Many of you know that I run a trading service called The Billionaires Portfolio which is an investing service that piggybacks the stock picks of the world’s greatest Billionaire investors and Hedge Funds. This service, all modesty aside, has performed excellent, our model portfolio is currently outperforming the S&P 500 by 5 to 1, and has produced two triple digit winners in less than six months since the service started. Moreover many of our subscribers are up more than 20% in their portfolios.
Remember the reason I started The Billionaires Portfolio is to show the everyday investor how the richest and smartest investors in the world are generating huge returns in the stock market, but not every Hedge Fund is the same.
Currently there are over 8000 Hedge Funds, yet only 5% or 400 of these hedge funds have actually outperformed the market on a consistent basis. So it’s crucial to know the Hedge Fund Industry the strategies these Hedge Funds employ and the managers who run them. To understand Hedge Funds you must have worked in the industry, my apologies to all journalists out there, but journalists and people who have never been employed as an analyst or trader by a real hedge fund or investment management firm (and by real I mean a firm with at least a 5 year track record and $100 million in assets), have no business analyzing or writing on Hedge Funds.
So Caveat Emptor, when you read articles on the internet about Hedge Funds, look at the author and see what their background is, because trust me its very important, as Hedge Funds use tricks and secrets that only people who have worked in the industry would be able to understand. For more on my background and how my service The Billionaires Portfolio has been able to crush the stock market, please register for my free Webinar on Wednesday February the 27th.
My first job out of graduate school was with a $1.2 Billion Dollar Institutional Hedge Fund run by a former Goldman Sachs Partner and Harvard MBA. I was lucky enough as a 25 year old kid to learn from one one of the top investment minds on Wall Street. My boss invested only in stocks and he used an investment philosophy called GARP. This is called Growth at a Reasonable Price. What this means is that you are looking to buy stocks that are growing but are still selling at a reasonable price.
My boss learned this style of investing while working as an equity analyst at Goldman Sachs, covering the retail sector. By using GARP our fund was able to beat 99% of other investment managers and our assets grew from $100 to over $1 billion in just 3 years. My point in writing this, is that GARP is the only proven investment style that works in all market conditions, both bull and bear markets. It is used by Stephen Mandel of Lone Pine Capital, who is considered the best stock picker in the hedge fund business, Mr. Mandel manages over $17 billion dollars and has averaged close to 30% a year since 1997 versus 6% in the S&P 500.
GARP works because it forces you to only buy stocks that are rising in terms of growth and price. We have seen what happens when you bottom fish or try and buy so called value stocks that are cheap or declining in price. Some of the most famous so called value managers lost more than 50% in 2008 and in 2011 using this philosophy.
So as someone who has worked at a real hedge fund, I am telling you to stay away from Apple, and ignore David Einhorn. Mr. Einhorn as I told you before, does not own enough of Apple stock to control the company or be an activist, Mr. Einhorn is just upset because he is a classic value manager who purchased Apple too high and is now down more than 20% on his position.
Apple is not a GARP stock, Apple was a GARP stock for the last 3 years, because its earnings and price kept moving up yet the stock always sold for a reasonable valuation, a P/E of 15 or less, now Apple is just a boring value stock. How do I know this? because all of the talk is not about Apple’s new products, but its about Apple’s cash, and how they are going to use it to pay a dividend. Dividend paying stocks are not growth stocks they are value stocks and oh by the way, do you know who else hates Dividend stocks, Warren Buffett.
So the bottom line is Apple is not a growth stock anymore its a value stock, its a dividend paying cash rich stock, which will never go up 50% or 100% in a year its now a nice safe company that value based mutual fund managers will buy in their funds so they can return a pedestrian 7% a year.
If you really want to make 25% to 30% returns a year in your portfolio you need to buy GARP stocks, stocks that are moving up in price and whose earnings and revenues are growing at a faster pace every year.
You can easily find great GARP stocks through our service at www.billionairesportfolio.com as we follow and piggyback the worlds best Billionaire Hedge Fund Managers like Stephen Mandel of Lone Pine Capital, who only buys great GARP stocks.
According to an article from eFinancialCareers.com yesterday, Activist Hedge Funds are primed to explode in 2013.
Performance Activist hedge funds made a killing, and are primed to be even more aggressive through the final 10 months of 2013.
Activist investor Jana Partners saw two of its funds gain over 23% in 2012, while Cevian Capital’s Cevian II fund gained roughly 25%, and Daniel Loeb’s Third Point delivered a 33.6% gain in 2012.
These strong performances are likely to attract more capital for activist hedge funds that are already sitting on piles of cash, according to a new report from Moody’s Investors Service. The rating agency expects big things from activist hedge fund managers in coming months – in technology, industrial goods, consumer goods, basic material, pharmaceuticals and energy sectors.
