Einhorn, Ackman and Tilson: Wall Street’s Three Amigos

Three young guns, Bill Ackman, David Einhorn and Whitney Tilson, have taken Wall Street by storm over the past year, imposing a brand of frontier justice that has not been so one sided since George Soros took the Bank of England over his knee and broke it in two. These Amigos are being celebrated, most certainly by people who have not met them, or had even heard of them twelve months ago, but know a good time when they see it.

And these Amigos don't need no stinking badges to take an investment thesis public. If you are wondering what motivates them, well, Whitney Tilson has your answer:

I write and speak publicly about stocks I own because I like to teach and feel an obligation to give back. I’ve learned an enormous amount because great investors like Ben Graham, Warren Buffett, Seth Klarman, Joel Greenblatt and many others took the time to write and speak and share their wisdom with others. I certainly don’t claim that my wisdom is even a tiny percentage of theirs, but the obligation to try to give back is the same. Seeking Alpha

Whitney has a long history of philanthropy, although I am not sure I am buying into his explanation without performing further due diligence, which you can do by going here. But the Amigos have clearly formed a mutual admiration society, which seems to enjoy a stronger foundation than many of the transparent relationships on the Street, and Ackman's praise of Einhorn is simply effusive.

Amigos Take the Stage at the Value Investing Congress

“A super-high-quality human being,” says Bill Ackman of Pershing Square Capital, who has known him for about eight years New York Magazine

But taking on powerful interests is best done with someone covering your back, and the Amigos have that base covered.

And while Ackman’s call on the monolines was spot on, not everything has been so super high quality, at least from a return perspective:

Ackman clearly misjudged Borders (BGP-NYSE), and nearly top ticked a large position in Target Corp.  Some people even have the temerity to question his math and accounting skills, given he conveniently left off Borders debt, and muffed the enterprise value calculation, in proposing that Amazon.com buy Borders Group. A takeout is certainly in his best interests, and would bail him and at least one of the other Amigos out of large losing positions:

“Amazon could buy the company for about $400 million to get those locations that would take more than $1 billion to build,” he told reporters on the sidelines of a conference in New York. Business Week

Of course, Borders has roughly $500 million in debt, which Ackman did not address. Perhaps his quote was taken out of context.

Amigo Whitney is rushing to his defense, but with his Tilson Focus Fund (TILFX) down 25% over the past 12 months, and nearly dead last against his peers over the past one and three years, Whitney might be better off returning to his dog-eared version of Graham and Dodd, spending more time in his office rolling up his sleeves, and less as the third wheel in the Ackman/Einhorn relationship.

That is unlikely however, as Amigos travel in three’s, and Tilson seems a bit stubborn to boot, although he has a high tolerance for pain, given he piggybacked Ackman into Borders.

When in trouble, double, down:

Signs of a bottom? Borders One Year Chart

In the case of Borders, we have been closely following the unfolding situation and, after careful consideration, more than doubled our position recently when the stock tumbled below $5/share (it closed Friday at $6.17). This might strike some as pouring good money after bad, but while we don’t think Borders is a great business, we’re confident that it’s much more valuable than the market is giving it credit for. Tilson in Seeking Alpha

Bad stocks are fact of life, and the Amigos are not infallible. Although to be honest, the performance of the Tilson Focus Fund has been abysmal. That is not up for debate.

We are clearly going to see more of these actors in the future, which might make us all better investors, assuming the debates are not one way affairs.

Debating the bear case can improve your research methodology, and occasionally you get it right.  In 2002 shorts made a stink over the prospects for Stericycle, Inc, which caused me to redouble my research efforts on the stock. When Barron’s wrote a bearish piece in late July of that year, I was ready, realizing the shorts had spent their last bullet in getting Bill Alpert to forward their case in Tech Trader (strange for a healthcare stock to be discussed in that column), and the stock quickly ramped as well prepared longs ended the debate.

On other occasions I bailed after the bears settled in, presenting me with evidence that my investment case was weak or flawed. Unfortunately, many people do not understand how these situations work their way through the investment community, and ultimately on to the front pages of the financial media. The short side is always more controversial, but I would have to side with the Amigos, and agree that debating these issues in a civil manner can be a worthwhile endeavor, although the lunatic fringe, which occasionally includes yours truly, can turn the firefights into clusterf*cks.

Still, not everyone on the BuySide embraces the new Modus Operandi:

A senior partner at a buyout firm, though no fan of Lehman’s, summarized one cynical view of Einhorn on the Street: “When a guy stands to profit as much as he does, shorting a company in so precarious a condition that the Fed had just moved in to protect it, well, you have to wonder about his motivation. Yeah, there’s truth to his argument, but now is not the time. Two years ago would’ve been heroic. If he brings down Lehman, the guarantors are going to be me and you the taxpayer.” New York Magazine

His dogged pursuit of Erin has earned him a cult like following, but his zeal was a bit over the top for some, given the circumstances:

A hedge-fund analyst who covers the banking sector agrees that Einhorn’s analysis is hard to refute, but believes that “the same is probably true of all the broker-dealers. I don’t know any CFO who’d be willing to give you real numbers for what’s on their balance sheet in this environment.”

Goldman’s CFO admitted today on the conference call that the firm has de-levered far in excess of what they had guided to three months ago; showing your cards when you are playing poker is foolish, and while the circumstances are vastly different, certainly nobody is taking David Viniar to task, little white lie or not.

Lehman’s capital raise was never in doubt, but they certainly could not admit it in late April or early May, when Einhorn stepped up his public pronouncements. The stock was just starting to find its sea legs, and Lehman was still woozy after barely surviving a dramatic trading day on March 18th that took the firm to the brink.

And some people are even claiming Einhorn was right for the wrong reasons. Yes, David Trone from research boutique Fox-Pitt is once again at odds with Einhorn and his thesis.

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But the Amigos are here to stay, and deserve to be acknowledged for getting the stock right, which I missed to some extent while fixing my gaze squarely on Jimmy Cayne late into 2007.

Still, even David would have to admit that his haul in Lehman pales in comparison to the killing he made in First Plus Financial, roughly ten years ago. Honorary Amigo Loeb was on it like white on rice, and I cannot imagine David missed out. An implosion from $40 to $4, assuming my memory is correct, makes Lehman seem more like a single or double to that home run.

And while I will not force you to pick a favorite, I would not be surprised to soon see Amigo bobbleheads for sale, which might be a sign their fame is getting a little long in the tooth.  Maybe they can give it a rest this summer and come back in September with fresh ideas, assuming they have had time to put their positions on.

Amigos For Life

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The Confidence Man
New York Magazine

NYT Smears David Einhorn, Again
Seeking Alpha

Why We Doubled Our Position in Borders
Seeking Alpha
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. Long one campy movie

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