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GURU INVESTOR EDGE

REPORT

(Q3 2015)

→ What Are The Gurus Selling?

→ What Are The Gurus Buying?

→ Guru Conviction Positions

→ Value Revealed: Cheniere Energy

Exclusive New Content

In the GIE Members Area (log in at www.GuruInvestorEdge.com)

or email Support@EndlessRiseFinancial.com)

Quote of the Quarter “Unfortunately, a good process does not prevent mistakes, nor does it guarantee good outcomes, espe-

cially on a short-term basis. Because we look for investments that have a healthy margin for error, a

misjudgment of analysis is rarely a disaster. We don’t need much to go right in order to make money,

and in many cases we can get a lot wrong and still break even…”

David Einhorn (Greenlight Capital)

Idea Generation From Today’s Top Investors

Are These Stocks Fully Valued? During Q3 2015, Guru Investors trimmed big positions in Cheniere Energy, Micron, and Bank

of America Six Gurus reduced or eliminated positions in Allergan. Another four reduced posi-

tions in Priceline Group, MasterCard, and Wells Fargo.

As the stock market limped into the

new year, we saw Guru Investors

parring back position on a number

of their investments in anticipation

of such a move. We saw Guru Inves-

tors trimming numerous positions

in the Energy, Technology, and

Banking space. This is likely due to

these businesses approaching fair

value.

Richard Perry (Perry Capital)

sold his entire position in shares of

Cheniere Energy (LNG). Cheniere

is the owner and operator of the

Sabine. Carl Ichan just made

Cheniere a ~8% position in his

portfolio. In the 13D filing says they

will seek discussions on,

“operations, capital expenditures,

financings, and executive compen-

sation.” Shares are trading at $54

per share, near 52-week lows of

$53.71. Investors continue to pur-

chase shares in the business as they

see the exporting of LNG to be a ma-

jor growth industry over the coming

years.

This is another battleground stock

right now. Jim Chanos recently an-

nounced a big short position in the

name saying, “We've been pretty

negative for the past six months on

this LNG space. We think it's a loom-

ing disaster...It's a little bit tied into

Asia," Chanos said of his latest

short. "LNG was seen as a savior of a

lot of natural gas plays, a way to ba-

sically satiate the incredible de-

mand for energy out of Asia. The

problem is ... everybody figured it

out ... at the same time…with the

stock at 30 times 2020 earnings,

with the upside coming from a glut-

ted market, we think the risk-

reward in this, given where other

LNG plays are in Australia and else-

where, is just completely out-of-

whack.”

Richard Perry was active last

quarter as he eliminated his posi-

tion in Office Depot (ODP) as well.

He appeared to have gotten out just

in time as the merger between Of-

fice Depot and Staples was rejected

by regulatory authorities saying

that such a merger would not re-

duce competition in their respective

industry. Office Depot received a

bump in share price after the an-

nouncement, but shares have stead-

ily declined since the announce-

ment as the market expected the

rejection from the regulatory au-

thorities.

David Einhorn significantly

parred back his position in Micron

(MU) saying, it “was our biggest

winner in 2014. Unfortunately, we

overstayed our welcome and gave

back much of those gains this year.

The shares peaked at over $36 last

December before collapsing to

$14.98 on Sept. 30. Our thesis has

been that Micron Technology’s pri-

mary product, DRAM, has consoli-

dated to three players, who are like-

ly to create more industry profits

compared to when DRAM produc-

tion was highly fragmented…The

problem is that structural industry

improvement doesn’t make DRAM

less cyclical. The large capital re-

quirements force participants to

make large investments in anticipa-

tion of future demand. If the indus-

try overestimates demand, it still

makes sense to operate at full ca-

pacity and oversupply ensues. This

year, demand came up short, DRAM

prices collapsed, and despite our

concerns about PC demand, we

missed the turn of the cycle. “

The largest collection of Guru in-

vestor selling came from Allergan

(AGN) and Alphabet (GOOG). At

the moment, the selling in Allergan

appears to be relatively ill-timed as

shares traded well above the aver-

age of $295.80 during the quarter.

AIG’s appear ill-timed at the mo-

ment as shares are currently trad-

ing well above the avg price in Q3.

For the second straight quarter, 4

Guru Investors collectively sold or

eliminated shares in Priceline

(PCLN). Despite the selling, David

Rolfe has this to say about the com-

pany, “We continue to think Price-

line is doing an excellent job getting

returns on shareholder funds, rein-

vesting in travel service demand...

