The Top Stock Pitches From the 2017 Sohn Investment Conference
Motley Fool analyst Matt Argersinger recently returned from the Sohn Investment Conference in New York, where some of Wall Street's top fund managers take the stage to share their views, both bullish and bearish, about various companies. And on this episode ofMarket Foolery, Mac Greer welcomes Matt to the show to share his most interesting takeaways: the buys, the shorts, and more.
A full transcript follows the video.
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This video was recorded on May 10, 2017.
Mac Greer: It'sWednesday, May 10th. Welcome to Market Foolery. I'm Mac Greer. Joining mein studio today,we have Matt Argersinger from Million Dollar Portfolio. Matt,how are you doing?
Matt Argersinger: Hey,I'm doing pretty good, Mac! Greer: Matt,we're going to try something different today. You're fresh off the SohnInvesting Conference in New York City,which is the muckety-mucks, it's some of the tophedge fund managers and fundmanagers sharingsome of their top picks, right? Argersinger: That's right.
Greer: Let'sget right to it. I want to set the stage here.I want to have you share some of the pitches, both the buysand the sells,and I want to have some key takeaways. Let'sstart by just explaining, what is Sohn, andwhy should investors care about what goes on at Sohn?
Argersinger: Sure. TheSohn Investment Conference is anannual conference in New York City. It's named after Ira Sohn, who was aWall Street trader who died of cancerat the age of 29. Since 1995, the SohnInvestment Conference has been honoring Ira, and byhonoring him they're hosting thisinvestment conference that brings togetherhedge fund titans likeBill Ackman, Dave Einhorn, which we'lltalk about, and it raises money forpediatric cancer,trying to curechildhood cancers. It'sa really worthy cause. Tickets arereally expensive. I was fortunate enough to get in on a media pass. But it's a very worthy cause, andit's an exciting conference that reallygets you some top ideas from top-tier investors that we can share.
Greer: Let'stalk about some of those top ideas,beginning withTesla(NASDAQ: TSLA).Social CapitalFounder and CEO Chamath Palihapitiya --
Argersinger: Oh,you nailed it.
Greer: I nailed it.
Argersinger: His name, I was so sweating that.
Greer: Yeah,we've been practicing that before the podcast.Chamath Palihapitiya pitches Tesla,tell me about that pitch.
Argersinger: Sure. He's the owner of Social Capital, a hedge fund, and he's also the part ownerthe Golden State Warriors, for those who don't know him. But last year, at Sohn, he famously said that Amazon.comwas a 10x opportunity in 10 years. He got a lot of press behind that, so far, withAmazon up 40% over the last 12 months, he's been right. And that'skind of what he's looking for. He brought Tesla to the tableat the conference. And I have to say,when he said the name Tesla, there were notable laughsacross the audience.
Greer: Andwhy is that?
Argersinger: I think because with Telsa, there's baggage. Alot of people think it's a bubble, it's a stock at an all-time high,Elon Musk is always in the news for good and bad reasons, it seems. So you havea really bipolar view of Tesla,either it's going to be an amazing success that'sgoing to revolutionize all theseindustries, or it's a stock bubble waiting to crash. But Chamath Palihapitiya made the case for Tesla,and I thought it was a prettycompelling case. He said, if youthink about what the Model X and Model S have done, they'veessentially come out in the last several years, and they'vealreadydominated large swaths of the market for their respective categories. And he thinks the Model 3, which is Tesla'snext car, which is going to come out later this year, isgoing to be similar to the iPhone 3 back in 2009. In other words, thisdevice that just comes out --in this case, of course, an electric car -- andconsolidates the market, builds huge excitement, andtakes over the market, and there'sgoing to be such demand for it, once people buy the Model 3,it's going to become the car of the future,no one is ever going to go back to internal combustion engines. Andif you believe that Tesla is on this Apple iPhone curve, he thinks the auto business for Tesla could be worth $340 billion alone in 10 years. That's 7 times Tesla's current market cap, and that's just the auto business for Tesla. So,obviously, he's really excited about that.
Greer: And that's somehappy shareholders if that plays out.
