Motley Fool analyst Matt Argersinger recently returned from the Sohn Investment Conference in New York, where some of Wall Street's top fund managers take the stage to share their views, both bullish and bearish, about various companies. And on this episode of Market Foolery, Mac Greer welcomes Matt to the show to share his most interesting takeaways: the buys, the shorts, and more.
A full transcript follows the video.
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This video was recorded on May 10, 2017.
Mac Greer: It's Wednesday, May 10th. Welcome to Market Foolery. I'm Mac Greer. Joining me in studio today, we have Matt Argersinger from Million Dollar Portfolio. Matt, how are you doing?
Matt Argersinger: Hey, I'm doing pretty good, Mac!
Greer: Matt, we're going to try something different today. You're fresh off the Sohn Investing Conference in New York City, which is the muckety-mucks, it's some of the top hedge fund managers and fund managers sharing some of their top picks, right?
Argersinger: That's right.
Greer: Let's get right to it. I want to set the stage here. I want to have you share some of the pitches, both the buys and the sells, and I want to have some key takeaways. Let's start by just explaining, what is Sohn, and why should investors care about what goes on at Sohn?
Argersinger: Sure. The Sohn Investment Conference is an annual conference in New York City. It's named after Ira Sohn, who was a Wall Street trader who died of cancer at the age of 29. Since 1995, the Sohn Investment Conference has been honoring Ira, and by honoring him they're hosting this investment conference that brings together hedge fund titans like Bill Ackman, Dave Einhorn, which we'll talk about, and it raises money for pediatric cancer, trying to cure childhood cancers. It's a really worthy cause. Tickets are really expensive. I was fortunate enough to get in on a media pass. But it's a very worthy cause, and it's an exciting conference that really gets you some top ideas from top-tier investors that we can share.
Greer: Let's talk about some of those top ideas, beginning with Tesla (TSLA -2.02%). Social Capital Founder and CEO Chamath Palihapitiya --
Argersinger: Oh, you nailed it.
Greer: I nailed it.
Argersinger: His name, I was so sweating that.
Greer: Yeah, we've been practicing that before the podcast. Chamath Palihapitiya pitches Tesla, tell me about that pitch.
Argersinger: Sure. He's the owner of Social Capital, a hedge fund, and he's also the part owner the Golden State Warriors, for those who don't know him. But last year, at Sohn, he famously said that Amazon.com was a 10x opportunity in 10 years. He got a lot of press behind that, so far, with Amazon up 40% over the last 12 months, he's been right. And that's kind of what he's looking for. He brought Tesla to the table at the conference. And I have to say, when he said the name Tesla, there were notable laughs across the audience.
Greer: And why is that?
Argersinger: I think because with Telsa, there's baggage. A lot of people think it's a bubble, it's a stock at an all-time high, Elon Musk is always in the news for good and bad reasons, it seems. So you have a really bipolar view of Tesla, either it's going to be an amazing success that's going to revolutionize all these industries, or it's a stock bubble waiting to crash. But Chamath Palihapitiya made the case for Tesla, and I thought it was a pretty compelling case. He said, if you think about what the Model X and Model S have done, they've essentially come out in the last several years, and they've already dominated large swaths of the market for their respective categories. And he thinks the Model 3, which is Tesla's next car, which is going to come out later this year, is going to be similar to the iPhone 3 back in 2009. In other words, this device that just comes out -- in this case, of course, an electric car -- and consolidates the market, builds huge excitement, and takes over the market, and there's going to be such demand for it, once people buy the Model 3, it's going to become the car of the future, no one is ever going to go back to internal combustion engines. And if you believe that Tesla is on this Apple iPhone curve, he thinks the auto business for Tesla could be worth $340 billion alone in 10 years. That's 7 times Tesla's current market cap, and that's just the auto business for Tesla. So, obviously, he's really excited about that.
Greer: And that's some happy shareholders if that plays out.
