawing collectiveinsight from this group of 30 of theworld’s best investors, which currentlyincludes William Ackman, LeonCooperman, David Einhorn, GlennGreenberg, John Griffin, Carl Icahn,Seth Klarman, Daniel Loeb, StephenMandel, John Paulson, David Tep-per, Jeffrey Ubben and many more.
U P F R O N T
John HeinsCo-Founder andEditor-in-Chief
Whitney TilsonCo-Founder
December 2, 2014
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Based on the buying activity of the 30
top investment firms we track quarterly
in our sister publication SuperInvestor
Insight , the fertile and unpredictable deal
environment around global pharmaceuti-
cals has been top of mind. Multiple star
investors increased their stakes last quar-
ter both in putative buyers, AbbVie and
Valeant Pharmaceuticals, and also in their
respective prey, Shire and Allergan [see ta-
ble below]. While neither deal happened,
seven SuperInvestors also showed appar-
ent foresight in establishing new positionsor adding to existing ones in Actavis,
which actually ended up agreeing in mid-
November to buy Allergan. All clear?
While it’s not entirely clear why the
market would cheer both winners and
losers alike in this M&A game, the share
prices of unfulfilled suitors Valeant and
AbbVie have marched nicely upward of
late, as have the shares of Actavis. For-
merly a generic-drug maker called Watson
Pharmaceuticals, Actavis has expanded
dramatically through acquisition over the
past two years. After the Allergan deal
closes, it will be a top-10 global pharma-
ceutical company with a market capital-
ization roughly 12x what it was before it
embarked on its acquisition spree.
From a share-price perspective, the oddman out thus far has been Shire. Since
U.S.-based AbbVie backed away from
its original buyout offer after concluding
it wouldn’t reap expected tax benefits,
Shire’s ADRs have fallen to a recent $213,
off 20% from their September highs. They
still trade 20% above where they did be-
fore the original buyout rumors, however
as Shire remains entrenched on analysts
lists of prospective takeover candidates.
Shares of Chinese e-commerce jug
gernaut Alibaba were the most actively
bought by top investors last quarter, with
10 of them establishing new positions at
or right after the company’s late-Septem
ber IPO. Initially priced at $68 per share
the shares rose nearly 40% on their firs
day of trading and have yet to look backclosing recently at around $106. While
the company has less than one-eighth
the annual revenue of Amazon.com – no
shrinking violet when it comes to valua
tion – its more than $270 billion marke
What’s the Deal?Deal-related activity – from M&A to spinoffs – regularly attracts smart investors, looking to capitalize when
upheaval and uncertainty results in share mispricing. Such certainly appears to have been the case last quarter.
W H A T T H E Y ’ R E B U Y I N G
What They’re Buying:In Play
Four or more SuperInvestors added to existing positions or established new ones in these stocksduring the third quarter. Healthcare-related stocks were in particular demand, as were an acquirerand an acquiree in the dollar-store industry. The biggest disappointment so far: drug maker Shire.
Company Ticker IndustryPrice@12/1/14
Q3 2014 # of Increasedor New Positions
% Change In SharesHeld – All FundsLow High
Alibaba BABA Internet Services 105.99 86.62 99.70 10 All new positions
Actavis ACT Pharmaceuticals 263.07 201.91 249.94 7 33.6%
eBay EBAY Online Retail 54.87 49.74 57.30 7 65.6%
Allergan AGN Pharmaceuticals/Medical Devices 210.65 151.11 181.94 6 8.7%
Valeant Pharmaceuticals VRX Pharmaceuticals 145.81 106.00 131.87 6 1.5%
AbbVie ABBV Pharmaceuticals 69.11 51.37 60.02 5 922.3%
Dollar General DG Discount Retail 66.32 53.78 65.10 5 20.9%
Hertz HTZ Car/Equipment Rental 23.36 24.66 31.61 5 96.5%
Humana HUM Health Insurance 139.08 115.51 135.86 5 22.8%
Liberty Global LBTYA Cable Services 50.54 41.14 45.12 5 (-4.6%)
AerCap Holdings AER Aircraft Leasing 43.40 40.68 50.02 4 58.4%
Covidien COV Medical Equipment 100.99 81.93 92.15 4 117.2%
Dollar Tree DLTR Discount Retail 67.94 53.17 59.84 4 466.4%
Shire SHPG Pharmaceuticals 213.00 222.50 264.98 4 204.2%
Time Warner TWX Media/Entertainment 83.96 68.80 88.13 4 6.7%
Walgreen WAG Drugstores 67.77 57.75 74.37 4 (-8.5%)
Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2014.
