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In one of our earliest issues of Value

Investor Insight [May 22, 2005] we

wrote about the challenge investors

face in marrying confidence with humility:

There's no question that confidence in

one's investing abilities is a prerequisite tosuccessful investing. To commit your own

and others' hard-earned capital requires

conviction, and conviction requires confi-

dence. But as with fine scotch or pepper-

oni pizza, too much of a good thing can

cause problems. The market can be unfor-

giving when over-confidence results in too

much trading, sloppy analysis, lack of fol-

low-through and excessive risk-taking.

How difficult it is to walk the line

between sticking to your guns and recogniz-

ing when you may be wrong hit home againfollowing Bill Miller's announcement earli-

er 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 modi-

fied or doesn't seem to be working. A com-

petitive threat comes out of the blue. While

we can certainly attest to the fact that suc-

cessful 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-

ingness to recognize errors in judgment andrespond 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, it’s proba-

bly not the most important weapon against

the potential damage of hubris. More criti-cal is Ben Graham’s 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

I N T H I S I S S U E

What They’re Buying

Last quarter offered many market-tanking types of ideas on which topinvestors pounced, from tech titansto once-proud outcasts. Page 2

Table: Coming Into RangeTable: Biggest New Bets

What They’re Selling

SuperInvestor selling last quarterfocused more on swapping one

idea for a better one than on exit-ing big winners or losers. Page 4Table: Middle Innings?Table: Selling Out

What They Own

Star investors’ attitude toward tech-nology and financials has diverged,but both remain well represented inquarter’s-end portfolios. Page 6

Table: Wisdom of CrowdsTable: Top Holdings

Stock Spotlight: HCA HoldingsAvid SuperInvestor interest lastquarter in this hospital operatorwould indicate they rememberleverage works both ways. Page 8

INSIGHTSuperInvestor

From the Editors of Value Investor Insight

U P F RO NT

SuperInvestor Insight tracks the activityof an elite group of value-orientedhedge-fund managers (plus BerkshireHathaway), based on their holdings as

filed in Forms 13F with the SEC. Whilespecific investors will be highlighted,the focus is on drawing collectiveinsight from this group of 30 of theworld’s best investors, which currentlyincludes William Ackman, LeonCooperman, David Einhorn, GlennGreenberg, John Griffin, Carl Icahn,Seth Klarman, Stephen Mandel,John Paulson, David Tepper, JeffreyUbben and many more.

The SuperInvestors

Confidence Game

December 2, 201

John HeinsCo-Editor-in-Chief

Whitney TilsonCo-Editor-in-Chief

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SuperInvestor Insight 2December 2, 2011 www.superinvestorinsight.com

Lying in WaitStocks 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 market’s swoon took the shares of good company and bad down with it.

The specifics vary widely, but the rea-

sons most value investors give for why a

given stock gets cheap enough for them to

buy usually fall into a few broad cate-

gories: the overall market is tanking, the

relevant sector is cyclically down or out-

of-favor, the company is undergoing sig-

nificant 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 near-

ly 20%, taking the shares of good compa-

ny 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 operat-

ing results continued to impress. It also

helps explain the aggressive buying in

deep-moat credit card company Visa,

whose business Thomas Russo extolledwhile speaking of competitor MasterCard

in the latest Value Investor Insigh

[November 29, 2011]: “[These are] heav

ily branded consumer products that have

extraordinary potential globally due to

the substitution of commerce for subsis

tence, and the migration within commerce

toward payment systems other than cash

This is also a case where I believe the busi-

ness 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 aswell to augment share declines during the

W HAT T H EY ’ RE B U Y I NG

Company Ticker IndustryPrice@12/1/11

Q3 2011 # of New orInc. Positions

% Change In SharesHeld - All FundsLow High

Google GOOG Internet Services 613.77 490.86 627.50 9 45.1%

Apple AAPL Computers/Consumer Electronics 387.93 334.20 422.86 6 16.2%

CVS Caremark CVS Pharmacy Services 38.48 31.30 38.82 6 (-12.3%)

