Sohn Investment Conference 2018: Hedge Fund Titans Give Hot Tips

The Sohn Investment Conference, now in its 23rd year, is arguably the most respected and influential hedge fund gathering in the world. So of course, Investopedia is there, bringing you dispatches. Hedge fund titans give their Longs and Shorts, and any stock they mention rises and falls in real time, often before the speaker has even stepped off the stage. Sohn is where you are most likely to witness the so-called Einhorn Effect first hand—the phenomenon by which Greenlight Capital’s David Einhorn publicly announces a short, and the share price drops.

Billionaire Bill Ackman made his infamous “Short Herbalife” speech at the 2012 Sohn, the beginning of one of the most publicly mocked failed shorts in history. He finally exited his $1 billion short position in Feb. 2018. Ackman is conspicuously absent from this year’s Sohn. Another notable absence was Stanley Druckenmiller, who last gave a Sohn presentation in 2016, saying basically that all you need is gold and all other investments are rubbish. He did not present in 2017 but appeared briefly to introduce another speaker, and to jokingly explain that his bum gold pick is why he was not presenting that year. No word as to where he is at the moment, but it's worth noting that he offloaded and re-added goldsince that long recommendation of 2016.

John Khoury

Founder and Managing Partner, Long Pond Captial LP


The homebuilder has 63% upside in the coming years, says Khoury. “The company is transitioning from asset heavy to asset light model.” This, he believes, will lead to higher returns, higher trading multiple, faster earnings growth.” Khoury believes DHI is going into a “pure play manufacturer of homes,” what he calls nothing short of a “paradigm shift.”

Basically, Khoury sees home building as not one but two discrete businesses: “We see a land development business and a home manufacturing business.” DHI, believes Khoury, is in the midst of transitioning from the former to the latter. He points to another company, NVI, as a shining example of the higher multiple potential of a business making this type of transition. NVI, he points, out, “has no debt, whereas typical homebuilder has 30% debt to capital ratio.

Jeffrey Gundlach

CEO, DoublieLine CapitalLP

​​LONG S&P Oil and Gas (XOP)

SHORT Facebook, Inc. (FB)

His Long and Short is all we understood. Not sure what Gundlach's on about; he's a gnomic man. He's got a Good and Bad list, like Santa. Example: Is inflation good or bad? It was once thought bad but is now desired.

The resident Wise Man, Gundlach's chat is peppered with gems of his own: "We know a long term investor right? A trader who's underwater." 

Gundlach is basing his presentation on the thoughts of Jesse Livermore, a speculator who made $100 million by betting on the 1929 crash, whom Gundlach admires.

In explaining his case against Facebook, Gundlach quotes Livermore: "What has happened in the past will happen again." Which is to say, Gundlach is not a fan of the multiple Zuckerberg apology cycle. Quips Gundlach, "FB has 2.2 billion users. when I hear that I hear 2.2 billion compliance breaches." 

Chamath Palihapitiya

Founder and CEO, Social Capital LP

Big Idea: Artificial Intelligence

2018 Pick: Long Box Inc. (BOX)

Social Capital’s AI Stack: Long Amazon, Google and Box Inc.

“The time has come. There’s a 1000 robots outside to replace us,” began Palihapitiya , whose Social Capital is on a mission to ‘advance humanity by solving the world's hardest problems.’  While that sounded ominous, his next big bet on artificial intelligence and its vast applications is not quite so. It's simple logic really, that AI helps make things cheaper, better and faster by creating what he calls a positive feedback loop. In order to take advantage of AI, he believes that companies need to harness their data and that is where Box comes into the picture. “They sit on top of huge amount of R&D that these big internet giants are already doing,” he said. Last year almost $44 billion was spent on R&D by Amazon, Microsoft and Google.

(Chart of BOX price activity; the sudden spike occurred right after Palihapitiya's Sohn talk. Times are shown UTC. Made with Tradingview)

The company has 82,000 enterprise customers and the reason that makes Box even more attractive is that it has begun offering value added services along with its enterprise software accounting for nearly 75% of its $100k + plus deals in Q4 2017. With 10 million paid subscribers and $547 million in recurring revenue, that doesn’t look shabby at all. 

"This is a new business stream that when they land customers comes in at more 90% gross margin but it’s a business that we believe is incredibly cheap and undervalued with low incredibly low churn and unbelievable margin of safety.”

The prediction is a 20–25% CAGR for revenue over the next 10 years. Now, Palihapitiya has a track record of picking ‘obvious’ investments for his Sohn idea, like Amazon in 2016 but at 54% compounded return, that doesn’t matter does it?

John Pfeffer

Partner, Pfeffer Capital

Sohn 2018 pick: LONG Bitcoin

This may be the first time anyone has taken this position on the Sohn stage. But seasoned investor Pfeffer believes "Bitcoin is a good bet, despite substantial risks." Whilst gold, he said is the only "universal, non sovereign decentralized measure" of wealth we have, Bitcoin is the "first viable candidate to replace gold that the world has seen." He added that Bitcoin is "as good as or better than gold. Bitcoin’s very DNA is based on immutability, decentralization, and censorship resistance.“ And of all crypto assets, believes Pfeffer, Bitcoin is the least likely to be deemed a security, which in turn makes it the most viable candidate to be treated as a currency.

"It is possible that it would replace at least some reserve currency," posited Pfeffer, who believes that if one small country replaces its reserves with Bitcoin, this could have a domino effect.

So the big question: How much could Bitcoin be worth? Conservatively, Pfeffer puts its potential value at 90-180K per bitcoin, which is a 13x–25x multiple. "Despite the risks," concluded Pfeffer, "the upside is sufficient that a long term buy and hold strategy makes sense." Putting his money where his mouth is, Pfeffer announced a donation of 10 BTC to the Sohn Foundation, on the condition that they hold it for five years.

Larry Robbins

Founder, Portfolio Manager and CEO, Glenview Capital Management LLC

Not so much a long or short as answering this question: "Alexa, is Amazon entering the pharma business?" The short answer: Don't assume, and don't believe everything you read. Gundlach FOIA'd Amazon's applications, they're not for pharma production. "Why? There are barriers to entry even for Amazon." The supply chain logistics of being a pharma company would be a nightmare for Amazon, said Robbins. You need cold storage for opioids, for example. Notice Amazon doesn't do firearms, alcohol or tobacco, because it doesn't want to foray into industries with nightmarish regulatory requirements.

David Einhorn

President, Greenlight Capital

Sohn 2018 position: SHORT Assurance Guaranty Ltd (AGO)

Einhorn's presentation was by far the most eagerly awaited of the conference, particularly given the aforementioned absences of Ackman and Druckenmiller. 

Einhorn started his presentation by saying that he has been speaking at Sohn since 2002; today, he said, he wore a “new suit, same tie.” AGO, said Einhorn, has "fooled its sleepy auditors and lures investors by aggressively returning capital it doesn’t earn." He compared the bond insurer as a ‘melting ice cube’.

Bond insurance was once considered so secure as to be called a "zero loss" investment, since munis rarely default. But AGO's success started to diminish as the industry attracted competition, which caused bond insurers like AGO to go into structured finance and accelerated risk taking, culminating in a 2008 bubble and crash.

Post crisis, AGO "wobbled but didn’t fall down," said Einhorn.  

There are a few problems with AGO that concern Einhorn: Its amortization of old business is greater than the income of new business. Furthermore, it is self-rating, which as we remember, was a significant factor in the 2008 financial crisis.

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