Of Asset Management. I spoke to the head of the behavioral economists. It has been exciting to you. People will no longer be racing to be firsttime buyers anymore. We know this has been going on for many years now. Why do people Pay Attention to this . Biggestave some of the Financial Gurus in the market here speaking. People have been up in the markets. Longterm equity guys are struggling. 19th annual. Is dollarsay thousands of to get an understanding of what the year will apply the head. Earlier. To my he is saying brazil is so bad, it is good. He has an idea to go along with brazil as by the inflation. Lenovo is saying things look bad and it is time to buy. Standby. We will be back in just a moment. A lot of ideas were introduced in the conference. Julie hyman joins me now with a look back at what we can call the greatest hits. There are calls made every year that are successful or not so successful. But some really stand out as the ones that made a lot of headlines and were striking because they really went against the tide. One of them was David Einhorn back against the lehman brothers. As was at a time where he came out and crystallized it. He said government regulators should elationward a recap hopefully before federal taxpayer assistance is required. That proved to be a good call at the time. He also made interesting calls in 2011. He said Steve Ballmer should go as ceo. That cannot happen right then but it ended up happening. In 2012, after he asked a question on a Conference Call and did not mention it at the conference, it has fallen and rebounded, in that case, it was by virtue of the fact of something that was not said instead of something that was no it was. At a special conference presentation, not part of the made presentation but rather in december of 2012, we talked about general growth properties, which turned out to be very profitable. And then a sampling of other calls we got, one of the protest in 2011, justs said by the dollar and in 2012 semester, we had kyle talk about japan becoming completely insolvent. A lot of dramatic calls have come out of the conference. Christ what about last year . How have they done so far . You have winners and losers. You do tend to see, particularly among the bigger games, movement in the stock on the day of the conference. Whether the movements are sustained throughout the deep throughout the year is another thing. Jonathan jacobson recommended a short of Digital Realty trust. Jim chanos said he would short see technology. Jeff gordon good lock, who we just mentioned, he recommend shorting chipotle. Hat stock is up it has been a mixed picture. Remember people want to get the wisdom from these various managers with driven track records. These guys are talking their book and making recommendations. We do not know exactly when they are doing the buying and selling. They probably know there will be a little reaction. We are hearing it should just be a few minutes before Larry Robinson speaks at the investment conference. Ets bring back my colleague stephanie, you noted you spoke earlier to joel at Asset Management and he told you he does not think most headlines justify their fees to be in with. Is that a view shared by most managers . It is. He is a mutual fund guide. When the Hedge Fund Managers are asking for two and 20 and are not outperforming the market, how they justified . The more smart investors we speak to, they talk about the importance of longterm investing. We heard charlie monger and Warren Buffett criticize activist investment, and that is a problem hedge funds face. So many are forced to give investors quarterly and monthly and even daily liquidity. If you offer investors back kind of liquidity and make longterm investment the same time, they do not lineup. As was said earlier, they will not justify getting the egregious fees because they will not perform that well. You mentioned buffett among your criticism this weekend. T was the reaction . Definitely resonated. Tons of people are talking about it because what is activism . Download is here and not speaking. He has been all over the news this morning. 0s have now extended harry wilson, those are the other people he propose. The talk of activist investors coming to shake things up, dan now has a seat on the board. Bill ackerman, who i will speak with later, he is criticized for being an activist. You look at his holdings, they are very long. Some of these last him five or six years. There is much criticism around shortterm investment. You have to be in it for the long term to really win. He said to look at a company like apple. Many people were looking at it in the 300s of david dyer the dollar price was too high. It has volatility but as a longterm play, it starts to make sense. You want to be longterm. We would be remiss if we also did not mention there was a link between pediatric cancer research. Tell us about that. There is. All of the proceeds from the conference go from pediatric cancer research. People are here spending the money because they want to get the big ideas. Hedge Fund Managers are putting them out specifically to raise funds. He made his way from california and will be on bloomberg tv smart money making a very , shortinge statement homeownership saying basically people should be short and we are at it im a time right now and home owner strength is going down, at a time when real estate prices are going up and yes, it may be the American Dream to own a home, but no longer are firsttime buyers saying it is part of the american way because theyre not good young people are living at home or. Youth unemployment is still in that shape your in the u. S. , especially internationally. Thethe the eggs hsp a trade idea. Quest joining us, thank you. Center. W, lincoln i wanted a picture that summarized april and march for the Hedge Fund Community and i we will skip it. Disclaimers. Thisve the conference at time because it is a good time to