Best Stock Pick From The 2018 Sohn Conference

My favorite hedge fund event is the annual Sohn Conference in New York. This year’s event will be held on May 6, so I decided to take a look at how last year’s picks fared and whether hedge fund managers were able to generate any outperformance with their recommendations. Last year Harvard University’s Patrick Luo released a paper about these types of investment conferences. Here is what he said:

“Using a novel dataset drawn from investment conferences from 2008 to 2013, I show that hedge funds take advantage of the publicity of these conferences to strategically release their book information to drive market demand. Specifically, hedge funds sell pitched stocks after the conferences to take profit and create room for better investment opportunities. However, the pitched stocks still perform better than non-pitched stocks in the funds’ portfolios afterwards. Hedge funds do not pitch obviously bad stocks because maintaining a good reputation helps them raise money. Pitched stocks earn a cumulative abnormal return of 20% over 18 months before the pitch and continue to outperform the benchmark by 7% over 9 months afterwards.”

Patrick Luo basically uncovered the fact that the stocks pitched at investment conferences aren’t necessarily the “best” stock picks of hedge funds as they start selling these stocks after the conferences to create room for their real best ideas. However, these stocks still outperformed the market by an average of 7 percentage points (14.2% average gain for the pitched stocks vs. 7.5% gain for the market) over the following 9 months.

I have been tracking hedge funds full-time for the last eight years and trying to develop quantitative investment strategies that can outperform the market by large margins. In our monthly newsletter we recommend stock picks based on hedge fund presentations, investor letters, and activist filings. Our list of stock picks in our monthly newsletter returned 64.2% since its inception in March 2017 through April 2, 2019. S&P 500 ETF (NYSE:SPY) returned 25.5% during the same period. After attending last year’s Sohn Conference I decided that only one of the stocks pitched at the conference was attractive enough to be recommended to our subscribers. Five months after recommending this stock to our subscribers, we shared this recommendation with everyone else in a free sample issue of our monthly newsletter (you can still download it free of charge). I will reveal the name and performance of this stock at the end of this article. Let’s first take a look at the performance of other stocks pitched at last year’s Sohn Conference in New York.

D.R. Horton Inc (NYSE:DHI) was pitched by Long Pond Capital’s John Khoury (read his thesis). Khoury predicted that DHI will advance 63% as its earnings multiple expands from 8 to 13. DHI is flat since Khoury’s recommendation and underperformed the market by about 10 percentage points.

GrubHub Inc (NYSE:GRUB) was recommended by Half Sky Capital’s Li Ran. Li saw an upside potential of 60%. GRUB returned as much as 50% following Li’s recommendation but the stock crashed during Q4 and is currently down 28% since last year’s Sohn Conference.

Li Ran Half Sky Capital Sohn Conference

Li Ran of Half Sky Capital

Jeff Gundlach recommended shorting Facebook Inc (Nasdaq:FB) as he expected a wave of data privacy scandals. “There is never just one cockroach in the kitchen,” Gundlach said. Facebook shares initially spiked but later declined by about 20% through the end of December. Overall, though, the stock is up 10% since the Sohn Conference. Gundlach also mentioned that he is long SPDR S&P Oil & Gas Exploration & Production ETF (NYSE:XOP). This ETF went up about 15% through the end of September, but is currently down 21% since the Sohn Conference.

Chamath Palihapitiya recommended Box Inc (NYSE:BOX) after saying the company “is a business that is incredibly cheap and undervalued with incredibly low churn and unbelievable margin of safety.” BOX shares gained 30% within a couple of months, however, the stock gave back those gains and is currently down 13% since the Sohn Conference.

Nathaniel August recommended a position in Peabody Energy (NYSE:BTU) which “is the largest and least expensive way to participate in the coal market” according to this fund manager. Unfortunately the stock lost more than 26% since August’s recommendation.

David Einhorn recommended a short position in Assured Guaranty (NYSE:AGO) due to its exposure to bad debt in Puerto Rico. AGO shares declined 5% within a couple of weeks of Einhorn’s recommendation, but then took off and is currently up 26% since Einhorn’s pitch. This means Einhorn’s pitch underperformed a short position in the S&P 500 Index by 16 percentage points (i.e. if Einhorn recommended a short position in an index fund, he would have lost 10% instead of 26%, so his recommendation’s underperformance is 16 percentage points).

Larry Robbins recommended positions in ESRX, McKesson Corporation (NYSE:MCK), and CVS Health (NYSE:CVS) because he didn’t see Amazon as a threat to these companies. ESRX returned 30% until its merger with Cigna. MCK declined by 23% and CVS lost nearly 20% since Robbins’ presentation. Robbins’ average underperformance with respect to the S&P 500 Index is about 14 percentage points.

Benchmark Capital’s Bill Gurley was bearish on both Tesla Inc (Nasdaq:TSLA) and Hertz Global Holdings (NYSE:HTZ). Tesla is down about 5% and Hertz lost nearly 14% since his presentation.

Sachem Head’s Scott Ferguson recommended a long position in LSE’s Whitbread plc (LON:WTB). The stock is up 19% since Ferguson’s pitch.

Alex Captain of Cat Rock Capital recommended a position in (AMS:TKWY) which trades at the Amsterdam Stock Exchange. The stock is one of the biggest winners of the Sohn Conference as it is up nearly 46% since Captain’s presentation.

Diameter Capital Partners’ Scott Goodwin recommended a short position in French company Rallye SA (RAL). It looks like this is another successful European stock pitch as the stock lost nearly 21%.

Glen Kacher of Light Street Capital

Glen Kacher of Light Street Capital

Palo Alto Networks Inc (Nasdaq:PANW) was Glen Kacher’s best idea (read his thesis). This stock was another winner as it gained more than 23% since Kacher’s presentation.

As you can see most of the stocks pitched at the Sohn Conference failed to outperform the market. I didn’t like any of the stocks mentioned above. The only stock pitch that excited me was Ascendis Pharma A/S (Nasdaq:ASND) which was recommended by EcoR1 Capital’s Oleg Nodelman. I liked this pitch for two reasons. First, Nodelman was the best performing hedge fund manager among all Sohn presenters, having returned 53% in 2017. Second, Ascendis’ drug candidate wasn’t a new formulation but a new delivery mechanism. Instead of daily injections ASND’s Phase 3 candidate utilized a weekly injection of a growth hormone that was already approved by the FDA. So, the probability of success for this drug candidate was much higher than usual. ASND shares were slightly up until the beginning of March, but then jumped to a 90% gain following positive news.

Overall, when we give equal weights to each hedge fund manager’s average relative performance, we see that hedge fund managers who presented at the 2018 Sohn Conference generated an average outperformance of 3.2 percentage points. Without Oleg Nodelman’s ASND recommendation, this figure would have been a negative 3.25%.

Disclosure: None.

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