January 3, 5:00 pm EST
As we’ve discussed, the dysfunctional stock market has put pressure on Trump to stand down and make a deal with China.
And Apple’s CEO, Tim Cook, turned up that pressure yesterday. In a letter to investors, he warned that Apple, the biggest and most powerful company in the world, would have lower revenue in the quarter that just ended. The blame was placed on economic deceleration in China —due to the trade dispute.
Now, it’s clear that Cook wanted to draw attention to the impact of the trade dispute. And the media was happy to run with that story today.
But the slowdown at Apple last quarter also had a lot to do with “fewer iPhone upgrades than anticipated.” This was tossed into the context of slower economic activity in China, which makes it look like a macro issue. But Apple also has a micro issue. They seem to have exhausted the compelling innovation that has historically gotten iPhone users excited about buying the latest and greatest phone. The older models are still pretty great. No reason to upgrade.
So, Apple has used a violent market and slowdown in China, perhaps, in an attempt to divert attention away from the slowing device business.
The good news: Even if they don’t develop the next world-changing device, they have a services business (Apple pay, Apple Music, iCloud Drive, AppleCare and the iTunes App store) that is producing almost as much revenue as Facebook.
And the stock is incredibly cheap. On trailing twelve months, the stock trades at 12 times earnings. But if we back out the nearly $240 billion of cash Apple is sitting on, the business at Apple is being valued at $437 billion. That’s about 7 times trailing twelve month earnings.
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Yesterday we talked about the risks surrounding markets (Italy, Interest Rates, China), and said these risks are likely serving as a catalyst to start the correction in tech stocks.
And we looked at this chart on Amazon as the key one to watch.
Here’s what the chart looks like today …
|This big trendline broke today, a line that represents the more than doubling of Amazon in a little more than one year’s time. This is a company that went from a valuation of $500 billion to $1 trillion in a year.
So we get this big technical break, and Amazon is now down 14% from the highs.
Again, as we’ve discussed here in my daily note many times, at a trillion dollar valuation, the market was pricing Amazon like a monopoly that would go unchecked, and allowed to destroy any and all industries in its path.
But Trump has made it clear that he’s not going to let it happen. Amazon, Facebook and Google have all been subject to Trump threats to rein them in through regulation — to level the playing field for their competition. And if there’s one thing we know about Trump, as the President: he will follow through on threats, and he likes a good fight.
With that, the FANG (Facebook, Amazon, Netflix, Google) trade, after being UP as much as 50% this year (as an equal weighted group), isfinally breaking down. And that is creating some shock waves in broader markets.
So, is this the beginning of a bigger global meltdown or will it ultimately be a repricing of the tech giants. I think the latter.
Remember, the tech heavy Nasdaq, for much of the year, performed with near impunity from any geopolitical turmoil. As trade rhetoric heightened, the Dow would suffer, while the Nasdaq continued to climb. At one point this summer, the Nasdaq was up double-digits on the year, while the Dow was down.
So this is more likely a rebalancing (the rotation from tech giants to value stocks).
As we go into third quarter earnings, we continue to run at 20% earnings growth on the year. The P/E for stocks remains low, in a low/accommodative interest rate environment (yes, 3.2% 10-year yield remains low relative to history). And the economy is hot, with low and stable inflation.
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If we look back at some of the great investors of our time, for many of them you can attribute timing to their success. For example, if Warren Buffett and Carl Icahn started their careers in a different era, they would not have likely achieved the same level of success they have in investing. Warren Buffett has said it himself.
Of course, given the right time and the right place, you still have to act, have skill, take smart risk and be good at what you do.
Though rare, we have these “right times and right places” throughout history. And I think we are standing right in the middle of one, right now.
First, if we think about the long term performance, opportunities and risks of the U.S. Stock market, first we should acknowledge that the U.S. stock market is unmatched. It represents the largest, most sophisticated capital markets in the world, in the largest and leading economy in the world, one with advanced corporate governance, investor protections and fueled by a relationship with the economy that is self-reinforcing.