While Priceline’s business model

revolves around connecting travel

industry asset owners (e.g. hotels,

rental cars, restaurants) with travel-

ers, we think the Company’s com-

petitive advantage comes from be-

ing a highly-efficient, and therefore

low -cost provider focused on serv-

ing smaller, more fragmented asset

owners that lack the scale and mar-

keting reach of Priceline’s global,

online properties.”

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The biggest individual NEW posi-

tions included the popular

Mondelez Int’l (Pershing Square)

and Alcoa Inc. (Baupost Group).

Mondelez (MDLZ) is the spin-off

from Kraft Foods in 2012. The bulk

of their revenue is derived from

snacks, such as Oreos, Ritz cracker,

and Trident gum. Bill Ackman’s Per-

shing Square recently established

a large position in the company,

making it the fourth largest position

in the portfolio. In the 2015 letter to

shareholder he said, “...while we

believed Mondelez was trading at a

significant discount to intrinsic val-

ue, we reduced our stake in

Mondelez through the sale of for-

ward contracts representing 15 mil-

lion shares at an average price of

~$44 per share, reducing our total

ownership in stock and derivatives

to ~105 million shares. We contin-

ue to be highly optimistic about the

potential for Mondelez as it im-

proves its operational efficiency and

continues to grow while remaining

an attractive merger candidate, and

therefore, we expect to remain a

substantial, long-term holder. While

we are long-term investors, we al-

ways seek to optimize the risk/

return profile of the portfolio by

changing the weightings of existing

holdings and comparing portfolio

holdings with new investment op-

portunities, making adjustments

and wholesale changes when appro-

priate.”

Union Pacific (UNP) is big new

position with Whitney Tilson estab-

lishing a large position, making it

the railroad company his ninth larg-

est position. Shares are trading at

~$78.00 per share, near 52-week

lows. Tilson had this to say about

the company, The multiple for apple

has contracted (likely to continue)

because of the drop in coal and

shale shipments. However, many of

the Guru Investors see this stock as

incredibly cheap at current levels.

Shares trade at relatively low valua-

tion multiples with forward P/E of

11.76, P/FCF of 19.63, and a EV/

EBIT of 8.38. Continued share re-

purchases and increased dividends

should help bolster this underval-

ued stock and close the gap be-

tween price and intrinsic value over

time.

The cable network industry con-

tinues to be a favorite sector among

Guru Investors and Time Warner

(TWC) seems to be the ‘go-to” in

the sector lately. MS Global Fran-

chise Fund had this to say about the

company, Time Warner “is one of

the largest U.S. cable network busi-

nesses and parent company of

Warner Brothers film and TV studi-

os. Time Warner networks include

CNN, HBO and Turner Networks.

Return on operating capital at the

cable networks is currently over

50% and closer to 15% at the film

studios. We believe Time Warner is

one of the best run cable network

businesses in North America as it

offers almost pure exposure to high

return businesses where other net-

works companies often do not. The

company is the leader in original

scripted content in North America

and also has a leading film fran-

chise. It has an extensive film li-

brary and is able to monetize its

content not just in the U.S., but glob-

ally. The stock is trading on a free

cash flow yield of about 7%, with

free cash flow expected to grow

over 6% per year for several years

to come.”

We saw a flurry of Guru Investors

buying shares in Microsoft (MSFT)

with 6 Gurus increasing or estab-

lishing new positions in the compa-

ny. They reported strong earnings

on the back of its cloud strategy and

game console sales. The new man-

agement team appears to be execut-

ing well and continues to spend

money and resources developing an

integrated operating system for lap-

tops, tablets, phones, etc. that

should help to slow down the attri-

tion and grow the business.

Amazon (AMZN) was another

stock that saw increased buying,

with 4 Gurus increasing or estab-

lishing new positions in the compa-

ny. Wally Weitz (Weitz Funds) had

this to say about the company. “The

company has a long runway of

growth ahead; Amazon’s strong,

customer- obsessed culture is

unique among technology and retail

firms, and its long-term investment

philosophy allows for a continuous

flow of new product ideas. In addi-

tion to the retail business, the com-

pany’s Amazon Web Service busi-

ness has built significant share and

scale within the infrastructure as a

service sector of technology. This

business is highly profitable and

participates in a large and growing

market.”

Notable buys near or approaching

52-week lows include AA, GM, LNG,

UNP, and CNQ.

