Summary:

1. The first two morning presenters pitched Canadian companies, and the third presenter was Canadian. This could be coincidental, but it might tell you something about the valuation of the current U.S. equity market.

2. Two presenters pitched the same long idea within the aircraft parts industry. Looks like hedge funds are spending time on the themes of supply/demand imbalance in the plane manufacturing supply chain due to Boeing's issues and the post-COVID travel rebound.

3. Two pitches on semiconductors, not surprising when everyone is “AI-this, AI-that.”

4. This was the first in-person Sohn conference since COVID-19. Usually, it was held in the David Geffen Hall at Lincoln Center, but this time it was held in a smaller venue. Given the declining popularity of single-manager hedge funds, I wonder if the size of the Sohn Conference can be used to gauge where that asset class is headed. However, it’s also possible the committee is easing into relaunching the in-person event.

5. Investors I spoke with complained about the excessive number of college and MBA students at the event. I agree: especially when the overall attendee count goes down in a smaller venue, proportionally more students will only make the experience worse. As a result, the students ended up talking to themselves while investors only talked to other investors, creating a bifurcation of social circles at the event.

With that, let’s dive into the pitches and discussions.

The Sohn Conference consists of two parts: In the morning, emerging hedge fund managers present stock ideas, and in the afternoon, established figures take the stage.

Eric Wolff: Gumshoe Capital

Eric is ex-Hawk Ridge, an LA-based event-driven L/S fund. Gumshoe stays in the event-driven small cap style.

He pitched long Pason Systems Inc. (PSI.TO)

• Canadian software and hardware company serving the oil and gas industry.

• Their product, the Electric Drilling Recorder (EDR), is mission-critical as it maintains the official record of oil sites. Rig operators cannot drill if the EDR malfunctions.

• The company has pricing power because EDR software spending represents a small fraction of an oil E&P company’s daily drilling cost.

• Revenue is divided between hardware and software (65% software). Eric thinks the name deserves a higher valuation, but the challenge lies in having only one comparable company, which is more of a pure-play software name.

• The company boasts high barriers to entry:

  • Hardware is Department of Defense-grade equipment.

  • Established field support team in North America.

  • Innovation: ~9% of revenue is allocated to R&D annually.

  • Oil and gas customers, being risk-averse, tend to stick with the incumbent vendor (in this case Pason), creating a switch cost

• The investor base is predominantly energy investors, and it's covered by energy sell-side analysts, leading to misunderstandings.

Nikhil Daftary, NK capital

NK Capital is a concentrated long-only manager with low portfolio turnover

He pitched long Couche-Tard Alimentation (ATD.TO), a convenience store (“C-stores”) operator at gas stations.

His thesis:

• Unique value-add: 80% of goods purchased are consumed within one hour. Consumer spends on average 3.5 minutes on small ticket impulse buys. Stores are open 24/7.

• Hard to replicate network: 15,000 stores. Hard to build new gas stations because of the saturation, creating a barrier to entry. Hard for big retailers to replicate the model at $7.50 revenue per customer and be profitable – operational excellence is required (like for dollar stores)

• Fragmented industry: 60% of units are owned by moms-and-pops. Big Oils previously owned many C-stores so they have been underinvested, creating an opportunity for Couche and private equity to roll up. The end state will be like Japan: 90% of C-stores are owned by big players like 7-Eleven, FamilyMart, and Lawson.

• The change to electric vehicles will be slow. A slowly declining industry can be a great thing. Nikhil gave examples of Philip Morris, AutoZone, and Valvoline, all operating under slowly declining volume industries but the stocks did well

• Incentive alignment: Directors and Executives own 24% of outstanding shares.

• Valuation: 18x NTM P/E for a business that has CAGR adj EPS 21% through two cycles from 2007 – 2023, including two macro downturns. He expects the business to compound low- to mid-teen EPS for a long time going forward.

Michelle Ross, CIO of StemPoint Capital

She is a Soros lineage investor who spent 7 years at Soros Fund Management investing in global healthcare, followed by 3 years at PointState, which came out of Stan Druckenmiller’s Duquesne Capital.

She pitched long Crinetics Pharmaceuticals CRNX 0.49%↑

• I didn’t understand the pitch: it’s a GLP-1 theme play.

• The company has had 3 successful FDA phase 2 and 3 trials in the past 6 months. They employ an oral drugs approach that is better than current treatments in the growing obesity market.

• Management has 20 years of experience focusing on the endocrine market

• 50% of the US adult population is addressable, with a TAM of over $200 billion.

Gor Ter-Grigoryan, CIO of Sellaronda Global Management LP,

He pitched long Schibsted ASA (SCHA:OSL) It’s a Nordic internet marketplace business.

