Year end review

Happy new year! I took some time to disconnect over the last two weeks and enjoy the holidays. For the first post of 2013, I thought it might be a good to review all the picks from the last 3 months to see how I fared.

AIG (AIG)

AIG is still one of my top picks. It is up about only $2 from the price I paid for the stock. However, I feel it still has significant upside. Mainly all the arguments I made previously still apply:

  • It trades at half of book value.
  • The government completely sold AIG shares at the end of 2012. It now only holds warrants in the company.
  • AIG sold its stake in AIA. It also has agreed to sell a majority of its stake in ILFC.
  • The company can now focus on its core insurance operations and improve its return on assets.

Dean Foods (DF)

I sold Dean at a little bit of a loss. I still think Fresh Diary Direct segment is undervalued. However, the volatility of Whitewave was too much for me to take. I think the best way to play Dean is to wait for them to distribute the Whitewave shares and buy it before the distribution date if the current prices remain as they are.

General Motors (GM)

GM is one of my biggest winners. It is up nearly 50% for me. The government sold off 200 million shares of its stake in the company to GM recently. This should have a positive impact on EPS. If the economy improves in US and Europe and vehicle sales return to a normalized state, earnings could easily be over $5 over the coming years. Also, it is slowly removing the overhang of the pension liabilities. This could also be a big boon.

With the stock to almost $30, I might cut my position in half and book some profit. The auto industry is very capital-intensive and very competitive.

Orchard Supply Hardware (OSH) & Sears Hometown & Outlet (SHOS)

I have written a lot about these two Sears spin offs and I am short both. As I mentioned in my previous articles, I am convinced Orchard will go under. So far, it has been a very profitable short for me. I am not 100% convinced on Sears Hometown, so I only have a small short position there. Both of these plays are a bit risky, since they are cheap on a revenue multiple basis. Sears Outlet is a wild card for SHOS. If it can grow that successfully, the stock may have upside. I have no faith in the Sears Hometown business as it has had negative same store sale numbers for years. I know a lot fellow financial bloggers are long SHOS and I am open on seeing their analysis. So far, I have been wrong as SHOS. It has bounced nicely from $30 to $35 recently.

Xerox (XRX)

I bought Xerox around $6.50. The stock is around $7.20 today. Nothing fundamentally has changed about the company since I wrote the bullish case. It still trades at a significant discount to FCF and has increased its dividend. I still think there is significant upside.

Genie Energy (GNE)

Genie was a quick arbitrage trade on its offer to exchange common shares for prefered shares. I booked little less than a 10% profit on the trade. I still think there may be an opportunity on this type of trade in Genie in the future. Nobody will exchange the common for the preferred as the common is trading higher than the preferred.

Pandora (P)

I have a small short position in Pandora. So far, it has not been a good trade as the stock has shot up from $8 to $10. I continue to believe that this company will not exist in the future. It really has no barriers to entry, no competitive advantage, and is not profitable. Obviously, a lot of Pandoras profitability depends on the outcome of the Internet Radio Fairness Act. However, there is no doubt that there will be more competitors in this space in the future. I will keep this short position.

Susser Holdings (SUSS)

Susser is up about a $1 from what I bought it at. It may take some time for this stock to go up. However, it should be able to expand a lot faster after the spin-off of SUSP. I have a small position and will keep that position.

Others

I also missed out in some of my other bullish calls such as Facebook, Lumos Networks, Nacco Industries and Einsteins. I wrote a bearish case on Western Union, but the stock has been up since then. I still believe in the bearish case. I believe that Western Unions biggest competitor Moneygram will have a tough 2013 due to Western Unions price cuts. I will be looking to short in 2013.

DIsclosure: I own or am short most of the positions

Bruce Berkowitz’s Big Bet On AIG

This is part 2 of HypeZero’s 10 best investment ideas from the best hedge fund managers. These 10 ideas are generated by the HypeZero proprietary algorithm. The algorithm has been back tested since 2004 and has returned over 170% cumulatively. Here is the third investment idea:

American International Group, Inc. (AIG: Nasdaq) ($33.30, September 10, 2012)

After what happened to the AIG during the financial crisis, a lot of investors are afraid to touch AIG. However, that can’t be said for Bruce Berkowitz of Fairholme Capital Management. Over 40% of Fairholme’s portfolio consists of AIG and AIG warrants.