reflect on what we thought would happen at the beginning of the year and have conditions change. We think the playbook for 2014 in 2015 is very similar to the playbook that worked in 2015. We will talk about different. Deas take a look at the picture. We go through Interest Rate and more timescles, but, than not, as the calendar turns, the environment does not. Resist the temptation to think sometime somehow 2014 is different just because the calendar changed. We think the conditions are favorable for longterm investment. We presented a conference two years ago and at that time, we were entering the Systemic Risk phase. Gonenly have the u. S. Through the mortgage crisis, but europe was going through the confidence crisis. It was really in the middle of 2012, with the passage of the omt, that germany functionally guarantee the system in europe and investors could now stop asking themselves, what if the system crashes, and could start asking themselves, which stocks do we want to invest in. Correlations fell, valuations rose. The single biggest difference people misunderstand is while riskfree Interest Rates have risen, look at high yield bonds. Here are at 5. 6 why do you see increased shareholder engagement activism, because that is where the money is. There are four drivers of convergence in the market. Cheap valuations. The market is more expensive than it was during the time we last talked to you, but it actually looks reasonably attractive and we and other presenters here are able to aggregate portfolios which are cheap to that. We have seen a lot of capital deployment and excess cash remains exceedingly high. We talked about how low are owing costs are. A news why youre seeing level of shareholder engagement every week and every month. Last six or seven quarters, these forces, systemic let stocks town, drift up. Think you will now have to find situations that will lift up and it will be the actions of management, board, and shareholders, that will determine whether investments have an ordinary return were extraordinary return. The concept were focused on is fictional. Convertible equity. We know what convertible bond is. Makes an adoring investment exciting. Maker a convertible equity is investment in a secular Growth Business that also carries with it the extra option ali to add returns based on a management change, m a, and other value enhancing events. That is what we look for. Another thing we are looking for is, when everything is rising up, do not mind being popular. As we get into a lift up situation, we will probably have to be back to being more contrary and. We have taken two industries that, if you walk down main street, you would think there are fairly hated industries. Of gm owes, genetically modified seeds, and yet one mans trash is another mans treasure. We see significant value. Lets not let facts get in the way of a good argument. If we we ryan the clock a few years ago, the debate about the Affordable Care act really centered on the hmos. Who cares if they employ a half Million People the u. S. They must all be bad actors. It is not true. If you wanted to reduce health care spending, should you go after the slice or the pie. If you watch what the government did rather than what they said, they embraced managed care as a tool to bring the cost down. We see that in the form of increased outsourcing through managed medicaid. We see an increased panic penetration in Medicare Advantage. We are very familiar with the ination of public exchanges order to insure the uninsured. Despite the fact hmos have weathered the storms and it had a brighter outlook, theyre the only sector and health care that have not recovered. There are a present she brought a relevant relative basis. On an absolute basis, the entire group trades for 10. 6 times, 2006 earnings. Thinkocks we like best we our trading about eight times the oneyear forward in investment. What we see that we like hmos is in the the pain Rearview Mirror and the sunny days are out the front window. The pain is welldocumented. It is known as profit margin cap. The government told hmos they can only earn a certain amount. Fees and taxes imposed on the we that industry, and then have seen employment headwinds, industry headwinds, pressure the earnings of hmos over a fiveyear time. Eitherthese headwinds turned neutral or turned to terrell wins in the next five years. Desk tailwinds in the next five years. A lower margin the past, they are much higher growing and moved from nine percent to 22 of portfolios on average. You have a Better Business mix today that has increased medicaid penetration not only this year, but in future years and will benefit as the economy recovers. The final effect is a private exchange everyone is so excited about. Most people will move from a commercial plan. It is really just a low margin administrative service. When they moved to a private exchange, they made four to five times as much money as an at risk patient. This dumping effect is very margin and revenue positive. I will move to the next. We have seen a new wave of management. Four of the five Major Players have been at the top of the cfo level. United health care has long been viewed as the Gold Standard in management. The other ones have revitalized their management teams, focused on Regulatory Compliance but it was carries with it a focus on valuation creation. Humana is primarily what is called in Medicare Advantage company. If you are 65 or older, you can take basic medicare. From private company, you can take medicaid advantage and it dental and hearing benefit. It is an enhanced product. More seniors like that. The federal government does not want to pay to much. We will take a look at the trends underneath the business. There is an alarming outbreak of old people in the united states. I am not sure if youve noticed. Three percent more bad grandpas running around in an environment where there is only 70 basis points of population growth. Investould you rather when there is better value growth. Industry is not only growing population but beneficial it is a doubledigit topline for humana. Seniors like Medicare Advantage. What happens with midterm elections . Four years ago, they said ma would decline in membership. Everybody likes ma. Looking at ally top line growth at the 1015 range and we get positive mix match because it grows in the bigger percentage it is. That is the based business part of humana, a reason to be excited. Lets talk about the options attached. While humana has been able to withstand price decreases, it used to be the Medicare Advantage paid 100 . 