Argersinger: I would say. There's a lot of reasons to love Tesla,and I think having someone likePalihapitiya haveconfidence in it and be an investor in it ...I will qualify this by saying,he's not actually investing in the stock himself. His fund isactually buying the convertible bonds, whichI think it's interesting because there'smuch more downside protection. Youbasically have to assume that Tesla goes bankrupt to not get paid on those bonds, butyou get about 95% of the upside. I kind of like that play.
Greer: Interesting. Let'smove on to another stock.I admit I did not expect to see this name as a buy, as a stock that someone was pitching --United Airlines(NYSE: UAL).
Argersinger: United Airlines. This, to me, wasone of the more compelling pitches. It was byBrad Gerstner ofAltimeterCapital.I have not been a fan of the airlines, and I think we've trained our brains as Foolish investors to think thatindustry is terrible. And it has been aterrible industry for investors for decades. But we know Buffettgot into it recently. Gerstner's point is that today, the U.S. airline industry is in such amuch better place than it was even 10 years ago. Right now, essentially fourairlines control 80% of the revenue, of whichUnited is a part of. That consolidation has increased load factors, revenue per seat mile,it's given airlines pricing power. He actually also thinks there'sa bit of a secular growth story with airlines,in the sense that millennials,whether you believe this or not, aregoing to travel a lot more than previous generations. So you put all that together, andhe actually thinks, in his best-case scenario, that United Airlines, within five years, could be worth $235 a share. That's if they hit his profit metrics that he has for them, and airlines in general start getting awardedthe kind of multiples thatrailroads have been awarded, orother transportation industries.Airlines, of course, for years, have gotten low multiples,because no one likes investing in the industry. Butthat could be about to change. And if Buffett is behind it, and I think this case does really well,if you believe that airlines are back and they have pricing power, you could do really well. $235 for United in five years, compared to today's $78 stock price, not a bad return, if you can get it.
Greer: I appreciate the fact that consolidationhas become a real thing. When I fly to Houstonto see my family and friends that I grew up with,I basically have two choices if Iwant to fly nonstop --Southwestor United. And I love Southwest, butwhen the times don't work or the price isn't right,I will fly United. And I hate hate hate that theydragged this guy off the plane,but I also don't want to be measured by my worst moment. So I'm like, they'reone of the few games in town, andI'm going to play that game.
Let'sgo on to a company I don't know much about,real estate development companyHoward Hughes(NYSE: HHC).
Argersinger: Yeah,this was Bill Ackman's pick.Pershing Square, we all know Bill Ackman. This was interesting from Bill Ackman. He got on stage -- forthose who know Bill Ackman, he'susually very energetic, he'sin the public eye a lot, he'scharismatic --he was rather subduedwhen he was on stage making this pick.
Greer: Andjust to clarify, because maybesome of us don't know Bill Ackman. We'vetalked about him recently in terms ofHerbalife, he's very much shortHerbalife, on the other side of that bet isCarl Icahn --
Argersinger: They'vehad a little bit of a Clash of the Titans on that.
Greer: A bit of a clash,we're still waiting to see how that plays out. But,most associated with Herbalife, also has a big stake inChipotleas well.
Argersinger: That's right. His fund,Pershing Square's main fund,has not done well the last couple years. So maybe that's part of it. So his pitch wasHoward Hughes Corp. We know the nameHoward Hughes, the famous aviator,explorer, and filmmaker. But Howard Hughes Corp isbasically a big real estate owner. They'reone of the largestowners of what is called master plan communities, MPCs, in the country. These are essentially big swaths ofdeveloped land, eitherland with housing developments orcommercial property, big swaths of land.Howard Hughes owns it. It's kind of a nice business whenyou think about it. Hughesgenerates income from real estate sales, operating income for leases, itreinvests back into the property andimproves land values, itbrings in new residents, newcommercial leases, the demand goes, and as the prices rise,it's a little bit of a virtuous cycle. Ackman's bottom line point was, at about $122 a share for Howard Hughes,which was the price before he made the presentation, he thought an investor was gettingessentially the entire business ofHoward Hughes, plus, theSeaport District in Manhattan,which they also own,which is an amazing several acre spot,one of the premiere spots in Manhattan --
Greer: Nice real estate.
Argersinger: Yes. Alarge piece of land in Hawaii, and about 37 million square feet of future development across Howard Hughes' portfolio, all for free.
