When you get some of the biggest names — and biggest egos — of Wall Street and the District of Columbia in one room, the results promise to be interesting. That was certainly the case in Wednesday’s Delivering Alpha conference, hosted by CNBC and Institutional Investor.
Among other gems, Senator Ted Cruz mused on his theory of why Wall Street executives are evil to an audience of, you guessed it, Wall Street executives.
Meanwhile, Carl Icahn admitted his social media ineptitude by revealing that his daughter was the one who “does his Twitter thing.”
But it wasn’t all fun and games. Icahn had quite a bit to say at the conference, even getting into a sparring match with BlackRock (BLK) CEO Larry Fink over the role ETFs play in distorting the bond market: “They sell liquidity,” Icahn explains, but unfortunately, “There is no liquidity (and) that’s what’s going to blow this up.”
Of course, Fink had a few words to say about activist investors like Icahn, arguing the activist obsession with share repurchases at the expense of new investments contributes to “below trend line” gross domestic product growth.
Perhaps the only tragedy is that Icahn wasn’t allowed to spar with fellow guest and longtime rival Bill Ackman. And by spar, I mean actually throwing on some boxing gloves, stepping into a ring and wailing away on each other. That would have made for good television.
At any rate, let’s cover some of the best and unconventional investment themes and stock picks from the conference.
The REIT Trend Is Still Gaining Steam
Probably the biggest recurring theme of the conference is what we’ve been seeing marketwide — the idea of turning everything into a real estate investment trust.
It’s a trend that has been building for years. Darden Restaurants (DRI) made news last month by announcing plans to spin off part of its restaurant real estate portfolio into a REIT, and Eddie Lampert’s pet project Sears Holdings (SHLD) made similar plans to roll some of its store real estate into a new REIT, Seritage Growth Properties. This follows a trend of recent years of reorganizing nontraditional assets — everything from prisons to billboard — as REITs.
At Delivering Alpha, Macy’s (M) was recommended by Starboard Value specifically because of its real estate holdings and the value sitting unrealized. Starboard believes that Macy’s is worth roughly double its price going into the conference based on the value of its real estate. And while I’m somewhat skeptical, it should be noted that Starboard has some experience here as the driving force behind Darden’s REIT spinoff.
Tom Sandell of Sandell Asset Management named Ethan Allen Interiors (ETH) as his best pick, specifically commenting on the value of its real estate.
I’m in favor of anything that will lower the corporate tax bill, and a REIT conversion can certainly save a bundle. But don’t expect a nontraditional REIT to trade at the same valuations of more diversified retail REITs like Realty Income (O). Realty Income is considered to be a blue chip precisely because of its tenant and property diversity. A REIT loaded with the properties of a single tenant, built to serve the needs of one individual, is obviously worth a lot less.
Still, who am I to get in the way of progress? I might spin my garage into a REIT and pay myself rent to park my car there. It might fool the IRS. Maybe.
ARCP Is a Stock With Bond-Level Risk and Stock Market Returns
Speaking of REITs, American Realty Captital Partners (ARCP) was the choice of Corvex Capital’s Keith Meister as his best pick for 2015.
ARCP has been in hot water since late 2014, stemming from an accounting scandal that caused a restatement of earnings, a dividend suspension and a complete overhaul of the management team. But now that the damage has been done, ARCP is a safe bet with “bond-like risk with equity-like returns,” according to Meister.
I wholeheartedly agree and am long the stock myself.
Meister believes the stock to be worth about $13 per share based on the quality of its real estate portfolio. Today, it’s trading well below $9.
ARCP should be reinstating its dividend within months, and I expect it to yield in excess of 5%. Probably far in excess of 5%. This means that we will be paid to wait for Wall Street to realize the intrinsic value of ARCP stock.
High Risk but High Reward in Fannie Mae
No hedge fund powwow would be complete without comments from Pershing Square’s Bill Ackman, who repeated his bullish calls on government sponsored enterprises Fannie Mae (FNMA) and Freddie Mac (FMCC).
Ackman noted that FNMA and FMCC shares offered “the most upside” of all the stocks in his portfolio, but also the most downside. In other words, Fannie and Freddie represent a high risk for high-return trade.
Ackman’s bet here is that the government eventually releases its stranglehold on Fannie and Freddie and allows them to return to operating as “normal” companies without Big Brother constantly looking over their shoulders.
Ackman is a controversial manager who has had some phenomenal successes and some phenomenal failures in recent years. As a general rule, I don’t like to bet on stocks with “binary” outcomes of “win big” or “lose everything.” If I wanted those kinds of odds, I would try my luck in Las Vegas.
Still, if Ackman considers it his best trade at the moment, that is certainly something to consider.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. As of this writing, Charles Sizemore is long ARCP and O stock.