Thesis:

• Regional network effects: in two verticals (auto and real estate if I remember correctly):  they have achieved a dominant position to be the #1 player.

• They are asset-light (with 50-75% FCF margin) with room to flex pricing

• It’s a complexity-simplification story. They are selling assets to become a pure-play marketplace.

• They are eliminating dual share class, arguing for private equity buyouts as downside protection.

• They are searching for a new CEO to run the marketplace business, which could drive up the stock.

Short-selling Panel:

The short panel was a new format at Sohn. It’s one of the best sessions during this year’s conference in my opinion. The panel was moderated by Carter Simonds, who is ex-Tiger Management and a Blue Ridge (founded by John Griffin) partner with expertise in shorting for-profit education companies.

Chris Drose of Bleeker Street Research pitched short Sealed Air Corp SEE 1.56%↑ ,

• A $5 billion market cap company with $4.8 billion of debt.

• Revenue exposure to Amazon through Bubble-Wrap, and Amazon is phasing out the use of single plastic waste in packaging

• In the food packaging segment, they provide products that contain PVDC, which food packagers are moving away from due to health concerns.

Nate Koppikar of Orsa Partners is short Globe Life Inc. GL 2.24%↑

• He argues it’s a life insurance pyramid scheme.

• He showed a video of one of the bigger agencies, Arias Agency, and the agency has been accused of sexual harassment and a toxic culture.

Fahmi Quadir of Safkhet Capital is short Adtalem Global Education ATGE -1.26%↓

• The entity that bought Devry University.

• 75% of their revenue is tied to Federal student financial aid. Their education outcomes are below average across the board.

• The government’s implementation of gainful employment (which measures debt to earnings of students) should disqualify them from Title IV funding, which will be a major hit to their revenue.

• The CEO is the company’s former general counsel, so he has no understanding of how to build an education services business, and enrollment is declining.

Carter asked the panelists to discuss the following subjects around short-selling:

• Benefits of publicizing their short research: it helps to get better information flow for the short sellers because ex-employees of their target will want to talk to the short sellers.

• Impact of the shift to passive investing: floats are 40-50% held by Vanguard, 20-30% held by active managers, making it more challenging to short.

• Impact of the rise of pod shops: hard to conclude because some pod shops are doing alpha shorts while others are playing short squeeze. You cannot get a signal by looking at pod shops as a whole.

• Fahmi Quadir discussed the role of short sellers: she is motivated by a mission, not by money. She discussed the importance of believing in her ideas to sit through short squeezes.

• Chris Drose on Risk Management: Ensure your book is factor-balanced and mitigate risks by considering factor exposure. Understand the driving factors behind each name in your portfolio.

• Nate shared tips on doing primary work as an edge: For instance, he considered B. Riley a compelling short. His firm had to navigate legal channels to unseal court documents, revealing insights less appealing to novice investors. Fahmi noted that for firms with intricate structures, visiting specific jurisdictions might be necessary to access subsidiary filings for unique insights.

• Chris Drose is excited about the shorting environment going forward. Since 2022, the environment has been favorable, but he mentioned no new issuances. He joked about Reddit's potential IPO, suggesting more overhyped IPOs could emerge as fertile ground for future shorts.

• Fahmi on how to make use of the insights found by short sellers: To succeed, short sellers require advocates capable of acting on esoteric information. For instance, in the Ebix case, which ended in bankruptcy, short sellers engaged with the PCAOB, the auditor regulator. Without such actions, the market may never value a company at $0.

This concludes the morning session. Lunch was meh, sandwiches and some soda.

David Einhorn, Greenlight Capital

His first slide was “Solve AI,” which I suspected was either a short on something AI-related or a wordplay long. It turned out to be the latter.

He pitched long Solvay (SOLB.BR), a Belgian chemical company that produces soda ash and BICAR (sodium bicarbonate).

I wasn’t paying attention when it turned out to be a chemical name but you can watch the pitch here.

Here is the rough thesis to my understanding:

• Solvay has a leading market share in soda ash production, and soda ash is a localized market because it is heavy and therefore costly to ship.

• The company benefits from low production costs due to proximity to ports so they are competitive on the cost curve in their regional markets of Europe and North America.

• Barrier to entry: Soda ash is a very stable pricing commodity, and it takes new capacity three years to come online.

• The bear thesis has revolved around Chinese Inner Mongolia soda ash mines, but transportation costs to compete with Solvay in the European market make Chinese peers uncompetitive

• Einhorn argues that 2024 should be trough pricing year for soda ash. Secularly, requirement of soda ash in lithium production (in EV) should help pricing.

• This name has two other segments, one is peroxide where they have take-or-pay contracts, and the specialty chemical division deals with rare earth, which is used in making permanent magnet engines for EVs.