14 on the dollar. The Government Law down the reimbursement and will be at parity in 2015. In 2016 and beyond, we have modest pricing growth. When we look at the humana,ility of province have been flat for cluster years, but profits are likely to accelerate before for addons and they are meaningful. Hasst every significant hmo joint venture with a large scale pharmaceutical venture in order to achieve scale and lower cost. Humana is likely to do that in the next one or two years. Analytically, it would make sense for them to do that. We believe that could be 1015 of earnings per share, another potential call option and uplift. Humana is the most wellcapitalized, with a 22 the 22 ratio. Everybody else has a little bit more debt that is cheap and humana can take on a little more debt that is cheap and buy another Medicare Advantage plan and another commercial hmo, or could buy their own shares trading at a discount and all those things will be meaningfully accrued to value. Growth, theseto exchanges could add up to 40 per share. The management of medicare and , wecaid dual eligibles believe would also add 15 per share to earnings. 10 and 2 in 2016. They can earn as much as 13 per share. Study. Case very similar approach. Their businesses more about traditional managed care business. Forof the options we see wellpoint, it was one of the moving anders of joint venture with somebody else. They sold their business for 4. 7 billion. It is so nice they could sell it twice. Funds always had a shortterm orientation, five years from now, we will we know we can get the business back here will have a Business Value or a new contract at a lower price or another joint venture relationship. That as two dollars per share in out your earnings. Future, it is worth about 15 today. Warren buffett says we should attention because goodwill does not advertise and we agree. We would like to have cash earnings, which are higher. Why would we like to see them be higher . Because they have a complicit off ounce set asset. When we add up the Interest Rate, of medicaid expansion, we. Et a stats return you can get 80 or 90 . The final and potentially most controversial recommendation we have is the shares in monsanto. All utopian world we would buy organic food and pay 40 higher price because that is what it takes to have organic food. In the real world, we simply cannot solve world hunger on an organic basis. You have that choice is to get to two or three percent. We can increase the farmland but that is not increasing. You can use more Capital Equipment to far more efficiently, chemicals or pesticides, or you could modify the seeds to get more yields. Options that are not utopian, we think the best rgm ohs. We think there are a bunch of leading scientific studies that adjust the safety of gm ohs in a manner we could not do. We can do economics. The farmer makes a 260 irr because when they buy them on a similar gm oh seed, they pay more but they get more crops they can sell at market at higher cross. The world and the wins because he gets more food, the farmer wins because they get more money. 80 of the value goes to farmers and 20 profit is something near and dear to hedge funds. Lets look at the numbers. It may look optimally like a more expensive investment, 19 times this year and 15 times next year, when we start to decompose it, we realize how cheap it is. I wish all of our businesses were this high quality, that they had on one side of the business a 38 share and on the other side a 39 share. Portfolio, every seed planted and 90 pointed in u. S. Coin, there are the market here have, createsthey a waterfall of about seven percent pricing in topline growth. Growthtes a base earning of 58 to grow on. We are more excited on the mediumterm because they have products on the pipeline that do not contribute today. These products are likely to come to market. We think it will add between 1. 50 to two dollars and 50 serifs cents per share. It is going better than expected and we think that whereas 67 of growth. There are casas fax cost effects that will bring growth to 25 . Could we go back one, please . The most important one slide, please. Perfect. Now we are there. Forward to the back. There we go. Our most significant suggestion is that they recognize their own business quality and reflect that in how they invest capital in cash. If you had a near monopoly business and trade and a strong would this nots, be a business that generates cash for year, that is appropriate to leverage where they can borrow a two percent tax. We think they should be leveraged, especially chemicals and strong Investment Grade companies. I would take their mold full down to 12 times. Multiple and they would go faster. When we add up in stacks all of these traits together, though growth goes to 20 over the mediumterm and mid30s earnings per share growth. The biggest pushback we get is, are you asking them to do something unnatural. If we look at the return that is there, it is an ordinary investment. Celebrants. E are it is an extraordinary investment. Monsanto has an ability to do precision farming and according to their own numbers, the business that earns nothing today will generate enough revenues on a six dollar earnings base. That is more Venture Capital than we are u