SuperInvestor

December 2, 2011

From the Editors of Value Investor Insight

INSIGHT

UP FRONT

IN THIS ISSUE
What Theyre Buying
Last quarter offered many markettanking types of ideas on which top
investors pounced, from tech titans
to once-proud outcasts.
Page 2
Table: Coming Into Range
Table: Biggest New Bets

Confidence Game

n one of our earliest issues of Value

Investor Insight [May 22, 2005] we
wrote about the challenge investors
face in marrying confidence with humility:

What Theyre Selling

SuperInvestor selling last quarter
focused more on swapping one
idea for a better one than on exiting big winners or losers.
Page 4
Table: Middle Innings?
Table: Selling Out

There's no question that confidence in

one's investing abilities is a prerequisite to
successful investing. To commit your own
and others' hard-earned capital requires
conviction, and conviction requires confidence. But as with fine scotch or pepperoni pizza, too much of a good thing can
cause problems. The market can be unforgiving when over-confidence results in too
much trading, sloppy analysis, lack of follow-through and excessive risk-taking.

How difficult it is to walk the line

between sticking to your guns and recognizing when you may be wrong hit home again
following Bill Miller's announcement earlier this month that he was stepping down as
manager of the Legg Mason Value Trust
mutual fund that made him famous. Much
of the commentary that ensued focused on
Miller's first misreading the depths of the
housing downturn in 2007 and then way
overstaying his welcome with financials in
2008. As Miller himself told The Wall Street
Journal, Our philosophy has always been
to go in and buy the disrupted sector, but it
didn't work the last time.
As were Miller's in 2007 and 2008,
investors' convictions are challenged all the
time. A cycle appears to turn sooner or later
than expected. A restructuring plan is modified or doesn't seem to be working. A competitive threat comes out of the blue. While
we can certainly attest to the fact that successful investors don't lack self-confidence
and strong conviction, we'd also argue that
what often sets them apart is a constant
search for disconfirming evidence and a will-

What They Own

Star investors attitude toward technology and financials has diverged,
but both remain well represented in
Page 6
quarters-end portfolios.
Table: Wisdom of Crowds
Table: Top Holdings
ingness to recognize errors in judgment and
respond accordingly. A typical example:
After buying Yahoo stock in the first quarter
in part because of hidden value it saw in the
company's stake in China's Alibaba Group,
David Einhorn's Greenlight Capital sold its
shares the following quarter when a dispute
arose over the ownership of some of
Alibaba's assets. Explained Einhorn simply:
This wasn't what we signed up for.
While such flexibility is key, its probably not the most important weapon against
the potential damage of hubris. More critical is Ben Grahams concept of investing
with a margin of safety, which he described
as being available for absorbing the effect
of miscalculations or worse than average
luck both of which unfortunately seem
to be in ample supply. SII

John Heins
Co-Editor-in-Chief

Whitney Tilson
Co-Editor-in-Chief

Stock Spotlight: HCA Holdings

Avid SuperInvestor interest last
quarter in this hospital operator
would indicate they remember
leverage works both ways. Page 8

The SuperInvestors
SuperInvestor Insight tracks the activity
of an elite group of value-oriented
hedge-fund managers (plus Berkshire
Hathaway), based on their holdings as
filed in Forms 13F with the SEC. While
specific investors will be highlighted,
the focus is on drawing collective
insight from this group of 30 of the
worlds best investors, which currently
includes William Ackman, Leon
Cooperman, David Einhorn, Glenn
Greenberg, John Griffin, Carl Icahn,
Seth Klarman, Stephen Mandel,
John Paulson, David Tepper, Jeffrey
Ubben and many more.

W H AT T H E Y R E B U Y I N G

Lying in Wait
Stocks get cheap enough for SuperInvestors to buy for a variety of recurring reasons, many of which were well
in evidence in the third quarter as the markets swoon took the shares of good company and bad down with it.
The specifics vary widely, but the reasons most value investors give for why a
given stock gets cheap enough for them to
buy usually fall into a few broad categories: the overall market is tanking, the
relevant sector is cyclically down or outof-favor, the company is undergoing significant change that is misunderstood or
unappreciated, or something bad happens
on the earnings front or otherwise to
shake investor confidence.
This year's third quarter offered up
several market-tanking types of ideas of
which SuperInvestors appear to have

taken advantage (see table below). From

its high for the quarter on July 7th, the
S&P 500 within a month had fallen nearly 20%, taking the shares of good company and bad down with it. This likely
explains why so many top investors
increased their positions or added new
ones in tech titans Google and Apple,
whose stock prices swooned while operating results continued to impress. It also
helps explain the aggressive buying in
deep-moat credit card company Visa,
whose business Thomas Russo extolled
while speaking of competitor MasterCard