HCA Holdings HCA Hospitals 24.19 17.03 34.92 6 88.6%

News Corp. NWSA Media/Entertainment 17.56 13.38 18.20 6 86.8%

Williams WMB Oil & Gas 32.41 23.46 33.16 6 112.2%

Citigroup C Banking 26.99 23.19 43.06 5 (-9.9%)

Seagate Technology STX Computer Storage Devices 17.40 9.96 17.17 5 (-24.8%)

Visa V Credit Cards 97.76 76.11 94.75 5 445.7%

Wells Fargo WFC Banking 25.64 22.58 29.63 5 0.5%

American Tower AMT Wireless Infrastructure 58.60 46.04 56.21 4 (-6.4%)

Coca-Cola Enterprises CCE Beverage Distribution 25.81 23.97 29.99 4 58.2%

Comcast CMCSA Cable Services 22.57 19.19 26.14 4 (-34.8%)

Express Scripts ESRX Pharmacy Services 46.50 37.06 57.47 4 51.0%

General Motors GM Automobiles 20.96 19.77 32.08 4 76.1%

Home Depot HD Home-Improvement Retail 39.34 28.13 37.25 4 (-48.3%)

Life Technologies LIFE Medical Products 39.17 35.30 52.61 4 15.4%

Sprint Nextel S Wireless Services 2.70 2.95 5.75 4 34.0%

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 quitepopular, as were once-proud outcasts such as News Corp., General Motors and Sprint Nextel.

What They’re Buying:Coming Into Range

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

http://localhost/var/www/apps/conversion/tmp/scratch_2/%C8%94%EF%BF%90http://localhost/var/www/apps/conversion/tmp/scratch_2/%C8%94%EF%BF%90

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quarter. Media giant News Corp. made

the most-bought list for the second quar-

ter in a row – with six investors adding to

positions – as the company's public-rela-

tions nightmare over sleazy and potential-

ly illegal reporting practices in the U.K.

resulted in high-level management depar-

tures and called into question the stew-

ardship 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-subsidyspending 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 let-

ter: “Management is on the verge of los-

ing the confidence of the financial mar-

kets. We believe the business opportunity

and asset values remain sufficient to justi-

fy 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 quarter’s most-bought

list, top-investor interest in the sectorpicked 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

initial offering price of $30 due to genera

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 consen

sus 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 initi

ated an H-P position worth $466 million

The final shared trait: Both companiesunceremoniously dumped their CEOs in

September. We'll assume the investors in

either case were not surprised.

Funds co-managed by Whitney Tilson are long

C, STX and WFC.

SII

W HAT T H EY ’ RE B U Y I NG

Company Ticker Industry Price@12/1/11

Q3 2011 Investor Price Vs.Q3 2011 HighLow High

El Paso EP Oil & Gas 25.04 16.64 21.18 Icahn 18.2%

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%)

Lowe’s 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%)

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

What They’re Buying:Biggest New Bets



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Swap MeetFew 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 wesell when we've been wrong, and some-

times 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 reali-

ty 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 mid-

dle 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

time horizons for value to be realized in

many names likely prompted movemen

into “earlier-inning” stocks as the overal

market fell. Enthusiasm for asset manag

er BlackRock, for example, proved short

lived as five investors sharply reduced

their positions, three of which were sold

out entirely. Already the largest asse

manager in the world with more than

$3.3 trillion in assets, the company wil

struggle to show exciting profit growth as

long as investor fear levels remain high

and if lower-margin passively managedfunds – now more than half of the com-

pany'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

W H AT T H E Y’ R E S E L L IN G


Q3 2011 # of Decreased orClosed Positions

% Change In SharesHeld - All FundsLow High

Apple AAPL Computers/Consumer Electronics 387.93 334.20 422.86 6 16.2%

JPMorgan Chase JPM Banking 30.46 28.53 42.55 6 (-48.9%)

UnitedHealth UNH Health Insurance 48.52 41.27 53.50 6 (-34.1%)

BlackRock BLK Asset Management 167.41 140.22 199.10 5 (-60.3%)


eBay EBAY Online Retail 29.68 26.86 34.99 5 (-5.2%)

SPDR Gold Trust GLD Gold ETF 169.63 143.97 185.85 5 (-35.7%)

Teva Pharmaceutical TEVA Pharmaceuticals 39.74 35.00 49.72 5 (-85.5%)

