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SuperInvestorINSIGHT

From the Editors of Value Investor Insight

Sizing Up

There’s a sound argument to be made

that stocks of smaller companies

are more likely to be mispriced,

a result of their being less followed, less

transparent and less actively traded than

their larger brethren. As noted small-cap

expert Carlo Cannell of Cannell Capital

put it in Value Investor Insight : “It’s just

not in the best interest of the vast major-

ity of the investing ecosphere to spend 10

minutes on the companies we spend our

lives looking at.”

While the theoretical appeal may be

there, SuperInvestors find investing in

small-cap stocks difficult in practice.

Competence attracts assets, and it’s hard

to make the math work for small caps

when you’re managing billions of dollars.

Most of the investors we track manage

much more than this, but say you have$5 billion under management and have

set your minimum position size at 2%.

To buy into even a $1 billion market-cap

company you’d need to take a 10% stake

in it, a level likely to limit your flexibility

in both buying and selling. It’s not impos-

sible to manage, but most star investors

don’t consider it worth the trouble.

To put some numbers behind that con-

tention, we looked at all the stocks in

which at least four SuperInvestors owned

a stake at the end of the third quarter.There were 62 such holdings in all and

they sported a mean $66 billion mar-

ket cap, with the median at $34 billion.

In comparison, companies in the Russell

2000 Index – the benchmark for many

small-cap funds – according to the most

recent tally on Russell’s website have a

weighted average market cap of around

$1.7 billion, with a median of nearly $715

million.

In a year in which small-cap stocks are

significantly underperforming large-cap

ones, what types of smaller companies are

currently attracting collective top-investorattention? The smallest companies held

are a varied lot, led – with sub-$3 billion

market caps – by engineering and con-

struction firm KBR, Inc. and mortgage-

servicer Ocwen Financial, both of which

have been dismal performers this year.

Rounding out the “bottom” 10 (all with

$10 billion or less in cap size), in which

multiple top investors appear to see big

things in small packages: solar leader

SunEdison, real-estate broker Realogy,

control and sensor maker Sensata Tech-

nologies, chemicals producer Ashland,

discount retailer Family Dollar, real-estate

services firm Fidelity National Financial,

plane lessor AerCap [see Stock Spotlight,

p. 8] and fashion house PVH.

I N T H I S I S S U E

What They’re Buying

SuperInvestors retained their highinterest in healthcare-related stockslast quarter, while also taking ashine to Alibaba’s IPO. Page 2

Table: In PlayTable: Biggest New Bets

What They’re SellingTop investors are willing to make aquick trade. Two Q3 examples with

likely different motivations: RalphLauren and SeaWorld. Page 4

Table: Diminishing ReturnsTable: Selling Out

What They Own

All firms obviously face threats, butthere’s a solidity and predictabilityunderlying most common Super-Investor favorites. Page 6

Table: Solid GroundTable: Doubling Down

Stock Spotlight: AerCap

Are macroeconomic fears undulymasking the unique competitivestrengths of this new “800-poundgorilla” in its industry? Page 8

The SuperInvestors

SuperInvestor Insight tracks the activityof an elite group of value-orientedhedge-fund managers (plus BerkshireHathaway), based on their holdings asfiled in Forms 13F with the SEC. While

specific 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, Daniel Loeb, StephenMandel, John Paulson, David Tep-per, Jeffrey Ubben and many more.

U P F R O N T

John HeinsCo-Founder andEditor-in-Chief

Whitney TilsonCo-Founder

December 2, 2014

SII

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December 2, 2014 www.superinvestorinsight.com SuperInvestor Insight 2

Based on the buying activity of the 30

top investment firms we track quarterly

in our sister publication SuperInvestor

Insight , the fertile and unpredictable deal

environment around global pharmaceuti-

cals has been top of mind. Multiple star

investors increased their stakes last quar-

ter both in putative buyers, AbbVie and

Valeant Pharmaceuticals, and also in their

respective prey, Shire and Allergan [see ta-

ble below]. While neither deal happened,

seven SuperInvestors also showed appar-

ent foresight in establishing new positionsor adding to existing ones in Actavis,

which actually ended up agreeing in mid-

November to buy Allergan. All clear?

