I spent yesterday at the Sohn Conference in London. If you haven’t been to this and you are the kind of person who has the odd £1,000 to spare, you should. It is not only a fabulous investment conference with an almost ridiculously good line up of impressive speakers with interesting trading ideas (they get 15 minutes each to make a long or short case, sometimes both), but it is in a very good cause: the aim is to support innovative initiatives to cure and treat paediatric cancer.
A hugely undervalued hotel manager
I missed a few of the final presentations but below is a run down of the ideas that I found most interesting of those I did catch. The first came from Guillaume Rambourg of Verrazzano Capital. He played on two themes that came up again and again during the conference – buying good quality companies with strong competitive positions, and buying companies that might do well out of rising merger and acquisition (M&A) activity in Europe. His tip? Accor (Paris: AC), for its exposure to M&A and its pricing power. Not long ago the firm was assumed to be ex-growth but today it is working to exit its sale and leaseback deals; it has four years of hotel openings in the pipeline, which in turn means it has 6-7% growth “embedded in the system:” and it has the kind of real estate assets that effectively make it “the leading European Reit [Real Estate Investment Trust].” It should, says Rambourg, show 14% compound annual growth from here – so it makes no real sense that it should trade on a much cheaper Ebitda ratio than its peers (8-9x vs 13 times).
A great play on the US real estate market
Next up was Michael Messara of Caledonia, who was about as convincing as it is possible for a fund manager to be on a stock. His call? Zillow (Nasdaq: Z), the leading real estate portal in the US. His firm has, he says, invested more in the “extraordinary opportunity” that is this firm than they have ever invested in one company before. “By a factor of three.”
Why? Because he thinks he can see exactly how the future of the firm will unfold. That’s because he has seen it happen before – in the UK and in Australia. People approach the buying and selling of their biggest asset in the same way wherever they are – the key to their behaviour is FOMO (fear of missing out). FOMO means that everyone wants to do as much work on price discovery as possible. And that means they want a comprehensive portal to do it on. The result? In this business, first-mover advantage is absolute. Once a leader is established it is all but impossible to knock them off their perch: in all markets, the top two portals have 70-80% of the market. The US is late to portal creation – the localised nature of estate agents delayed things – but in 2005, Zillow and Trulia (with which it has now merged) appeared on the scene to meet the demand for a national portal.
And what demand there has been – 72% of mobile property searches now take place on Zillow. In other words, the firm has gone from having 0% share to 72% of what is one of the largest asset markets in the world in under a decade. That gives it a virtually unassailable first-mover advantage (back to the competition theme), something that should in turn make it a fortune in advertising revenues.
Right now the agents spent a mere 4% of their advertising money on Zillow. So ad revenue lags market share by 18 times! If they matched, ad spend would come to $7.9bn and imply a share price of $770. But that’s not the end of it, said Messara (he was getting pretty excited at the this point). There is “adjacent advertising too.” What mortgage lender wouldn’t want to advertise on Zillow? What home improvements firm? And what rental manager? Quite. I’ll leave that one with you (the shares rose 5% in the wake of the presentation and not everyone loves it – Jim Chanos took a swipe at it later in the day).
A chemicals firm and a software giant with high barriers to entry
The next good one came from Bruno Rocha of Dynamo. He chose Brenntag AG (Germany: BNR), the largest independent distributor of chemicals in the world. Its original owners (a German utility company) left it with “very good assets” and the private equity group that IPO-ed it in 2011 left it with a “culture of free cash flow generation.” It also comes with hefty barriers to entry (the competition theme again!). Regulation makes it all very expensive to build new warehouses at the moment and even if that wasn’t a problem, planning permission would be: who wants to live next door to a building jammed with all manner of chemicals? Finally its excellent, long-term relationships with clients would be very hard to replicate.
Then there is the M&A (our other theme!). There are hundreds of small private chemical firms in Europe, vey few of which are run by second-generation owners. They will be wanting to sell up and Brenntag is likely to want to buy up – since 2007 some 40% of its growth has been linked to M&A. The shares trade at a discount to their peers – Rocha doesn’t see why they should.
Next up, Mala Gaonkar of Lone Pine Capital. She suggested Adobe (Nasdaq: ADBE) on the back of its “sticky monopoly” (competition theme again) as a provider of digital marketing software (the vast majority of the world’s best brands use Adobe) and the way in which ad spend is drifting away from TV to the internet.
One bank that’s actually worth buying
Then we got Nikolai Tangen of AKO Capital with a tip close to my heart – the Swedish bank I have often suggested you all switch your accounts to, Handelsbanken (Stockholm: SHBA). It is, he says, “a compounding machine” that has built its book value and dividend by 15% a year for years by “growing powerfully” in Scandinavia and now in Holland and the UK.
The average European bank has a share price 50% lower than before the crisis. Handelsbank’s is 140% higher. As I have pointed out here before that’s because it has no casino division, offers no bonuses, has its employees as its main shareholders and is entirely decentralized (each branch manager makes his or her own decisions).
There’s also a very strong balance sheet and serious growth potential: earnings are up 36% year-to-date and that’s before many of the new UK branches move into profit. Better yet this remains something very rare for today’s markets: a quality contrarian investment. The bank pays a dividend of 4.8%, is valued at only 14 times earnings but is rated as buy by a mere 6% of analysts. Tempting stuff.
Buy clean energy and sell the dirty old stuff
We moved on to Marc Chatin of Parus Finance. His controversial call (I say controversial because it was ridiculed by Jim Chanos later) was electric car maker Tesla (Nasdaq: TSLA). It looks shockingly expensive but buying it now might turn out to be as successful an idea as buying Apple in 2005, says Chatin. Back then we paid Nokia $150 for a mobile phone with a five-day battery life. Today we pay Apple $600 for one that has a five-hour battery life. Why? Because it’s better.
It wasn’t just in with the new from Chatin – he had an out with the old idea for us too – short (as in sell) Transocean (NYSE: RIG) on the basis that deepwater drilling is soon to be a thing of the past. Shale has broken the old supply equilibrium for oil and smarter demand is changing the way we use it too: that’s why Transocean’s fleet is 30% uncontracted for next year and 60% uncontracted for 2016 (for more on this subject see my column on oil and technology from last week).
Buy this little-known debt collector
Nearly there now. One of the last ones of interest came from Leah Zell of Lizard Invesments. She’s a huge fan of small cap investing. You will all know most of the arguments on this but she points to one new factor: since the crisis capital has become more concentrated in big funds than ever before and “big funds can’t fish in small ponds.”
Her tip then is a stock that – as far as she knows – no mainstream bank or analyst has written a report on: KRUK SA (Warsaw: KRU), a Polish debt collecting firm. It’s small, it’s cheap; it has good economies of scale; and it also has efficient (and “amicable” apparently) collection methods and favorable financing rates. The only problem is it might be rather trickier to buy than most of the other stocks listed here.
Oh, and short the art market
I had just about had enough by this point (there are only so many ideas one head can hold) but it is worth mentioning Jim Chanos. He didn’t fancy Tesla much but devoted most of his time to taking down Sothebys (NYSE: BID). It has changed from an ordinary auction house to a risk-carrying financing vehicle – holding inventory, offering financing and doing both of those things in a very very iffy area (contemporary art). Chanos says sell.