Friday, June 13, 2008

Bill Ackman Part II: Eight Easy Steps to Becoming a Short-Seller

So you want to be a short-seller (or an activist). Here are some lessons gleaned from Pershing Square Capital founder William Ackman at our Deals & Deal Makers conference Wednesday.

Do your homework: Ackman said he gets most of his ideas not from sophisticated tips but just by "brute force" just from reading annual reports and looking for ways in which companies are undervalued by the stock market. Then he can pull just a few simple levers to boost the companies' stock valuations to where he believes it should be.

Find a theme and export it: Ackman says he invested in Sears and Sears Canada because the retailing companies financed their credit-card receivables on its own balance sheet, which wasn't well-understood by the markets. He used the same kind of thinking to tackle Target, which he believed was strong company with a solid debt profile and also one of the only retailers to still finance its credit cards in-house.In the case of Sears, Ackman evaluated it as its component parts, including Sears Hardware, Home Services, Sears Canada, Land's End and Sears Mexico, all of that is before you get to the company's extensive real estate value. "The only thing wrong is the stock price," he said, a line that drew laughs, because Ackman acknowledged later, it bore a similarity to the old joke about "other than that, how was the show, Mrs. Lincoln."

Operate unlevered: Ackman's hedge fund doesn't use debt. (A co-investment vehicle uses non-recourse leverage, which are loans that don't require collateral). "We're never exposed to market fluctuations and our prime broker doesn't make margin calls," he boasted. Without worries about debt, market panic is "just noise," he said. "It's all opportunity."

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