While it’s not entirely clear why the

market would cheer both winners and

losers alike in this M&A game, the share

prices of unfulfilled suitors Valeant and

AbbVie have marched nicely upward of

late, as have the shares of Actavis. For-

merly a generic-drug maker called Watson

Pharmaceuticals, Actavis has expanded

dramatically through acquisition over the

past two years. After the Allergan deal

closes, it will be a top-10 global pharma-

ceutical company with a market capital-

ization roughly 12x what it was before it

embarked on its acquisition spree.

From a share-price perspective, the oddman out thus far has been Shire. Since

U.S.-based AbbVie backed away from

its original buyout offer after concluding

it wouldn’t reap expected tax benefits,

Shire’s ADRs have fallen to a recent $213,

off 20% from their September highs. They

still trade 20% above where they did be-

fore the original buyout rumors, however

as Shire remains entrenched on analysts

lists of prospective takeover candidates.

Shares of Chinese e-commerce jug

gernaut Alibaba were the most actively

bought by top investors last quarter, with

10 of them establishing new positions at

or right after the company’s late-Septem

ber IPO. Initially priced at $68 per share

the shares rose nearly 40% on their firs

day of trading and have yet to look backclosing recently at around $106. While

the company has less than one-eighth

the annual revenue of Amazon.com – no

shrinking violet when it comes to valua

tion – its more than $270 billion marke

What’s the Deal?Deal-related activity – from M&A to spinoffs – regularly attracts smart investors, looking to capitalize when

upheaval and uncertainty results in share mispricing. Such certainly appears to have been the case last quarter.

W H A T T H E Y ’ R E B U Y I N G

What They’re Buying:In Play

Four or more SuperInvestors added to existing positions or established new ones in these stocksduring the third quarter. Healthcare-related stocks were in particular demand, as were an acquirerand an acquiree in the dollar-store industry. The biggest disappointment so far: drug maker Shire.

Company Ticker IndustryPrice@12/1/14

Q3 2014 # of Increasedor New Positions

% Change In SharesHeld – All FundsLow High

Alibaba BABA Internet Services 105.99 86.62 99.70 10 All new positions

Actavis ACT Pharmaceuticals 263.07 201.91 249.94 7 33.6%

eBay EBAY Online Retail 54.87 49.74 57.30 7 65.6%

Allergan AGN Pharmaceuticals/Medical Devices 210.65 151.11 181.94 6 8.7%

Valeant Pharmaceuticals VRX Pharmaceuticals 145.81 106.00 131.87 6 1.5%

AbbVie ABBV Pharmaceuticals 69.11 51.37 60.02 5 922.3%

Dollar General DG Discount Retail 66.32 53.78 65.10 5 20.9%

Hertz HTZ Car/Equipment Rental 23.36 24.66 31.61 5 96.5%

Humana HUM Health Insurance 139.08 115.51 135.86 5 22.8%

Liberty Global LBTYA Cable Services 50.54 41.14 45.12 5 (-4.6%)

AerCap Holdings AER Aircraft Leasing 43.40 40.68 50.02 4 58.4%

Covidien COV Medical Equipment 100.99 81.93 92.15 4 117.2%

Dollar Tree DLTR Discount Retail 67.94 53.17 59.84 4 466.4%

Shire SHPG Pharmaceuticals 213.00 222.50 264.98 4 204.2%

Time Warner TWX Media/Entertainment 83.96 68.80 88.13 4 6.7%

Walgreen WAG Drugstores 67.77 57.75 74.37 4 (-8.5%)

Sources: Forms 13F filed with the Securities and Exchange Commission for holdings as of September 30, 2014.

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value is 80% higher than Amazon’s. In an

indication that SuperInvestors’ time hori-

zons here may not be long, one manager

we contacted had this to say: “Everyone

wanted Alibaba if they were lucky enough

to get it on the underwriting. The bigger

question is who still owns it?”At another end of the hype spectrum,

embattled car-rental company Hertz also

attracted top-investor interest last quarter.