What Theyre Buying:

Coming Into Range
Company

Ticker

in the latest Value Investor Insight

[November 29, 2011]: [These are] heavily branded consumer products that have
extraordinary potential globally due to
the substitution of commerce for subsistence, and the migration within commerce
toward payment systems other than cash.
This is also a case where I believe the business is enhanced rather than threatened by
technology, resulting in innovative ways
to pay by credit that will hasten the shift
away from paying by cash.
There was specific negative news as
well to augment share declines during the

Four or more SuperInvestors added to existing positions or established new ones worth at least
$20 million in these stocks last quarter. Technology powerhouses Google and Apple were quite
popular, as were once-proud outcasts such as News Corp., General Motors and Sprint Nextel.

Industry

Q3 2011

Price@
12/1/11

Low

High

# of New or
Inc. Positions

% Change In Shares
Held - All Funds

Google

GOOG

Internet Services

613.77

490.86

627.50

45.1%

Apple

AAPL

Computers/Consumer Electronics

387.93

334.20

422.86

16.2%

CVS Caremark

CVS

Pharmacy Services

38.48

31.30

38.82

(-12.3%)

HCA Holdings

HCA

Hospitals

24.19

17.03

34.92

88.6%

News Corp.

NWSA

Media/Entertainment

17.56

13.38

18.20

86.8%

Williams

WMB

Oil & Gas

32.41

23.46

33.16

112.2%

Citigroup

Banking

26.99

23.19

43.06

(-9.9%)

Computer Storage Devices

17.40

9.96

17.17

(-24.8%)

Credit Cards

97.76

76.11

94.75

445.7%

Seagate Technology
Visa

STX
V

Wells Fargo

WFC

Banking

25.64

22.58

29.63

0.5%

American Tower

AMT

Wireless Infrastructure

58.60

46.04

56.21

(-6.4%)

Coca-Cola Enterprises

CCE

Beverage Distribution

25.81

23.97

29.99

58.2%

Comcast

CMCSA

Cable Services

22.57

19.19

26.14

(-34.8%)

Express Scripts

ESRX

Pharmacy Services

46.50

37.06

57.47

51.0%

General Motors

GM

Automobiles

20.96

19.77

32.08

76.1%

Home Depot

HD

Home-Improvement Retail

39.34

28.13

37.25

(-48.3%)

Life Technologies

LIFE

Medical Products

39.17

35.30

52.61

15.4%

Wireless Services

2.70

2.95

5.75

34.0%

Sprint Nextel

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2011.

December 2, 2011

www.superinvestorinsight.com

SuperInvestor Insight 2

W H AT T H E Y R E B U Y I N G

quarter. Media giant News Corp. made

the most-bought list for the second quarter in a row with six investors adding to
positions as the company's public-relations nightmare over sleazy and potentially illegal reporting practices in the U.K.
resulted in high-level management departures and called into question the stewardship of those who remained. The
impact on the company's business has
been minimal, however, and the stock has
rebounded, trading today at around
$17.60, up 30% from its Q3 low.
The bad news has been more tangible
for wireless service provider Sprint
Nextel, which attracted bottom-fishing
buying interest from four star investors
last quarter. The company reported weak
earnings as a result of phone-subsidy
spending to drive customer acquisition. It
announced higher-than-expected capital
spending needs and then bungled badly
its explanation for how it would pay for
it. Even the announcement that it would
start selling Apple's iPhone was met with

criticism over the profitability of the

effort. David Einhorn of SuperInvestor
Greenlight Capital which upped its
Sprint share stake by one-third in the
quarter offered this critical assessment
of the company in his latest investor letter: Management is on the verge of losing the confidence of the financial markets. We believe the business opportunity
and asset values remain sufficient to justify holding the shares, and we wouldn't be
surprised if shareholders begin to agitate
for significant strategic change. Given the
heavy need to invest, the opportunity may
be better pursued by a new owner with a
lower cost of capital.
While healthcare stocks were absent
from the previous quarters most-bought
list, top-investor interest in the sector
picked up last quarter with active buying
in CVS Caremark, HCA Holdings,
Express Scripts and Life Technologies.
Hospital owner HCA appeared very much
the busted IPO during the quarter, as its
shares fell as much as 40% from a March

