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All Contents © 2018The Kiplinger Washington Editors
By Charles Sizemore
| December 6, 2016
It’s that time again, and no, I’m not talking about the holiday shopping season. Forty five days after each quarter end, the SEC requires large institutional money managers — what we think of as the “smart money” — to file their 13-F reports disclosing all of their current long investments and any trades they made over the course of the quarter.
It gives ordinary investors like us a chance to peek over the shoulders of the smart money. There are limitations, of course. By the time we get the data, it’s already at least 45 days old, and a lot can happen in 45 days. The 13-F reports also include only long stock positions, so we have no visibility on any shorts by the smart money managers or whether the long positions are part of a pair trade or some sort of hedging strategy.
But even given these minor limitations, smart money 13-F filings give us a window into the minds of some of the sharpest minds on Wall Street. It’s up to us to interpret the data and to figure out if it’s tradable!
As always, there were some surprises this quarter. Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) dipped into a sector that the Oracle has shunned for decades … and multiple smart money managers are loading up on an old tech company that had been mostly left for dead.
So without further ado, here are 10 stocks the smart money likes right now.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Mike Mozart via Flickr
I’ll start with one of my favorite lunch spots, Chipotle Mexican Grill, Inc. (CMG). Yes, I enjoy their burritos enough to risk food poisoning. It’s worth it.
But while I love the burritos, I’ve kept my distance from the stock. Chipotle is still struggling with the fallout from its food safety scandals, and worse, the stock is something of an orphan right now. It’s no longer a high-growth momentum stock worthy of a sky-high earnings multiple … but it is by no means cheap enough to be on any value investor’s menu any time soon. It’s a stock without a base of buyers, and that’s a tough position to be in.
Interestingly, Pershing Square’s Bill Ackman sees something he likes. Ackman took a position in CMG stock last quarter and now owns about 9.9% of the company. He’s also reportedly negotiating with management over changes to the board of directors. Unlike you or me, Ackman is not a passive investor. He’s an activist investor who seeks to unlock value by loudly agitating for change.
Often, his tactics work well. Other times … ahem, J C Penney Company Inc. (JCP) … his efforts have done more harm than good. It’s far too early to speculate as to what changes Ackman might bring about. But some fresh ideas are definitely needed.
Aybek Erkinov via Flickr
Speaking of Ackman, one of his favorite shorts, nutrition company Herbalife Ltd. (HLF) is attracting the attention of some other smart money gurus. Ackman and fellow activist investor Carl Icahn famously squared off over Herbalife a few years ago, and thus far it appears that Icahn has had the upper hand.
While HLF stock has had a rough ride over the past two months, it’s up by more than a third since Icahn started buying it. Ichan boosted his holdings by 15% last quarter, and his buying continues. He’s added yet another 15% just this month.
And it seems he’s not alone. George Soros’ family office initiated a new position in HLF last quarter. Soros’ family office (formerly his hedge fund) has traded in and out of the stock several times in recent years, most recently selling out in late 2015. Soros no longer manages the day to day trading, but his team very clearly learned from the best.
Ackman is stubbornly maintaining his short in Herbalife, insisting that the company is a pyramid scheme. Thus far, the regulators have disagreed.
Ackman, Icahn and Soros have all had storied careers. Yet, at least one of them is going to end up looking very bad once this fully plays out. Until that happens, this is a stock I’d recommend avoiding.
Oliver Holzbauer via Flickr
Warren Buffett once said that best way to become a millionaire was to start as a billionaire and then buy an airline. So imagine how surprising it was to find that Mr. Buffett’s Berkshire Hathaway made an investment in American Airlines Group Inc. (AAL).
Now, it’s debatable whether it was the Oracle himself that purchased the shares. Buffett has been delegating more and more investment authority to his lieutenants Ted Weschler and Todd Combs, so it’s likely that the move was made by one of these gentlemen. But even if Buffett wasn’t the one pulling the trigger on the trade, this is still a major turn of direction for Berkshire.