News from the company since August has

been uniformly bleak. It withdrew full-

year performance guidance, citing “op-

erational challenges” and heavy costs as-

sociated with an accounting review that it

expects to result in a revision of results go-

ing back to 2011. It said it might have to

delay the spinoff of its equipment-rental

business beyond next year’s first quarter.It pushed out CEO Mark Frissora prior

to having a replacement. Between mid-

August and mid-October, the shares lost

one-third of their value.

Not long ago, Hertz was being lauded

for enhancing and then capitalizing on its

leading position in a consolidating global

car-rental market. While the narrative has

clearly changed for the time being, the five

top investors who upped their stakes in

the company last quarter appear to be bet-

ting that isn’t a permanent state of affairs.

Four SuperInvestors increased theirholdings last quarter in AerCap Holdings,

another global leader in a consolidating

industry. The company closed in May on

the purchase of AIG’s International Lease

Finance unit, making it the industry’s

second-largest player behind GE Capital

Aviation Services. After a charmed run,

AerCap’s stock hit turbulence starting in

August as slower economic growth in Asia

and resulting order cancellations at plane

maker Airbus raised concerns that new-

jet demand was slowing. AerCap hasn’tpulled back on the growth throttle, adding

to its fleet in the expectation that airlines

will continue a shift from owning to leas-

ing planes in order to take advantage of

new-plane technology and fuel efficiency.

The market appears less optimistic – at

just over $43, AerCap shares trade at 8.5x

consensus 2015 earnings estimates.

While banks haven’t been high on top

investors’ buy lists of late, the biggest in

dividual new bets in the quarter [see table

below] included Brave Warrior’s purchase

of JPMorgan Chase and Greenlight Capital’s buy of Citizens Financial. Citizens

went public at $21.50 per share on Sep

tember 24, the first step in parent Roya

Bank of Scotland’s planned exit from its

U.S. subsidiary. Citing a need to “decou-

ple from RBS’s agenda,” CEO Bruce Van

Saun plans to expand Citizens’ efforts in

mortgage banking, business banking and

wealth management. The stock is up 12%

from the initial offering and currently

trades at a roughly 15% premium to tan-

gible book value.While a rising tide has tended to lift al

boats, a notable few of the big new buys

have yet to gain much traction. Shares

of Hertz, pipeline operator Enbridge and

broadcaster CBS all still trade around

their lows of the third quarter. SII

W H A T T H E Y ’ R E B U Y I N G


Q3 2014

InvestorPrice vs.

Q3 2014 HighLow High

Alibaba BABA Internet Services 105.99 86.62 99.70 Viking 6.3%

Hertz HTZ Car/Equipment Rental 23.36 24.66 31.61 Icahn (-26.1%)

AbbVie ABBV Pharmaceuticals 69.11 51.37 60.02 Paulson 15.1%

Facebook FB Internet Services 75.10 62.21 79.71 Lone Pine (-5.8%)

Alibaba BABA Internet Services 105.99 86.62 99.70 Third Point 6.3%

Dollar General DG Discount Retail 66.32 53.78 65.10 JANA 1.9%

Agrium AGU Fertilizer 96.14 88.08 95.10 ValueAct 1.1%

Actavis ACT Pharmaceuticals 263.07 201.91 249.94 Glenview 5.3%

Yahoo YHOO Internet Services 50.10 32.93 44.01 Starboard 13.8%

Enbridge ENB Energy Distribution 45.85 46.79 51.95 Highfields (-11.7%)

CBS Corp. CBS Media/Entertainment 54.47 53.49 65.24 Maverick (-16.5%)

Covidien COV Medical Equipment 100.99 81.93 92.15 Abrams 9.6%

JPMorgan Chase JPM Banking 60.00 54.96 61.85 Brave Warrior (-3.0%)

Zoetis ZTS Animal Health 44.37 31.67 37.31 Pershing Square 18.9%

Citizens Financial CFG Banking 23.98 21.35 23.57 Greenlight 1.7%


What They’re Buying:Biggest New Bets

These are the 15 largest brand-new positions taken by different SuperInvestors last quarter. Twoinvestors made newly public Alibaba their top new choice. While banks have not collectively beenin high demand, two made the quarter’s big-new-bet list: JPMorgan Chase and Citizens Financial.

