Sohn Conference 2017: our Legends’ stock picks

The world-renowned Sohn Investment Conference, held annually in New York since 1995, has been bringing the world’s savviest investors together to share fresh insights and money-making ideas. We visited this year’s conference on May 8th and report the ideas of our Legends presenting at the conference. We will also look back to see how our managers fared with their ideas of last year’s conference.

Last year, two of our Legends presented their stock picks at the Sohn Conference: Larry Robbins of Glenview Capital and Richard Deitz of VR Global. Now that a year has passed, we look back on how their picks performed over this 12-month period. To start with Robbins, he recommended health insurer Anthem Inc and VCA Inc., an animal-hospital chain (and trading by the descriptive ticker ‘WOOF’). At the time he said these companies’ prices didn’t reflect fundamentals.

While the anticipated merger of Anthem and Cigna was blocked by U.S. judges, Anthem’s share price still appreciated by a healthy 30% validating Robbins’ view that the shares were undervalued even on a standalone basis.

In the case of VCA the results were even better. From Robbins’ presentation on May 4th, shares jumped 45% as Mars Inc. acquired the company in January of this year.

Richard Deitz pitched positions in Greek Government Debt and and Greek banks. The 02/24/2027 Greek Government Bonds gained 30% over the period and National Bank of Greece gained close to 20%. Deitz continues to hold positions in both securities and he believes there is significant further upside.

This year’s picks

At Sohn 2017, once again Legends Fund was represented by 2 managers: Bill Ackman and Larry Robbins. Ackman pitched his long-time holding in Howard Hughes Corporation, and shares of the company gained 4% on the news. We will discuss Ackman’s thesis on Howard Hughes in a future letter. For now we will take a look at Robbins’ picks.

The theme Robbins talked about was that of merged companies where merger synergies (net of consolidation risk) are not yet captured by stock prices. In his view many of those stock prices have lagged, creating strong investment opportunities. He discussed three names:

DXC Technology

The company resulted from the merger of long-term Glenview holding Computer Sciences Corp and the Enterprise Services segment Hewlett Packard Enterprise Co. The merger according to Robbins is highly accretive to earnings per share. The company is cheap (the tenth cheapest stock in the S&P 500 on pro forma numbers) and the management team has a proven record of creating value. It has a $4.4bln war chest and management is likely to take further strategic steps like spinning off public service businesses. The company is poised to grow revenue and Robbins expects a re-rating of its multiple.

FMC Corp.

The company has bought Dow/DuPont divestures and is on track to attain the agricultural industry’s fastest organic revenue growth. The company is uniquely positioned to outgrow the market as it is nimble and an advantaged acquirer, thanks to having the industry’s best balance sheet. The firm is an active participant in industry consolidation and could well be a take-over candidate. Its lithium business offers an embedded call option as the company explores a separation from the business in 2018.

Quintiles IMS

Robbins believes the merged company’s combination of IMS’s data with Quintiles’ outsourced contract research organisation service capabilities will transform clinical development for pharma customers. Both companies had track records of creating shareholder value and compounding earnings at an attractive rate. The merger creates a meaningful cross-sell opportunity for Quintiles to gain market share from pharma customers that have an IMS data subscription or consulting relationship today. And while the market is waiting for Quintiles to prove it, management is aggressively repurchasing stock. Quintiles and IMS historically traded at ~20x on a blended basis vs. ~15x on current pro forma 2018 EPS.