Argersinger: I would say. There's a lot of reasons to love Tesla, and I think having someone like Palihapitiya have confidence in it and be an investor in it ... I will qualify this by saying, he's not actually investing in the stock himself. His fund is actually buying the convertible bonds, which I think it's interesting because there's much more downside protection. You basically have to assume that Tesla goes bankrupt to not get paid on those bonds, but you get about 95% of the upside. I kind of like that play.
Greer: Interesting. Let's move on to another stock. I admit I did not expect to see this name as a buy, as a stock that someone was pitching -- United Airlines (UAL -2.62%).
Argersinger: United Airlines. This, to me, was one of the more compelling pitches. It was by Brad Gerstner of Altimeter Capital. I have not been a fan of the airlines, and I think we've trained our brains as Foolish investors to think that industry is terrible. And it has been a terrible industry for investors for decades. But we know Buffett got into it recently. Gerstner's point is that today, the U.S. airline industry is in such a much better place than it was even 10 years ago. Right now, essentially four airlines control 80% of the revenue, of which United is a part of. That consolidation has increased load factors, revenue per seat mile, it's given airlines pricing power. He actually also thinks there's a bit of a secular growth story with airlines, in the sense that millennials, whether you believe this or not, are going to travel a lot more than previous generations. So you put all that together, and he actually thinks, in his best-case scenario, that United Airlines, within five years, could be worth $235 a share. That's if they hit his profit metrics that he has for them, and airlines in general start getting awarded the kind of multiples that railroads have been awarded, or other transportation industries. Airlines, of course, for years, have gotten low multiples, because no one likes investing in the industry. But that could be about to change. And if Buffett is behind it, and I think this case does really well, if you believe that airlines are back and they have pricing power, you could do really well. $235 for United in five years, compared to today's $78 stock price, not a bad return, if you can get it.
Greer: I appreciate the fact that consolidation has become a real thing. When I fly to Houston to see my family and friends that I grew up with, I basically have two choices if I want to fly nonstop -- Southwest or United. And I love Southwest, but when the times don't work or the price isn't right, I will fly United. And I hate hate hate that they dragged this guy off the plane, but I also don't want to be measured by my worst moment. So I'm like, they're one of the few games in town, and I'm going to play that game.
Let's go on to a company I don't know much about, real estate development company Howard Hughes (HHH -2.04%).
Argersinger: Yeah, this was Bill Ackman's pick. Pershing Square, we all know Bill Ackman. This was interesting from Bill Ackman. He got on stage -- for those who know Bill Ackman, he's usually very energetic, he's in the public eye a lot, he's charismatic -- he was rather subdued when he was on stage making this pick.
Greer: And just to clarify, because maybe some of us don't know Bill Ackman. We've talked about him recently in terms of Herbalife, he's very much short Herbalife, on the other side of that bet is Carl Icahn --
Argersinger: They've had a little bit of a Clash of the Titans on that.
Greer: A bit of a clash, we're still waiting to see how that plays out. But, most associated with Herbalife, also has a big stake in Chipotle as well.
Argersinger: That's right. His fund, Pershing Square's main fund, has not done well the last couple years. So maybe that's part of it. So his pitch was Howard Hughes Corp. We know the name Howard Hughes, the famous aviator, explorer, and filmmaker. But Howard Hughes Corp is basically a big real estate owner. They're one of the largest owners of what is called master plan communities, MPCs, in the country. These are essentially big swaths of developed land, either land with housing developments or commercial property, big swaths of land. Howard Hughes owns it. It's kind of a nice business when you think about it. Hughes generates income from real estate sales, operating income for leases, it reinvests back into the property and improves land values, it brings in new residents, new commercial leases, the demand goes, and as the prices rise, it's a little bit of a virtuous cycle. Ackman's bottom line point was, at about $122 a share for Howard Hughes, which was the price before he made the presentation, he thought an investor was getting essentially the entire business of Howard Hughes, plus, the Seaport District in Manhattan, which they also own, which is an amazing several acre spot, one of the premiere spots in Manhattan --
Greer: Nice real estate.