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value is 80% higher than Amazon’s. In an
indication that SuperInvestors’ time hori-
zons here may not be long, one manager
we contacted had this to say: “Everyone
wanted Alibaba if they were lucky enough
to get it on the underwriting. The bigger
question is who still owns it?”At another end of the hype spectrum,
embattled car-rental company Hertz also
attracted top-investor interest last quarter.
News from the company since August has
been uniformly bleak. It withdrew full-
year performance guidance, citing “op-
erational challenges” and heavy costs as-
sociated with an accounting review that it
expects to result in a revision of results go-
ing back to 2011. It said it might have to
delay the spinoff of its equipment-rental
business beyond next year’s first quarter.It pushed out CEO Mark Frissora prior
to having a replacement. Between mid-
August and mid-October, the shares lost
one-third of their value.
Not long ago, Hertz was being lauded
for enhancing and then capitalizing on its
leading position in a consolidating global
car-rental market. While the narrative has
clearly changed for the time being, the five
top investors who upped their stakes in
the company last quarter appear to be bet-
ting that isn’t a permanent state of affairs.
Four SuperInvestors increased theirholdings last quarter in AerCap Holdings,
another global leader in a consolidating
industry. The company closed in May on
the purchase of AIG’s International Lease
Finance unit, making it the industry’s
second-largest player behind GE Capital
Aviation Services. After a charmed run,
AerCap’s stock hit turbulence starting in
August as slower economic growth in Asia
and resulting order cancellations at plane
maker Airbus raised concerns that new-
jet demand was slowing. AerCap hasn’tpulled back on the growth throttle, adding
to its fleet in the expectation that airlines
will continue a shift from owning to leas-
ing planes in order to take advantage of
new-plane technology and fuel efficiency.
The market appears less optimistic – at
just over $43, AerCap shares trade at 8.5x
consensus 2015 earnings estimates.
While banks haven’t been high on top
investors’ buy lists of late, the biggest in
dividual new bets in the quarter [see table
below] included Brave Warrior’s purchase
of JPMorgan Chase and Greenlight Capital’s buy of Citizens Financial. Citizens
went public at $21.50 per share on Sep
tember 24, the first step in parent Roya
Bank of Scotland’s planned exit from its
U.S. subsidiary. Citing a need to “decou-
ple from RBS’s agenda,” CEO Bruce Van
Saun plans to expand Citizens’ efforts in
mortgage banking, business banking and
wealth management. The stock is up 12%
from the initial offering and currently
trades at a roughly 15% premium to tan-
gible book value.While a rising tide has tended to lift al
boats, a notable few of the big new buys
have yet to gain much traction. Shares
of Hertz, pipeline operator Enbridge and
broadcaster CBS all still trade around
their lows of the third quarter. SII
W H A T T H E Y ’ R E B U Y I N G
Company Ticker IndustryPrice@12/1/14
Q3 2014
InvestorPrice vs.
Q3 2014 HighLow High
Alibaba BABA Internet Services 105.99 86.62 99.70 Viking 6.3%
Hertz HTZ Car/Equipment Rental 23.36 24.66 31.61 Icahn (-26.1%)
AbbVie ABBV Pharmaceuticals 69.11 51.37 60.02 Paulson 15.1%
Facebook FB Internet Services 75.10 62.21 79.71 Lone Pine (-5.8%)
Alibaba BABA Internet Services 105.99 86.62 99.70 Third Point 6.3%
Dollar General DG Discount Retail 66.32 53.78 65.10 JANA 1.9%
Agrium AGU Fertilizer 96.14 88.08 95.10 ValueAct 1.1%
Actavis ACT Pharmaceuticals 263.07 201.91 249.94 Glenview 5.3%
Yahoo YHOO Internet Services 50.10 32.93 44.01 Starboard 13.8%
Enbridge ENB Energy Distribution 45.85 46.79 51.95 Highfields (-11.7%)
CBS Corp. CBS Media/Entertainment 54.47 53.49 65.24 Maverick (-16.5%)
Covidien COV Medical Equipment 100.99 81.93 92.15 Abrams 9.6%
JPMorgan Chase JPM Banking 60.00 54.96 61.85 Brave Warrior (-3.0%)
Zoetis ZTS Animal Health 44.37 31.67 37.31 Pershing Square 18.9%
Citizens Financial CFG Banking 23.98 21.35 23.57 Greenlight 1.7%
Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2014.
