|| Bill Ackman, chief executive officer of
Pershing Square Capital Management LP (Photo Credit:
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.
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
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."
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
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
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."
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.
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.
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.
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
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.