He is very concerned about Ireland and says it is very likely to default. It's not a matter of 'if', but 'when. Bass mentioned that he is using out of the money interest rate call options to play the potential or in his mind, inevitable Japanese default. Should he be correct, he will make 50x to x his original investment.
Additionally, Bass says Greece and Iceland are the two other countries in peril here. Greece's default is inevitable and people's reaction will be to buy U. Lastly, the Hayman Capital manager shifted his focus to Australia where he believes the country is due for a housing crisis. Pabrai's presentation at the Value Investing Congress West back in May also focused on his checklist. Pabrai will tell you about the checklist, why he created it, and how you can create your own.
However, he seemingly does not tell you what is on his checklist as he must regard it as proprietary. He says the best way to craft an investment checklist is to look at crashes and hone in on others mistakes. By learning from them, you can ensure you don't make the same ones. His checklist is an ongoing process and he's had around 97 questions on the list broken down into categories such as management, ownership, moat, and leverage. While no company can give him the green light by successfully answering all 97 questions, it helps him decide how he should allocate position sizes.
This has led to a change in his portfolio allocations. He was previously more concentrated and now is more diversified. Currently, he is seeing opportunity in Japan and he's building a basket of high quality Japanese stocks. It's interesting to see Bass pound the table on Japan's demise one minute, and the next to see Pabrai recommending the country. For more from this value investor and Warren Buffett emulator, we've highlighted notes from Pabrai's annual meeting as well.
Giving a case study, Kao in particular liked GM convertible bonds. He mentioned he was long the convertible bond and short the stock. Overall, he thinks we're close to a bottom in vehicle sales. The current iteration of the trade would be long GM convertible bonds and then short Ford F.
Recessions cause less vehicles per driver, but it rebounds as economy does. What should it do with its cash? Government has 50M shares. If Obama is re-elected, he may be willing to sell at a loss. Otherwise, they could still do a large open market buyback instead.
This is midcycle, not peak result, so deserves a better multiple. Long Cigna CI : Lots of work. Then you have to understand their non-HMO businesses. Investors don't like HMOs now. Earnings are hard to predict from Q to Q. Obamacare scares investors. Obamacare: capped profits, risk of financial penalties Bull case: Secular growth, high barriers to entry, big players have scale already. Still, ROE has been strong over time. CI is the best performer in the group.
They reprice annually so they always make money. Obamacare is just "a homework problem" that can be analyzed. PBM is a potential high multiple sale GDL segment is consistent source of earnings despite weak employment trends. International is for multinational corporations' employees living overseas. Trades at 7. You can see further comments from Einhorn on Cigna in Greenlight's Q2 letter. Average sector multiple is 22x.
Restaurant business: low barriers to entry, Obamacare brings additional costs since they don't currently provide health care for employees, summer drought affects costs in coming periods. Taco Bell has more locations and cheaper menus. Lots of insider selling as well. CEO said they had an investigation, but only took 23 days. Thinks the stock has further downside. Not long. Future price for CMG?
He says "we don't have to worry about that, we just think risk-reward favors the downside. He says they will sell sooner rather than later, and they are a passive role. Chevy Volt obviously not going well and it's a tiny part of GM's business.


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