• The sell-side is bearish because of excessive focus on just soda ash when, in reality, Solvay has diversified into less cyclical end markets (75% of revenue is not tied to soda ash.) The stock should re-rate higher over time while pricing should improve from the trough for a high fixed-cost business, so it will benefit from both increased earnings and multiple expansions.

Scott Goodwin, Diameter Capital

Scott Goodwin is the co-founder of Diameter Capital Management. They are a credit player.

He pitched long securities of the failed Signature Bank that is now managed by the FDIC.

• The FDIC has sold a 20% stake in a venture holding a real estate portfolio to players such as Blackstone Real Estate Income Trust. He argues that Blackstone and Santander bidding for Signature’s real estate portfolio signals the bank’s assets have value.

• Goodwin projects a substantial increase in the bank's market capitalization from its current $145 million to over $600 million. He also anticipates a significant rise in the value of Signature's bonds.

Seth Fischer, Oasis Management

Oasis is an Asian activist investor.

He pitched long Kao (4452 JP), Kao (花王) is a Japanese cosmetics and chemicals company. I know of the company because they do ads in Japanese TV dramas.

Thesis:

• Dermatology is a secular category.

• Kao is poorly managed, despite having very strong product quality. Management is not trying to grow the company and has been neglecting marketing.

• The CEO is an R&D guy. The CFO worked in supply chain in chemical businesses. No one on the board has global marketing experience, and no one on the board is under 60 years old. Product-led growth doesn’t work in consumer products with no switching cost.

• Activism: Kao should focus on better packaging (currently they use white color for everything in packaging), needs better website design and physical store layouts. All of these are fixable in Fischer’s view by engaging the right outside help (eg. get a marketing consultant.)

Lightning Round Pitches

This segment involves investors pitching a stock for 5 minutes, moderated by Boykin Curry, co-CIO of Eagle Capital Management.

Michael Buckley, Duquesne family office

He pitched long Natera NTRA -0.72%↓

Natera is a medical diagnostics company whose product is a DNA blood test that tests cancer recurrence 9 months earlier than CT scans.

• Moat: won against patent infringement.

• Key studies are incoming to drive volume and reimbursement: right now, the company’s test does not prompt physicians to start treatment if recurrence is detected, but lots of publications are driving oncologist adoption. If this key study goes through, treatment can begin if Natera’s test becomes the standard for detection.

• Profitable company and lots of tests run today are not getting paid.

Currently, only 10% penetration in the addressable market, pitching for 30% penetration by 2030. The product benefits the healthcare system by reducing the reactive cost of cancer treatment. Michael projects the company will become profitable 2 years before consensus.

Mohammad Anjarwala, Advent International

He pitched long Carpenter Technology CRS -1.16%↓ They make mission-critical performance alloys that go into jet engines.

Thesis:

• These parts operate at high RPM and temperature inside a jet engine. They cannot fail. Pricing has gone up 40% yearly, indicating a structural change.

• High barrier to entry because Boeing and Airbub will only qualify very few vendors for each part that goes into an aircraft, creating an oligopoly industry structure

This is the most interesting idea I heard during the conference, which was pitched again by Angela Aldrich of Bayberry Capital, a Tiger Grand Cub hedge fund.

Boykin Curry, co-CIO of Eagle Capital Management

He pitched long China

He highlighted the outcome of investing in China over the last 10 years: GDP has increased significantly, but the stock market is overall down. Value has accrued to stakeholders such as consumers, not shareholders. The problem is that barriers to entry are not high enough.

But he believes in buying in China if you have a long-term time horizon.

Matt Harris, Bain Venture

Regional banks are in trouble. Banks grew their commercial real estate (CRE) books too quickly and smaller banks are more exposed to CRE. Bombs are waiting within regional banks.

Smaller banks have wider net interest margins by overcharging on loans and underpaying depositors. With the rise of AI, price transparency will make regional banks uncompetitive, as they traditionally relied on local brands. And smaller banks have underinvested in technology.

Regulators should allow smaller banks to merge to survive on a larger asset base over a shrinking NIM% (net interest margin).

Angela Aldrich, Bayberry Capital

Angela is a “Tiger Grandcub”, after cutting her teeth under John Griffin at Blue Ridge. She pitched two long ideas into the themes of aircraft manufacturing value chains.

She highlighted two ways to play: 1. after the market cycle because fleets are aging 2. new planes ramp up.

She also pitched long CRS CRS -1.16%↓ , which is exposed to both OEM and aftermarket.

In addition, she pitched long AER (AerCap) AER 0.34%↑ , an aircraft lessor: She believes that lessors will experience a period of structural over-earnings due to a shortage of OEM deliveries. Demand for flying has returned to the original trend lines while the supply of airplanes is short due to Boeing’s operational issues.

