Glenview Capital Management

Glenview Capital Management was founded in February 2001 by Larry Robbins. The seven billion dollar hedge fund, based in Manhattan, New York, is split between Glenview Funds, a short fund, and Little Arbor Fund, a multi-strategy fund. Glenview Capital has returned 260%, together with an annualized return of 14.2% for its investors, for a decade since the firm’s inception. The firm’s Glenview Funds gained 301%, for the same period, while the average hedge fund gained but 71% and the S&P500 gained just 15%. The firm’s main focus is on delivering attractive absolute returns by utilizing deep fundamental research and stock selection.

Larry Robbins, the flamboyant Portfolio Manager and CEO of Glenview Capital, is the stock picker in charge and has affability to making concentrated bets on large cap stocks. He also invests in bonds and some of his large debtors have marked him with the scarlet letter. No, no, not for Adultery but for Activism. The L-train, as Mr. Robbins is referred to in financial /paparazzi circles, does not shy away from publicly voicing his concerns regarding management and at times demanding complete overhaul. Nonetheless, Mr. Robbins remains highly regarded in the press. He was described by Business Insider as “one of the most optimistic hedge fund managers around” and by The New Yorker as a “Hot shot who utilizes a variety of strategies.”

Mr. Robbins, a graduate of the Wharton School and Moore School of the University of Pennsylvania, joined the financial world as an analyst for Gleacher & Company, a New York merger and advisory boutique. After three years, Mr. Robbins joined Omega Advisors as an analyst on their US equity long/short team. During his six years there, Mr. Robbins became partner and had the opportunity work with the buyout king himself: Leon Cooperman. Not to discount the influence of Mr. Gleacher or Mr. Cooperman, Mr. Robbins unabashedly credits his Midwestern upbringing and his love of hockey as the greatest inspiration for his success. Playing hockey for his school in Glenview, the firm’s namesake, Il, he learned the values of teamwork and diligence. He posits that the consistency of effort is what differentiates the winners from the losers.

Glenview Capital Management generally seeks out good businesses, low valuations, excess capital, a business that can succeed irrespective of economic environment, and pricing power. Mr. Robbins runs a semi-diversified portfolio with 60 to 70 positions and a net equity exposure around 40-60% which makes his portfolio partially hedged. The majority of the investments are heavy in the sector weightings for the healthcare, industrial, financial, services and technology sectors. While the firm’s portfolio holdings are diversified by industry, end market and growth drivers, Mr. Robbins believes that the common elements of modest valuations, above consensus earnings growth and accelerating productive capital deployment would all contribute to promote value for his largest equity holdings.

Mr. Robbins points out that he is in the “re-cycling business” when looking for prospective investment opportunities. Even though there are about seven thousand public companies in the US, Mr. Robbins concentrates his efforts on 1,000 to 1,500 companies that fit Glenview Capital’s definition of a good business. Dusting off old memos, revisiting ideas is mainly how the firm generates ideas which may come from the team, bottom up, or upon Mr. Robbins behest, top down. Businesses experiencing change in management due to stock price movement, companies affected by change in regulation, raw material prices, environmental concerns are brought to attention. The observation of these conditions inspires idea-generation.

Mr. Robbins points out that after the initial idea-generation, the idea is scrupulously put to intense research which is conducted by his team consisting of seven different groups, six sector specific and one functional. A full investment plan is then presented to the investment committee whose workings Mr. Robbins likens to completing a jigsaw puzzle by “collecting more and more pieces.” It’s like playing Wheel of Fortune, further expounds Mr. Robbins, the more letters one has the easier it would be to find the answer.

Mr. Robbins, well known for crafting clever analogies, describes the US equity market equating it to bowling. In the late nineties, the economy was bowling right down the middle of the lane with 4% growth and low inflation. Today’s macroeconomic scenario is different in that the ball is rolling down the middle but bouncing off the gutter guards on either side: Recession being the left gutter and inflation or hyperinflation being the right one. Mr. Robbins believes that the Fed and the central banks are providing the economy with a guard against the “recessionary” right gutter, while inflation is being kept under control with a zero-interest-rate policy.

However, Mr. Robbins points out that the way that he invests is not based upon any particular economic forecast, but mainly on another (!) one of his analogies: the investing stool. The stool comprising of actually four legs: economic growth, liquidity, low valuations and high excess cash balances. Each “leg” is closely monitored to keep abreast with any changes that may cause instability and when to take action on risk management. One leg falling off will not make the stool fall, says Mr. Robbins, but two would definitely call for a change in portfolio and/or position.

Noticeably, there is a large weight discrepancy between the size of longs and shorts. Since Mr. Robbins is a long/short multi-strategy manager maybe the discrepancy in positions is just a variation on the theme, investment style, or it may be that he is more confident about his one than his shorts. To configure this, but more importantly to try to understand Mr. Robbins’ modus operandi, let’s examine the factors involved in each one of his trades: long and short.

Mr. Robbins is a big fan of the healthcare sector and it comes as no surprise that healthcare accounts for 40% of Glenview Capital’s portfolio. He is long hospitals and life sciences(Tenet in particular) as he believes that there is much asset mis-pricing in the healthcare segment. He believes that the for profit hospitals — such as Tenet Healthcare Corporation, HCA Holdings Inc., LifePoint Hospitals– are overcapitalized, possess good cash flow, and EBITDA , a solid metric to analyze and compare profitability between companies and industries, has grown.

These companies have a compound annual growth rate, CAGR, of 9% since 2004 and their stock is trading at 7x earnings because, according to Mr. Robbins, “the market hates them.”

Thanks to the enactment of the affordable healthcare act, the lower income populace will qualify for medicaid and hospitals will be able to get more money from the government. By 2014, everyone will have to buy health insurance and the government provisions would encourage people not only to get health insurance but also to frequent hospitals more often. At this time about half of the beds are empty at the for-profit hospitals. Furthermore, Mr. Robbins foresees medicare rates going up increasing hospital profits. Also, these companies have a huge amount of leverage and given their excess cash flow, they will be able to re buy every single share.
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Mr. Robbins shorts what he refers to as the “new high club” – treasuries, utilities (ITC in particular) and the defense sector. ITC Holdings is an energy company regulated by the states. Generally utilities are allowed 11.2% on equity but ITC is allowed 13.2% ROE and has more equity. Glenview Capital believes that the company’s capital structure allows it to overcharge customers, however also believing that this “sweetheart deal” will not be overlooked by the regulators forever. The regulators have noticed ITC’s high margins, FERC is starting to take action but Mr. Robbins remains unconcerned as ITC is qualified as a transmission company.

QUOTES

“Consistency of effort wins the game.”

“I grew up in the Midwest as a student and a hockey player. Playing hockey, you quickly learn that it is a team sport where everybody is good and that you need to work hard, and you need to work hard throughout the whole game.”

“Consistency of effort often makes the difference between who wins and who loses …We know that the key is to realize that on January 1st, when the sheet reads zero point zero, we have to remember that it’s not about what you did before, but about that persistence and continuity of work effort.”

“The first analogy we would make is that if the late 90s were about just bowling right down the middle, now this is bowling with gutter guards.”