Now, let’s consider that stocks over the past 15 years have produced just 3.8% annualized returns for investors, an extreme weak level compared to historical rolling 15-year periods (see chart below). That’s an even weaker 15-year period than that of the bear market that ended in 1974. With that, the next 15-years are likely well above average returns for stocks. You can see in this chart from Barron’s below, the rolling 15-year periods that followed that ’74 bear market were in the mid to high teens, roughly doubling the long-term average return of the S&P 500. This argues for very good times for stocks in the years ahead.
Additionally, there are a slew of fundamental reasons that support this scenario. To name a few, U.S. stocks have global capital flows working in their favor. The Fed is on a path to remove emergency policies (rates higher), the ECB and BOJ continue to be well entrenched in aggressive QE programs (rates lower). That creates weaker currencies in QE countries, which creates capital exit, and the best home for that capital is the U.S. — an economy performing better on a relative basis, and with prospects for rising rates (a primary driver of currency appreciation and capital flows). Add to that, given the record low base rates will be moving from, there is no incentive to put capital into bond markets — the bond market alternative is stocks (winner stocks).
From a historical perspective, the record cash levels sitting in the coffers of institutional money managers argue for much higher stocks to come, as that cash gets put to work. The go-to valuation metric for Wall Street, P/E, is very low on next year’s earnings, especially when you consider what valuation tends to look like in historically low interest rate environments. In those cases, it tends to trade north of 20. Of course, we are in the mother of all low interest rates environment (ZERO). The P/E on next year’s earnings is now 15.1. That’s on earnings estimates of $127.62. If we multiply next year’s earnings estimate of $127.62 by 20 (where stocks tend to be valued in low rate environments), we get 2,552 for the S&P 500 by next year – almost 30% higher than current levels. We did this analysis last year and early this year, when P/E was closer to 17 and sure enough, given low rates, and given weak alternatives, stock valuations gravitated toward and above 20x on trailing 12 month earnings.
Add to this that we are at 15-year lows in market sentiment (a contrarian indicator). So we digest all of this within the framework of an environment where the central banks continue to promote growth, and respond to any shocks that can knock the global economic recovery off path.
With that, remember back in the middle of 2012, when Europe was on the brink of collapse and global markets were quaking because of the potential of European debt defaults and a break-up of the euro. The head of the European Central Bank, Mario Draghi, stepped in, and in a prepared speech said that they will do “whatever it takes” to preserve the euro. That comment turned the sentiment tide, not only for Europe, but for global markets that day. If you bought German stocks on that comment, you never saw a day in the red – the DAX rose 20% by the end of the year and has risen at a 45 degree angle ever since, nearly doubling those “pre-comment” levels earlier this year.
Same can be said for U.S. Stocks. If you woke up and bought stocks on the back of the Draghi comment, you never saw a down day and enjoyed as much as a 60% run since.
Throughout the entire global economic crisis, there has been no better example of the impact of sentiment on markets and the global economic outlook, and no better example of how that sentiment can successfully be managed.
With this in mind, there was a very symbolic stand made last week by the very important figure heads of the developed world, all standing in front of podiums and speaking. We’ve seen Yellen attempting to temper the uncertainty about the Fed rate path and their view on the economy. Japan’s Prime Minister Abe (the orchestrator of Japan’s big stimulus policies) spoke in NY on Tuesday of last week and said some very magic words … he vowed that he and the BOJ would do “whatever it takes” to return Japan to robust sustainable growth. And this past Thursday night, the head of the ECB, Mario Draghi, also spoke in the U.S. He emphasized the importance of the return to health of the European economy, saying “it’s in our interest, in your interest, and that of everybody, everywhere.” And he said “we will not rest until our monetary union is complete.” So we have the two major central banks/administrations that have taken the QE torch from the Fed, standing up and telling us that they will continue to do what it takes to fuel growth and promote stability. To top it off, Bernanke, the ex-Fed Chairman and architect of the global economic recovery, did a one hour interview this morning to kick off the new week on CNBC, has done an Op-Ed in the Wall Street Journal and is scheduled to do Bloomberg tomorrow. Under the guise of a book promotion, he has spoken very candidly about current monetary policy, something ex-Fed heads don’t typically do, as it can draw attention away from the current Fed and potentially muddy and already muddied picture. Clearly, global policymakers are stepping up communications, which is key in curbing fear and uncertainty — and the ex-Fed Chair seems to be part of it.
