The Ira Sohn Conference offers some of the best ideas the hedge fund world has to offer, and this year was no different, with luminaries such as Jeffrey Gundlach, Bill Ackman, and Jim Chanos offering ideas to the investing community.
Jeffrey Gundlach, who last year said he was to short the high-flying Apple (AAPL), took a shot at another high-flier, Chipotle Mexican Grill (CMG). DoubleLine Capital's Gundlach said that Chipotle is a good short, due to the fact he hates the chart. He noted he loves the product, but increased competition from taco trucks, Taco Bell(YUM), and other fast-food companies moving into higher-end products will impact Chiptole in the future.
Gundlach, who has been dubbed the "Bond King" by Barron's, recommended other short ideas, as he believes the Fed's quantitative easing is going to end badly. He said that insurance companies have not factored in low interest rates into their models, and should be avoided as long as we're in a low interest rate environment. He also said to short French bonds, noting the French are a basket case." Gundlach also said avoid bank deposits, and gold, as quantitative easing has changed the game, and investors should play by the new rules.
World famous short-seller Jim Chanos took a shot at the PC space, saying the hard disk drive makers are likely to see sharp share price declines in the next twelve months.
Chanos, who runs Kynikos Associates, believes PC sales are only just starting to decline as tablets, especially Apple's iPad take wallet share. In tune, the hard disk drive decline will be more pronounced than the PC decline. The two largest players in the space, Western Digital(WDC) and Seagate Technologies(STX) appear to be cheap, but are "value traps." The two companies have vastly outperformed the likes of HP and Dell over the past three years, aided in part by the Thailand flood, which caused prices to spike. Chanos believes this is unsustainable, and all you have to do is look at the industry to see why. Toshiba (TOSBF), the third largest hard disk drive maker, expects its margins to be cut in half, and Samsung (SSNLF) exited the business, selling it at .5 times revenue to Seagate.
If the declining business prospects weren't enough, there's also accounting issues at Seagate, especially with the Samsung purchase. The company took a $1 billion in goodwill on the purchase, something which Chanos questioned openly. The company is also seeing sizable drop in insider holdings from the executive suite, and the company's chief technology officer, Bob Whitmore, stepped down abruptly, though he still remains with the company.
Pershing Square's Bill Ackman has been in the news regarding his battle with Herbalife, but the noted hedge fund manager took the chance to speak about something much less newsworthy: Procter & Gamble (PG).
Pershing Square, who owns 29 million shares of the Cincinatt-based conglomerate, believes P&G is vastly under earning its potential. With strong profitability, high barriers to entry, exciting global growth opportunities, and limited private label competition, P&G could earn as much as $6 per share by 2016, up from $4 per share today. The company is embarking on a $10 billion cost savings measures to help this, but Ackman believes it could do more.
The company never fully integrated its Gillette purchase, it has suboptimal manufacturing, an inefficient organizational design, its marketing investments are not reaching the appropriate returns, and pricing is not optimized. P&G should generate consistent 5% organic growth. as its key competitors are doing 4-7% organic growth. The company should have a 24% EBIT margin, up from 19% today, just via cost savings, with gross margins between 52% and 54%.
If P&G can earn $6 per share, it deserves a 20 multiple by 2016, trading at $120 per share.