What Theyre Buying:

Biggest New Bets
Company

initial offering price of $30 due to general

economic concerns and fears that U.S.
debt discussions would result in even
greater healthcare spending restrictions.
Though off their lows, at a recent $24.20
the shares trade today at only 7x consensus 2012 earnings estimates. (For more on
HCA, see Stock Spotlight, p. 8.)
In addition to Silicon Valley addresses
and less-than-stellar performance, Yahoo
and Hewlett-Packard shared two other
distinctions during the quarter. The first
was that they were among the biggest
new buys by individual SuperInvestors
(see table below), as Third Point LLC
bought Yahoo shares worth $632 million
at quarter's end and Baupost Group initiated an H-P position worth $466 million.
The final shared trait: Both companies
unceremoniously dumped their CEOs in
September. We'll assume the investors in
either case were not surprised. SII
Funds co-managed by Whitney Tilson are long
C, STX and WFC.

These are the 15 largest brand-new positions taken by different SuperInvestors last quarter. Two
investors each made significant wagers on News Corp. and Family Dollar Stores. Those currently
trading the furthest from their Q3 highs: Freeport-McMoRan, Owens-Illinois and Hewlett-Packard.
Q3 2011

Price@
12/1/11

Low

High

Oil & Gas

25.04

16.64

Ticker

Industry

Investor

Price Vs.
Q3 2011 High

21.18

Icahn

18.2%

El Paso

EP

Yahoo

YHOO

Internet Services

16.23

11.09

15.95

Third Point

1.8%

Hewlett-Packard

HPQ

Computer Equipment/Services

28.22

21.50

37.70

Baupost

(-25.1%)

News Corp.

NWSA

Media/Entertainment

17.56

13.38

18.20

Highfields

(-3.5%)

Apple

AAPL

Computers/Consumer Electronics

387.93

334.20

422.86

Viking

(-8.3%)

Lowes

LOW

Home-Improvement Retail

23.87

18.07

24.21

Pershing Square

(-1.4%)

Las Vegas Sands

LVS

Gaming

46.69

36.08

50.49

Lone Pine

(-7.5%)

Marvell Technology

MRVL

Semiconductors

13.86

11.23

15.93

Greenlight

(-13.0%)

News Corp.

NWSA

Media/Entertainment

17.56

13.38

18.20

Paulson

(-3.5%)

Intel

INTC

Semiconductors

24.92

19.16

23.39

Berkshire Hathaway

6.5%

Family Dollar Stores

FDO

Discount Retail

59.06

44.42

55.89

Scout

5.7%

Owens-Illinois

OI

Glass Containers

19.51

15.11

27.07

Farallon

(-27.9%)

Freeport-McMoRan

FCX

Metals/Mining

39.28

30.37

56.78

Relational

(-30.8%)

Family Dollar Stores

FDO

Discount Retail

59.06

44.42

55.89

Pennant

5.7%

Lockheed Martin

LMT

Defense

78.98

66.36

82.23

Karsch

(-4.0%)

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2011.

December 2, 2011

www.superinvestorinsight.com

SuperInvestor Insight 3

W H AT T H E Y R E S E L L I N G

Swap Meet
Few big winners or glaring errors stand out among stocks sold last quarter by SuperInvestors. The more likely
selling rationale: swapping out of middle-innings opportunities and into those closer to the start of the game.
When asked why SuperInvestor Scout
Capital had sold two core holdings
Verisk
Analytics
and
Coca-Cola
Enterprises in this year's first quarter
after he and co-portfolio manager James
Crichton had articulated the detailed bull
cases for each a few months earlier in
Value Investor Insight (December 2,
2010), Adam Weiss offered a clear
description of how Scout thinks about
selling: There is nothing negative we'd
say about either company. Sometimes we
sell when we've been right, sometimes we
sell when we've been wrong, and sometimes we sell because there are four more
things that became more compelling.
That is what happened here. There's a
common expectation that people who do
primary research in the depth we do to

arrive at their own fundamental view of

what value is over a three- to five-year
time horizon should hold the stocks for
that long. That can happen, but the reality is it often doesn't work out that way. I
would stress that we could get back into
either of them at any time, but when we
looked at our portfolio during the first
quarter, we felt we had other, fresher
ideas more in the early innings of the
market's misunderstanding than the middle innings, and we will consistently make
that swap.
This description would appear to
explain the rationale behind many of the
stocks most frequently sold by
SuperInvestors in the third quarter (see
table below). Few big winners or glaring
errors stand out, but the stretching out of