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lic markets in April of last year at an IPO

price of $27, the shares recently closed at

less than $17.

Ralph Lauren shares also moved from

the most-bought list to the most-sold list

last quarter [see table on previous page],

but likely for different reasons. Unlikemany of its peers, the upscale fashion and

accessories company has been a solid per-

former for decades, expanding its various

lines without diluting its brand image or

materially cannibalizing sales. The stock

fell below $150 in May, in part due to the

announcement that Roger Farah, a long-

time lieutenant to founder Ralph Lauren,

was retiring. The stock rebounded, but

four top investors who had added to ex-

isting stakes in the prior quarter reversed

course and sold shares last quarter, withthree selling out entirely. The stock has

continued its upward march, and at a re-

cent $181 trades near its all-time high.

Collective top-investor selling last

quarter in Apple and satellite-TV compa-

ny Dish Network has so far proven poorly

timed. Apple shares, riding the successful

launch of the iPhone 6, are up 11% from

their third-quarter high, while Dish shares

have increased 14% from their top price

of the quarter. Dish is at a strategic disad-

vantage to cable and telecom competitors

that can bundle their services with Internetaccess and phone service, a disadvantage

that grows as consumers increasingly ac-

cess content over the Internet. But compa-

ny founder Charles Ergen has been savvy

in acquiring wireless spectrum that, based

on results of recent government spectrum

auctions, appears to have higher-than-

expected asset value. How Ergen realizes

that value is still an open question, but the

market has pushed Dish’s shares back to

levels not seen since the telecom bubble in

anticipation of his figuring it out.While SuperInvestors avidly bought

Alibaba last quarter, they collectively sold

shares in Chinese Internet search pioneer

Baidu, with five investors reducing or

exiting their stakes. As Google has suc-

cessfully done in the U.S., Baidu has been

spending heavily to expand its advertising

prowess and content offer on mobile de-

vices. Results so far have been excellent

with revenue increasing more than 50%

in the company’s latest quarter. At a recen

$237, the shares trade at 26x consensus

2015 earnings estimates.There’s disagreement among the bes

investors over big individual bets. For

example, while Lone Pine Capital made

Twenty-First Century Fox the largest com

plete sale in the quarter [see table below]

ValueAct Capital was doubling down on

its stake in the TV and movie producer

building a position valued at around $1

billion as of September 30. Similarly, Far-

allon Capital sold its entire large stake in

Yahoo last quarter, while Starboard Value

made the Internet-services firm its biggestnew buy and offered specific proposals for

how the company should spend its IPO

windfall from selling some of its Alibaba

shares. So far Starboard is looking much

the wiser, as Yahoo’s stock, now around

$50, is up 23% since quarter’s end. SII

W H A T T H E Y ’ R E S E L L I N G


Q3 2014Investor

Value @ 6/30($mil)Low High

21st Century Fox FOX Media/Entertainment 35.72 31.00 35.54 Lone Pine $564.0

Time Warner TWX Media/Entertainment 83.96 68.80 88.13 Viking $553.0

Timken TKR Diversified Industrial 42.11 42.34 49.96 Relational $465.1

Mallinckrodt MNK Pharmaceuticals 88.22 67.18 91.38 JANA $458.2

Thermo Fisher Scientific TMO Medical Equipment/Supplies 127.96 116.36 127.21 Paulson $380.6

Deere & Co. DE Agricultural Equipment 89.58 81.55 91.50 Berkshire Hathaway $360.3

