5 Big Ideas from the Sohn Conference

A group of well-known hedge fund managers, academicians and other thought leaders participated in the seventh annual Sohn San Francisco Conference this week, providing investment ideas and market outlooks in a series of 20-minute presentations. The Sohn Conferences raise money to fund the development of educational opportunities and life outcomes for under-served youth, as well as support innovative initiatives to cure and treat pediatric cancer.

Most retail investors, including many of our readers, are on the lookout for good investment ideas. Indeed, there are no easy ways to find stock market bargains in today’s environment, but hedge fund conferences such as the one discussed above can provide investors with a treasure trove of useful information. With that in mind, we decided to delve into five of the investment ideas presented at the recently-held Sohn San Francisco Conference, three of which come courtesy of hedge funds that we track.

At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

ValueAct Capital’s Bullish Thesis on Morgan Stanley (NYSE:MS)

Mason Morfit, a Partner and the President of Jeffrey Ubben’s ValueAct Capital, recommended investors go long Morgan Stanley (NYSE:MS) in his presentation at the investment conference. It is already known that the activist hedge fund initiated a 38 million-share stake in Morgan Stanley in mid-August, arguing that it was the market, not the company, that had it wrong. According to Mr. Morfit, the diversified financial services company has three defined units and seven defined revenue units. By conducting in-depth research to understand each unit’s economics, he determined that 75% of the company’s revenue and 85% of its profit come from asset light fee-based businesses rather than capital intensive businesses. On that note, Morgan Stanley has been successful in maintaining or even increasing its share in wealth management and investment banking advisory according to Mason Morfit. All in all, the President of ValueAct Capital said that Morgan Stanley’s long-term business growth looks positive.

Although the number of hedge funds in our system with equity stakes in the bank decreased to 49 from 52 during the second quarter, the overall value of those stakes rose by 67% quarter-over-quarter to $2.93 billion. Morgan Stanley’s shares are up by 1% this year. Clint Carlson’s Carlson Capital reported ownership of 4.95 million shares of Morgan Stanley (NYSE:MS) during the 13F filing period for the June quarter.

The next two pages of this article will discuss four other investment ideas presented at the Sohn San Francisco Conference.

Marcato Capital Management Reiterates Bullish Call on Buffalo Wild Wings (NASDAQ:BWLD)

Mick McGuire of Marcato Capital Management reiterated his bullish view on Buffalo Wild Wings (NASDAQ:BWLD) in a presentation at the aforementioned conference, arguing that the restaurant chain must transition to a franchised store model to unlock value. The founder of Marcato asserted that the management of the owner and operator of Buffalo Wild Wings, R Taco and PizzaRev restaurants needs to implement three proposals to unlock value: complete the transition to a 90%-franchised model (the mix of company-owned and franchised restaurants is around 50/50 at the moment), improve operating margins, and optimize the company’s capital structure by issuing more debt.

“We believe BWLD’s stock price could rise by more than two to three times under Marcato’s proposal,” said Mr. McGuire in the presentation. Marcato Capital Management’s founder presented evidence that restaurants which have more than 70% of their stores as franchises trade at higher multiples than chains operating mostly company-operated stores, asserting that the shares of Buffalo Wild Wings could reach a price level of between $218 and $311 by moving to a higher franchised model. There were 25 asset managers in our system with long positions in the restaurant chain at the end of June, down from 29 recorded as of the end of March. Jim Simons’ Renaissance Technologies reported ownership of 190,100 shares of Buffalo Wild Wings (NASDAQ:BWLD) in its 13F for the June quarter.