What They’re Buying:Biggest New Bets
These are the 15 largest brand-new positions taken by different SuperInvestors last quarter. Twoinvestors made newly public Alibaba their top new choice. While banks have not collectively beenin high demand, two made the quarter’s big-new-bet list: JPMorgan Chase and Citizens Financial.
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lic markets in April of last year at an IPO
price of $27, the shares recently closed at
less than $17.
Ralph Lauren shares also moved from
the most-bought list to the most-sold list
last quarter [see table on previous page],
but likely for different reasons. Unlikemany of its peers, the upscale fashion and
accessories company has been a solid per-
former for decades, expanding its various
lines without diluting its brand image or
materially cannibalizing sales. The stock
fell below $150 in May, in part due to the
announcement that Roger Farah, a long-
time lieutenant to founder Ralph Lauren,
was retiring. The stock rebounded, but
four top investors who had added to ex-
isting stakes in the prior quarter reversed
course and sold shares last quarter, withthree selling out entirely. The stock has
continued its upward march, and at a re-
cent $181 trades near its all-time high.
Collective top-investor selling last
quarter in Apple and satellite-TV compa-
ny Dish Network has so far proven poorly
timed. Apple shares, riding the successful
launch of the iPhone 6, are up 11% from
their third-quarter high, while Dish shares
have increased 14% from their top price
of the quarter. Dish is at a strategic disad-
vantage to cable and telecom competitors
that can bundle their services with Internetaccess and phone service, a disadvantage
that grows as consumers increasingly ac-
cess content over the Internet. But compa-
ny founder Charles Ergen has been savvy
in acquiring wireless spectrum that, based
on results of recent government spectrum
auctions, appears to have higher-than-
expected asset value. How Ergen realizes
that value is still an open question, but the
market has pushed Dish’s shares back to
levels not seen since the telecom bubble in
anticipation of his figuring it out.While SuperInvestors avidly bought
Alibaba last quarter, they collectively sold
shares in Chinese Internet search pioneer
Baidu, with five investors reducing or
exiting their stakes. As Google has suc-
cessfully done in the U.S., Baidu has been
spending heavily to expand its advertising
prowess and content offer on mobile de-
vices. Results so far have been excellent
with revenue increasing more than 50%
in the company’s latest quarter. At a recen
$237, the shares trade at 26x consensus
2015 earnings estimates.There’s disagreement among the bes
investors over big individual bets. For
example, while Lone Pine Capital made
Twenty-First Century Fox the largest com
plete sale in the quarter [see table below]
ValueAct Capital was doubling down on
its stake in the TV and movie producer
building a position valued at around $1
billion as of September 30. Similarly, Far-
allon Capital sold its entire large stake in
Yahoo last quarter, while Starboard Value
made the Internet-services firm its biggestnew buy and offered specific proposals for
how the company should spend its IPO
windfall from selling some of its Alibaba
shares. So far Starboard is looking much
the wiser, as Yahoo’s stock, now around
$50, is up 23% since quarter’s end. SII
W H A T T H E Y ’ R E S E L L I N G
Company Ticker IndustryPrice@12/1/14
Q3 2014Investor
Value @ 6/30($mil)Low High
21st Century Fox FOX Media/Entertainment 35.72 31.00 35.54 Lone Pine $564.0
Time Warner TWX Media/Entertainment 83.96 68.80 88.13 Viking $553.0
Timken TKR Diversified Industrial 42.11 42.34 49.96 Relational $465.1
Mallinckrodt MNK Pharmaceuticals 88.22 67.18 91.38 JANA $458.2
Thermo Fisher Scientific TMO Medical Equipment/Supplies 127.96 116.36 127.21 Paulson $380.6
Deere & Co. DE Agricultural Equipment 89.58 81.55 91.50 Berkshire Hathaway $360.3
American International Group AIG Insurance 54.43 51.61 56.56 Third Point $327.5
Oracle ORCL Software 42.08 38.14 42.09 Brave Warrior $319.7
Walgreen WAG Drugstores 67.77 57.75 74.37 Glenview $265.2
Yahoo YHOO Internet Services 50.10 32.93 44.01 Farallon $234.6
Broadcom BRCM Semiconductors 42.80 36.55 41.65 Highfields $226.6
T-Mobile TMUS Wireless Services 28.56 28.25 34.55 Owl Creek $193.6
Cognizant Technology CTSH IT Services 54.05 41.51 51.38 Pennant $162.2
Computer Sciences CSC IT Services 63.52 56.19 65.52 Greenlight $146.9
Sally Beauty SBH Beauty Products 30.94 24.09 28.29 Blue Ridge $135.2
Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2014.