American International Group AIG Insurance 54.43 51.61 56.56 Third Point $327.5

Oracle ORCL Software 42.08 38.14 42.09 Brave Warrior $319.7

Walgreen WAG Drugstores 67.77 57.75 74.37 Glenview $265.2

Yahoo YHOO Internet Services 50.10 32.93 44.01 Farallon $234.6

Broadcom BRCM Semiconductors 42.80 36.55 41.65 Highfields $226.6

T-Mobile TMUS Wireless Services 28.56 28.25 34.55 Owl Creek $193.6

Cognizant Technology CTSH IT Services 54.05 41.51 51.38 Pennant $162.2

Computer Sciences CSC IT Services 63.52 56.19 65.52 Greenlight $146.9

Sally Beauty SBH Beauty Products 30.94 24.09 28.29 Blue Ridge $135.2


What They’re Selling:Selling Out

These 15 stocks were the largest positions eliminated by different SuperInvestors last quarter. Bigsales in both 21st Century Fox and Yahoo were matched by big buys of other star investors. Theseemingly best-timed sales so far: Relational’s exit from Timken and Owl Creek’s from T-Mobile.

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One of Warren Buffett’s many admi-

rable traits is an ability to explain clear-

ly and concisely. Take, for example, this

description from Berkshire Hathaway’s

2013 annual letter of his analytical pro-

cess when contemplating an investment:

When Charlie Munger and I buy stocks

– which we think of as small portions

of businesses – our analysis is very

similar to that which we use in buying

entire businesses. We first have to de-

cide whether we can sensibly estimate

an earnings range for five years out or

more. If the answer is yes, we will buy

the stock (or business) if it sells at a rea-

sonable price in relation to the bottom

boundary of our estimate. If, however,

we lack the ability to estimate future

earnings – which is usually the case –

we simply move on to other prospects.

In the 54 years we have worked togeth-

er, we have never forgone an attractive

purchase because of the macro or politi-

cal environment, or the views of other

people. In fact, these subjects never

come up when we make decisions.

It can be difficult to generalize, and

certainly all businesses face competitive

and technological challenges, but there’s

a solidity and predictability – borne out

of such things as scale, market position,

intellectual property and brand strength

– to many of the businesses most widely

owned by SuperInvestors [see table be

low]. You can probably estimate the earn

ings range five years out of cable-services

providers like Liberty Global and Charter

Communications, which compete in high

ly concentrated local markets. Monsanto’s

patent portfolio and R&D prowess make

its global positions in agricultural seeds

and crop-protection products relatively

secure. Even financial-crisis pariah AIG

after years of shrinking, is now focused on

geographic markets and product lines inwhich it’s likely to have staying power.

Another telling example is Microsoft

Jeff Ubben of ValueAct Capital disclosed

W H AT T H E Y O W N

Staying PowerAll businesses face competitive and technological challenges, but there’s a solidity and predictability – borne out

of unique strengths – that characterizes many of the companies most widely owned by SuperInvestors.


52-Week # of PortfoliosThat Own

Price vs.52-Week HighLow High

Dollar General DG Discount Retail 66.32 53.00 67.95 11 (-2.4%)

Actavis ACT Pharmaceuticals 263.07 156.40 272.75 10 (-3.5%)

Alibaba BABA Internet Services 105.99 82.81 120.00 10 (-11.7%)

eBay EBAY Online Retail 54.87 46.34 59.70 10 (-8.1%)

Valeant Pharmaceuticals VRX Pharmaceuticals 145.81 105.17 153.10 10 (-4.8%)

Allergan AGN Pharmaceuticals/Medical Devices 210.65 94.98 214.64 9 (-1.9%)

Liberty Global LBTYA Cable Services 50.54 37.98 53.47 9 (-5.5%)

American International Group AIG Insurance 54.43 46.80 56.56 8 (-3.8%)

Charter Communications CHTR Cable Services 168.49 116.78 169.73 7 (-0.7%)

Cheniere Energy LNG Liquefied Natural Gas 66.70 38.42 85.00 7 (-21.5%)

Microsoft MSFT Computer Software/Services 48.62 34.63 50.05 7 (-2.9%)

Monsanto MON Agricultural Products 118.85 104.08 128.79 7 (-7.7%)

Anadarko Petroleum APC Oil & Gas 78.73 73.60 113.51 6 (-30.6%)