Argersinger: Yes. A large piece of land in Hawaii, and about 37 million square feet of future development across Howard Hughes' portfolio, all for free.
Greer: And Houston, you left out Houston. [laughs]
Argersinger: Yeah, they're one of the biggest, I forget what it's actually called, but it's a piece of land, one of the premiere places in Houston.
Argersinger: Yeah, it's three times or four times the size of Manhattan itself. Anyway, this is, according to Ackman, one of the premiere real estate companies in the world. And I think we have a service here or two that has recommended Howard Hughes in the past. It's one that hasn't really been on my radar, but it's one that I'm going to be taking a closer look at.
Greer: Let's move on to the short position, Core Labs (CLB). Greenlight's David Einhorn. A lot of people may know David Einhorn, back in 2007 he shorted Lehman Brothers, which subsequently went bankrupt, so that worked out well. In recent years, he's also shorted a little company called Amazon.com. Not so good.
Argersinger: Yeah. He's known mostly for being a short seller. He's had some bad bets. I think he was also short Chipotle at some point, I think he made the claim that Taco Bell was going to eat Chipotle's lunch at some point. But he's also been a longtime investor in Apple, which has worked out really well. So he's kind of all over the place. But he brought to the table Core Labs, which is an oil field services company that specializes in seismic and high data analysis of wells. It's used by drillers and explorers as a way of trying to maximize their yield on a given exploration. His point was a good one, though. If you look at Core Labs' exposure, they're exposed mainly to these complex international, mostly deepwater exploration projects. That part of the oil business has just been terrible. They don't have a lot of exposure to the only place that's really working, which is North American shale. At the same time, investors seem to have rewarded Core Labs this elevated multiple because they think it's a secular growth story. The idea that, everyone is going to be using high data analysis now to do intricate, complex explorations. But, actually, that's not true. He thinks it's a bit of a false narrative that this is a secular growth story. He thinks, this is just a cyclical oil services company like Halliburton or any other, and it shouldn't be awarded these higher multiples. He thinks their earnings are about to drop off a cliff starting later this year, and once that happens, investors are going to award a much lower multiple to the business, and he thinks the stock is going to drop 30% to 40%.
Greer: Pulling back here, Matt, you talk about how exclusive this event is, the Sohn Investing Conference. Give us a little more color, because I'm envisioning ice sculptures and you're sipping champagne at lunch and maybe eating a little bit of caviar, because these are billion-dollar fund managers. What's it like?
Argersinger: Well, it's held at a prestigious place, the Lincoln Center in New York City. For those who haven't been there, it's one of the most beautiful, theatrical venues in the entire world. The tickets were $5,000. So it's not a cheap event. But I have to say, it felt to me more like any other investing conference. You go there, there's booths set up, funds are advertising, investment companies are advertising --
Greer: Box lunch?
Argersinger: A bit of a box lunch. There were little sandwiches. No caviar, I looked for the caviar and couldn't find the caviar. But sandwiches, soda, water. Most of it was just sitting down, listening to presentations, having a few breaks, mingling. I didn't do a lot of mingling because I was typing furiously the whole time. But it felt like any other event, I didn't feel like I was in a room full of billionaires. It felt like a room full of people who were interesting in investing. And that's where I love to be.
Greer: I like this. So, not pretentious.
Argersinger: No, not pretentious.
Greer: I like hearing that. OK, Matt, as we wrap up here, a little lightning round, I want to hit you with a few questions, beginning with, what was the most convincing pitch you heard at Sohn
Argersinger: I'd have to go back to Brad Gerstner pitch for United Airlines, just because it caught me off guard, I had never looked at the company, and he made such a compelling case for the airlines, and for United Airlines in particular. His scenario seemed very plausible, you can get a multi-bagger return by investing in United today. So, that was the pitch that struck me the most.
