Success in China made Yum! Brands, the parent company of Pizza Hut, one hedge fund manager's top pick at this year's Sohn Conference.
Courtesy of Pizza Hut
By Jen Wieczner
May 4, 2015

On stage at Lincoln Center in Manhattan for the 20th annual Sohn Investment Conference, a slate of renowned hedge fund managers from David Einhorn to Bill Ackman had 15 minutes apiece to pitch their best investment ideas.

Following Einhorn’s presentation on why he is shorting Pioneer Natural Resources and other oil frackers, a series of stock pickers discussed their bullish bets.

Here’s a rundown of who’s long on which companies, and why:

Barry Rosenstein, founder and managing partner of Jana Partners: Qualcomm

Extolling the virtues of shareholder activism, Rosenstein described what he called a “before and after picture” of investor influence in the boardroom—using as his examples two companies in which Jana Partners had invested in order to push for improvements to the business. “One is working constructively with shareholders, and I think one will in the future,” Rosenstein said.

The first (the “after” picture) was Walgreens, which had floundered until its recent merger with Swiss pharmacy company Alliance Boots. Jana Partners helped accelerate the closing of that merger, pressing for it to wrap up in late 2014 instead of this year as originally expected, Rosenstein said. Since then, the company has also declared a share repurchase program and other measures at Jana’s behest. (The merged company, Walgreens Boots Alliance(WBA), has seen its stock rise about 10% since the merger was completed, compared with a rise of 3% in the S&P 500.)

The success of that activist campaign has led Rosenstein to bet on Qualcomm(QCOM), which is in a similar situation to the one Walgreens was in before Jana got involved, he said—in other words, Qualcomm is the “before” picture to Jana’s activism. “Like the old Walgreens, Qualcomm is an iconic brand that many recognize has lost its way,” Rosenstein said. Already, the company has announced a share buyback and a cost review “at our urging,” Rosenstein said.

Keith Meister, founder and managing partner of Corvex Management: Yum! Brands

Meister, who worked for Carl Icahn before launching the $8 billion Corvex, explained that he’d recently invested $1.5 billion in Yum! Brands(YUM)—his “second largest investment ever,” Meister said.

The firm owns KFC, Pizza Hut and Taco Bell, and one-third of its business is in China, where those American “iconic brands” are increasingly popular, Meister said. While the China restaurants had suffered a couple of “food scandals” causing Yum’s stock price to stagnate and become “range bound,” Meister said the company is recovering, yet is still undervalued.

In order to unlock more value, Meister is advocating for the company to spin off its China business into a separate company and adopt a franchise structure similar to Yum’s U.S. businesses. Already, 51% of consumers in China name KFC as their favorite place to eat, Meister said, and the new company would benefit as the Chinese middle class expands. “By spinning off China and entering into a franchise agreement, you do what cannot be done—you create your own franchise, run by the same great management that’s been running Yum,” Meister said. “[It] has best-in-class U.S. corporate governance, U.S.-educated China national management, and huge returns on invested capital.”

Leon Cooperman, chairman and CEO of Omega Advisors: Actavis, Citigroup and others

Cooperman, a veteran hedge fund manager known for his winning stock picks, opened his talk with a synopsis of his outlook on the market. Despite investors’ concerns that stocks are overvalued, Cooperman said that he thought the current average price-to-earnings ratio of roughly 17 was “about right,” and that he didn’t see any signs that we were heading for a crash.

“I would observe that bear markets do not emerge out of immaculate conception,” Cooperman said. “If there’s a bubble out there, the bubble is in the fixed income market.”

With an expectation that equities will return 7% to 9% including dividends this year, Cooperman launched into a number of his favorite picks, including pharmaceutical company Actavis(ACT), Citigroup, Dow Chemical, General Motors, Google and Priceline.

A few minutes earlier, a fellow investor had asked Cooperman, whether he was “nervous that Actavis is very heavily owned by hedge fund managers,” but Cooperman said he was very comfortable owning the company. Trading at just 16 times earnings, Cooperman said the company was “selling at a substantial discount.”

Citigroup(C) is also undervalued, given that it’s a “world class franchise selling at nine times earnings” and it’s growing, Cooperman said.

While he didn’t have time to explain all of his positions, Cooperman offered a pick for those who are “contrary in your thinking,” and believe natural gas prices will rise: Gulf Coast Ultra Deep Royalty Trust (GULTU). While it trades at less than $1 per share, Cooperman said the royalty trust capitalizes on one jackpot of a gusher, and it has the capacity to drill 20 more wells on the same site it already controls.

Larry Robbins, founder and portfolio manager of Glenview Capital Management: AbbVie, Brookdale

A healthcare bull who pitched insurance companies Humana and WellPoint at last year’s Sohn conference, Robbins this year suggested pharmaceutical firm AbbVie(ABBV) and elder care company Brookdale Senior Living (BKD).

Though Robbins made the case for each company on its own, he said that the ongoing M&A trend in the healthcare industry could benefit both businesses. Of AbbVie, he said that “we don’t know if they’re going to be the pill that is swallowed” or the acquirer of another company, “but future combinations offer additional optionality.” (Last year, AbbVie walked away from its proposed acquisition of Ireland-based Shire after the U.S. government announced tougher restrictions on tax inversions—a maneuver by which AbbVie had planned to relocate to Ireland after the deal, thereby lowering its tax rate. “We respect the decision the board made,” Robbins said.)

Meanwhile, the consolidation in health care has put additional pressure on companies like AbbVie to operate more efficiently, Robbins said. “They’re feeling it from the Valeants, Actavises, even Pfizer, and activists like [hedge fund] Pershing Square pushing them to think like owners,” he said.

Brookdale Senior Living had already made some strategic acquisitions, Robbins said, and he expected more in the future. “Looking at their menu of choices is like reading a Cheesecake Factory menu—there are so many choices,” Robbins said.

Mala Gaonkar, co-portfolio manager, Lone Pine Capital: Microsoft

Gaonkar presented what she called “one of our most debated ideas at Lone Pine,” the hedge fund founded by Stephen Mandel. That idea: “The value that’s hidden in legacy tech,” she said, citing Microsoft(MSFT) as one example of the stocks she likes in that category.

“Microsoft has been the butt of every tech ad joke during the new millennium,” Gaonkar said, showing a slide picturing one of the classic Mac vs. PC commercials. Still, she said, while Apple has wowed creative types and young people with its trendy technology, the bulk of the business world still runs on Microsoft, relying on Outlook for email and other Microsoft core products.

Besides, “new and far stronger management led by Satya Nadella,” its new chief executive, Microsoft has benefited from the constructive influence of activist hedge fund ValueAct Capital. The company is a “super tanker,” but it is slowly turning itself around, Gaonkar said.

While many investors have abandoned Microsoft and other legacy tech companies for fast-growing cloud software companies, which trade at many times Microsoft’s stock valuation, they’re missing a key point, Goankar said. According to her, legacy tech companies like Microsoft already have 85% of the total spending on cloud software—a market that is quickly growing. While 15% of the cloud market is in the hands of the “usurpers,” or newer tech companies, Microsoft and others already have a significant foothold. “Legacy tech remains misunderstood,” she said.

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