And interestingly, Buffett & Company weren’t the only smart money investors reevaluating airline stocks. Joel Greenblatt’s Gotham Asset Management also added shares last quarter. Greenblatt screens stocks using his “magic formula,” which filters stocks for value and for profitability. So this would imply that, at least by Greenblatt’s metrics, airlines are both cheap and profitable. American Airlines trades at an earnings yield (Greenblatt’s preferred metric) of 12.4% and sports a return on capital of 17.6%. Not too shabby.
If Buffett & friends were bullish on American Airlines, it stands to reason that they’d be bullish on rival Delta Air Lines, Inc. (DAL) as well. Berkshire Hathaway also took a position in Delta last quarter.
But Buffett’s crew weren’t the only smart money investors nibbling at Delta stock. Appaloosa Management’s David Tepper scooped up nearly half a million shares.
Interestingly, this isn’t Tepper’s first time to fly Delta. He’s been actively trading the stock for years, and had liquidated his position as recently as the second quarter of 2016. So it’s interesting to see him jump into this stock again so soon. But if his past trading is any indication, I’d expect him to increase his position size by at least a factor of 10.
Tepper has one of the best track records of any large manager over the past decade, so I tend to take his trading moves seriously. But the most profitable trade of his career was likely the decision he made to move his operation to tax-friendly Florida.
Tepper’s former state of residence — heavily taxed New Jersey — faced a mild crisis when it had to scramble to find a way to replace the roughly $140 million in taxes that Tepper had formerly been paying. That’s when you know you’ve made it in life. When packing up and moving causes a fiscal crisis in the place you left behind.
Jerry Landers via Flickr (Modified)
Let’s add one last airline to our list of smart money stocks, budget pioneer Southwest Airlines Co (LUV). One of my favorite value managers, Mohnish Pabrai, recently scooped up about half a million shares. And if Pabrai’s history is any indication, he’s probably got a lot more left to buy.
Pabrai tends to bet big and runs a highly concentrated $300 million portfolio. As of his last reporting, he had just eight stocks in the portfolio. At an allocation of about 6%, Southwest is currently one of his smallest positions. Pabrai isn’t the only smart money buyer, of course. Steve Cohen’s Point72 Asset Management initiated a new position, and Jim Simons’ Renaissance Technologies upped its existing position last quarter. And Berkshire Hathaway reportedly added a small position too, although after the quarter end.
What is it that these smart money investors seem to find so appealing about airlines?
Well, to start, they’re cheap. Most trade at forward price-earnings ratios that are about half the levels of the S&P 500. And after dealing with capacity and cost issues for years, the airlines are in much better financial health than at any time in recent history.
Interestingly, David Tepper — who is busily buying Delta Airlines — reduced his formerly large position in Southwest by nearly 3 million shares last quarter.
Yuanbin Du via Flickr
Consumer electronics powerhouse Apple Inc. (AAPL) doesn’t quite get the attention from smart money gurus that it used to. But it still most certainly has its fans. And you can add to that list Third Point’s Dan Loeb. Last quarter, Loeb bought 2.5 million shares, making it a top-ten holding for his firm.
Loeb is an activist investor best known for taking large positions in companies before writing scathing open letters to management designed to shame them into action. It remains to be seen what Loeb’s angle with Apple will be. Loeb’s fund isn’t big enough for him to force his way onto the board of directors. But, as we saw with Carl Icahn a few years ago, he could absolutely wage a PR war with Apple if he wanted to. But at this stage of the game, it isn’t clear what Loeb wants or what his intentions are.
Interestingly, David Tepper also took a position in Apple last quarter. Both Tepper and Loeb have been in and out of Apple stock over the past few years.
Interestingly, one long-time Apple bull is lightening the load. David Einhorn reduced his position in Apple by about 24% last quarter, though it remains his largest long position at over 11% of his portfolio.