Proven Long Term Results from Activists Legendary Activist Carl Ichan has returned 26% a year over the last 20 years versus a 7.5% performance in the S&P 500 and that is only for the stocks in which he filed a 13D (5% or more ownership).
So what are you waiting for!! Our service The Billionaires Portfolio tracks over 200 of the biggest and best peforming Activist hedge funds and their stocks picks. We have already had some triple digit winners in less than 6 months and our portfolio is currently outperforming the S&P 500 by multiples of returns.
On Monday March 18, the CBOE, the Chicago Board of Options Exchange plans to list mini Options on some of the most high priced and liquid stocks in the market including everyone’s favorite stock Apple ($AAPL).
Here is how a mini option will work, it will act just like a regular options contract, allowing you to buy calls or puts at various strike prices for a stock like Apple. The big difference is that the mini option will be a lot less expensive more than 1/10 the price of a regular option. The reason for this is a mini option contract will allow you to control 10 shares of a stock per contract instead of the 100 shares which a normal option contract controls.
This is huge news for people who have always wanted to trade options on Apple ($AAPL) and Google ($GOOG), since regular option contracts cost thousands of dollars on these stocks. With the new mini options contract you will be able to buy one option contract which will control 10 shares of Apple for as little as $90. Here is how it will work; right now a March in the money Apple $450 call will cost you $9.50 or $950 dollars. With the new mini options contract this same call option at the $450 in the money strike price will only cost you $.95 cents or $95 dollars to control 10 shares of Apple stock wow!!!. That’s right you will be able to control 10 shares of Apple stock for only $95 dollars.
Stay tuned on this, I will be commenting on mini options almost every day for the next month at my website www.billionairesportfolio.com, as well as offering a trading service on how to trade mini options with as little as a $500 account.
Will Meade
Editor at the Billionaires Portfolio
www.billionairesportfolio.com
After reviewing hundreds of the quarterly filings from some of the world’s biggest and best Billionaire hedge funds this weekend, a few investment trends have emerged.
1) Be Cautious of owning Gold- Both George Soros and Billionaire Louis Bacon of Moore Capital substantially reduced their holdings in the Gold ETF (GLD). Moore Capital sold off their entire position in GLD and George Soros reduced his position in GLD by 55%, signaling that a lot of the smart money is moving out of Gold.
2) The Majority of Billionaire Hedge Fund sold their position in Apple (AAPL) this is not surprising as the stock has dropped more than 30% from its peak last quarter. I still think based on Billionaire Smart Money Flows that Apple (AAPL) still has more room to fall, so be caution on Apple as well.
3) Three top Billionaire Hedge Funds, Lone Pine Capital, Farrallon Capital and Tiger Consumer all took major positions in the “Dollar Stores”, both Family Dollar (FDO) and Dollar Tree (DLTR). This to me is the most significant move I found as both stocks Family Dollar and Dollar tree are near their 52 week lows. Furthermore as I have explained before it is very bullish, based on my backtesting and research, when Billionaire Hedge Fund Managers acquire or add to their stakes in companies that have declined or are near a 52 week low, and that is the case here with both DLTR and FDO.
Warren Buffett announced this morning that he is acquiring Heinz, the ketchup maker (HNZ) for $72.50 a share. This should not be a shock to anyone who has followed the stock picks of Buffett for years, as I have, since Buffett loves companies with a certain set of characteristics.
What are the characteristics that Buffett looks for in a stock? a consistently profitable business that is easy to understand with a great brand that generates high returns on capital,and at a price that is less than half of what the company returns on its capital.
Lets look at each factor individually:
1) The Company must have a Great Brand Name, if you have never heard of the brand or ever purchased anything from the company as a consumer, than it is not a great brand name.
2) The Company must be easy to understand and have predictable cash flows and earnings. This is fairly easy to look up as well, all you have to do is look at the cash flow statement and the earnings of the company over the last 10 years, if they are stable and do not fluctuate a lot, that is a business Warren wants to buy.
3) The company must generate a high return on capital. This is the secret tip, Buffett looks at a very simple ratio to derive Return on Capital, he looks at EBIT (which is Earning Before Interest and Taxes which can be found on the Income Statement) and divides this by the company’s total equity (which is the company’s total assets minus its total liabilities, this can be found on the balance sheet. Buffett has said in the past (from articles and speeches) that he would love to buy companies which can consistently return more than 25% on capital a year.
So Buffett’s secret formula is this:
1) The Company must have a strong Brand Name
2) The Company must have a predictable and stable business.
3) The Company must have a high return on capital.