Apple AAPL Computers/Consumer Electronics 115.07 70.51 119.75 6 (-3.9%)

Equinix EQIX Data Centers 224.18 155.83 229.16 6 (-2.2%)

HCA Holdings HCA Hospitals 68.69 45.07 73.94 6 (-7.1%)

Mondelez MDLZ Packaged Foods 38.98 31.83 39.54 6 (-1.4%)


What They Own:Solid Ground

Six or more SuperInvestors held at least $15 million stakes in these companies as of the end of thethird quarter. Technology stalwarts such as Apple, Microsoft and eBay remain well represented.Energy-related stocks Anadarko and Cheniere trade by far the furthest from their 52-week highs.

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his firm’s large stake in the software gi-

ant in April 2013, calling it at an invest-

ment conference a “perception vs. reality

opportunity.” After acknowledging that

Microsoft’s consumer businesses were

challenged – and saying, “Who cares?”

– he made the case that the company’sentrenched position with enterprise cus-

tomers in traditional and, increasingly,

new product areas was far more lucra-

tive and important to its future success.

As that view of the company has become

more widely held and continues to be sup-

ported by performance, Microsoft’s shares

are up 57% since Ubben’s speech, vs. 32%

for the S&P 500. SuperInvestors’ collec-

tive interest in the stock remains high,

with seven owning stakes – all in excess of

$100 million – as of September 30.An additional technology stalwart

attracting widespread interest is eBay,

owned by ten star investors at quarter’s

end. After rejecting Carl Icahn’s call ear-

lier this year for the company to separate

its Marketplaces and PayPal units, the

company on September 30 agreed to do

just that by the end of 2015. While PayPal

is the sexier asset, the Marketplaces busi-

ness boasts some 150 million users and

has extended its franchise beyond online

auctions to include sales of popular new

products. In addition to touting its po-tential as a long-term bet on e-commerce,

market wags within days of the split an-

nouncement also pegged a stand-alone

eBay as an attractive takeover candidate –

with China’s Alibaba as a “natural” buyer.

Compared to most of the widely held

stocks by SuperInvestors that are trading

near 52-week highs, shares of Anadarko

Petroleum and Cheniere Energy have been

much less buoyant of late. Anadarko, the

only energy exploration and development

company to make the list, is credited withhaving a diverse asset portfolio – includ-

ing low-cost domestic natural gas, deep-

water oil, and unconventional reserve

plays in the U.S. and abroad – that gives

it excellent financial and operational flex-

ibility across a variety of oil and gas price

scenarios. Even so, its shares have fallen

right along with energy prices – at a recen

$78.75, the stock is off 30% from its Au

gust highs.

Cheniere, owned by seven top investor

at quarter’s end, is a different beast. The

company has never posted an annual profit, but has been locking up deals to expor

liquefied natural gas that it has said can so

far bring in more than $2 billion in annua

revenues for as long as 20 years. Enam-

ored by the potential of selling low-cost

U.S. natural gas overseas, the market has

taken notice. Though Cheniere shares are

down more than 20% from their Septem-

ber highs, they’re up some 3,500% over

the past five years.

As is typically the case, the largest posi

tions in which top investors at least doubled their stakes during the quarter [see

table below] comprise an eclectic lot. In

cluded: old-line media firm Gannett, Chi

nese Internet security provider Qihoo 360

biotech pioneer Amgen and beer maker

Anheuser-Busch InBev. SII

W H AT T H E Y O W N

Company Ticker Industry Price@12/1/14 Q3 2014

Investor Price vs.Q3 2014 HighLow High

Shire SHPG Pharmaceuticals 213.00 222.50 264.98 Paulson (-19.6%)

21st Century Fox FOX Media/Entertainment 35.72 31.00 35.54 ValueAct 0.5%

Charter Communications CHTR Cable Services 168.49 149.66 167.30 Berkshire Hathaway 0.7%

eBay EBAY Online Retail 54.87 49.74 57.30 JANA (-4.2%)

