SALT, Day Two: Ackman Dishes on Valeant; Chanos Disses Tesla

May 19, 2017   Amanda Cantrell, Stephen Taub

The second day of the SkyBridge Alternatives Conference was heavy on investment ideas, both long and short. Some of them were even new.

   
   Bill Ackman, chief executive officer of Pershing Square Capital Management LP (Photo Credit: Michael Nagle/Bloomberg).

The second day of the SkyBridge Alternatives Conference in Las Vegas was heavy on investment ideas and political themes. SkyBridge and SALT co-founder Anthony Scaramucci was back to open the day’s sessions and to conduct interviews with Third Point founder Dan Loeb, who was one of the biggest-name managers on the agenda, and Pershing Square Capital Management founder Bill Ackman. Alas, we can’t report what Loeb said, because his session was off the record. Fortunately, everything else, including Ackman, was fair game.

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In fact, Ackman’s session was also initially off the record, only to be reversed. In his interview with Scaramucci, the Pershing Square founder didn’t break much new ground, but he offered lessons from his disastrous investment in Valeant Pharmaceuticals International, which contributed to his public fund’s losses of 13.5 percent in 2016 and more than 20 percent in 2015. (Ackman has since dumped his entire stake in Valeant; Pershing Square was up 1.9 percent for the year through April, after gaining 4.6 percent last month.)

Scaramucci kicked off the interview by asking Ackman what changes he would demand if he were to engage in an activist campaign with the Trump administration. "So the first thing I would do is hold a press conference, pretend like I’m the president…say I’m delighted the investigation has been launched, this has been hanging over the people; let’s put it aside because I’ve got a country to run. The first thing we’re going to do is launch the most significant infrastructure program in the history of the country." When asked how he would pay for that, Ackman quipped, "by settling Fannie and Freddie."

Next, Ackman argued that Trump should enact corporate tax reform, then personal tax reform, and forget about healthcare, which he said every president wants to tackle first despite the fact that it "destroys their credibility." "You have to take one step at a time. It’s like running a successful hedge fund and having a big drawdown. One day at a time…."

He then explained his decision to invest in troubled Mexican food chain Chipotle, which has been profitable for Pershing. He took a stake late last year after Chipotle shares had tanked following an E. coli outbreak at several of its restaurants. "It’s a great concept and great brand and [has] a strong CEO, and [they’ve recovered] from a crisis …. You can imagine what the potential is if they optimize it." He described the Chipotle stake as part of Pershing Square’s core strategy and compared it to his highly successful investment in Canadian Pacific Railway in terms of having a quality underlying business.

As for its Valeant experience, Ackman said his biggest mistake was buying into a business that was highly dependent on management. "We just picked the wrong kind of business for us. We like businesses that are incredibly stable…. We underestimated the importance of business quality." He also underestimated "what Soros would call the ultimate case of reflexivity" — in other words, the decline in the stock price made the business much less valuable.

He called his decision to sell "one of the best things we did," despite knowing "it was going to look like a stupid sale at some point." But it also focused his team on core ideas, including a new investment to be announced in a few months. And Valeant forced him to return Pershing Square to the fundamental investment principles that had long guided the firm. "I’m incredibly focused and I’ve got something to prove," he said.

Scaramucci did not ask Ackman about his short on Herbalife, which has been another uphill battle. But Ackman briefly flicked at his investment in Howard Hughes, the planned-community development company that he discussed last week at the Sohn Investment Conference in New York. When asked about the long-term viability of malls (shorting retail being a recurring theme of the conference), Ackman said he thought that malls have futures, but only as retail venues. "The real estate’s fine, but the tenants need to change fairly dramatically," he said.

Another thing that needs to change, in Ackman’s view: hedge fund fees. "I think the hedge fund industry is like the mall industry. It’s got to adapt," he said. "I don’t think you can charge 1.5 or 2 percent [management fees] and 20 percent of profits and make people 8 percent or 5 percent or 2 percent... My view is the hedge fund industry should be a place where you earn high returns. If it’s not a high-return strategy, you have to compromise on your fees."

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In a special media session, James Chanos, the Kynikos Associates founder and famed short-seller, took questions from reporters on topics ranging from Tesla to Trump. Chanos holds a dim view of the President, both as a world leader and a corporate executive. "I teach a course on financial market frauds and for the first time I taught Trump casinos and hotels as a business case," said Chanos, who said that SEC filings show that Trump was caught manipulating his earnings. "There were lots of instances where stuff was buried in 10Qs and 10Ks and not in the press release… More importantly, his operating acumen was not very good by historical records. But he managed to really sell himself as a business success and license that paradoxically. He failed in his businesses and succeeded in branding himself as a business tycoon."

He noted that Nixon’s approval ratings in August 1974, after his resignation over the Watergate scandal, were higher than President Trump’s are today. He said that at the end of the day, the markets are looking for lower taxes, but as he jokes to his Republican friends, it’s only good to have lower taxes on your income if you actually have an income to tax. "I’ve made most of my big money on the short side under Republican presidents," he said. "Markets and the economy tend to do well under Democratic presidents."

As for electric car maker Tesla, Chanos reiterated his short thesis, arguing that in a low interest rate environment, investors are easily seduced by "a visionary CEO" and are willing to overlook missed production and earnings estimates and current losses. "Tesla is really one of the poster children of this market," he said, noting that analysts are valuing the company on 2025 earnings. "Analysts can’t tell you what’s going to happen in the next quarter, but they’re happy to tell you what will happen in 2025," he said. "This is a company involved in a capital-intensive business, with negative cash flow, huge debt, a management team with cavalier regard for the truth, questionable accounting, and an executive departure list longer than Valeant [Pharmaceuticals International]. If you wouldn’t be short this, what would you be short?"