What Theyre Selling:

Middle Innings?

time horizons for value to be realized in

many names likely prompted movement
into earlier-inning stocks as the overall
market fell. Enthusiasm for asset manager BlackRock, for example, proved shortlived as five investors sharply reduced
their positions, three of which were sold
out entirely. Already the largest asset
manager in the world with more than
$3.3 trillion in assets, the company will
struggle to show exciting profit growth as
long as investor fear levels remain high
and if lower-margin passively managed
funds now more than half of the company's assets continue to make up a
higher percentage of the total.
After piling into fertilizer company
Mosaic in the previous quarter, star
investors piled out of it last quarter,

Four or more SuperInvestors reduced or eliminated positions in these stocks during the third
quarter. Selling often came in sector pairs, including fertilizer companies Mosaic and Potash,
managed-care firms UnitedHealth and WellPoint, and pharmaceutical stalwarts Pfizer and Teva.
Q3 2011

Ticker

Industry

Price@
12/1/11

Low

High

Apple

AAPL

Computers/Consumer Electronics

387.93

334.20

422.86

16.2%

JPMorgan Chase

JPM

Banking

30.46

28.53

42.55

(-48.9%)

UnitedHealth

UNH

Health Insurance

48.52

41.27

53.50

(-34.1%)

BlackRock

BLK

Asset Management

167.41

140.22

199.10

(-60.3%)

Citigroup

Banking

26.99

23.19

43.06

(-9.9%)

Company

# of Decreased or % Change In Shares

Closed Positions
Held - All Funds

eBay

EBAY

Online Retail

29.68

26.86

34.99

(-5.2%)

SPDR Gold Trust

GLD

Gold ETF

169.63

143.97

185.85

(-35.7%)

Teva Pharmaceutical

TEVA

Pharmaceuticals

39.74

35.00

49.72

(-85.5%)

Aon

AON

Insurance Brokerage

45.87

39.68

52.17

(-16.8%)

Microsoft

MSFT

Computer Software/Services

25.28

23.79

28.15

(-27.9%)

Mosaic

MOS

Fertilizer

52.77

48.49

74.31

(-62.7%)

Pfizer

PFE

Pharmaceuticals

20.03

16.63

20.95

(-86.2%)

Potash

POT

Fertilizer

43.51

43.06

62.60

(-44.7%)

Viacom

VIA

Media/Entertainment

51.87

47.86

59.45

(-45.6%)

WellPoint

WLP

Health Insurance

70.08

56.61

80.90

(-23.4%)

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2011.

December 2, 2011

www.superinvestorinsight.com

SuperInvestor Insight 4

W H AT T H E Y R E S E L L I N G

which they did as well from competitor

Potash. Both companies' shares performed
admirably
through
midSeptember when as highly cyclical
stocks often do they fell even more
sharply than the tanking market due to
global macroeconomic fears rather than
any company-specific news. With the
long-term demand case for fertilizer
intact due to declining global arable
land per person coupled with a growing
appetite and ability to pay in the developing world for more and better food it
wouldn't be a surprise to see either stock
back in the good graces of top investors
when they turn more offensively minded.
The most aggressive selling during the
quarter was reserved for pharmaceutical
companies Teva Pharmaceutical and
Pfizer. Teva has successfully expanded
through acquisition and R&D from its
traditional generic-drug roots to also

owning a lucrative global portfolio of

branded pharmaceuticals, including leading multiple sclerosis drug Copaxone. Its
shares have performed poorly over the
past year, however, burdened by weak
U.S. generic sales, concerns over generic
competition for Copaxone and setbacks
in both its generic and innovative drug
pipelines. While such ups and downs are
relatively common for a company like
Teva, four of the five SuperInvestors
holding it at the beginning of the quarter
chose not to ride this latest wave and sold
their positions entirely.
One clear big winner that has finally
come in for frequent selling among star
investors: SPDR Gold Trust. The gold
ETF has been a long-time favorite of the
smart-money crowd, but five investors
chose to take at least some profits in it
last quarter. There are likely plenty of
profits to be had, as GLD's stock chart

