Hickey versus Hawkins

No, this is not a court case from the past being cited as the US Senate debates the merits of putting Joseph Alito on the US Supreme Court.

Instead, it relates something I posted here last November on Dell Computer and that occurred to me again when re-reading the latest installment of Barron’s Roundtable.

Roundtable participant Fred Hickey, of the High-Tech Strategist newsletter, said he’s short Dell. It’s not one of his Roundtable picks; he just stressed his bearishness on the company during the proceedings. I’m not familiar enough with Hickey to know whether or not he considers himself a “value investor.” But he earned a stellar reputation for keeping his head during the tech bubble when most others covering the industry lost theirs. And he examines companies from a bottom-up perspective.

Yet it’s interesting that Mason Hawkins and his Longleaf Partners Fund is long Dell. In fact, it's the 4th largest position in the fund (as of September 30). This Longleaf fund held 14.69 million shares and Southeastern Asset Management held 38.04 million at last report. Longleaf management wrote in their 3rd quarter report to shareholders that Dell is an entrenched brandname, has dominant market share, and produces generous free cash flow. They say that Dell's management owns a substantial stake in the company (thereby aligning their interests with shareholders) and is growing value by aggressively buying back shares at depressed prices.

As stated in my post on Dell last fall, I don’t have a dog is this fight. But it will be worth watching to see who’s right on this one.

Comments

[Steve]

I'm a longtime subscriber to The High-Tech Strategist and have been an investor in the Longleaf Partners Fund for many years.

Cates and Hawkins are very, very smart guys - that's why I've entrusted them with some of my capital. Admittedly, their performance was subpar in 2004 and 2005. But their strategy is to generate attractive long-term returns, not to beat some arbitrary benchmark year in and year out. Waste Management was a terrific call on their part. More recently, their positions in GM and Dell aroused my suspicion.

Hickey is an equally bright fellow, who is tech focused (and much more macro-oriented of late). His ability to collect, synthesize and analyze data and other intelligence across sectors, industries and specific companies is indeed impressive.

Let's not forget that even the very best investors (Templeton, Buffett, et. al.) only bat .600 over the long haul. But in the Dell game, my money's on Hickey. By the way, insider ownership becomes virtually meaningless when the owners have billions of dollars invested elsewhere.

[Jeffrey Miller]

I also have a great deal of respect for the managers at Longleaf. They have an excellent record.

I do take exception however to their claim that because the managers at Dell own a large share of the company, their interests are aligned with non-management shareholders.

If management bought their shares in the open market, that would be true. But that's not typically how Dell executives aquire their shares. Instead, they get them through massive option grants. The scale on which Dell grants options
is enormous. It results in a huge and until now unreported cost to shareholders. If anyone would like a nice overview of how the interests of managers and shareholders are NOT aligned by the generous payment of poorly structured stock options, read Buffett's 1985 letter to shareholders, or any of his more recent epsitles on the same subject.

Longleaf misses the mark on this issue, when they extol the fact that management has a large equity stake, without considering how they aquired that stake.

[John]

Steve and Jeffrey,

You both make excellent points, and are making me feel good about not owning Dell. :-)

Longleaf typically holds roughly 20 positions in their funds, as you know. So Dell is a big holding for them. Which makes this more interesting to an observer (like me) than if it was one position spread out over 100 or 200 stocks.