Sohn Conference: D. R. Horton (DHI), Assured Guaranty (AGO), and Palo Alto Networks (PANW) Put Under the Microscope

Assured Guaranty Ltd. (NYSE:AGO)

For the second-straight year at Sohn, billionaire investor David Einhorn of Greenlight Capital pitched a short idea. At last year’s event, it was Core Laboratories N.V. (NYSE:CLB) that earned his ire, with Einhorn predicting that the oilfield services company’s earnings would disappoint going forward based on its exposure to the least desirable parts of the market. He predicted a decline of 45%, which Core Laboratories got about halfway to at points in August and October of last year. However, a huge rally in the stock this month has pushed it to 10% gains since Einhorn’s pitch.

This year, Einhorn set his sights on Assured Guaranty Ltd. (NYSE:AGO), which he compared to Allied Capital, a company that he pitched a short idea on way back in 2002, which set off a contentious six-year battle between Einhorn and the company. Einhorn believes the end could be much nearer for Assured Guaranty than it was for Allied Capital (which was sold in 2010 after shares collapsed during the financial crisis), stating that the company could implode as early as this year. Einhorn estimates that Assured’s exposure to bad debt in Puerto Rico has led to $2.8 billion in implied losses that the company hasn’t recognized so as not to put its S&P rating at risk, and that it’s weighed down by junk grade bonds, with its $7 billion in capital being 32- to 54-times levered.

Assured Guaranty Ltd. (NYSE:AGO) responded to Einhorn’s presentation by stating that he “demonstrates a fundamental lack of understanding of our business model and the municipal debt markets,” and claimed that its balance sheet is strong and it doesn’t face liquidity risks.

Palo Alto Networks Inc (NYSE:PANW)

We give the last word to Glen Kacher of Light Street Capital, which gained 38% in 2017 net of fees, and is up a further 11% thus far in 2018. Kacher pitched Palo Alto Networks Inc (NYSE:PANW) as a long idea and appears to be very bullish on the company’s opportunity in the cloud security space, predicting 90% upside potential over the next two years.

Kacher discussed the immense need for online security in an era of government-funded criminal hacker organizations looking to divert wealth to their digital coffers. The threat is grave enough that a single large-scale cyber theft could potentially trigger a financial collapse through widespread fear of the banking system, potentially wiping out over $20 trillion in wealth. Given that, Kacher questioned the U.S government’s spending on cyber security, stating that they spend just $13 billion annually to fight a cyber war that’s actually occurring right now, while spending $600 billion on defense for a conventional war that isn’t occurring (and isn’t very likely to).

That security is made all the more challenging by the increasing prevalence of the hybrid cloud model in IT, where data must travel over many clients and networks, which creates a huge opportunity for Palo Alto Networks Inc (NYSE:PANW)’s leading hybrid security solution, which is capable of protecting both the enterprise and cloud operations of companies with a single solution. And there’s far more growth in cloud yet to come, as Kacher told CNBC following the event that only 14% to 15% of computing has been shifted to the cloud thus far.

Palo Alto is hugely successful at capitalizing on its customers through its transition to a subscription-based model, pulling in four-times as much revenue per customer as its competitors, and Kacher predicts that will lead to robust revenue growth of over 20% for years to come, outpacing overall firewall market growth by 3X. Kacher also likes that the company’s management has become more disciplined when it comes to expenses, which he estimates will help drive operating and free cash flow margins to 27% and 41% respectively by 2021.

Disclosure: None