Actavis ACT Pharmaceuticals 263.07 201.91 249.94 Viking 5.3%

Cheniere Energy LNG Liquefied Natural Gas 66.70 67.12 85.00 Lone Pine (-21.5%)

Dollar Tree DLTR Discount Retail 67.94 53.17 59.84 Highfields 13.5%

Pentair PNR Diversified Industrial 62.75 62.91 73.63 Glenview (-14.8%)

Gannett GCI Media 32.65 29.64 35.70 Icahn (-8.5%)

DirecTV DTV Satellite TV 87.73 83.14 88.25 Farallon (-0.6%)

Qihoo 360 QIHU Internet/Mobile Security 68.90 66.05 104.81 Maverick (-34.3%)

Amgen AMGN Biotechnology 166.41 114.93 144.46 Third Point 15.2%

Anheuser-Busch InBev BUD Beer 116.15 105.84 115.84 Corvex 0.3%

EMC EMC Data Storage 30.29 26.34 30.18 Ivory 0.4%

YPF S.A. YPF Oil & Gas 32.29 30.60 41.74 Owl Creek (-22.6%)


What They Own:Doubling Down

These are the 15 largest positions in which different SuperInvestors at least doubled their shareholdings last quarter. Companies based outside the U.S., including Anheuser-Busch InBev, Shire,Qihoo 360 and YPF, garnered much increased interest. Most challenged so far: Cheniere Energy.

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A year ago AerCap Holdings would

not have been on the radar screens of

most SuperInvestors. While public since

2006 and with a reputation as an adept

buyer and seller of planes, it operated in

the second tier of competitors in a global

aircraft-leasing industry with two domi-

nant players, GE Capital Aviation Services

and the International Lease Finance Corp.

[ILFC] division of insurer AIG.

AerCap’s profile shifted considerably

with the announcement last December

that it was buying ILFC from AIG, morethan tripling its asset base to a current fleet

of 1,300 aircraft, with another 400 new

planes on order through 2022. The deal

was so warmly welcomed by Wall Street

that the cash and stock consideration for

the purchase went from around $5 bil-

lion at the time of purchase to closer than

$7.5 billion when the deal closed in May.

Despite AerCap’s shares doubling from

pre-deal levels, SuperInvestors have taken

increased notice, with four upping their

stakes or establishing new large positionsin the company during the third quarter.

Size obviously matters in a highly

capital-intensive and global business like

aircraft leasing. The biggest players can

not only negotiate the best prices from

plane manufacturers, but the breadth and

depth of their customer networks also al-

lows them to re-let planes more effectively

when they come off-lease or are repos-

sessed. That helps smooth cyclicality, says

Mahmood Reza, a portfolio manager at

SuperInvestor Omega Advisors, which es-tablished a new AerCap stake last quarter:

“If you’re positioned with the right, fuel-

efficient aircraft – which AerCap is – may-

be utilization levels in a bad cycle go from

99% today to the low-90s,” he says. “The

cycle is much more manageable, say, than

in shipping, where a downturn results in

big asset writedowns and net losses.” As

a testament to the stability of the busi-

ness, he says, AerCap since going public in

2006 increased its book value by an aver-

age 13.3% annually prior to buying ILFC.

(That number is 19.3% post-acquisition,

given the roughly 35% discount to adjust-

ed book value it ended up paying.)

While he believes the cycle will be

manageable, Reza also expects the over-

all trend to be nicely upward. Global air

travel, fueled by demand in developing

countries, is expected to continue growing

at 1.5x to 2x the level of global GDP. At

the same time, lessors’ share of the overal

global fleet is also expected to continue to

grow. The share of the commercial aircraf

fleet provided by leasing companies has

doubled to 42% over the past 20 years, as

airlines increasingly turn to leasing in or

der to reduce capital outlays and the obso

lescence risk of their primary assets. Mos

estimates put that share number above

50% within the next several years.

S T O C K S P O T L I G H T : A e r C a p H o l d i n g s

Flight PlanDespite seeming industry tailwinds and a dramatically enhanced market position, the shares of aircraft leas-

ing company AerCap Holdings don’t appear particularly high-flying. Multiple SuperInvestors beg to differ.