L-3 Communications

Ticker

Industry

Price@
12/1/11

Q3 2011
Low

High

Investor

Value @ 6/30
($mil)

Defense

66.01

58.30

88.55

Relational

$555.1

CMCSA

Cable Services

22.57

19.19

26.14

Paulson

$514.4

Pfizer

PFE

Pharmaceuticals

20.03

16.63

20.95

Greenlight

$483.2

JPMorgan Chase

JPM

Banking

30.46

28.53

42.55

Viking

$390.5

OReilly Automotive

ORLY

Automotive Parts/Supply

77.70

56.25

72.00

Lone Pine

$364.5

Microsoft

MSFT

Computer Software/Services

25.28

23.79

28.15

Ivory

$302.8

Pfizer

PFE

Pharmaceuticals

20.03

16.63

20.95

Appaloosa

$298.6

Citrix Systems

CTXS

Computer Software/Services

71.35

50.21

84.00

Blue Ridge

$245.2

Lions Gate Entertainment

LGF

Media/Entertainment

8.42

6.17

7.58

Icahn

$236.4

Aetna

AET

Health Insurance

41.68

34.50

45.39

Glenview

$231.2

Marathon Oil

MRO

Oil & Gas

27.72

21.58

34.97

Karsch

$210.6

McDonalds

MCD

Fast-Food Restaurants

95.50

82.01

91.22

Scout

$194.8

Charles River Labs

CRL

Medical Services/Supplies

28.46

27.76

42.20

Jana

$167.0

Teva Pharmaceutical

TEVA

Pharmaceuticals

39.74

35.00

49.72

Omega

$162.1

Alere

ALR

Medical Diagnostics

23.60

19.62

38.53

ValueAct

$156.0

Comcast

LLL

Funds co-managed by Whitney Tilson are long

C, JPM and MSFT.

These 15 stocks were the largest positions eliminated by different SuperInvestors last quarter.
Paulsons exit from otherwise popular Comcast most went against the grain. Those on which the
trigger appears to have been pulled too soon: OReilly Automotive, Lions Gate and McDonalds.

What Theyre Selling:

Selling Out
Company

has risen upward in almost uninterrupted

fashion since its launch in November
2004, rising an average annualized 21%
since then.
Among the largest individual sales last
quarter (see table below), Paulson &
Co.'s exit from its large Comcast stake
stands out for going against the grain.
Paulson was the only seller of the cable
services giant, while five other top
investors increased their stakes.
In the turbulent market since the end
of the third quarter, three other large sales
Scout's sale of McDonald's, Lone Pine's
exit from O'Reilly Automotive and
Icahn's sale of Lions Gate Entertainment
stand out for another reason: each has
continued to prosper and reach multiyear share-price highs. SII

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2011.

December 2, 2011

www.superinvestorinsight.com

SuperInvestor Insight 5

W H AT T H E Y O W N

Something Bold, Something Blue

While SuperInvestors generally have been actively buying technology and actively selling financials so far this
year, both sectors are well represented among the most widely held stocks at the end of the third quarter.
Holding the shares of banks and other
financial institutions has certainly been
no picnic in 2011. While the overall market is more or less flat, Vanguard's
Financials ETF is down 17% while large
money-center banks have fared much
worse Bank of Americas stock, for
example, is off nearly 60%. While they've
been abandoning B of A and have generally been far more likely to sell financials
than buy them this year, SuperInvestors
did remain large holders of giant bank
holding companies such as Citigroup,
Wells Fargo and JPMorgan Chase at the
end of the third quarter (see table below).
Gardner Russo & Gardner's Thomas
Russo described the investment case for
Wells Fargo in the latest issue of Value
Investor Insight (November 29, 2011) as

a bet on far higher earnings power in the

next couple of years as integration
expenses from its Wachovia acquisition
go away, troubled real estate loan portfolios slowly mend, and the yield curve that
has pressured net interest margins eventually turns more normal. At a recent
$25.65, Wells' shares trade at only
around 6x the $4-plus per share Russo
believes the company can earn in 2014.
Pershing Square Capital's latest quarterly investor letter summarizes its thesis
for Citigroup, which was owned by ten
top investors at quarter's end: As the
macro environment has weakened and
worries over the fiscal situation in Europe
have increased, the entire large-cap financial sector, including Citi, has experienced
material share price declines. During this

Six or more SuperInvestors held stakes in these companies as of the end of 2011s third quarter.
Banks Citigroup, Wells Fargo and JPMorgan Chase are proving to be particular dead weights on
portfolios. Newcomers to the list: BP, Expedia, Fidelity National Information and Life Technologies.

