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Rhizome Partners Took A Victory Lap on The Howard Hughes Corporation (HHC)

Rhizome Partners felt vindicated and took a victory lap on its The Howard Hughes Corporation (NYSE:HHC) investment. You can download a copy of Rhizome Partners’ 2019 Q2 investor letter here. Here is what Bill Chen said:

“The second quarter of 2019 reminds us of the importance of a consistent investment process.  We have been patient shareholders of Howard Hughes Corporation (HHC) for over two years.  Despite consistent growth in shareholder value during this time, share prices actually declined by over 25% from our initial purchase price. For many investors, the change in share price by itself would be taken as an indication their thesis was wrong.

Instead, over the course of two years we became more familiar with the asset quality and more confident in the management team.  We initially bought Howard Hughes for $117 to $129 per share while we thought that NAV was roughly $170 about two years ago. To our surprise, the market would give us two more opportunities to buy HHC at increasingly cheaper prices.  In both situations, we acted swiftly and added to our positions as we believed we were buying real estate at less than half price.  During the days leading up to June 26th, share prices reached a low of $92. We quickly increased our position size by an additional 4% of our partners’ capital bringing our position size to 16% of our partners’ capital.  On June 27th, David Faber of CNBC reported that Howard Hughes Corporation had retained Centerview Partners to explore strategic alternatives, which was later confirmed by HHC.  Shares in Howard Hughes Corporation ended the day up by about 42% resulting in likely the largest one day gain of roughly 7% of our partners’ capital in the Fund’s history.

There are a few takeaways from the Howard Hughes Corporation saga to‐date.  First, we feel grateful toward our partners.  Without their patience and long investment horizon, we would not have been able to hang in there during the ups and downs and buy with conviction when opportunities presented themselves.  If our partners were to focus solely on short‐term performances, Howard Hughes Corporation would have been an investment mistake after a two year holding period.  We have heard from the HHC management team that many portfolio managers and analysts have said, “I just cannot own it in the fund because I need performance in the next 12 months. I have brought HHC personally for myself and my kids.  Keep up the good work.” In contrast, our partners have chosen to focus on the fundamental developments of Howard Hughes Corporation rather than the share price, trusting Rhizome’s “look through” way of measuring investment results.”

The Howard Hughes Corporation (HHC) has been pitched by several value oriented hedge fund managers during the last 10 years. The stock’s biggest champion was Bill Ackman. In May Ackman said that the stock is undervalued.

Can hedge funds beat the market

However, Ackman also said ““I think this is one of the most attractive times in the history of the company to invest,” in May of 2017 at the Ira Sohn Investment Conference in New York when the stock was trading at $125 (see all recommendations from that Conference here).

That’s not it though. Ackman has been talking about HHC for a very long time. In 2014, he boosted Pershing Square’s stake in HHC when the shares were trading at $120. True, HHC shares approached $160 later that summer but the stock has been dead money since then.

Rhizome Partners is still extremely bullish about the stock. ” At the recent low of $92 a share, we estimate that the intrinsic value is 117% higher.  In addition, we believe that the company is creating roughly $15 per share of value per year through developments, operating cash flow, and the sale of residential land parcels,” Bill Chen said in his investor letter. He also provided updates about the recent developments in this stock which you can read about on our site.

I considered recommending HHC to our premium subscribers at the beginning of 2018 when Ackman announced that he’d trim his stake in the stock. HHC shares were trading at $128 at the time and I decided against recommending the stock. Our stock recommendations that are shared in our monthly newsletter returned an average of 33.8% since then, whereas HHC shares have been flat. Now that the stock is already up about 40% over the last 3 months, I don’t think it offers a great return/risk combination at $130 per share.

Disclosure: None. This article was originally published at Insider Monkey.

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