AerCap Holdings(NYSE: AER)

Business: One of the two largest globalaircraft lessors, engaged in the leasing,financing, trading, sales and management

of commercial airplanes and jet engines.

Share Information(@12/1/14):

Price 43.4052-Week Range 21.09 – 50.02Dividend Yield 0.0%Market Cap $9.21 billion

Financials (TTM): Revenue $2.60 billionOperating Profit Margin 53.9%Net Profit Margin 23.1%

Valuation Metrics(@12/1/14):

AER S&P 500Trailing P/E 11.1 19.4Forward P/E Est. 8.5 17.2

Largest Institutional Owners(@6/30/14):

Company % OwnedJANA Partners 10.0%Donald Smith & Co 7.5%Fidelity Mgmt & Research 4.8%

Deutsche Bank 4.3%Wellington Mgmt 4.1%

Short Interest (as of 11/14/14):

Shares Short/Float 6.8%

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

AER PRICE HISTORY

THE BOTTOM LINE

Mahmood Reza believes the market is underestimating the company’s growth prospectsand its newly enhanced earnings power, while overestimating the possible macroeco-nomic risks to its business. At what he considers a reasonable 10x forward multiple onhis 2016 estimate of operating EPS, the shares one year out would trade at around $60.

Sources: Company reports, other publicly available information

2012 2013 2014

50

40

30

20

10

50

40

30

20

10

8/16/2019 SII 2014.12



Success in the leasing business also rests

heavily on capital-allocation skills. Aer-

Cap is highly regarded for the stewardship

of its fleet, deemed more likely to sell the

appropriate planes – it sold 68 last year

– at the appropriate points in their useful

lives. Reza also likes that management ap-

plies a similar valuation discipline to its

own stock. Over a 12-month period from

2011 to 2012, it stepped up aircraft sales

in order to buy back 25% of its total mar-

ket cap at share prices in the low teens.

Despite seeming tailwinds, AerCap

shares don’t appear particularly high-fly-

ing, trading at just 8.5x consensus 2015

earnings estimates. Among the key market

concerns are that new-plane order cancel-

lations from Asia signal a downturn in air-

craft demand, and more recently, that lowoil prices will diminish leasing interest in

newer, fuel-efficient planes. With respect

to order cancellations, Reza says they have

been fully in line with historical averages,

and so far seem to signal no more than the

type of regional economic slowdown that

a global player like AerCap can offset by

strength in other regions. He also believes

oil-price concerns are overstated. “Air-

lines make their capital plans over five to

ten years and get oil-price volatility,” he

says. “The decline in oil prices would haveto be much sharper and sustained for ex-

pectations on future prices to come down

enough for airlines to materially cancel

already-committed leases.”

Another likely overhang for the stock

is AIG’s approximately 45% ownership

stake, a portion of which it can start to sel

in late February of next year. Reza doesn’

consider this a big issue – AIG has two

members on AerCap’s board and now has

significant excess capital, making it more

likely to be a patient owner until it can ge

what it considers a full price.

What would such a full price be? Reza

believes the company can beat consensus

for next year and earn $5.50 in operating

EPS, driven by incremental merger-related

cost savings and higher lease yields on the

acquired planes it bought at a discount

On the $6 in EPS he estimates for 2016

he believes a 10x forward multiple would

be reasonable, resulting in a $60 share

price a year from now. “Now one of the800-pound gorillas in this market is pub-

lic,” he says. “It may take time for the

market to recognize the quality of the busi

ness, but over time we think it will.” SII

S T O C K S P O T L I G H T : A e r C a p H o l d i n g s

Expand Your Idea “Grapevine”Gain insight from what superstar investors

own, what they’re buying and whatthey’re selling. Value Investor Insight subscribers receive four quarterly issuesof SuperInvestor Insight for only $149!

Subscribe Online »

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ON MARKET PERCEPTION:

Now one of the 800-pound

gorillas is public – it may

take the market time to rec-

ognize the business’s quality.

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