Aon AON Insurance Brokerage 45.87 39.68 52.17 4 (-16.8%)

Microsoft MSFT Computer Software/Services 25.28 23.79 28.15 4 (-27.9%)

Mosaic MOS Fertilizer 52.77 48.49 74.31 4 (-62.7%)

Pfizer PFE Pharmaceuticals 20.03 16.63 20.95 4 (-86.2%)

Potash POT Fertilizer 43.51 43.06 62.60 4 (-44.7%)

Viacom VIA Media/Entertainment 51.87 47.86 59.45 4 (-45.6%)

WellPoint WLP Health Insurance 70.08 56.61 80.90 4 (-23.4%)

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

What They’re Selling:Middle Innings?




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which they did as well from competitor

Potash. Both companies' shares per-

formed admirably through mid-

September 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 develop-

ing 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 andPfizer. 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 lead-

ing 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 investorschose to take at least some profits in it

last quarter. There are likely plenty of

profits to be had, as GLD's stock chart

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 las

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 Entertainmen

– stand out for another reason: each has

continued to prosper and reach multi

year share-price highs.


C, JPM and MSFT.

SII

W H AT T H E Y’ R E S E L L IN G


Q3 2011Investor

Value @ 6/30($mil)Low High

L-3 Communications LLL Defense 66.01 58.30 88.55 Relational $555.1

Comcast 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

O’Reilly 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

McDonald’s 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

These 15 stocks were the largest positions eliminated by different SuperInvestors last quarter.Paulson’s exit from otherwise popular Comcast most went against the grain. Those on which thetrigger appears to have been pulled too soon: O’Reilly Automotive, Lions Gate and McDonald’s.

What They’re Selling:Selling Out



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Something Bold, Something BlueWhile 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 mar-

ket is more or less flat, Vanguard's

Financials ETF is down 17% while large

money-center banks have fared much

worse – Bank of America’s stock, for

example, is off nearly 60%. While they've

been abandoning B of A and have gener-

ally 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 portfo-

lios slowly mend, and the yield curve that

has pressured net interest margins eventu-

ally 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 quar-

terly investor letter summarizes its thesis

for Citigroup, which was owned by tentop 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 finan-

cial sector, including Citi, has experienced

material share price declines. During this

period, Citi's business performance has

been solid and its valuation has become

more compelling. Citi trades at 60% o

tangible book value, at about eight times

the depressed level of current earnings per

share of its ongoing CitiCorp core busi

ness, and about three times our estimate

of normalized earnings per share, after

giving credit for the value of excess capi

tal, tax, and other assets.” Potential cata

lysts 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 o

W HAT T HE Y OW N



52-Week # of PortfoliosThat Own

Price vs.52-Week HighLow High

Apple AAPL Computers/Consumer Electronics 387.93 310.50 426.70 12 (-9.1%)


Google GOOG Internet Services 613.77 473.02 642.96 10 (-4.5%)

CVS Caremark CVS Pharmacy Services 38.48 31.30 39.50 9 (-2.6%)

eBay EBAY Online Retail 29.68 26.86 35.35 8 (-16.0%)

News Corp. NWSA Media/Entertainment 17.56 13.38 18.35 8 (-4.3%)

Wells Fargo WFC Banking 25.64 22.58 34.25 8 (-25.1%)

Williams WMB Oil & Gas 32.41 21.90 33.47 7 (-3.2%)

BP BP Oil & Gas 42.75 33.62 49.50 6 (-13.6%)

Expedia EXPE Online Travel 28.03 19.61 32.89 6 (-14.8%)

Fidelity National Information FIS Payment Services 24.61 22.53 33.76 6 (-27.1%)

HCA Holdings HCA Hospitals 24.19 17.03 35.37 6 (-31.6%)

JPMorgan Chase JPM Banking 30.46 27.85 48.36 6 (-37.0%)

Life Technologies LIFE Medical Products 39.17 35.30 57.25 6 (-31.6%)

Microsoft MSFT Computer Software/Services 25.28 23.65 29.46 6 (-14.2%)

Qualcomm QCOM Wireless Technology 54.73 45.98 59.84 6 (-8.5%)