Dayne Topkin via Unsplash
Speaking of David Einhorn, Greenlight Capital also made a new investment in old-economy United States Steel Corporation (X). Einhorn accumulated just over 3 million shares. Importantly, these purchases happened last quarter, before the presidential election.
U.S. Steel’s price was already heading higher prior to the election, but the Trump victory has sent the shares sharply higher in the belief that big infrastructure projects — and potential tariffs on foreign competition — are likely.
While U.S. Steel is not a popular stock, Einhorn is not completely alone. Leon Cooperman and Steve Cohen’s firms both initiated positions last quarter, and Paul Tudor Jones added to his existing position.
After the run U.S. Steel has had, I would be very reluctant to follow the lead of Einhorn and his fellow smart money investors. The stock is up over 60% in less than a month.
I hate Facebook Inc (FB), I really do. This is a company that has done more to ruin face-to-face human interaction than any company in memory. But while I hate its service, I’d be a fool if I didn’t like its stock.
And on that front, I’m not alone. David Tepper made a major new investment last quarter, buying 1.5 million shares. Facebook is now his sixth-biggest long position at 4.3% of his portfolio.
And Tepper certainly isn’t the only smart money investor loading up on Facebook. Funds run by Dan Loeb and Steve Cohen, John Paulson, Ray Dalio and Julian Robertson all added to existing positions in the quarter.
It’s not hard to understand their enthusiasm. Facebook has been one of the few growth stories of the past few years in a market that drastically needs a bullish narrative to go higher. Facebook is also the only social media stock that seems to know how to monetize its user base. It’s an expensive stock, trading for 45 times earnings. But in a market starved for growth stories, it’s likely to stay expensive for a while.
Next up is Chinese e-commerce juggernaut Alibaba Group Holding Ltd (BABA), founded by Jack Ma. BABA has been drifting lower for the past two months, but that hasn’t appeared to dampen its appeal to at least a solid handful of smart money investors.
Howard Marks’ Oaktree Capital Management, Stanley Druckenmiller’s Duquesne Capital Management, Daniel Loeb’s Third Point and Steve Mandel’s Lone Pine Capital all initiated positions in Alibaba last quarter. Steve Cohen’s Point72 sold out of its position after trading in and out of it for the past two years.
It remains to be seen how any of these gentlemen feel about this stock post election. A trade war between the U.S and China can’t be ruled out, and it’s unclear what effect, if any, that might have on Alibaba operations. If a trade war lead to a hard landing for the Chinese economy or a sharp devaluation of the yuan, investors in Chinese stocks could be in for a wild ride.
Alibaba trades at a forward P/E of 23, which by the standards of high-growth tech stocks today, is certainly not unreasonable.
Jerry Luo via Unsplash
I’ve saved the most popular smart money stock for last. It seems that large hedge fund managers just can’t get enough of Dell Technologies Inc (DVMT) Value investing demigod Seth Klarman of the Baupost Group made a large new purchase, and DVMT now accounts for nearly 5% of his portfolio. Funds owned or managed by Dan Loeb, Jeremy Grantham, George Soros, John Paulson, Leon Cooperman, Steve Cohen, David Dreman and Jim Simons also initiated positions last quarter.
When you have this many smart money managers piling into a stock, it’s bound to raise eyebrows. So, what’s the story here?
Dell Inc. the struggling maker of PCs, took itself private two years ago, needing time away from the public eye to restructure itself. Well, the company wasted little time. About a year ago, Dell announced it would be acquiring enterprise software and storage company EMC Corporation, and Dell Technologies is what emerged from the merger. Cloud services company VMware, Inc. (VMW) is also controlled by the new Dell, as it was formerly controlled by EMC.
Whether the marriage will be fruitful remains to be seen, but some of Wall Street’s heaviest hitters certainly seem to think it will be.
This article is from Charles Sizemore of InvestorPlace. As of this writing, he was long Apple.
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