October 19, 2016, 3:00pm EST
By November 15th, the biggest investors in the world will be required to disclose a snapshot of what their portfolios looked like at the end of the third quarter.
I suspect we’ll find that Apple was heavily bought during the period.
You might recall, the media was stirring about the second quarter filings (which were reported back in August). Some big names had sold or trimmed stakes in Apple.
But, as I discussed at that time, the Q2 portfolio snapshots came just days following the big surprising Brexit decision in the UK. Global markets swung violently on the news back in June. Remember, between June 23rd and June 27th, the S&P 500 fell as much as 5.7%. It made it all back the subsequent four days.
With that event in mind, billionaire investors David Einhorn, George Soros and Chase Coleman – all had sold Apple shares by the end of the second quarter.
But remember, unlike most stocks they own, they can all trade Apple with virtual anonymity between quarters. The stock is too large for anyone one investor to take a 5% controlling stake, which would trigger the requirement of a 13D or 13G filing with the SEC, which would require updated filings (or amendments) within 10 days of any change in the position size (sell one share, you have to report it).
Einhorn even bragged in one of his investor letter’s this year that they have done a good job of “trading” Apple.
Make no mistake, even with the trimmed stakes of Q2, Apple was (and is) still the “who’s who” of billionaire investor-owned stocks. It was still Einhorn’s largest position into the end of Q2. Buffett swooped in and bought shares near the 52-week low.
When we see the Q3 filings next month, I would expect those that were cutting stakes at the end of Q2, were adding it all back in early Q3. And with the run-up in Apple shares since, up 22% from the June lows, I predict it will be the most bought stock of the third quarter. If that’s true, I predict the media and Wall Street will be talking about how great Apple is again (i.e. analyst upgrades will follow).
In the past month, there’s been a solid take up on the new iPhone 7 for Apple. Importantly, with the iPhone 7 launch, all four major carriers have returned to the model of offering free new iPhones for long term contracts. That’s a huge positive on the stock as a product-cycle driven company. Add to that, there’s no other stock that, if not owned and owned enough, can get a professional money manager fired than Apple. That creates a “fear of missing out” trade in the institutional investor community — pushing them off of the sidelines and back into Apple.
But perhaps the most important event for Apple has been the very public implosion of their biggest competitor Samsung. Samsung has been forced to recall their competitive smartphone the Galaxy Note 7 because it’s been bursting into flames. It’s projected to cost the company over $5 billion. Most importantly, it’s positioning Apple, right in the sweetspot of their new product (latest phone) rollout, to take more market share.
If we do indeed find next month that the biggest and smartest investors in the world spent Q3 loading up on Apple, it should give a stamp of approval that sentiment has turned for the stock. Apple remains one of the most undervalued stocks in the S&P 500, with the most powerful fundamentals: it’s cheap at 13x trailing and forward earnings, has an incredible balance sheet with $231 billion in cash, and a high analyst price target of $185 a share.
As I noted last week, the company reported a second consecutive quarter of year-over-year earnings decline in July. But it crushed estimates. The stock took off from $96 and trades today at $117. They report on the most recent quarter on October 25. The consensus earnings estimate is $1.64–which would be a third consecutive year-over-year decline. The recent revisions to that estimate have been down (not surprisingly), which sets up for a beat. The last time Apple reported two consecutive quarters of year-over-year declines was mid-2013. The stock bottomed in that period.
Click here to get started and get your portfolio in line with our Billionaire’s Portfolio.
Today we want to talk about the quarterly SEC filings that came in over the past several days week.
All big investors that are managing over $100 million are required to publicly disclose their holdings every quarter. They have 45 days from the end of the quarter to file that disclosure with the SEC. It’s called a form13F.
While these filings have become very popular fodder for the media, what we care more about is 13D filings. And of course we have our formula for narrowing down the universe to what we deem to be the best ideas.
For a refresher: The 13D forms are disclosures these big investors have to make within 10 days of taking a controlling stake in a company. When you own 5% or more of a company’s stock, it’s considered a controlling stake. In a publicly traded company, with that sized position, you typically become the largest shareholder and, as we know, with that comes influence. Another key attribute of this 13D filing, for us, is that these investors also have to file amendments to the 13D within 10 days of making any change to their position.
