My Favorite Idea From a Gathering of Billionaires

It’s a gathering of billionaires … That’s how a few media outlets describe the Ira Sohn investment conference. Every year, some of the world’s greatest investors including David Einhorn, Bill Ackman, Jim Chanos, Stanley Druckenmiller, Jeffrey Gundlach and Larry Robbins (to name a few) share their favorite investment ideas. The conference was held in New York City last week. It was also covered by CNBC (just partnered with the Ira Sohn Foundation) who interviewed many of these billionaires shortly after their presentations. I attended the event and watched from the third row. I actually sat behind hedge fund legend Bill Ackman as these Wall Street elites used their 20-minute window to pitch their new ideas.Most of the presentations were solid. There were unique ideas including shorting utilities, shorting the riyal (Saudi’s currency), buying Greek bonds, and using leverage to go long mortgage REITs (real estate investment trusts), a sector that’s been crushed over the past 18 months. However, my favorite idea was presented by value investing legend John Koury … He’s the managing partner of Long Pond Capital. That’s a hedge fund with over $2 billion in assets under management. He believes lodging giant Hyatt Hotels (H) has at least 65% upside from the current price. Hyatt is trading nearly 20% off its highs. The stock has fallen alongside most lodging stocks — a sector Koury calls one of the worst performers over the past 12 months. As you can see from the chart below, the stock was down nearly 40% before the markets rallied in February. Yet, shares are still underperforming the market by a wide margin.Koury started his presentation off by highlighting the negative sentiment in the lodging sector. For example, rental lodging website Airbnb — which allows homeowners to rent their places to just about anyone, has been taking market share from most hotel companies. Plus, investment banking giant Goldman Sachs has a “Sell” rating on the sector. Koury says Airbnb is no longer a threat to Hyatt. In short, Hyatt has been selling off its low- to middle-end properties. This is where Airbnb provides the biggest threat.Hyatt is now sitting on mostly high-end properties (over 650 in total) that appeal to high-end consumers and business travelers.Plus, he says the “Sell” rating from Goldman Sachs will allow investors to pick up a premier lodging company at a dirt-cheap valuation. But he says Goldman is likely right about other hotel stocks that are trading at much higher valuations. Koury also highlighted Hyatt’s investment-grade credit rating. It’s one of the highest in the industry. The company has significant liquidity, including $1.5 billion in available funding through an undrawn credit facility. That’s a lot of liquidity for a $6.5 billion market-cap company. Hyatt has been using its cash to buy back stock. They purchased $715 million in stock in 2015 and $84 million thus far in 2016. This amounts to 41% of the float that Hyatt has already bought back. Koury said:

“If Hyatt keeps repurchasing shares, at some point, there’ll be no float left.”

Koury also brought up a great point on growth … He said EBITDA (earnings before interest, taxes, depreciation and amortization) has grown by 66% since 2010. Yet, the share price of Hyatt is only up 15% over the same time frame. And management bought back 20% of float over this same time period.Koury makes a great case to buy Hyatt here. Sure, the stock is trading off its lows … but shares are still down significantly compared to the market. Hyatt has also traded in line with low-end hotel chains that have less leverage to grow, weaker balance sheets and a much-lower-quality portfolio of assets. I wouldn’t be surprised to see shares hit his $79 price target over the next 12 months. That’s about 65% higher than the current price. Just be sure to do your due diligence before making any moves.