Where’s The Value? Guru Investors added significant NEW positions in Mondelez, Alcoa, and Union Pacific. Eight

Gurus added to their position in Allergan. Six added to their position in Microsoft. And another

five added to their positions in Alphabet, Cheniere Energy, and Time Warner Cable.

Idea Generation From Today’s Top Investors

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Conviction Positions

Berkshire Hathaway (Warren

Buffett) was given shares in Kraft

Heinz Co (KHC) after the newly

combined company began trading

in July 2015. Currently Kraft Heinz

is Berkshire’s second largest posi-

tion behind Wells Fargo. Buffett has

this to say about the company, “we

will be in the stock forever...it’s a

permanent holding, on our part…

the one thing I can promise you, is

that you will not see Berkshire re-

duce its interest.” Also, David Rolfe

had this to say about the company,

“We expect to see rapid profitability

growth over the next few years as

3G Capital instills its highly disci-

plined culture of minimizing cost

and expanding margins at the under

-earning Kraft Foods Corp (along

with further optimization at Heinz).

Once KHC margins have been max-

imized, we expect KHC to plow that

capital back into more M&A and re-

peat this process with other brand-

ed staples that exhibit bloated cost

structures. We expect this excep-

tional compounding of profits will

drive exceptional performance at

KHC for several years.”

David Einhorn (Greenlight Capi-

tal) increased his position in Ap-

ple (AAPL) by 52.08%. We’ve cov-

ered Einhorn’s position in Apple

before, and the large recent share

purchase tells us all we need to

know about his conviction for the

long-term sustainability of the com-

pany. Apple is by far the largest po-

sition in his portfolio at 20.53%.

Shares trade near 52-week lows and

the company has a fortress-like bal-

ance sheet with net cash.

Microsoft (MSFT) continues to

be a favorite among Guru Investors

with 7 owning the company at more

than 5% of their equity portfolio.

They reported strong earnings on

the back of its cloud strategy and

game console sales. The new man-

agement team appears to be execut-

ing well and continues to spend

money and resources developing an

integrated operating system for lap-

tops, tablets, phones, etc. that

should help to slow down the attri-

tion and grow the business.

Another favorite investment of

Guru Investors is Allergan (AGN).

Although the recent M&A spree in

the bio-tech space may be waning,

investors continue to like the long-

term potential for Allergan. Actavis

purchased Allergan and changed it’s

name to Allergan. They continued

their buying spree with a $2.1 bil-

lion buyout of Kythera. This buyout

will help bolster Allergan’s com-

pounded growth goals of 10% for

its branded drug business. The com-

pany continues to build its generic

business as well by purchasing U.K.

drug makers Auden KcKenzie for

over 300 million Euro in cash, plus

royalties. Revenues and free cash

flow have grown steadily over the

past five years at around 22.30%

and 24.10% per year respectively.

Traditional valuation metrics will

be a little “off” because of the M&A

activity, however, shares are trad-

ing at a forward P/E of 14.66 and a

P/FCF of 29.66.

Valeant Pharma (VRX) made the

list with five Guru Investors holding

a 5% or more position in their equi-

ty portfolio. There’s been a signifi-

cant amount of controversy sur-

rounding the company of late. Nu-

merous prominent shareholders

have paid dearly for holding shares

in the company as shares have

dropped from $260 to a low of $70

in mid November. Bill Ackman

(Pershing Square) stated in his lat-

est quarterly report, “When the

stock price rose this summer to the

mid-$200s per share, we did not sell

as we believed it was probable the

company would likely complete ad-

ditional transactions that would

meaningfully increase intrinsic val-

ue. In retrospect, this was a very

costly mistake. Our failure to sell

stock wasn’t entirely an unforced

error as we found ourselves largely

restricted from trading during this

period. During the summer, we

were made aware of a large poten-

tial transaction that Valeant was

working on, and as a result, we

were restricted from trading at a

time when it would have been pru-

dent to take some money off the

table. In retrospect, in light of Vale-

ant’s leverage and the regulatory

and political sensitivity of its under-

lying business, we should have

avoided becoming restricted to pre-

serve trading flexibility, or alterna-

tively, we should have made a

smaller initial investment in the

company.”