What They’re Selling:Selling Out
These 15 stocks were the largest positions eliminated by different SuperInvestors last quarter. Bigsales in both 21st Century Fox and Yahoo were matched by big buys of other star investors. Theseemingly best-timed sales so far: Relational’s exit from Timken and Owl Creek’s from T-Mobile.
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One of Warren Buffett’s many admi-
rable traits is an ability to explain clear-
ly and concisely. Take, for example, this
description from Berkshire Hathaway’s
2013 annual letter of his analytical pro-
cess when contemplating an investment:
When Charlie Munger and I buy stocks
– which we think of as small portions
of businesses – our analysis is very
similar to that which we use in buying
entire businesses. We first have to de-
cide whether we can sensibly estimate
an earnings range for five years out or
more. If the answer is yes, we will buy
the stock (or business) if it sells at a rea-
sonable price in relation to the bottom
boundary of our estimate. If, however,
we lack the ability to estimate future
earnings – which is usually the case –
we simply move on to other prospects.
In the 54 years we have worked togeth-
er, we have never forgone an attractive
purchase because of the macro or politi-
cal environment, or the views of other
people. In fact, these subjects never
come up when we make decisions.
It can be difficult to generalize, and
certainly all businesses face competitive
and technological challenges, but there’s
a solidity and predictability – borne out
of such things as scale, market position,
intellectual property and brand strength
– to many of the businesses most widely
owned by SuperInvestors [see table be
low]. You can probably estimate the earn
ings range five years out of cable-services
providers like Liberty Global and Charter
Communications, which compete in high
ly concentrated local markets. Monsanto’s
patent portfolio and R&D prowess make
its global positions in agricultural seeds
and crop-protection products relatively
secure. Even financial-crisis pariah AIG
after years of shrinking, is now focused on
geographic markets and product lines inwhich it’s likely to have staying power.
Another telling example is Microsoft
Jeff Ubben of ValueAct Capital disclosed
W H AT T H E Y O W N
Staying PowerAll businesses face competitive and technological challenges, but there’s a solidity and predictability – borne out
of unique strengths – that characterizes many of the companies most widely owned by SuperInvestors.
Company Ticker IndustryPrice@12/1/14
52-Week # of PortfoliosThat Own
Price vs.52-Week HighLow High
Dollar General DG Discount Retail 66.32 53.00 67.95 11 (-2.4%)
Actavis ACT Pharmaceuticals 263.07 156.40 272.75 10 (-3.5%)
Alibaba BABA Internet Services 105.99 82.81 120.00 10 (-11.7%)
eBay EBAY Online Retail 54.87 46.34 59.70 10 (-8.1%)
Valeant Pharmaceuticals VRX Pharmaceuticals 145.81 105.17 153.10 10 (-4.8%)
Allergan AGN Pharmaceuticals/Medical Devices 210.65 94.98 214.64 9 (-1.9%)
Liberty Global LBTYA Cable Services 50.54 37.98 53.47 9 (-5.5%)
American International Group AIG Insurance 54.43 46.80 56.56 8 (-3.8%)
Charter Communications CHTR Cable Services 168.49 116.78 169.73 7 (-0.7%)
Cheniere Energy LNG Liquefied Natural Gas 66.70 38.42 85.00 7 (-21.5%)
Microsoft MSFT Computer Software/Services 48.62 34.63 50.05 7 (-2.9%)
Monsanto MON Agricultural Products 118.85 104.08 128.79 7 (-7.7%)
Anadarko Petroleum APC Oil & Gas 78.73 73.60 113.51 6 (-30.6%)
Apple AAPL Computers/Consumer Electronics 115.07 70.51 119.75 6 (-3.9%)
Equinix EQIX Data Centers 224.18 155.83 229.16 6 (-2.2%)
HCA Holdings HCA Hospitals 68.69 45.07 73.94 6 (-7.1%)
Mondelez MDLZ Packaged Foods 38.98 31.83 39.54 6 (-1.4%)
Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2014.