4) The Price for which he is willing to pay for the company must be less than half of the company’s return on capital.(Use Price to Cash Flow or Enterprise Value to EBIT for this)
Obviously in the case of Heinz, all of these criteria were met, everyone has heard of or bought Heinz Ketchup, the Ketchup business is very stable and predictable, further evidenced by the company’s historical cash flow and earnings statements, the company earns a high return on capital (an incredible 36% Return on Capital) and lastly the price, Buffett paid 17 times cash flow which is half of the the company’s Return on Capital (36).
So here is a simple screen that you can use to find stocks that Buffett would invest in, oh and if you can do this successfully you too can return 25% a year on your portfolio as well.
Here is the screen:
1) Screen for stocks with a Market Cap over $2 Billion (These are stocks that are Midcap and above, the larger the market cap the more stable the company usually is and the stronger its brand name is)
2) Screen for stocks with a Return on Capital above 30%
3) Buy only the stocks that have the following: A Brand you have heard of or used, and most importantly a Price to Cash Flow or Enterprise Value to EBIT that is less than half of the stocks Return on Capital.
Lastly remember Buffett is very picky about the stocks he buys so you should never come up with a list of more than 2 or 3 stocks if you are running the screen correctly.
When I ran the screen this morning I came up with only one stocks and that is Bed Bath and Beyond (BBBY).
1) Everyone has heard of or purchased something from Bed Bath and Beyond, so this stock passes the brand name test.
2) The company has a return on capital of 30% with zero debt
3) The company has very stable earnings and cash flow, as the company’s products towels, lines and bath products are virtually recession proof.
4) Most Importantly Bed Bath and Beyond is cheap, it has a Price to Earnings Ratio of 13, a Price to Cash Flow of 14.7 and Enterprise Value to EBIT of only 8 all of which are less than half of the company’s Return on Capital of 30.
I truly believe this is the exact type of company Buffett would buy if he was not handicapped with so much money, and its exactly the type of companies that most Billionaire Investors and Hedge Funds buy as well.
Everyday I read all the 13D’s (a Form filed with the SEC within 10 days after a Investor or Fund acquires 5% or more of a stock, it can also include letters to management as well) with the SEC, and today I found a great one about one of the stocks we own in our Billionaires Portfolio, Wet Seal (WTSLA).
The Hedge Fund Clinton Group filed a 13D today stating their intentions as well as congratulating Wet Seal for their recent shareholder friendly actions.
Why I want to share this with everyone is that it’s a great example of how Activist hedge funds like the Clinton Group create instant shareholder value and huge returns for investors who piggyback their stock picks.
This is the exact letter written by the Portfolio Managers at the Clinton Group.
“Ladies and Gentlemen:
I write on behalf of Clinton Group, Inc. (“Clinton”), the investment manager of several funds and accounts that collectively own nearly 7 million shares of the common stock of The Wet Seal, Inc. (“Wet Seal” or the “Company”).
We appreciate the swift actions of the new Board, including the appointment of a new Chief Executive Officer, the reduction in overhead costs, the announcement of a share buyback plan and the resolution of various EEOC matters. We believe these actions put the Company on firm ground for future operating improvements and will benefit shareholders and the stock price.
In particular, we estimate that once implemented, the annual cost savings and reduced share count should augment EPS in FY13 by $0.04 and annually by more than $0.06 per share thereafter. At the average price to earnings multiple of the last five years, these early moves by the new team should add more than $0.75 per share to the stock price.
As we have often indicated, given the importance of every day and every penny of EPS, we believe the Company should return all of its excess capital to shareholders as soon as possible. The buyback is one good way to return capital and to take advantage of supply-demand imbalances in the Company’s stock. We applaud you for authorizing that program.
The Company should also adopt a more aggressive approach to returning its significant, excess capital to shareholders rapidly and with certainty. A Dutch Auction self-tender would likely permit the Company to return as much as an additional $35 to $55 million in capital this quarter, reducing the share count and adding almost another $0.06 to EPS in FY14 (and another $0.75 to the stock price).
Given the long-term prospects of the business and our confidence in your ability to continue to affect positive change, we would not be sellers into such a tender offer. But it appears some shareholders are sellers at these price levels; there is no better buyer of their stock than the Company, which has unused shareholder capital at its ready disposal.
We would certainly recommend that the Company retain sufficient cash reserves for its working capital purposes and for future growth in store count. But we also know that every day that goes by while the extra cash remains on the balance sheet, an opportunity to create additional shareholder value dissipates. Certainly, if the Company waits until evidence of the operational turnaround is manifest, the stock price will be much higher and the impact of buying back stock on the remaining shareholders will be substantially dampened. Now is the time to act.
What to take from this letter:
1) .$75 added to Wet Seal’s current share price equals a 25% return not bad!!!
2) How fast shareholder friendly changes can be made to a company when an activist hedge fund takes control.. new CEO, stock buyback etc.