Chanos also riffed on healthcare, the theme he emphasized on the best ideas panel earlier in the day. Chanos said on the panel that he is shorting special pharmaceuticals company Mallinckrodt Pharmaceuticals and pharmacy benefits manager Express Scripts, with which it has an exclusive partnership to distribute one of its drugs. Chanos called the alliance "murky" and said it inflates drug prices; a spokesman for Express Scripts told Reuters Chanos’s presentation was "wildly inaccurate." In the separate session, Chanos criticized lawmakers for failing to negotiate drug prices and said Americans have "the worst of both worlds" in terms of single-payer versus private healthcare systems, arguing that the U.S. spends the most and has the worst outcomes of any developed country.

Speaking of things that are expensive, Chanos also didn’t mince words about hedge fund fees. "They’re coming down, but they’re still too high," he said, nothing that in addition to managing funds, he also sits on three investment committees, so he sees both sides of the equation. He observed that clients are getting smarter about what they are paying for and are cranking up the pressure on managers. "A well-known fund offered to cut their fees by 50 percent in exchange for a three-year lockup" when one of the investment committees on which he serves threatened to redeem from the fund, Chanos said. He also noted that the active versus passive debate continues to hurt money managers, but it will hit traditional managers harder."

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Another short idea came from Ricky Sandler of Eminence Capital, who recommended shorting Iron Mountain, a real estate investment trust (REIT) that specializes in storage and information management. Sandler stressed it is not the typical REIT, since a sizable part of its business involves storing paper documents in warehouses at a time that more and more companies in health care and other industries are digitizing documents, which is cheaper to store. It also gets less of its business from real estate than traditional REITs, which means it gets less in tax benefits. Meanwhile, he disputes how the company calculates adjusted funds from operations (AFFO), a key REIT measurement, and asserts it is declining while it is up for many other REITs. So he believes Iron Mountain is not generating enough cash flow to pay its hefty dividends. In fact, he points out that in the past two years it raised about $1.7 billion in new capital from the stock and bond markets to pay about $2 billion in dividends. "As a REIT it looks inexpensive, but it is cheap for good reasons," says Sandler. So, he thinks the stock is worth closer to $16.70. It closed Wednesday at $35.41, up for the day.

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One person who pitched a long idea was Jason Karp, founder of Tourbillon Capital Partners. The former SAC Capital portfolio manager talked up the shares of Sarepta Therapeutics, a biotechnology company that has received regulatory approval for its Duchenne muscular dystrophy (DMD) drug, which is called an orphan drug because it treats rare diseases. The stock has gone on a wild ride leading up to and following its receipt of the approval last September, partly because it used fewer numbers of patients in its trials and a smaller control group than is usually required for drugs treating largely potential numbers of patients. Also, the insurance companies were slow to approve reimbursement. But Karp is confident the company and its stock are now well on their way.

"The stock trades at a considerable discount to other orphan drug companies," he told the audience. He stressed there is big profit potential from leveraging growth in the drug. He said the company has a stable competitive advantage, a lot of pricing power, and has a pretty good pipeline with drugs that address other DMD mutations. "There is a large runway for growth," he added. He thinks the stock could trade at $97 by the end of next year based on the multiple he uses on expected revenues. Karp’s presentation was probably responsible for the stock surging more than 4 percent on Wednesday, closing at just $35.84.

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Another long idea came from John Lykouretzos, founder of Hoplite Capital Management and one of the rare Tiger Cubs who does the conference circuit. The former Tiger Management analyst talked up the shares of Nike, which he says is nearly two times the size of rival Adidas. He says Nike owns 27 percent of the U.S. market but less than 10 percent of Asia. Lykouretzos stressed there is a big opportunity in that region given that China is refocusing on health and fitness. Meanwhile, Nike’s stock, which has always traded at a much higher price-to-earnings multiple than the S&P 500, has recently seen the disparity compressed, in part because it was hurt in the U.S. to recent declining interest in its basketball shoes as consumers moved more to casual and running footwear. "It is trading at the cheapest relative price in over seven years," Lykouretzos asserted. He said Nike has new products and a new ad campaign, which he is confident will help boost the company. So he believes the stock is very attractive, stressing the market in general continues to grow and Nike continues to innovate, take market share and will see an acceleration in growth of its top line.

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David Rubenstein, probably the biggest-name manager presenting on Thursday, certainly knew his audience. The founder of private equity powerhouse Carlyle Group interrupted his presentation to make an appeal to the audience to give more to charity. "If you can afford to come to the conference, you are in the one-tenth of one percent," he said. Stressing that income inequality is a growing problem, he noted that 8 percent of the people in the world own 85 percent of the wealth. "All of you are blessed," he said.

This month, he said, is the 100th anniversary of President John F. Kennedy’s birth, invoking his famous challenge: "Ask not what your country can do for you, but what you can do for your country," while emphasizing that everyone can at least give back modestly. "Think about what you can do with the short period of time you are on the face of the earth, relatively speaking, what you can do in the period of time to make yourself proud to be a human, make your parents and your children proud."

Rubenstein then invoked his parents, neither of whom earned a high school or college degree.

His mother never talked to him about the deals he did or the money he made. But, when he started giving money away, she would call to say how proud she was about what he was doing. "She said she liked what I was doing to give back to society," he said, adding that she died just a few weeks ago.


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