I am lucky to be attending the Value Investing Congress. I took extensive notes on every speech and hope to post each one on GuruFocus over the next few days, in addition I will be posting a couple of interviews I plan on conducting. To follow my live updates from the Congress sign up for my Twitter alerts http://twitter.com/valuewalk
Lee Ainslie spoke on the second day of the conference.
Lee Ainslie bio:
Lee S. Ainslie III is the Managing Partner of Maverick Capital Management, LLC. Before starting Maverick in 1993, Mr. Ainslie was a Managing Director of Tiger Management Corporation. Mr. Ainslie serves as Vice Chairman of the Board of Directors of The Robin Hood Foundation, and also serves on the Board of the University of Virginia's Jefferson Scholars Foundation. Mr. Ainslie received a B.S. in Systems Engineering from the University of Virginia and an MBA from the University of North Carolina.
I will cover all the points of his speech that I was able to write down. Any statement I was unsure of I did not include. However, it is possible that I misheard one or two things.
Lee commented on the wild volatility only a few years ago that was beyond anything we have ever experienced. One of the responses has been the increase in monetary base which doubled in only five months.
By 2009 things returned to normal when looking at items such as the VIX, bond spreads, CDSs. By the end of 2009 CDSs were below what they were in the beginning of 2008.
Lee noted the strange stock market rally since March. The lowest ranking stocks with C&D ratings lead the rally. The stocks with the highest beta stocks also performed the best. Stocks with worst balance sheets also had the best returns.
This surprisingly has continued into 2010. The largest cap stocks have continued to underperform. Investors have not discriminated between stocks with low and high ROEs. In addition the most leveraged companies have lead the way.
Other than 2008 we are at highest level of correlation in recent times. Funds that are market neutral returns have had negative returns. Stocks have similar P/E today regardless of growth rates and any other qualitative features which should play a large factor in how much investors are willing to pay.
The most attractive stocks are now are high quality, low betas, large cap stocks that have high returns on capital and strong balance sheets. Lee wants companies driven by secular not cyclical trends.
Right now Lee see all these opportunities in larger cap tech stocks.
Bonds are most expensive in many years compared to stocks. Tech stocks are cheapest based on a PE basis in 20 years. One reason for this is because tech stocks have trailed the market overall recently. Lee differentiated between the stocks that are undervalued and overvalued within the tech sector.
There are many value tech stocks which have been down YTD. Adobe, Cisco, CTV, Dell, DOX, HPQ, IBM, Intel, Marvel, and Microsoft are trading at 12% of FCF/EV this year and 13% based on next year estimates. Average FCF/EV over the past five years is 9%. CTV, Dell is some of the most attractive names that Lee sees.
Lee also likes tech stocks on the basis that they have more cash relative to their balance sheet today than any time since 1950s, and these companies also have a ton of cash relative to their market cap. These companies have nothing to do with that cash since t bills are at very low yields currently. As a result share buybacks are up 224% YTD.
Short term fundamentals are quite strong. Even though inventories are up they are at a low level relative to the past 15 year, in addition inventory is low based on capacity utilization.
Tech companies more than half revenue coming in from overseas so they are helped by the weak dollar. Companies are under-investing in capex, so when they start to ramp up capex it will be very positive. Tech companies have great pre-tax margins in the hardware, software and semi-conductor sector.
On long term basis these are a great buy. There has been significant consolidation. Earlier in 1990s Oracle had two businesses to compete, Cisco was being squeezed. Today innovations have made these companies much more competitive.
Switching costs are higher. It is not easy to rip out Cisco routers to get cheaper ones from China. There are hurdles that make it much harder for new potential competitors to enter.
Lee also noted how management has improved in most Tech. Two decades ago management consisted of brilliant engineers who knew little about running a business, now most of these tech companies are run by mangers who really know how to run a business.
FCF margins are up at historic high for tech companies nearing 16% currently.
Lee talked more about his favorite company; Comsco which makes wireless. It has been a huge beneficiary of the stimulus package. They plan to buy back ten percent of their shares. FCF is 11-12% down a bit because they had big one time charge. In 2012 Lee expects to see a yield closer to 15%.
Lee talked about past acquisitions; HP has good record, Dell does not. However, Dell is so cash rich they could use the cash for a smart acquisition. Ainslie also stated that the company could pay a large special dividend, and speculated that the company could be bought out by CEO Michael Dell who already owns a large chunk of the company.
17% of his portfolio is net long technology, so it is not a huge part of his allocation. However, technology is the largest component of his portfolio.
He holds several short positions but did not get into specifics.
In general Lee prefers buybacks over dividends but it depends on valuation, Coke bought shares back when the company was trading at 48x earnings which was obviously not a good move.
For profit education- Serves a minority that needs to be served, and it helps people who have no other avenues to advance their education. For profit colleges are delivering far better results than community colleges. However, there are bad actors especially in the private for profit sector. Even if for profits default in small number they pay far more in corporate taxes. Lee seems to disagree with Steve Eisman who successfully shorted subprime as detailed in Michael Lewis’s recent best sellerThe Big Short
, recently came out with an announcement that he is short several for profit institutions. (Steve Eisman is currently being sued by Keiser University you can read about it here-http://www.valuewalk.com/articles-about-gurus/steve-eisman-named-defendants-coconspirator-lawsuit/)
I wanted to talk to Lee and ask a few questions but he was not speaking to the press. My main question was; do you think Benjamin Graham would be buying tech stocks today, a sector which he disliked but looks very cheap today.
