During Whitney Tilson’s presentation yesterday at the 8th Annual Value Investing Congress he identified three key long ideas. Tilson founded T2 Partners in 1999 with Glenn Tongue, and since inception has returned 177%, versus an S&P 500 of 36%.
Tilson’s first long idea is Netflix, Inc. (NASDAQ:NFLX). Tilson opened his long pitch on Netflix with the fact that Netflix is universally hated—we cannot disagree here, as Netflix currently has an almost 30% short interest and made our list of terrible twenty stocks—he also notes that the future is uncertain, but believes that the company is cheap on a subscriber valuation basis, with a current valuation of around $100 per subscriber. See our other work on Netflix.
Tilson also makes an interesting comparison between Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN). Noting that in a head-to-head comparison of Netflix today and Amazon.com, Inc. (NASDAQ:AMZN) in 2001, the two companies have very similar metrics, except Netflix, Inc. (NASDAQ:NFLX) has around half the debt that Amazon had in 2001 and that Netflix operates in a less capital-intensive business. Tilson believes that Netflix, Inc. (NASDAQ:NFLX) has a better business model than Amazon.com, Inc. (NASDAQ:AMZN) with higher margins—find out if Amazon’s current valuation is justifiable.
Worth noting is that Tilson only owned around 10,000 shares of Netflix at the end of June according to T2’s 2Q 13F—see all of T2 Partners’ holdings.
Tilson’s second pick is Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B). We noted that Berkshire was one of Tilson’s top picks in our analysis earlier this month. Berkshire also made our list of the 10 most popular financial stocks among hedge funds. Tilson values the current Berkshire business operations on an 8x EBIT multiple, which is roughly 12x earnings. He claims the low multiples are indicative of an aging Warren Buffett. Using that metric along with cash and stock holdings, Tilson values the shares at around $175,000, versus a current share price of less than $140,000. Tilson also expanded on Buffet’s age and future concerns by citing an actuarial table that shows Buffett is projected to live 11 more years, with Tilson adding his own belief that Buffet will run Berkshire for at least five more years.
Additionally, Tilson uses Apple Inc (NASDAQ:AAPL) as an example to show how a company can continue to thrive even after its leader is gone. Apple is up almost 70% since Jobs left the company in August 2011. However, it is said that the last product Steve Jobs had a hand in designing was launched last month—the iPhone 5. As a result, it remains to be seen how the company will fare in the long run. On a positive note, Apple Inc (NASDAQ:AAPL) is still expected to grow 2012 revenue by 25%, after a 66% increase in 2011. The fact that the iPhone 5 was Jobs’s last product has not stopped fund managers from buying, with Apple Inc (NASDAQ:AAPL) making our list of the top stocks loved by billionaires.
Tilson’s third idea is Howard Hughes Corp (NYSE:HHC). Tilson pitched this idea last year at the Value Investing Congress and the company is T2 Partners’ seventh largest holding per the firm’s 2Q 13F. Howard Hughes was spun-off of General Growth Properties in 2010 and is a portfolio of real estate assets in premier U.S. locations. Tilson credited Bill Ackman with the idea. Ackman also has Howard Hughes as his seventh largest 2Q 13F holding.
Tilson noted that he had visited four Howard Hughes properties and provided notes on each. The first being the Summerlin planned development in Las Vegas—noting that the market is very weak, but there actually new homes being built in a few areas around Vegas. Tilson believes that many of the assets on Howard Hughes’ books are below fair value, citing the emergence from bankruptcy as the reason the assets were placed on the books at such low prices, including the other three properties he saw first hand.
Tilson also visited The Woodlands in the Houston, TX; a property in Honolulu, Hawaii that will be condo towers along the beach; and a property in South Street Seaport where Howard Hughes has development plans for 2015. Tilson believes the South Street Seaport has great potential, but is only on the books at $6 million.
As far as valuation, Tilson views the Howard Hughes’ price-to-book ratio of 1.25 very cheap, but he did not offer an exact value for the stock, only that it is worth much more than the current share price.
During the Q&A portion of Tilson’s presentation he revealed his performance year to date was roughly flat. He also furthered this by saying that some of his second quarter positions should have been downsized more in 2012’s first quarter. Tilson is likely referring to such stocks as and Promotora De Informaciones, down over 60% year to date, and Dell, which is down over 30% year to date. These stocks were Tilson’s fifth and sixth largest 2Q 13F holdings respectively.
Related tickers: Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN), Howard Hughes Corp (NYSE:HHC), Apple Inc (NASDAQ:AAPL), Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)