3) Why following these Activist Hedge Funds is like having an Investment Banker, a Lawyer and Hedge Fund on your side…
Just another great letter by a Billionaire Hedge Fund explaining how they can extract huge returns regardless of stock market conditions.
At BillionairesPortfolio.com, our research process is rooted in this philosophy: Activist investors create value in stocks, while we go along for the ride.
Arguing support for our niche investment research, yesterday, Mark Connors, the founder of Risk Dimensions, had these comments concerning hedge funds and their new investment strategy of creating instant value in the company’s they invest in:
“These new market conditions are causing hedge funds, when possible to create events or catalysts that will help them make money.
“Hedge fund investors are also operating to a greater extent in the same space as retail investors when they can. With Apple, you have an investor [Einhorn] trying to “bend time” to benefit his position now, potentially impacting the company and ordinary investors.
“Hedge funds [are] moving from the trading room where they were able to make money to the board room.”
Connors says he expects the trend to continue.
Bottom Line: This market environment is ripe for activist hedge funds, and billionaire hedge fund managers to create instant shareholder value by shaking up companies with catalysts. Which should mean more, and bigger gains for our Billionaire’s Portfolio service.
At the BillionairesPortfolio.com we track all of the major hedge funds and their stock picks in real time, and then analyze and recommend only the best investment opportunities to our subscribers.
So stay tuned, as this year should be incredibly exciting and lucrative as we piggyback the world’s best billionaire investors.
As we know, the big news this morning is that legendary hedge fund manager, David Einhorn of Greenlight Capital is suing Apple to modify a proposal in its proxy, which Einhorn believes does not conform to regulatory rules.
Greenlight said it is opposed to the proposal, which the firm said would remove Apple’s ability to issue preferred stock from its charter.
Furthermore, Einhorn says that Apple is “utterly misvalued at current levels” and that the company should be allocating its $145 Billion in cash to its shareholders, preferably through a preferred stock that would pay out a 4% dividend.
Now, at BillionairesPortfolio.com are always interested when a legendary billionaire hedge fund manager, who at times can play the role of an activist, comes out publicly to take on a company’s management. In this case, the investor is actually suing the company.
Is the bottom in for Apple?
Our research shows, through extensive studies and backtesting on perhaps the deepest database of activist investor data, when a high profile billionaire investor, like a David Einhorn, makes a public statement or strategic move against a company, a bottom is usually carved out in the stock.
The reason this action works: The sentiment on the stock tends to change from negative to positive, as everyone reads the news and believes that the company in the crosshairs will eventually comply with one of its largest shareholders.
Not so fast
But we don’t think this is the case with Apple and David Einhorn. First, Einhorn cut his stake in Apple significantly last quarter. That’s not a very strong sign of his confidence in the stock. Second, Einhorn initially started buying Apple in the high 200’s, according to SEC filings. Conversely, we find this “bottoming” effect to be most frequent when a large stakeholders is rattling cages, when he is down on a stock.
Bottom line: We don’t feel his lawsuit will push the stock higher in the long term. Yes, the stock will probably get a short term lift from the news today. But the biggest winners come when you find stocks where a large billionaire stakeholder is bullying company management when they are down significantly (20% or more) on the stock — and he/she has not reduced his position.
That’s not the case here with David Einhorn. He is not down on his position and has even reduced his stake in Apple. So Caveat Emptor (Buyer Beware) on this news today.
One of the great things about being an investor today, is the amount of products that are available to the everyday retail investor.
With 1000’s of ETF’s available to trade, ranging from gold, to oil to betting on volatility, the retail investor has the same tools to trade like a Billionaire Hedge Fund Manager.
Furthermore with increased liquidity and volume in the ETF market, options on ETF’s are now very easy and inexpensive to trade. Leveraged ETF’s have also become incredibly popular as the volume has increased enough that one can even day trade these instruments as well.
Now that the retail investor has the same tools as the Billionaire Hedge Fund Manager, one can take the same positions and expect the same returns as these Billionaire Hedge Fund Managers.
One of the easiest way to find out what the world’s best Billionaire Hedge Fund Managers are buying is to look at their SEC Filings ,specifically the 13F Filling which include their holdings and purchases of ETFs.
One of the best hedge funds to follow is Passport Capital, they are a leading global macro hedge fund, that has put up 30% annualized returns since inception. They are also one of the few hedge funds that actively buys big positions in ETFs.
Looking at Passport Capital’s most recent filing here are the ETF’s they currently own:
1) Market Vectors Oil Services ETF (OIH), they actually also own call options on this ETF as well!!
2) Utilities Select SPDR, The Utility Sector ETF, (XLU)
3) SPDR Gold Trust (GLD)
4) S&P 500 ETF (SPY)
To find out the world’s best Billionaires Investors and Hedge Funds are buying (ETFs and Stocks), please visit www.billionairesportfolio.com.