By comparison, the 13F filings only offer value to the extent that there is some skilled analysis applied. Thousands of managers file 13Fs every quarter. And the difference in manager talent, strategies and portfolio sizes run the gamut.
With that caveat, there are nuggets to be found in 13Fs. Let’s talk about how to find them, and the take aways from the recent filings.
First, it’s important to understand that some of the positions in 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends, which is 90 days. We only look at a tiny percentage of filings—just the investors that we know have long and proven track records, distinct approaches, and who have concentrated portfolios.
Through our research and nearly 40 years of combined experience, here’s what we’ve found to be most predictive:
- Clustering in stocks and sectors by good hedge funds is bullish. Situations where good funds are doubling down on stocks are bullish. This all can provide good insight into the mindset of the biggest and best investors in the world, and can be a predictor of trends that have yet to materialize in the market’s eye.
- For specialist investors (such as a technology focused hedge fund) we take note when they buy a new technology stock or double down on a technology stock. This is much more predictive than when a generalist investor, as an example, buys a technology stock.
- The bigger the position relative to the size of their portfolio, the better. Concentrated positions show conviction. Conviction tends to result in a higher probability of success. Again, in most cases, we will see these first in the 13D filings.
- New positions that are of large, but under 5%, are worthy of putting on the watch list. These positions can be an indicator that the investor is building a position that will soon be a “controlling stake.”
- Trimming of positions is generally not predictive unless a hedge fund or billionaire cuts a position by 75% or more, or cuts below 5% (which we will see first in 13D filings). Funds also tend to trim losers into the fourth quarter for tax loss benefits, and then they buy them back early the following year.
With that in mind, we want to talk about a few things we did glean from these recent filings.
This biggest news out of the filings this week was that Warren Buffett initiated a new $1 billion plus stake in Apple. Buffett loves to invest in out-of-favor companies that are depressed in price, with strong brand names, low P/Es and high return on capital. Apple checks the boxes on all of the above.
We think Buffett’s stamp of approval will change the sentiment on Apple, which has had a short-term ebb. Apple shares were up 4% on the news Buffett has entered, the biggest one day move in over two months.
Additionally, billionaire David Einhorn added to his Apple position last quarter. He now has more than 15% of his $5.9 billion hedge fund in Apple.
We’ve talked a lot about oil over the past several months. The oil price bust created a binary trade — either it destroyed the global economic recovery (and likely the global economy) or it bounced back aggressively. Thankfully, it’s done the latter. Billionaire oil trader, Boone Pickens said this week that he thinks oil could trade as high as $60 over the next two months.
In the filings from Q1, top billionaires just like in Q4 were initiating and adding new stakes in energy stocks – building some large, high conviction positions.
As we’ve said, we think oil-energy stocks are the macro trade of the year.
One of most popular growth stocks purchased by top billionaire investors last quarter was Facebook. Another notable tech stock in the cross hairs of influential investors: Yahoo. A couple of top activist investors, a hot macro investor are involved in Yahoo. And news this week that Warren Buffet and billionaire Dan Gilbert could be teaming up to buy parts of Yahoo.
Billionaires Bottom Fishing in Healthcare
Noted contrarian and billionaire John Paulson has doubled down on two beaten down healthcare stocks last quarter, Endo International and Akorn Inc. We think this is an interesting move because Paulson like many of the best billionaire investors have literally made billions from buying when everyone else is selling.
Many other top hedge funds remain heavily invested in healthcare stocks as well, even after their most recent selloff.
Now, a couple of bigger picture views from the filings…
Some of the biggest and best are bullish on stocks. Billionaire David Tepper has 12% of his fund invested in call options on the S&P 500 and Nasdaq 100. Billionaire global macro trading legend, Louis Bacon, now has more than 7% of his fund in Nasdaq call options. And two other macro investing studs, Paul Tudor Jones and John Burbank have both built big call options on emerging market stocks.
This activity gels nicely with what we’ve been discussing here in our daily notes. We have a global economic environment that is fueled by central bank support. The risk of the oil price bust has now been removed. And a lot of the economic data is setting up nicely for big positive surprises over the coming months. We think we are in the early stages of seeing a global sentiment shift, away from gloom, and toward optimism. And positive data surprises and changes in sentiment are two very powerful factors in driving markets.
Join us here to get all of our in-depth analysis on the bigger picture, and our carefully curated stock portfolio of the best stocks that are owned by the world’s best investors.