Greer: Conversely, how about the least convincing pitch?
Argersinger: All of the pitches were convincing. I don't think Ackman's pitch for Howard Hughes was as compelling as it could have been. I think he was very simplistic, he highlighted some of the qualities of the business, but it didn't make me think that buying Howard Hughes today was going to be a game-changing investment like investing in Tesla or even United Airlines, or shorting Core Labs, was, today. So I would say that felt soft to me.
Greer: And how do you think the whole Herbalife thing is going to work out for Ackman? I feel like if it walks like a pyramid scheme and it quacks like a pyramid scheme, it's kind of a pyramid scheme. And yet, obviously, Carl Icahn, very bullish on Herbalife, and it's still a multi-billion dollar market cap.
Argersinger: I think you and I see the same thing. I see a direct marketing company that eventually is probably going to fall out of favor. It's just, for whatever reason, this company has been able to maintain a very viable network generating lots of cash. You and I agree, I think a lot of the practices are pretty unsavory on the marketing side. So I want to say I feel like Ackman is going to be right eventually. Is he going to be right to the point where he makes a good return on his short? I don't know, because he's been fighting Carl Icahn a lot. But I have to say, five years from now, we'll look back and I guarantee you that Herbalife will not be around, or it'll be a much more diminished company than it is today.
Greer: How about, coming out of Sohn, one fund manager that everyone should follow?
Argersinger: I'll have to go back, I know the name is hard to pronounce, but Chamath Palihapitiya is a rising star in the hedge fund industry. I'm a Rule Breaker investor at heart, so I'm also the guy looking for 10x opportunities in 10 years, and that's kind of his mantra. So I like where he's focused. I'm a big believer in Amazon, and he is too. I liked his pitch for Tesla. So pay attention to him. I think he's looking in the right places, he's bringing a venture capital approach to the public markets, and that's exciting to me.
Greer: And I just learned watching an interview with him on YouTube that Chamath, his first name, means warrior. I don't know what Mac means, or Matt.
Argersinger: [laughs] It makes sense that he's a part owner of the Golden State Warriors.
Greer: Oh, I didn't even think of that, that's brilliant.
Argersinger: Yeah, there you go.
Greer: And Matt, how about one stock or trend from the Sohn conference that goes into your "definitely interested" bucket, something that you're going to watch because of the conference
Argersinger: I'm paying a lot closer attention to the airlines. We haven't spent a lot of time looking at airlines here at the Fool. We've followed Buffett's mantra of not being interested in that industry. But the fact that Buffett is now interested, and the fact that you can see some of the compelling dynamics coming back, and the pricing power coming back, it's a place I need to pay closer attention to, and I think we all should.
Greer: You perhaps just answered this, but did Sohn change your mind about anything?
Argersinger: I've been skeptical of where the stock market is, I guess, relative to historical patterns. There was some talk at the conference about, the stock market is at all-time highs, things are looking expensive, the Fed is raising interest rates. There was a macro discussion intertwined between all these pitches. I'd have to say, hearing some of the smartest money managers and hedge funds make strong cases for investing, it reminds me that there are good opportunities everywhere. Don't always go in skeptical saying, "This is too expensive." If Chamath Palihapitiya is going to say that Amazon is a 10x opportunity last year, and he says Tesla could be a 7x opportunity now, it reminds me, focus on the business, focus on who's innovating, what's working in the investing world. Don't worry so much about the overall price of the market. Ultimately, the best companies, the best investment ideas, are going to win.
Greer: To review some of those opportunities, the buy pitches were Tesla, United Airlines, and Howard Hughes, the real estate development company, and the short was Core Labs.
Greer: Matt, thanks for joining me today.
Argersinger: Thank you, Mac.
Greer: As always, people on the show may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks so much for listening, we'll see you next time!