What They Own:

Wisdom of Crowds
Company
Apple
Citigroup
Google

period, Citi's business performance has

been solid and its valuation has become
more compelling. Citi trades at 60% of
tangible book value, at about eight times
the depressed level of current earnings per
share of its ongoing CitiCorp core business, and about three times our estimate
of normalized earnings per share, after
giving credit for the value of excess capital, tax, and other assets. Potential catalysts to the upside, the letter goes on to
say, include progress toward a resolution
of the European debt crisis and Citi's
on-track efforts to increasingly return
capital to shareholders starting next year.
While energy has not attracted avid
top-investor buying interest in recent
quarters, both Williams and BP were
among the most widely held stocks as of

Ticker

Industry

Price@
12/1/11

Low

52-Week
High

AAPL

Computers/Consumer Electronics

387.93

310.50

Banking

26.99

Internet Services

C
GOOG

# of Portfolios
That Own

Price vs.
52-Week High

426.70

12

(-9.1%)

21.40

51.50

10

(-47.6%)

613.77

473.02

642.96

10

(-4.5%)

CVS Caremark

CVS

Pharmacy Services

38.48

31.30

39.50

(-2.6%)

eBay

EBAY

Online Retail

29.68

26.86

35.35

(-16.0%)

News Corp.

NWSA

Media/Entertainment

17.56

13.38

18.35

(-4.3%)

Wells Fargo

WFC

Banking

25.64

22.58

34.25

(-25.1%)

Williams

WMB

Oil & Gas

32.41

21.90

33.47

(-3.2%)

BP

Oil & Gas

42.75

33.62

49.50

(-13.6%)

Online Travel

28.03

19.61

32.89

(-14.8%)

BP
Expedia

EXPE

Fidelity National Information

FIS

Payment Services

24.61

22.53

33.76

(-27.1%)

HCA Holdings

HCA

Hospitals

24.19

17.03

35.37

(-31.6%)

JPMorgan Chase

JPM

Banking

30.46

27.85

48.36

(-37.0%)

Life Technologies

LIFE

Medical Products

39.17

35.30

57.25

(-31.6%)

Microsoft

MSFT

Computer Software/Services

25.28

23.65

29.46

(-14.2%)

Qualcomm

QCOM

Wireless Technology

54.73

45.98

59.84

(-8.5%)

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2011.

December 2, 2011

www.superinvestorinsight.com

SuperInvestor Insight 6

W H AT T H E Y O W N

September 30. Scout Capital's Adam

Weiss at the October Value Investing
Congress argued that the market was mispricing Williams component natural gas
pipeline, midstream and exploration and
production businesses, in part due to
uncertainty around the spinoff of its E&P
business now planned for December 31.
The stock at a recent $32.40 is up 33%
since the end of the quarter, compared
with Scout's October base-case estimate
of $37 and its upside case of $47-50.
Still facing large and uncertain costs
from its Gulf of Mexico spill, BP has been
active in managing its portfolio of oil and
gas assets, targeting a total of $30 billion
in asset sales by year end and another $15
billion next year. The company generates
significant cash flow, but one key area of
uncertainty is its ability to increase global
production and reserves, especially in
light of partnership squabbles in Russia,
which accounts for 25% of the firm's

annual production. Six top investors

appear to believe such uncertainty is creating opportunity in the shares notably,
Baupost Group nearly tripled its BP stake
last quarter, making it the firm's largest
equity position (see table below).
In addition to BP, online travel company Expedia, bank IT-services provider
Fidelity National Information and medical-technology firm Life Technologies
were newcomers to the most-owned list
last quarter. Life Technologies sells consumables and instruments used in academic, governmental and commercial
medical research. Well regarded for its
strong patent portfolio, diversified product lines and recurring revenues 80% of
sales are in branded consumables the
company has not been immune to general economic worries and fears of industry
price pressures, which since August have
helped send the share price below $40
after it spent much of the year between

Funds co-managed by Whitney Tilson are long

C, JCP, JPM, MSFT and WFC.

These are the 15 largest holdings of different individual SuperInvestors as of the end of third quarter.
Three investors made Apple their top holding, while two activists ValueAct and Icahn see great
value in Motorola Solutions. At the biggest discount to its 52-week high: Life Technologies.

