The winner was a pitch to buy Italian defense giant Finmeccanica, a turnaround story with a market capitalization of 5 billion euros. The idea was pitched by Steven Wood, founder of investment fund GreenWood Investors.
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In a 30-page slide deck, Wood argues that the company is the "next Fiat" and will likely see a sharp improvement in margins under the watch of new CEO Mauro Moretti. Previously, Moretti was in charge of the Italian passenger train network, which was sustaining operating losses after the financial crisis. By 2013, Moretti slashed enough costs to bring the rail company's operating margin to 10 percent—even without an improvement in passenger loads.
Wood argues that European defense spending has a much more bullish outlook than the U.S. He pointed out that some NATO countries are below the new target of defense spending at 2 percent of GDP.
Wood came across the company by chance while visiting Italy last year. "I was meeting with one of my favorite brokers and he mentioned the new CEO of Finmeccanica at the end of a meeting," he said. "The new CEO's track record was phenomenal."
Wood said Italy is ripe with good deep-value ideas because so many investor have written off the country, and valuations are steeply discounted versus other parts of Europe. "Even the Italians are skeptical of their own stocks," he said.
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Wood's idea apparently blew away the panel of judges, which consisted of hedge fund and big asset allocators like university trusts. "The pool of submissions was deep and extremely high-quality in the contest. However, the Finmeccanica pitch earned the most votes overall as well as the most first place points of any idea contest, respectively, that we've ever run--and there have been many excellent ideas over the years," said SumZero COO Nicholas Kapur. "Personally, I had never even heard of the company, but the judges, many of whom come from excellent firms, are essentially telling us to pay close attention to this thesis and the company."
Wood founded GreenWood Investors in 2010 with an emphasis on longer-term views. He received a bachelor of arts from Tulane University in economics, political economy and international relations.
Second place went to a long bet on Atlas Energy, a partnership that trades like a stock and is in the process of selling off the majority of its assets in a complex transaction. The idea was pitched by Ian Clark, founder and managing director of hedge fund Dichotomy Capital. Clark, a former chemist, spotted the idea last year before the energy swoon and decided to act on it when the sector went into freefall.
Clark is focused on the value of the "stub" that will remain after most assets are sold sometime in the next few months. He said that at one point in December, the implied valuation of the "stub" actually swung to negative as investors dumped energy assets almost blindly. "The energy market was bad and some hedge funds were getting hit with redemptions," he said. "It all came together and led people to blow out of the position."
At the current price, the "stub" has an incredible annual yield of 82 percent, according to Clark's calculations. Most of the "stub" assets are tied to natural gas prices, which have fallen sharply in recent months. But there are hedges in place to make him comfortable that distributions will be paid for the rest of the year even if natural gas prices stagnate. He believes that investors will get all of their money back from the investment within two or three years through cash distributions.
Clark decided to leave chemistry behind and start investing during the crisis, taking a job at a hedge fund for a couple of years before starting his fund in 2013. "I became interested in finance during the debacle," he said.
Third place went to a pitch to buy Energizer Holdings, parent company of the namesake battery manufacturer and Schick razors. The company is planning to spin off its personal care business, including Schick razors, later this year, potentially unlocking value for shareholders. The idea was a joint pitch from Winston Chu of HT Capital Management and Perry Tan of Black Crane Capital. Both analysts are based in Hong Kong.
The pitch for Energizer was admittedly unusual for Asia-based investors, the two analysts said. "The thing about Asia is that most people are growth investors," Chu said. But Chu and Tan said they are much more focused on companies that can demonstrate strong returns on investment.
Part of the thesis stems from Warren Buffett's acquisition of Duracell from Procter & Gamble, which is expected to close later this year. The duo said that the Duracell deal put a floor on the valuation of Energizer's battery division. Using that number, they calculate that the personal care division has an implied valuation of just nine times earnings—far less than others in the personal care business.
They said there's a decent chance that a buyer like Unilever will buy the personal care business and begin selling Schick razors in markets where they aren't yet sold—such as Brazil. Even without a deal, they believe Schick can expand internationally on its own.
As for the battery business, the two investors aren't worried about a structural decline. "Who cares if the trend is negative if there's so much free cash flow," Tan said.
The winners were selected by 15 judges composed of hedge funds and major asset allocators.