What They Own:Solid Ground
Six or more SuperInvestors held at least $15 million stakes in these companies as of the end of thethird quarter. Technology stalwarts such as Apple, Microsoft and eBay remain well represented.Energy-related stocks Anadarko and Cheniere trade by far the furthest from their 52-week highs.
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his firm’s large stake in the software gi-
ant in April 2013, calling it at an invest-
ment conference a “perception vs. reality
opportunity.” After acknowledging that
Microsoft’s consumer businesses were
challenged – and saying, “Who cares?”
– he made the case that the company’sentrenched position with enterprise cus-
tomers in traditional and, increasingly,
new product areas was far more lucra-
tive and important to its future success.
As that view of the company has become
more widely held and continues to be sup-
ported by performance, Microsoft’s shares
are up 57% since Ubben’s speech, vs. 32%
for the S&P 500. SuperInvestors’ collec-
tive interest in the stock remains high,
with seven owning stakes – all in excess of
$100 million – as of September 30.An additional technology stalwart
attracting widespread interest is eBay,
owned by ten star investors at quarter’s
end. After rejecting Carl Icahn’s call ear-
lier this year for the company to separate
its Marketplaces and PayPal units, the
company on September 30 agreed to do
just that by the end of 2015. While PayPal
is the sexier asset, the Marketplaces busi-
ness boasts some 150 million users and
has extended its franchise beyond online
auctions to include sales of popular new
products. In addition to touting its po-tential as a long-term bet on e-commerce,
market wags within days of the split an-
nouncement also pegged a stand-alone
eBay as an attractive takeover candidate –
with China’s Alibaba as a “natural” buyer.
Compared to most of the widely held
stocks by SuperInvestors that are trading
near 52-week highs, shares of Anadarko
Petroleum and Cheniere Energy have been
much less buoyant of late. Anadarko, the
only energy exploration and development
company to make the list, is credited withhaving a diverse asset portfolio – includ-
ing low-cost domestic natural gas, deep-
water oil, and unconventional reserve
plays in the U.S. and abroad – that gives
it excellent financial and operational flex-
ibility across a variety of oil and gas price
scenarios. Even so, its shares have fallen
right along with energy prices – at a recen
$78.75, the stock is off 30% from its Au
gust highs.
Cheniere, owned by seven top investor
at quarter’s end, is a different beast. The
company has never posted an annual profit, but has been locking up deals to expor
liquefied natural gas that it has said can so
far bring in more than $2 billion in annua
revenues for as long as 20 years. Enam-
ored by the potential of selling low-cost
U.S. natural gas overseas, the market has
taken notice. Though Cheniere shares are
down more than 20% from their Septem-
ber highs, they’re up some 3,500% over
the past five years.
