I’ve read a lot of criticism of Whitney Tilson over the years. Most of it has been people suggesting Tilson is only an average investor who basically is just a good marketer who piggybacks on others investment ideas. I have to say, that even if that is true…who cares ? What matters is investment performance, and if the best way to grow your investors capital is by taking the best ideas of others then I think that is an excellent route to take.
Most people would have saved or made themselves a lot of money over the past couple of years if they had listened to Tilson. Here are a few of the topics he spoke about in public which proved to be quite accurate and profitable:
1) Warnings about the continued collapse in the housing market. This wasn’t his idea, and some of the best analysis that he used was prepared by others. But he acted on it and made his investors money because of it while other funds were dropping like rocks. Off the top of my head I can recall his suggestion to short Washington Mutual and buy Fairfax Financial.
2) Tilson also got in pretty early on General Growth Properties following Pershing Square. The last I checked this was a multi-multi-multi-bagger for him.
3) In the midst of the height of the BP oil spill coverage Tilson was on CNBC suggesting that BP was a good idea on the long side. He laid out his thesis quite clearly and so far it looks pretty sensible. It took some guts to go as public with this as he did given the public outcry against the company.
Last week Tilson was on CNBC again as the guest host for two hours in the morning. He laid out an interesting possibility for cheap quality large cap Johnson and Johnson. Here is a summary of what he said:
“Cash flow from operations for Johnson and Johnson is a very consistent $12-13 billion per year. The company is currently paying approximately $6 billion per year (or 50% of cash flow) to shareholders through dividends which creates a 3.7%.
Tilson asks you to imagine what would happen if Johnson and Johnson cut the dividend in half and used the $3 billion to issue 30-year debt. Assuming a 5% interest rate, $3 billion pays the interest on $60 billion of debt (note that last month Johnson and Johnson issued $1.1 billion of debt, half 10 year at 2.95% and half 30 year at 4.5%).
The $60 billion of debt proceeds could be used to buy back 36% of the current Johnson and Johnson shares outstanding at the current market price. After subtracting the interest payments (partially reduced by income tax savings), Johnson and Johnson’s earnings per share would increase 38% assuming no increase in net income. And because of the share repurchases the dividend yield, although cut in half in actual dollars paid would not reduce by that much per share, but rather would still be a very robust 2.9%.
Tilson points out that this is just a hypothetical scenario as Johnson and Johnson is too big and a $60 billion debt offering is not possible, but the idea works for smaller companies currently in a similar situation. And of course it also works for Johnson and Johnson on a smaller scale. With a balance sheet sporting $19 billion in cash and $11.5 billion in debt, Tilson suggests Johnson and Johnson could easily use $15 billion of its cash and issue another $15 billion of debt to buy back $30 billion of stock.”
I think Johnson and Johnson is very attractive at the current price. I also like another Tilson pick the even larger Microsoft. I think Tilson is an excellent source of ideas, his or others that he is piggybacking on. I also think he has a good sense of risk/reward and I will continue to read anything he is willing to share.
I wrote briefly about Microsoft earlier and briefly touched on why it looks attractive:
http://www.gurufocus.com/news.php?id=101063