Greer: AndHouston, you left out Houston.[laughs]
Argersinger: Yeah,they'reone of the biggest,I forget what it's actually called, but it's a piece of land,one of the premiere places in Houston.
Argersinger: Yeah, it's three times or four times the size of Manhattan itself. Anyway, this is,according to Ackman, one of the premierereal estate companies in the world. AndI think we have a service here or two that has recommended Howard Hughes in the past. It'sone that hasn't really been on my radar, butit's one that I'm going to betaking a closer look at.
Greer: Let's move on to the shortposition,Core Labs(NYSE: CLB). Greenlight's David Einhorn. Alot of people may know David Einhorn, back in 2007 he shortedLehman Brothers, whichsubsequently went bankrupt, so that worked out well. Inrecent years, he's also shorted a little company called Amazon.com. Not so good.
Argersinger: Yeah. He's knownmostly for being a short seller. He's had some bad bets.I think he was also short Chipotle at some point,I think he made the claim thatTaco Bellwasgoing to eat Chipotle's lunch at some point. But he'salso been a longtime investor inApple, which has worked out really well. So he's kind of all over the place. But he brought to the table Core Labs,which is an oil fieldservices company that specializes inseismic and high data analysis of wells. It'sused by drillers and explorers as a way of trying tomaximize their yield on a given exploration. Hispoint was a good one, though. Ifyou look at Core Labs' exposure, they're exposed mainly to thesecomplex international,mostly deepwaterexploration projects. Thatpart of the oil business has just been terrible. Theydon't have a lot of exposure to theonly place that's really working, which is North American shale. At the same time,investors seem to have rewarded Core Labs thiselevated multiple because they think it's a secular growth story. The idea that,everyone is going to be using high data analysis now to dointricate, complex explorations. But, actually,that's not true. He thinksit's a bit of afalse narrative that this is asecular growth story. He thinks, this is just a cyclicaloil services company likeHalliburtonor any other, and itshouldn't be awarded these higher multiples. He thinks their earnings are about to drop off a cliff starting later this year, andonce that happens, investors are going to award amuch lower multiple to the business, and he thinks the stock is going to drop 30% to 40%.
Greer: Pulling back here, Matt,you talk about how exclusive this event is, the SohnInvesting Conference. Give usa little more color, because I'm envisioning icesculptures and you're sipping champagne at lunch andmaybe eating a little bit of caviar, because these are billion-dollar fund managers. What's it like?
Argersinger: Well,it's held at a prestigious place, theLincoln Center in New York City. Forthose who haven't been there, it'sone of the most beautiful, theatrical venues in theentire world. The tickets were $5,000. So it's not a cheap event. ButI have to say, it felt to me more likeany other investing conference. You go there, there's booths set up, funds areadvertising, investment companies are advertising --
Greer: Box lunch?
Argersinger: A bit of a box lunch. There were little sandwiches. Nocaviar, I looked for the caviar and couldn't find the caviar. But sandwiches, soda, water. Most of it was just sitting down, listening to presentations,having a few breaks,mingling. I didn't do a lot of minglingbecause I was typingfuriously the whole time. But it felt like any other event,I didn't feel like I was in a room full of billionaires. It felt like a room full of people who wereinteresting in investing. Andthat's where I love to be.
Greer: I like this. So,not pretentious.
Argersinger: No, notpretentious.
Greer: I like hearing that. OK, Matt,as we wrap up here, a littlelightning round, I want to hit you with a few questions,beginning with, what was the mostconvincing pitch you heard at Sohn
Argersinger: I'd have to go back to Brad Gerstner pitch forUnited Airlines,just because it caught me off guard,I had never looked at the company, andhe made such a compelling case for the airlines, and forUnited Airlines in particular. Hisscenario seemed very plausible,you can get a multi-bagger return byinvesting in United today. So,that was the pitch that struck me the most.
Greer: Conversely, how aboutthe least convincing pitch?
Argersinger: All of the pitches were convincing.I don't think Ackman's pitch forHoward Hughes was as compelling as itcould have been. I think he was very simplistic, he highlightedsome of the qualities of the business, butit didn't make me think that buying Howard Hughes todaywas going to be a game-changing investment likeinvesting in Tesla or even United Airlines, or shorting Core Labs, was, today. SoI would say that felt soft to me.