Eli Casdin, Casdin Capital

He pitched long SMID cap biotech and gave a list of names that I know nothing about.

Thesis:

• Capita drain in biotech for last few years, valuation decade low

• But innovation is real and investors are already back to buying

• Biopharma is setting the floor price

Kevin Salimian, Lone Pine

He pitched long TSMC TSM -0.96%↓

Takeaways:

• 6% of revenue from AI. AI revenue will multiply. Currently low-value capture from Nvidia chip, but can go up as manufacturing becomes more complex. All roads to AI go through TSM.

• TSM charges customers on a per-wafer basis. CoWoS (Chip on Wafer on Substrate) is key bottleneck for AI chips. Opportunity for TSM to capture more value.

• Cloud/server revenue segment rebounding.

• TSM should have a revenue CAGR of 22% through 2026 with a high operating margin.

• I heard people on Twitter are throwing shades at this guy. I guess him not talking about the China risk is not good.

Sohn Idea Contest Winner: Vijay Shilpiekandula, Dilation Capital

Vijay pitched long ASML ASML -1.32%↓

Key points:

• ASML is similar to Nvidia in that it’s a hardware sales with software control, so it’s a system company, similar to how Nvidia chips and CUDA software go together.

• The company benefits from slowing Moore’s law and high bandwidth memory growth, which requires more EUV layers. ASML is the monopoly player in EUV at the leading edge (really complex technology)

• A growing service revenue stream should serve as a cycle hedge when machine unit growth slows. Additionally, EUV machines (the most high-end) represent a 7x service revenue opportunity versus DUV machines, and service revenue has high incremental margins.

• Management alignment: Incentivized on 3-year LT ROIC objectives; Management also has significant share ownership.

• Jesse Cohn, who presented after Vijay, complimented him by pointing out Jonathan Pollock, the co-CIO of Elliott and the best idea contest judge, is not easily impressed.

You can watch his pitch here.

Jesse Cohn, Elliott Management

He was there to reveal Elliott’s thesis on long Etsy ETSY 5.27%↑ :

• Marc Steinberg, a partner at Elliott, sits on the board.

• The stock was under pressure because 1) it faces tough comparisons against strong performance during COVID 2) the macro environment is hurting the discretionary category that Etsy serves.

• Low valuation to its peers while Etsy is still gaining market share in the category.

• Elliott likes the management under Josh Silverman. The company is still early in the monetization process and gave examples of implementing a royalty program and AI-enabled search. Seller fees are really low, so there is room to capture value by providing more value-added services.

• It seems like a setup an activist like Elliott can capitalize on by coming in and agitating for the acceleration of increasing pricing levers when the stock is trading poorly.

• Just like ValueAct, Jesse talked about how Elliott invests in situations where there is little downside if the activism does not work out.

Karen Karniol-Tambour, Bridgewater Associates

Karen is the CIO of Bridgewater Associates. She is too smart and too macro for me to keep up. So I only took away a few points:

• Strength for the US dollar is a paradox because of the big and growing budget deficit that’s counterbalanced by the world’s desire for US assets driven by value creation expectations in AI

• European companies could pass the inflation to consumers thanks to government support; otherwise, it would be a bigger disaster. Expectations for Europe were much lower, so it did well.

• Rising gold prices: The gold market is small. It only took a few concerned individuals to decide to park in a safe haven, driving price action in gold because no currency is safe to park, so gold was the only option.

The good news is you can watch the session:

Greg Coffey, Kirkoswald Capital

Greg Coffey is a high-profile trader who previously retired at the age of 41 with mid 9-figure net worth, after being the co-CIO of Moore Capital Europe (founded by Louis Bacon.)

Few takeaways:

• It’s harder to day trade today because algorithms will trade on near-term information faster than humans. Even as a trader, one needs to adapt to holding for the longer term. He made the example of Paul Tudor Jones holding for three years.

• He doesn’t believe in averaging up as a trader. He would rather go all in on the initial position and take risks off when it works.

• Trade smaller and let trends run longer.

You can watch the session:

Josh Resnick, Jericho Capital and Leon Shaulov, Maplelane Capital

Josh Resnick has spoken at Sohn in the past, pitching short Frontier Communications. Leon Shaulov was a senior PM at Galleon who founded Maplelane Capital.

Few takeaways:

• Companies with poor capital structures suffered in the AI era because they didn’t have the balance sheet to invest in AI to stay competitive.

• Right now is a great long-short TMT environment because of big dispersion, per Resnick.

• Shaulov: Amazon is hitting on all three cylinders.

You can watch the session here:

Despite the smaller venue and the hope for more investors and fewer students, I still enjoyed attending one of the premier public investing conferences. Let me know what you think about these ideas and the Sohn Conference.

Thank you for reading.