Sohn Conference: D. R. Horton (DHI), Assured Guaranty (AGO), and Palo Alto Networks (PANW) Put Under the Microscope

The Sohn Conference in New York, one of the biggest annual investment events, took place yesterday, with presentations from titans of the investment world like Larry Robbins of Glenview Capital, John Khoury of Long Pond Capital, and Jeffrey Gundlach, the CEO of DoubleLine Capital. Insider Monkey’s founder Ian Dogan was in attendance, allowing us to share exclusive insights from presentations made by the hedge fund world’s best and brightest.

D. R. Horton Inc (NYSE:DHI), Assured Guaranty Ltd. (NYSE:AGO), and Palo Alto Networks Inc (NYSE:PANW) were three of the stocks pitched on Monday, with two of them receiving bullish calls, while billionaire investing legend David Einhorn of Greenlight Capital was bearish on the other. We’ll examine the details of those calls below.

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D. R. Horton Inc (NYSE:DHI)

Let’s start with D. R. Horton Inc (NYSE:DHI), which was pitched by John Khoury of New York-based Long Pond Capital. The fund, which manages a 13F portfolio valued at $3.53 billion as of December 31, had over 15% of that figure ($540 million) invested in a long position in D. R. Horton Inc (NYSE:DHI) at the end of December, more than twice as much as any other stock. The fund also had a $105 million call position on the stock.

Khoury detailed some of the reasons why his fund is so bullish on D. R. Horton Inc (NYSE:DHI), beginning with the company’s transition into more of a pure-play home manufacturer focused on the entry-level homes market, which he says is the healthiest segment of the market. Existing-home inventory hit a record low heading into 2018, which has pushed home prices beyond the reach of many Millenials, millions of whom are in the market for a home. That should ensure strong demand for precisely what D. R. Horton Inc (NYSE:DHI) is built to offer now. Furthermore, Khoury and his team like the fact that D. R. Horton’s prime geographical regions are all experiencing net migration and have job growth rates exceeding the national average.

Khoury categorizes traditional homebuilders as operating in two distinct categories, land acquisition and development, and home manufacturing. Khoury praised D. R. Horton for focusing its model away from the capital-intensive former and into the free-cash-flow generating latter, which leads to far less risk and a higher return on equity. Khoury cites NVR, Inc. (NYSE:NVR) as a prime example of the effectiveness of this model in action, noting that in the lead up to the financial crisis, it outperformed traditional homebuilders by over 300% and continued to generate positive earnings through 2008 and 2009.

Nor is Khoury fazed by concerns over the effect that rising interest rates might have on the low-end of the market (or on homebuilders in general), dismissing the prevailing narrative that says they shouldn’t be invested in for that reason. Khoury believes rising interest rates are already priced into the stock and that homes are still affordable, as median mortgage payments as a percentage of median post-tax income stands at just 25%. That figure will rise to less than 30% should interest rates rise by another 100 basis points, which would still be well below the 40% figures in 2006/2007 that preceded the housing market crash.

All told, Khoury envisions D. R. Horton as having 63% upside potential, with a target earnings multiple of 13X (compared to 8X today) once the market prices in its transition away from traditional homebuilding to home manufacturing.

On the next page we’ll check out the pitches for Assured Guaranty Ltd. (NYSE:AGO) and Palo Alto Networks Inc (NYSE:PANW).

Assured Guaranty Ltd. (NYSE:AGO)

For the second-straight year at Sohn, billionaire investor David Einhorn of Greenlight Capital pitched a short idea. At last year’s event, it was Core Laboratories N.V. (NYSE:CLB) that earned his ire, with Einhorn predicting that the oilfield services company’s earnings would disappoint going forward based on its exposure to the least desirable parts of the market. He predicted a decline of 45%, which Core Laboratories got about halfway to at points in August and October of last year. However, a huge rally in the stock this month has pushed it to 10% gains since Einhorn’s pitch.

This year, Einhorn set his sights on Assured Guaranty Ltd. (NYSE:AGO), which he compared to Allied Capital, a company that he pitched a short idea on way back in 2002, which set off a contentious six-year battle between Einhorn and the company. Einhorn believes the end could be much nearer for Assured Guaranty than it was for Allied Capital (which was sold in 2010 after shares collapsed during the financial crisis), stating that the company could implode as early as this year. Einhorn estimates that Assured’s exposure to bad debt in Puerto Rico has led to $2.8 billion in implied losses that the company hasn’t recognized so as not to put its S&P rating at risk, and that it’s weighed down by junk grade bonds, with its $7 billion in capital being 32- to 54-times levered.

Assured Guaranty Ltd. (NYSE:AGO) responded to Einhorn’s presentation by stating that he “demonstrates a fundamental lack of understanding of our business model and the municipal debt markets,” and claimed that its balance sheet is strong and it doesn’t face liquidity risks.

Palo Alto Networks Inc (NYSE:PANW)

We give the last word to Glen Kacher of Light Street Capital, which gained 38% in 2017 net of fees, and is up a further 11% thus far in 2018. Kacher pitched Palo Alto Networks Inc (NYSE:PANW) as a long idea and appears to be very bullish on the company’s opportunity in the cloud security space, predicting 90% upside potential over the next two years.

Kacher discussed the immense need for online security in an era of government-funded criminal hacker organizations looking to divert wealth to their digital coffers. The threat is grave enough that a single large-scale cyber theft could potentially trigger a financial collapse through widespread fear of the banking system, potentially wiping out over $20 trillion in wealth. Given that, Kacher questioned the U.S government’s spending on cyber security, stating that they spend just $13 billion annually to fight a cyber war that’s actually occurring right now, while spending $600 billion on defense for a conventional war that isn’t occurring (and isn’t very likely to).

That security is made all the more challenging by the increasing prevalence of the hybrid cloud model in IT, where data must travel over many clients and networks, which creates a huge opportunity for Palo Alto Networks Inc (NYSE:PANW)’s leading hybrid security solution, which is capable of protecting both the enterprise and cloud operations of companies with a single solution. And there’s far more growth in cloud yet to come, as Kacher told CNBC following the event that only 14% to 15% of computing has been shifted to the cloud thus far.

Palo Alto is hugely successful at capitalizing on its customers through its transition to a subscription-based model, pulling in four-times as much revenue per customer as its competitors, and Kacher predicts that will lead to robust revenue growth of over 20% for years to come, outpacing overall firewall market growth by 3X. Kacher also likes that the company’s management has become more disciplined when it comes to expenses, which he estimates will help drive operating and free cash flow margins to 27% and 41% respectively by 2021.

Disclosure: None