What They Own:

Top Holdings
Company

$50 and $55. Apparently taking a longer

view are six SuperInvestors, three of
whom established brand-new positions in
the stock last quarter.
In addition to it being the most-owned
stock among star investors at the end of
the quarter, Apple which had not yet
lost its chairman, Steve Jobs was also
the largest individual holding of three of
them, Lone Pine, Greenlight and Blue
Ridge. Also the biggest holding of more
than one investor at September 30:
Motorola Solutions, the spinoff of
Motorola, Inc. that is not being purchased by Google (that would be
Motorola Mobility). For what it's worth,
while both investors Icahn and
ValueAct have been relatively quiet to
date, both are well-known in the industry
for their activism. SII

Ticker

Industry

52-Week

Price@
12/1/11

Low

High

Investor

Price vs.
52-Week High

Coca-Cola

KO

Beverages

66.83

61.29

71.77

Berkshire Hathaway

(-6.9%)

SPDR Gold Trust

GLD

Gold ETF

169.63

127.80

185.85

Paulson

(-8.7%)

AutoZone

AZO

Automotive Parts/Supply

335.30

246.26

341.89

Lampert

(-1.9%)

Motorola Solutions

MSI

Communications Devices

46.41

32.15

47.91

Icahn

(-3.1%)

J.C. Penney

JCP

Department Stores

32.22

23.44

41.00

Pershing Square

(-21.4%)

Motorola Solutions

MSI

Communications Devices

46.41

32.15

47.91

ValueAct

(-3.1%)

Apple

AAPL

Computers/Consumer Electronics

387.93

310.50

426.70

Lone Pine

(-9.1%)

Yahoo

YHOO

Internet Services

16.23

11.09

18.84

Third Point

(-13.9%)

U.S. Bancorp

USB

Banking

25.70

20.10

28.94

Viking

(-11.2%)

SLM Corp.

SLM

Student Lending

12.72

10.91

17.11

Highfields

(-25.7%)

Life Technologies

LIFE

Medical Products

39.17

35.30

57.25

Glenview

(-31.6%)

Apple

AAPL

Computers/Consumer Electronics

387.93

310.50

426.70

Greenlight

(-9.1%)

BP

BP

Oil & Gas

42.75

33.62

49.50

Baupost

(-13.6%)

CVS Caremark

CVS

Pharmacy Services

38.48

31.30

39.50

Relational

(-2.6%)

Apple

AAPL

Computers/Consumer Electronics

387.93

310.50

426.70

Blue Ridge

(-9.1%)

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2011.

December 2, 2011

www.superinvestorinsight.com

SuperInvestor Insight 7

S T O C K S P O T L I G H T: H C A H O L D I N G S

Walking the Tightrope

While most investors have been focused on avoiding risks in highly leveraged companies, SuperInvestors interest in hospital operator HCA Holdings last quarter would indicate they remember leverage can work both ways.
When asked about lessons learned
from 2008's financial crisis, most
investors report having had reiterated to
them the dangers of debt leverage, the
analysis of which is now top-of-mind and
the tolerance for which is currently quite
low. So it comes as a surprise that among
the companies most actively bought by
SuperInvestors in the third quarter was
HCA Holdings, the largest private hospital owner and operator in the U.S.
Having been taken private in 2006 in a
$33 billion LBO by investors including
Bain Capital, KKR and the founding Frist
family, HCA returned to public markets
in March with an IPO priced at $30. The
company is widely regarded as the class
of the hospital-management industry
maybe not the most ringing accolade
given that three-quarters of the industry
remains in the hands of non-profits and
it had improved its performance while
private through cost cutting, the sale of
under-performing assets and a focus on
higher-margin outpatient services. Its
EBITDA margin, averaging in the midteens prior to the LBO, hit 19% in 2010.
Debt, however, remains an issue. Even
after raising equity capital in the IPO,
HCA has a negative book value and a
debt/capital ratio of only 1.3x, says
Morningstar analyst Michael Waterhouse.
Given that one-third of adjusted annual
EBITDA goes toward the company's $2
billion annual interest expense tab and
that the remainder narrowly covers necessary capital spending, he says, We think
HCA is walking a bit of a tightrope.
But when HCA shares got slammed
over the summer due to general economic
fears and increased Washington rhetoric
about healthcare-spending cutbacks the
stock fell 50% from late July to midSeptember it was the healthcare stock
that attracted the most SuperInvestor buying interest. Six such investors sharply
increased their HCA positions, three of
December 2, 2011

which were brand new. The impetus,

explains the portfolio manager of one of
the new buyers (who asked not to be
quoted by name): We were basically
looking among the healthcare wreckage to
see what good was being thrown out with
the bad, and HCA stood out for how
cheap it was relative to what we considered to be a pretty dire recession case.