Social Capital Says Workday Inc. (NYSE:WDAY) Will Reach Market Cap of $100 Billion in 10 Years

Chamath Palihapitiya, the founder and CEO of Social Capital, which primarily invests in fast-growing private tech companies, told the crowd at the recently-held Sohn Conference that enterprise cloud software company Workday Inc. (NYSE:WDAY) will be worth $100 billion in ten years, which would represent a significant increase from its current market cap of around $18 billion. According to Mr. Palihapitiya, the provider of financial management, human capital and analytics applications is “a company that we think is purpose-built to really stand the test of time.” The founder of Social Capital applauded the launch of Workday Financials, a system of record to manage financials, and presented a slide showing that Workday Financials helped Netflix Inc. (NASDAQ:NFLX) significantly improve its ability to quickly close the books and file with the SEC.

Chamath Palihapitiya also said that “When you’re a really talented engineer and working at a place that has become sales and marketing driven [referring to competitors such as Oracle and SAP] you quit and go to Workday,” emphasizing the rapid pace of innovation at the company. The investor also mentioned that Workday has 97% customer satisfaction, pointing out that “this is the way people react to Google or Facebook so we should probably pay attention.”

There were 25 hedge funds followed by Insider Monkey with equity investments in Workday at the end of the second quarter, which amassed around 7% of the company’s outstanding shares. Eashwar Krishnan’s Tybourne Capital Management was the owner of 2.75 million shares of Workday Inc. (NYSE:WDAY) on June 30.

The final page of this article discusses two other investment ideas presented at the Sohn San Francisco Conference.

Short-Seller Presents Bearish Thesis on Tutor Perini Corp (NYSE:TPC)

Carlson Block, the founder of Muddy Waters Capital, presented his short investment thesis on small-cap construction contractor Tutor Perini Corp (NYSE:TPC). The short-seller claimed that the builder’s accounting and business practices were “quite aggressive,” mainly focusing his presentation on the company’s accounting of the so-called change orders (change orders are a common occurrence for contractors). Moreover, Carlson Block discussed the construction contractor’s lack of cash flow and weak balance sheet, saying that “We really question how much more runway the banks are willing to give Tudor Perini. We think there is a real risk that banks pull their revolver…This is a business that has so little liquidity, it doesn’t really take much to push it over the edge.” Additionally, the short-seller said that Tudor Perini’s loan agreement has been amended six times in five years to adjust for its weak EBITDA, claiming that “these kinds of changes are typical of a credit facility with distressed or CCC rated credits.”

The hedge fund sentiment towards Tudor Perini declined in the second quarter, as the number of asset managers in our system with equity stakes in the company fell to 12 from 16 quarter-over-quarter. Tudor Perini’s shares are up by 26% year-to-date. Ken Griffin’s Citadel Advisors owned approximately 63,000 shares of Tutor Perini Corp (NYSE:TPC) at the end of June.

Harvest Capital’s Bullish Thesis on Echostar Corporation (NASDAQ:SATS)

Jeffrey B. Osher, a portfolio manager at Harvest Capital Strategies LLC, presented his firm’s bullish investment thesis on Echostar Corporation (NASDAQ:SATS) at the Sohn San Francisco Conference. Harvest Capital’s sum-of-the-parts valuation of the global provider of satellite services, video, delivery solutions, and broadband satellite technologies yielded a target price of $71.76, about 50% higher than the current share price of nearly $47. The portfolio manager of the San Francisco-based hedge fund discussed the company’s Hughes segment, which provides broadband satellite technologies and broadband services to households that cannot get wired broadband. Echostar Corporation is focusing its efforts on growing its Hughes consumer revenue by maximizing utilization of its existing satellites while planning for new satellite launches. According to Harvest Capital, EchoStar’s 2016 satellite launches will drive 50% revenue growth for the Hughes segment within three years. Given incremental margins, the segment’s EBITDA should nearly double according to Harvest Capital’s portfolio manager. EchoStar’s Hughes segment had around 1.03 million broadband subscribers at the end of June.

There were a total of 23 asset managers tracked by Insider Monkey which held stakes in EchoStar on June 30, hoarding up 10% of the company’s common stock. Nathaniel August’s Mangrove Partners had 1.36 million shares of Echostar Corporation (NASDAQ:SATS) among its holdings at the end of June.

Disclosure: None