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5 Long Ideas from the 2015 Sohn London Conference

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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Although newspapers have been in secular decline for over a decade, Robert Harteveldt of Trishield Capital Management likes newspaper publisher New Media Investment Group Inc (NYSE:NEWM), given the company’s roll-up strategy of acquiring small and medium-sized local newspapers. Harteveldt thinks local papers are sustainable given that they have content that people can’t get elsewhere. New Media Investment Group Inc (NYSE:NEWM) has around 125 daily publications and 490 websites and trades at an attractive valuation, with a dividend yield of 7.3% and free cash flow yield of 17.9%. Unlike other publishers, New Media’s revenue and free cash flow has been increasing over the last few years (partly because the company makes accretive acquisitions).

Not to be left out, Elif Aktug of Pictet Asset Management likes Mead Johnson Nutrition CO (NYSE:MJN), a leader in baby milk formula. Given global demographic trends, baby-related products have a lot of growth ahead of them. Mead Johnson Nutrition CO (NYSE:MJN)’s management has been shareholder friendly, with the company recently implementing a cost cutting initiative and announcing a buyback that could reduce its float by as much as 10%. Because of consolidation in the industry, Aktug also believes the company is a potential take-over target.

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Last but certainly not least, Bo Börtemark of Carve Capital likes Yahoo! Inc. (NASDAQ:YHOO), whose core internet operations are valued at near-zero by the market. Börtemark thinks investors have basically given up on the company after many years of disappointing results. A sale of Yahoo! Inc. (NASDAQ:YHOO)’s core web operations could net the company a billion dollars in cash or more, which would likely add to Yahoo’s stock price. A successful turnaround that monetizes Yahoo’s audience would do even more for the stock. Of the 730 elite funds that we track, 89 of them owned Yahoo shares at the end of the third quarter, down from the 104 funds long the stock at the end of June.

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Disclosure: None