Disclosure: Long MSFT
http://www.valuewalk.com/
Lee Ainslie spoke on the second day of the conference.
Lee Ainslie bio:
Lee S. Ainslie III is the Managing Partner of Maverick Capital Management, LLC. Before starting Maverick in 1993, Mr. Ainslie was a Managing Director of Tiger Management Corporation. Mr. Ainslie serves as Vice Chairman of the Board of Directors of The Robin Hood Foundation, and also serves on the Board of the University of Virginia's Jefferson Scholars Foundation. Mr. Ainslie received a B.S. in Systems Engineering from the University of Virginia and an MBA from the University of North Carolina.
I will cover all the points of his speech that I was able to write down. Any statement I was unsure of I did not include. However, it is possible that I misheard one or two things.
Lee commented on the wild volatility only a few years ago that was beyond anything we have ever experienced. One of the responses has been the increase in monetary base which doubled in only five months.
By 2009 things returned to normal when looking at items such as the VIX, bond spreads, CDSs. By the end of 2009 CDSs were below what they were in the beginning of 2008.
Lee noted the strange stock market rally since March. The lowest ranking stocks with C&D ratings lead the rally. The stocks with the highest beta stocks also performed the best. Stocks with worst balance sheets also had the best returns.
This surprisingly has continued into 2010. The largest cap stocks have continued to underperform. Investors have not discriminated between stocks with low and high ROEs. In addition the most leveraged companies have lead the way.
Other than 2008 we are at highest level of correlation in recent times. Funds that are market neutral returns have had negative returns. Stocks have similar P/E today regardless of growth rates and any other qualitative features which should play a large factor in how much investors are willing to pay.
The most attractive stocks are now are high quality, low betas, large cap stocks that have high returns on capital and strong balance sheets. Lee wants companies driven by secular not cyclical trends.
Right now Lee see all these opportunities in larger cap tech stocks.
Bonds are most expensive in many years compared to stocks. Tech stocks are cheapest based on a PE basis in 20 years. One reason for this is because tech stocks have trailed the market overall recently. Lee differentiated between the stocks that are undervalued and overvalued within the tech sector.
There are many value tech stocks which have been down YTD. Adobe, Cisco, CTV, Dell, DOX, HPQ, IBM, Intel, Marvel, and Microsoft are trading at 12% of FCF/EV this year and 13% based on next year estimates. Average FCF/EV over the past five years is 9%. CTV, Dell is some of the most attractive names that Lee sees.
Lee also likes tech stocks on the basis that they have more cash relative to their balance sheet today than any time since 1950s, and these companies also have a ton of cash relative to their market cap. These companies have nothing to do with that cash since t bills are at very low yields currently. As a result share buybacks are up 224% YTD.
Short term fundamentals are quite strong. Even though inventories are up they are at a low level relative to the past 15 year, in addition inventory is low based on capacity utilization.
Tech companies more than half revenue coming in from overseas so they are helped by the weak dollar. Companies are under-investing in capex, so when they start to ramp up capex it will be very positive. Tech companies have great pre-tax margins in the hardware, software and semi-conductor sector.
On long term basis these are a great buy. There has been significant consolidation. Earlier in 1990s Oracle had two businesses to compete, Cisco was being squeezed. Today innovations have made these companies much more competitive.
Switching costs are higher. It is not easy to rip out Cisco routers to get cheaper ones from China. There are hurdles that make it much harder for new potential competitors to enter.
Lee also noted how management has improved in most Tech. Two decades ago management consisted of brilliant engineers who knew little about running a business, now most of these tech companies are run by mangers who really know how to run a business.
FCF margins are up at historic high for tech companies nearing 16% currently.
Lee talked more about his favorite company; Comsco which makes wireless. It has been a huge beneficiary of the stimulus package. They plan to buy back ten percent of their shares. FCF is 11-12% down a bit because they had big one time charge. In 2012 Lee expects to see a yield closer to 15%.
Lee talked about past acquisitions; HP has good record, Dell does not. However, Dell is so cash rich they could use the cash for a smart acquisition. Ainslie also stated that the company could pay a large special dividend, and speculated that the company could be bought out by CEO Michael Dell who already owns a large chunk of the company.
17% of his portfolio is net long technology, so it is not a huge part of his allocation. However, technology is the largest component of his portfolio.
He holds several short positions but did not get into specifics.
In general Lee prefers buybacks over dividends but it depends on valuation, Coke bought shares back when the company was trading at 48x earnings which was obviously not a good move.
For profit education- Serves a minority that needs to be served, and it helps people who have no other avenues to advance their education. For profit colleges are delivering far better results than community colleges. However, there are bad actors especially in the private for profit sector. Even if for profits default in small number they pay far more in corporate taxes. Lee seems to disagree with Steve Eisman who successfully shorted subprime as detailed in Michael Lewis’s recent best sellerThe Big Short
, recently came out with an announcement that he is short several for profit institutions. (Steve Eisman is currently being sued by Keiser University you can read about it here-http://www.valuewalk.com/articles-about-gurus/steve-eisman-named-defendants-coconspirator-lawsuit/)I wanted to talk to Lee and ask a few questions but he was not speaking to the press. My main question was; do you think Benjamin Graham would be buying tech stocks today, a sector which he disliked but looks very cheap today.
Disclosure: Long MSFT
http://www.valuewalk.com/