Bruce Berkowitz and Whitney Tilson (T2 Partners) believe that AIG trades at a significant discount to its intrinsic value. They believe that investors are undervaluing the fact that:

  • Its main core insurance businesses (Chartis and SunAmerica) are global, well managed leaders.
  • Their balance sheet is no longer risky like in the past.
  • Its stock is trading at almost half its tangible book value. Both believe that it should be worth at least 1x the book value.
  • As the government exits out of its ownership of AIG and as AIG sells its non core assets and buys back shares, the true value will shine through.
Looking into the details, AIG has sold off a lot of their non core assets recently and bought back shares with the proceeds. As of today, AIG has to following non core assets that it would like to get rid of:

  • Holds over a $5 billion stake in AIA Group. It has sold over $8 billion worth of AIA shares already this year.
  • International Lease Finance Corporation (ILFC), which it was trying to IPO for $6 to $8 billion.
  • United Guaranty Corporation (UGC), a mortgage guaranty business, which is valued around $1 to $2 billion.
AIG has bought back $8 billion worth of shares using proceeds from the sale of its non core assets. And in September, they just committed another $5 billion to purchase shares from the government as they are reducing their stake in AIG from 53% to just 20%. It will not be a surprise if, by the end of the year, they spend close to $20 billion in share purchases. This will not only increase earnings per share, but also increase book value per share. In addition to these non core assets, AIG has over $16 billion in deferred tax assets, which means they will not pay taxes for many years to come.

After all the non core assets are sold, AIG will be left with their main core insurance business selling for less than half book value. Once this happens and the government sells its partial stake, Berkowitz and Tilon believe that investors will truly understand the true value of AIG.

Disclosure: I do not own shares of AIG, but I may initiate a position within the next week.

Best Hedge Fund Investment Ideas (Part 1 of 5)

Every quarter, HypeZero offers 10 of the best investment ideas from the best hedge fund managers. These 10 ideas are generated by the HypeZero proprietary algorithm. The algorithm has been back tested since 2004 and has returned over 170% cumulatively. For the third quarter (August 15th to November 15th), Here are the 10 investments:

Apple Inc (AAPL: Nasdaq) ($631.69, August 14, 2012)

It’s no surprise that Apple tops the list of best investments. It is held by many of the best hedge fund managers including David Einhorn (Greenlight Capital), David Tepper (Appaloosa Management) and Julian Robertson (Tiger Management). In fact, over 13% of David Einhorn’s long portfolio is comprised of just Apple shares. Einhorn believes Apple is a business that offers a recurring revenue stream with a huge moat around its business.

“Despite its size, AAPL remains one of the most misunderstood stocks in the market. AAPL is a software company. The value comes from iOS, the App store, iTunes and iCloud. A Motorola RAZR phone was a one-time winner because when someone else made a phone that was just a little better, RAZR sales stopped. In contrast, a consumer with one AAPL product tends to want more AAPL products. Once the user has a second device, AAPL has captured the customer. At that point, a future competitor has to make a product that isn’t just a little better, but a lot better to get people to switch. The high switching cost makes AAPL’s business much more defensible than that of its predecessors.”

“Further, AAPL’s ability to consistently offer innovative features (as opposed to marginal improvements on the current features) encourages users to upgrade every couple of years. This provides a recurring revenue stream. And because AAPL embeds its software into its hardware, it doesn’t face Microsoft’s piracy problem. If the Chinese want AAPL, they have to buy AAPL. Rather than view AAPL as a hardware company, we see it as a software company that monetizes its value through the repeated sales of high margin hardware.”

If you back out the $120 cash and long term investments, even at today’s price $680, the company trades at around 13 times this years earnings estimate of $44/share. So, it is by no means overvalued. A lot of investors are frightened by the high stock price and the large market cap, but Apple is a great business at a fair price.

See below for full comments by David Einhorn in his 2nd Quarter letter to shareholders:

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Sears Holdings (SHLD: Nasdaq) ($55.17, August 14, 2012)

Sears makes it on the list thanks to Eddie Lampert (ESL Investments), who owns over 60% and Bruce Berkowitz (Fairholme Capital Management) who owns over 15% of its outstanding shares. In fact, Lampert just increased his stake by over 100 million on September 4th. The value case for sears has been nicely laid out by Fairholme.

Fairholme argues that if you sum up the different parts of Sears, they far exceed the market capitalization of the company. The major pieces are:

  • Real Estate: Sears holds prime mall based and other freestanding locations across the United States. These properties are either owned or leased long term for below market prices. Of course, the balance sheet does not accurately reflect the value of these assets.
  • Top Brands: Sears holds some of the top brands including: Kenmore, Craftsman, and DieHard. These brands were valued at $5.6 billion in early 2005.
  • Liquidity: Earlier in the year, there was some liquidity fears which made the stock crash to around $30. However, according the Fairholme the company had over $8.7 billion worth of liquid resources including $5.5 billion worth of net inventory.

With a market cap of just $6 billion, it is not hard to see why Lampert and Berkowitz love Sears and why the company has been buying over $1.5 billion worth of its shares over the last couple of years.

See below for Fairholme’s full case on Sears:

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This is part 1 of a part 5 series, please check back for part 2 later this week.

Disclosure: I do not own shares of AAPL or SHLD and do not plan to initiate a position within the next week.