Greer: Andhow do you think the whole Herbalife thing is going to work out for Ackman? I feel likeif it walks like a pyramid schemeand it quacks like a pyramid scheme, it'skind of a pyramid scheme. And yet, obviously,Carl Icahn, very bullish on Herbalife, and it's still a multi-billion dollar market cap.
Argersinger: I think you and I see the same thing. I see a direct marketing company that eventually is probably going to fall out of favor. It's just,for whatever reason, this company has been able to maintain a very viable networkgenerating lots of cash. You and I agree,I think a lot of the practices arepretty unsavory on the marketing side. So I want to say I feel like Ackman isgoing to be right eventually. Is hegoing to be right to the point where he makes a good return on his short? I don't know,because he's been fighting Carl Icahn a lot. But I have to say, five years from now, we'll look back andI guarantee you that Herbalife will not be around, or it'll be a much morediminished company than it is today.
Greer: How about, coming out of Sohn, one fund manager that everyone should follow?
Argersinger: I'll have to go back, I know the name is hard to pronounce, butChamath Palihapitiya is a rising star in the hedge fund industry. I'm a Rule Breakerinvestor at heart, soI'm also the guy looking for 10x opportunities in 10 years, andthat's kind of his mantra. So I like where he's focused. I'm a big believer in Amazon, and he is too. I liked his pitch for Tesla. So pay attention to him. I think he'slooking in the right places, he'sbringing a venture capital approach to the public markets,and that's exciting to me.
Greer: AndI just learned watching an interview with him on YouTube that Chamath, his first name, means warrior. I don't know what Mac means, or Matt.
Argersinger: [laughs] It makes sense that he's a part owner ofthe Golden State Warriors.
Greer: Oh,I didn't even think of that, that's brilliant.
Argersinger: Yeah,there you go.
Greer: And Matt, how about one stock or trend from the Sohn conference that goes into your "definitely interested" bucket, something that you're going to watch because of the conference
Argersinger: I'm paying a lot closer attention to the airlines. We haven't spenta lot of time looking at airlines here at the Fool. We'vefollowed Buffett's mantra ofnot being interested in that industry. Butthe fact that Buffett is now interested, and the fact that you can see some of the compelling dynamics coming back, and the pricing power coming back, it's a placeI need to pay closer attention to, and I think we all should.
Greer: Youperhaps just answered this, but did Sohn change your mind about anything?
Argersinger: I've beenskeptical of where the stock market is,I guess, relative tohistorical patterns. There was some talk at the conference about, the stock market is at all-time highs,things are looking expensive, the Fed is raising interest rates. There was a macrodiscussion intertwined between all these pitches. I'dhave to say, hearing some of thesmartest money managers and hedge funds make strong cases for investing, it reminds me that there aregood opportunities everywhere. Don'talways go inskeptical saying, "This is too expensive." IfChamath Palihapitiya isgoing to say that Amazon is a 10x opportunity last year, and he says Tesla could be a 7x opportunity now, it reminds me,focus on the business, focus on who'sinnovating, what's working in the investing world. Don't worryso much about the overall price of the market. Ultimately, the best companies, the best investment ideas,are going to win.
Greer: Toreview some of those opportunities, the buy pitches wereTesla, United Airlines, andHoward Hughes, the real estatedevelopment company, andthe short was Core Labs.
Greer: Matt,thanks for joining me today.
Argersinger: Thank you, Mac.
Greer: Asalways, people on the show may haveinterests in the stocks they talk about,and The Motley Fool may have formal recommendationsfor or against, so don't buy or sell stocks basedsolely on what you hear. That'sit for this edition ofMarket Foolery. The show is mixed by Dan Boyd.I'm Mac Greer. Thanks so much for listening, we'llsee you next time!
Mac Greer owns shares of Apple and Chipotle Mexican Grill. Matthew Argersinger owns shares of Amazon, Apple, Chipotle Mexican Grill, and Tesla. Matthew Argersinger has the following options: short December 2017 $800 puts on Amazon. The Motley Fool owns shares of and recommends Amazon, Apple, Chipotle Mexican Grill, Core Laboratories, and Tesla. The Motley Fool recommends Howard Hughes. The Motley Fool has a disclosure policy.