As is typically the case, the largest posi
tions in which top investors at least doubled their stakes during the quarter [see
table below] comprise an eclectic lot. In
cluded: old-line media firm Gannett, Chi
nese Internet security provider Qihoo 360
biotech pioneer Amgen and beer maker
Anheuser-Busch InBev. SII
W H AT T H E Y O W N
Company Ticker Industry Price@12/1/14 Q3 2014
Investor Price vs.Q3 2014 HighLow High
Shire SHPG Pharmaceuticals 213.00 222.50 264.98 Paulson (-19.6%)
21st Century Fox FOX Media/Entertainment 35.72 31.00 35.54 ValueAct 0.5%
Charter Communications CHTR Cable Services 168.49 149.66 167.30 Berkshire Hathaway 0.7%
eBay EBAY Online Retail 54.87 49.74 57.30 JANA (-4.2%)
Actavis ACT Pharmaceuticals 263.07 201.91 249.94 Viking 5.3%
Cheniere Energy LNG Liquefied Natural Gas 66.70 67.12 85.00 Lone Pine (-21.5%)
Dollar Tree DLTR Discount Retail 67.94 53.17 59.84 Highfields 13.5%
Pentair PNR Diversified Industrial 62.75 62.91 73.63 Glenview (-14.8%)
Gannett GCI Media 32.65 29.64 35.70 Icahn (-8.5%)
DirecTV DTV Satellite TV 87.73 83.14 88.25 Farallon (-0.6%)
Qihoo 360 QIHU Internet/Mobile Security 68.90 66.05 104.81 Maverick (-34.3%)
Amgen AMGN Biotechnology 166.41 114.93 144.46 Third Point 15.2%
Anheuser-Busch InBev BUD Beer 116.15 105.84 115.84 Corvex 0.3%
EMC EMC Data Storage 30.29 26.34 30.18 Ivory 0.4%
YPF S.A. YPF Oil & Gas 32.29 30.60 41.74 Owl Creek (-22.6%)
Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2014.
What They Own:Doubling Down
These are the 15 largest positions in which different SuperInvestors at least doubled their shareholdings last quarter. Companies based outside the U.S., including Anheuser-Busch InBev, Shire,Qihoo 360 and YPF, garnered much increased interest. Most challenged so far: Cheniere Energy.
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A year ago AerCap Holdings would
not have been on the radar screens of
most SuperInvestors. While public since
2006 and with a reputation as an adept
buyer and seller of planes, it operated in
the second tier of competitors in a global
aircraft-leasing industry with two domi-
nant players, GE Capital Aviation Services
and the International Lease Finance Corp.
[ILFC] division of insurer AIG.
AerCap’s profile shifted considerably
with the announcement last December
that it was buying ILFC from AIG, morethan tripling its asset base to a current fleet
of 1,300 aircraft, with another 400 new
planes on order through 2022. The deal
was so warmly welcomed by Wall Street
that the cash and stock consideration for
the purchase went from around $5 bil-
lion at the time of purchase to closer than
$7.5 billion when the deal closed in May.
Despite AerCap’s shares doubling from
pre-deal levels, SuperInvestors have taken
increased notice, with four upping their
stakes or establishing new large positionsin the company during the third quarter.
Size obviously matters in a highly
capital-intensive and global business like
aircraft leasing. The biggest players can
not only negotiate the best prices from
plane manufacturers, but the breadth and
depth of their customer networks also al-
lows them to re-let planes more effectively
when they come off-lease or are repos-
sessed. That helps smooth cyclicality, says
Mahmood Reza, a portfolio manager at
SuperInvestor Omega Advisors, which es-tablished a new AerCap stake last quarter:
“If you’re positioned with the right, fuel-
efficient aircraft – which AerCap is – may-
be utilization levels in a bad cycle go from
99% today to the low-90s,” he says. “The
cycle is much more manageable, say, than
in shipping, where a downturn results in
big asset writedowns and net losses.” As
a testament to the stability of the busi-
ness, he says, AerCap since going public in
2006 increased its book value by an aver-
age 13.3% annually prior to buying ILFC.
(That number is 19.3% post-acquisition,
given the roughly 35% discount to adjust-
ed book value it ended up paying.)
While he believes the cycle will be
manageable, Reza also expects the over-
all trend to be nicely upward. Global air
travel, fueled by demand in developing
countries, is expected to continue growing
at 1.5x to 2x the level of global GDP. At
the same time, lessors’ share of the overal
global fleet is also expected to continue to
grow. The share of the commercial aircraf
fleet provided by leasing companies has
doubled to 42% over the past 20 years, as
airlines increasingly turn to leasing in or
der to reduce capital outlays and the obso
lescence risk of their primary assets. Mos
estimates put that share number above
50% within the next several years.