The stability in HCA's business outlook comes from the nature of hospital
patient demand, which isn't significantly
influenced by economic ups and downs,
from scale cost advantages the company
uses to defend the 20-30% market shares
it typically has in its mostly urban markets, and from the positive demographic
tailwind it enjoys from aging populations

INVESTMENT SNAPSHOT

HCA Holdings
(NYSE: HCA)

Valuation Metrics

Business: Largest hospital owner and

operator in the United States, providing
roughly 4% of all domestic inpatient care
through some 270 facilities in 20 states.

(@12/1/11):

Share Information

Largest Institutional Owners

(@12/1/11):

Price

17.03 35.37
0.0%
$10.56 billion

Financials (TTM):

Revenue
Operating Profit Margin
Net Profit Margin

HCA
14.6
7.0

S&P 500
13.4
11.7

(@9/30/11):

24.19

52-Week Range
Dividend Yield
Market Cap

Trailing P/E
Forward P/E Est.

$31.90 billion
13.1%
2.5%

Company

% Owned

Bain Capital
Kohlberg Kravis Roberts
Glenview Capital
Wellington Mgmt
Bank of America

20.5%
20.0%
1.8%
1.7%
1.6%

Short Interest (@11/15/11):

Shares Short/Float

0.5%

HCA PRICE HISTORY

40

40

35

35

30

30

25

25

20

20
15

15
2009

2010

2011

THE BOTTOM LINE

When the market catches a cold today, the leveraged companys stock is likely to
catch pneumonia. If one believes the general market fears are overblown and that the
companys business outlook is relatively stable, the upside in such stocks can be substantial. Witness SuperInvestors interest in this hospital operator over the summer.
Sources: Company reports, other publicly available information

www.superinvestorinsight.com

SuperInvestor Insight 8

S T O C K S P O T L I G H T: H C A H O L D I N G S

in the largely southern states primarily

Florida and Texas in which it operates.
The SuperInvestor fund manager says his
firm's recession-case earnings estimate for
HCA is around $3 per share, so he was
able to buy the stock during the third
quarter at just over 6x earnings.
The same stability that provides protection to the income statement also tempered his concerns about the balance
sheet. Hospitals can bear a fair amount
of leverage, so that was not troubling, he
says. It's also worth pointing out that a
levered equity can recover dramatically if
the fears hitting the stock prove to be
overblown. When the market recovers
10%, the stock can recover 30-40%.
That's essentially what has happened so
far. At a recent $24.20, HCA shares are
up more than 40% from their September
low, during a period in which the market
is up 6%.
The longer-term prognosis for the
stock which still only trades at 7x Wall
Street's consensus 2012 earnings estimate
largely rests on one of the tougher ana-

lytical challenges in the market today:

what impact will future healthcare regulation have? The company actually tackled the question in a straightforward if
inconclusive way in its IPO prospectus:

ON LEVERAGE:

Its worth pointing out that a

levered equity can recover
dramatically if the fears hitting the stock are overblown.
We believe the expansion of private-sector and Medicaid coverage will, over
time, increase our reimbursement related
to providing services to individuals who
were previously uninsured. On the other
hand, the reductions in the growth in
Medicare payments and the decreases in
Disproportionate Share Hospital payments will adversely affect our government reimbursement. Because of the

many variables involved, including pending court challenges, the potential for
changes to the law as a result and efforts
to amend or repeal the law, we are unable
to predict the net impact of the Health
Reform Law on us.
Another wildcard is the companys
ability to restart the acquisition engine
that has fueled its long-term growth. The
hospital industry is expected to continue
to consolidate as a tougher environment
sends struggling non-profits into the
hands of more adept operators like HCA.
This could provide the company with
excellent opportunity for accretive
growth if it can afford it.
Our SuperInvestor's somewhat noncommittal take on the stock today:
There's risk that the rules continue to be
changed in ways that hurt HCA, but the
question is whether we believe the stock is
still oversold relative to that exposure.
We bought a good company at a good
price. It's been a nice trade, but was probably also a good entry point to a longerterm investment as well. SII

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