Baxter International (BAX)

popped up on our radar recently

when Dan Loeb increased his posi-

tion in Baxter by over 1,263.29%,

making it the largest position in his

equity portfolio. Shares appear to

be reasonably valued at current lev-

els and you’re paid to wait with a

dividend of 3.42%

Highest Conviction Investments? Guru Investors added significantly to their positions in Reynolds American, Apple, and Kraft

Heinz. Nine Guru Investors now hold Allergan at more than 5% of their portfolio. And another

seven hold 5% or more in their portfolio in Alphabet and Microsoft.

Idea Generation From Today’s Top Investors

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Value Revealed: Cheniere Energy (LNG)

Cheniere Energy (LNG) is the owner/operator of the

Sabine Pass LNG terminal in Louisiana, a natural gas

liquefaction and export facility four miles from the Gulf

Coast. The company hopes to benefit from increased

global demand for LNG with demand forecasted to from

at a 5.7% CAGR by 2025. The company has already se-

cured federal permits for U.S. natural gas to be exported

overseas. They have signed deals to purchase gas for

over 20 years. But the company’s looming debt load

and additional capital expenditures has become a con-

cern for many investors as shares have dropped 32% in

the past year alone.

On August 6, 2015, Icahn disclosed an 8.18% “active”

stake in stock and options with his filing of a 13D. Icahn

used fairly standard language in the 13D filings, stating

“acquired their positions in the Shares in the belief that

the Shares were undervalued. The Reporting Persons

intend to have discussions with representatives of the

Issuer's management and board of directors relating to

the Issuer's operations, capital expenditures, financings

and executive compensation. The Reporting Persons

may also seek shareholder board representation if ap-

propriate.”

Management and their compensation over the past

Cheniere Energy

(NYSE:LNG)

Description: Engaged in LNG-related

businesses. Owner/operator of the

Sabine Pass LNG terminal in Louisiana.

Price $29.33

52-Week Range $26.77—82.32

Dividend Yield N/A

Enterprise Value 23.92 B

Notable Shareholders:

Carl Icahn

Farmstead Capital

Seth Klarman

Yost Capital

Claren Road

Finepoint Capital

INVESTMENT SUMMARY

It’s a very tempting and appealing story given the supply of natu-

ral gas in the U.S. and the potential long wave of growth for a com-

pany with first-mover and geographic advantages. It tip-toes the

line between investing and speculating — make sure it’s a small

percentage of your portfolio if you do invest.

INVESTMENT SPOTLIGHT: Cheniere Energy (LNG)

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Value Revealed: Cheniere Energy (LNG)

few years were certainly significant concerns. Despite

never reporting net income or free cash, Cheniere’s

CEO, Charif Souki, was awarded a pay package of ~142

million in 2013. Currently, he receives no salary.

On August 24, 2015, two of Icahn Capital’s managing

directors, Jonathan Christodoro and Samuel Merksa-

mer, were appointed to the board. On September 9th,

famous short-seller Jim Chanos announced his short

position on Cheniere saying, “We've been pretty nega-

tive for the past six months on this LNG space. We think

it's a looming disaster." He goes on to say “…with the

stock at 30 times 2020 earnings, with the upside com-

ing from a glutted market, we think the risk-reward in

this, given where other LNG plays are in Australia and

elsewhere, is just completely out-of-whack."

Recently, Icahn increased his position to 12.07%. Re-

nowned value investor, Seth Klarman, also holds a large

position in Cheniere worth more than $1.5 billion. In a

recent interview on CNBC, Icahn said the contracts that

Cheniere has in place are “golden.” Even with in a de-

pressed natural gas environment, the company should

do well as the company has contracts in place with utili-

ties across the globe that need access to cheap natural

gas to keep the lights running.

BOTTOM LINE

Using traditional valuation metrics, the company is

grossly overvalued (near impossible to value). Let’s

make no mistake about it…this is a speculative play as

the company is riddled in debt and has never generated

net income, let alone free cash flow. But alas, the future

of the company does not benefit from the economics or

misdeeds of the past.

Regardless, this is a speculative bet on the future of

the U.S. as an exporter of natural gas. It’s a very tempt-

ing and appealing story given the supply of natural gas

in the U.S. and the potential long wave of growth for a

company with first-mover and geographic advantages.

Regardless, it’s difficult to justify investment (even with

activists and great investors circling the company).

Now, with that said, it’s ok to speculate in potential

game changers like Cheniere, just make sure it’s a small

percentage of your portfolio.

Notable Shareholders:

Carl Icahn | Seth Klarman | Claren Road | Farmstead

Capital | Yost Capital | Finepoint Capital

Source of figures and quotes: 13D Filing (SEC), Investor

Presentation

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