S T O C K S P O T L I G H T : A e r C a p H o l d i n g s
Flight PlanDespite seeming industry tailwinds and a dramatically enhanced market position, the shares of aircraft leas-
ing company AerCap Holdings don’t appear particularly high-flying. Multiple SuperInvestors beg to differ.
AerCap Holdings(NYSE: AER)
Business: One of the two largest globalaircraft lessors, engaged in the leasing,financing, trading, sales and management
of commercial airplanes and jet engines.
Share Information(@12/1/14):
Price 43.4052-Week Range 21.09 – 50.02Dividend Yield 0.0%Market Cap $9.21 billion
Financials (TTM): Revenue $2.60 billionOperating Profit Margin 53.9%Net Profit Margin 23.1%
Valuation Metrics(@12/1/14):
AER S&P 500Trailing P/E 11.1 19.4Forward P/E Est. 8.5 17.2
Largest Institutional Owners(@6/30/14):
Company % OwnedJANA Partners 10.0%Donald Smith & Co 7.5%Fidelity Mgmt & Research 4.8%
Deutsche Bank 4.3%Wellington Mgmt 4.1%
Short Interest (as of 11/14/14):
Shares Short/Float 6.8%
I N V E S T M E N T S N A P S H O T
AER PRICE HISTORY
THE BOTTOM LINE
Mahmood Reza believes the market is underestimating the company’s growth prospectsand its newly enhanced earnings power, while overestimating the possible macroeco-nomic risks to its business. At what he considers a reasonable 10x forward multiple onhis 2016 estimate of operating EPS, the shares one year out would trade at around $60.
Sources: Company reports, other publicly available information
2012 2013 2014
50
40
30
20
10
50
40
30
20
10
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December 2, 2014 www.superinvestorinsight.com SuperInvestor Insight 9
Success in the leasing business also rests
heavily on capital-allocation skills. Aer-
Cap is highly regarded for the stewardship
of its fleet, deemed more likely to sell the
appropriate planes – it sold 68 last year
– at the appropriate points in their useful
lives. Reza also likes that management ap-
plies a similar valuation discipline to its
own stock. Over a 12-month period from
2011 to 2012, it stepped up aircraft sales
in order to buy back 25% of its total mar-
ket cap at share prices in the low teens.
Despite seeming tailwinds, AerCap
shares don’t appear particularly high-fly-
ing, trading at just 8.5x consensus 2015
earnings estimates. Among the key market
concerns are that new-plane order cancel-
lations from Asia signal a downturn in air-
craft demand, and more recently, that lowoil prices will diminish leasing interest in
newer, fuel-efficient planes. With respect
to order cancellations, Reza says they have
been fully in line with historical averages,
and so far seem to signal no more than the
type of regional economic slowdown that
a global player like AerCap can offset by
strength in other regions. He also believes
oil-price concerns are overstated. “Air-
lines make their capital plans over five to
ten years and get oil-price volatility,” he
says. “The decline in oil prices would haveto be much sharper and sustained for ex-
pectations on future prices to come down
enough for airlines to materially cancel
already-committed leases.”
Another likely overhang for the stock
is AIG’s approximately 45% ownership
stake, a portion of which it can start to sel
in late February of next year. Reza doesn’
consider this a big issue – AIG has two
members on AerCap’s board and now has
significant excess capital, making it more
likely to be a patient owner until it can ge
what it considers a full price.
What would such a full price be? Reza
believes the company can beat consensus
for next year and earn $5.50 in operating
EPS, driven by incremental merger-related
cost savings and higher lease yields on the
acquired planes it bought at a discount
On the $6 in EPS he estimates for 2016
he believes a 10x forward multiple would
be reasonable, resulting in a $60 share
price a year from now. “Now one of the800-pound gorillas in this market is pub-
lic,” he says. “It may take time for the
market to recognize the quality of the busi
ness, but over time we think it will.” SII
S T O C K S P O T L I G H T : A e r C a p H o l d i n g s
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ON MARKET PERCEPTION:
Now one of the 800-pound
gorillas is public – it may
take the market time to rec-
ognize the business’s quality.
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December 2 2014 www superinvestorinsight com SuperInvestor Insigh
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