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5 Long Ideas from the 2015 Sohn London Conference

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Hedge funds and prominent investors recently met at the Sohn London Conference to present their latest ideas, for the benefit of cancer research. Given the in-depth research and extensive due diligence that top hedge funds perform, we’ll analyze some of the smart money’s top conviction bets as disclosed at the conference, including CF Industries Holdings, Inc. (NYSE:CF), eBay Inc (NASDAQ:EBAY), New Media Investment Group Inc (NYSE:NEWM), Mead Johnson Nutrition CO (NYSE:MJN), and Yahoo! Inc. (NASDAQ:YHOO).

Why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 38-month period beginning from September 2012 (see the details here).

First on our list is CF Industries Holdings, Inc. (NYSE:CF), a nitrogen fertilizer manufacturer and distributor. John Burbank of Passport Capital likes CF Industries because the company is the leader in nitrogen fertilizers, which Burbank believes is a better business than potash, given nitrogen’s essential status. Burbank likes how CF Industries Holdings, Inc. (NYSE:CF) management has reduced the total number of shares outstanding by 35% since 2012 through capital returns. Burbank notes that executives have been net buyers of the stock, another bullish sign. Burbank also likes CF’s acquisition of Netherlands-based OCI, which will allow CF to reduce its tax rate to 20-to-25% from 35%. Meanwhile, shares of CF trade at under 10-times forward earnings and boast a 2.77% dividend yield.

John Burbank
John Burbank
Passport Capital

Next up on our list is online auction giant eBay Inc (NASDAQ:EBAY), which spun off Paypal Holdings Inc (NASDAQ:PYPL) a few months ago. Per Johansson of Bodenholm Capital likes eBay because of the Paypal spinoff, which he thinks will unlock value in the long run, as well as because eBay Inc (NASDAQ:EBAY) has high margins and a strong balance sheet. Johansson also believes eBay’s growth will increase faster than expectations, as its recovers from various factors that slowed its growth in previous years (such as the strong dollar and a security breach that forced customers to change their passwords). The stock trades at 14.7-times forward earnings, substantially less than the NASDAQ’s forward P/E of 19.8.

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