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

What They Own:Wisdom of Crowds


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September 30. Scout Capital's Adam

Weiss at the October Value Investing

Congress argued that the market was mis-

pricing 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 cre-

ating 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 compa-

ny Expedia, bank IT-services provider

Fidelity National Information and med-

ical-technology firm Life Technologies

were newcomers to the most-owned list

last quarter. Life Technologies sells con-

sumables and instruments used in aca-

demic, governmental and commercial

medical research. Well regarded for its

strong patent portfolio, diversified prod-

uct lines and recurring revenues – 80% of

sales are in branded consumables – the

company has not been immune to gener-al 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

$50 and $55. Apparently taking a longer

view are six SuperInvestors, three o

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 o

the quarter, Apple – which had not ye

lost its chairman, Steve Jobs – was also

the largest individual holding of three o

them, Lone Pine, Greenlight and Blue

Ridge. Also the biggest holding of more

than one investor at September 30

Motorola Solutions, the spinoff o

Motorola, Inc. that is not being pur-

chased 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 industryfor their activism.


C, JCP, JPM, MSFT and WFC.

SII

W HAT T HE Y OW N


52-Week Investor

Price vs.52-Week HighLow 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%)

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 greatvalue in Motorola Solutions. At the biggest discount to its 52-week high: Life Technologies.

What They Own:Top Holdings



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Walking the TightropeWhile most investors have been focused on avoiding risks in highly leveraged companies, SuperInvestors’ inter-

est 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 hospi-

tal 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 onhigher-margin outpatient services. Its

EBITDA margin, averaging in the mid-

teens 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 neces-sary 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 mid-

September – it was the healthcare stock

that attracted the most SuperInvestor buy-

ing interest. Six such investors sharply

increased their HCA positions, three of

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 consid-

ered to be a pretty dire recession case.”

The stability in HCA's business out

look comes from the nature of hospita

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 mar

kets, and from the positive demographic

tailwind it enjoys from aging population

S T O CK S P O TL I G HT: H C A H O L D IN G S

HCA Holdings(NYSE: HCA)

Business: Largest hospital owner andoperator in the United States, providingroughly 4% of all domestic inpatient carethrough some 270 facilities in 20 states.

Share Information

(@12/1/11):

Price 24.1952-Week Range 17.03 – 35.37Dividend Yield 0.0%Market Cap $10.56 billion

Financials (TTM):

Revenue $31.90 billionOperating Profit Margin 13.1%Net Profit Margin 2.5%

THE BOTTOM LINE

When the market catches a cold today, the leveraged company’s stock is likely tocatch pneumonia. If one believes the general market fears are overblown and that thecompany’s business outlook is relatively stable, the upside in such stocks can be sub-stantial. Witness SuperInvestors’ interest in this hospital operator over the summer.

I N V E S T M E N T S N A P S H O T

HCA PRICE HISTORY

Sources: Company reports, other publicly available information

40

35

30

25

20

15

40

35

30

25

20

152009 2010 2011

Valuation Metrics

(@12/1/11):

HCA S&P 500Trailing P/E 14.6 13.4Forward P/E Est. 7.0 11.7

Largest Institutional Owners

(@9/30/11):

Company % Owned

Bain Capital 20.5%Kohlberg Kravis Roberts 20.0%Glenview Capital 1.8%

Wellington Mgmt 1.7%Bank of America 1.6%

Short Interest (@11/15/11):

Shares Short/Float 0.5%


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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 pro-

tection to the income statement also tem-

pered 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 areup 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 regu-

lation have? The company actually tack-

led the question in a straightforward – if

inconclusive – way in its IPO prospectus:

“We believe the expansion of private-sec-

tor and Medicaid coverage will, over

time, increase our reimbursement relatedto 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 pay-

ments will adversely affect our govern-

ment reimbursement. Because of the

many variables involved, including pend

ing 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 company’s

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 non

committal take on the stock today

“There's risk that the rules continue to bechanged 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 prob

ably also a good entry point to a longer

term investment as well.” SII

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ON LEVERAGE:

It’s worth pointing out that a

levered equity can recover

dramatically if the fears hit-

ting the stock are overblown.

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