Looking back, we could see this simple coordinated PR campaign to be enough to turn the tide of sentiment. And from there, the fundamentals take over.
When we consider this “rare opportunity” where we are in the right place at the right time, what comes to mind is the meteoric rise of billionaire Bill Ackman, and how he took advantage of the financial crisis to kick off one of the best 10-year runs of any investor in the world.
Back in late 2008, at the depths of the global economic crisis, Bill Ackman, one of the great billionaire investors we follow, stepped in and bought 25% of one of the largest real estate companies in the country. It was General Growth Properties (GGP). The stock was trading between 25 and 50 cents. And it was teetering on the brink of bankruptcy.
So why was the company nearing bankruptcy, and why would Ackman step in and buy it?
Well, as with many companies at that time, in a literal credit freeze, the company was in need of money. Their access to liquidity had been cut off. This was a risk that companies as large as Wal-Mart were facing at the time. From an investor’s standpoint, one that has cash and access to cash, this represented an opportunity. The company had more assets than liabilities. The company was well run. The core business was solid. They needed liquidity. If they don’t get money, they go bankrupt and fire sale assets. Stockholders get wiped out. Debt holders get pennies on the dollar from the fire sale. If they do get capital, not only do they have a very good chance of surviving, but they have the opportunity to dominate coming out of the economic crisis, as their competition (those not as well run and those that can’t access capital) get decimated. That means, a bigger market opportunity. With that, Ackman rode the stock through bankruptcy, helped convince debt holders of the opportunity and helped negotiate a debt restructuring and helped fund and raise the needed liquidity. Not only did shareholders remain in tact, out of bankruptcy, but all stakeholders made a killing.
Ackman sold General Growth Properties in late 2013, early 2014, turning his initial $60 million investment into $1.6 billion. That’s an eye-popping return, but when you look through the history of the portfolios of the billionaires we follow, it’s common to see the presence of huge winners. Take Icahn and Netflix: As we know, there is no better investor in the world than Icahn, but his performance of the past few years has been highly attributed to one huge winner: Netflix. He turned roughly $300 million into nearly $2 billion in three years.
This demonstrates the importance of taking good, calculated risks, spread across enough opportunities, and in situations that can be influenced by a big investor.
With energy and commodity stocks selling at 20-year lows, many at all-time lows, I think we will see another General Growth Properties in this environment – one of those right place/right time opportunities to make 10X, 20X or 50X on your money. The great thing is, we know how to spot these huge winners like GGP by following the best billionaire investors and activists into deeply distressed stocks, where they can influence the fundamentals, and where the potential upside is unlimited and the downside is limited. A number of billionaires have been bottom picking energy stocks in recent months, including legendary investors Carl Icahn, George Soros and Stanley Druckenmiller.
We currently hold a stock in our Billionaire’s Portfolio that represents one of these “right place/right time” opportunities. And it has all of the trappings to be the next billionaire-maker. Consider this: There is a pioneer activist investor that has 100% of his fund in this stock, he controls 100% of the board, he has his hand-picked CEO running the company, and he has a price target on the stock that is 1800% higher than current prices. Join our Billionaire’s Portfolio service now and we will send you all of the details on this high potential activist-owned stock immediately.
At BillionairesPortfolio.com, we’ve studied the track records of hundreds of billionaire investors and billion-dollar hedge funds. And one man stands above the rest, as the best investor of all-time.
I’m sure most would consider Warren Buffett to be the best investor ever. But the numbers tell a different story. In fact, the greatest investor of all-time is billionaire activist investor Carl Icahn.
Incredibly, both Icahn and Buffett have been building their respective investment empires for close to five decades. And more incredibly, they remain at the top of their profession.
Icahn has, unequivocally, shown superior skill as an investor.
Consider this: Icahn has returned 31% annualized since 1968. That would turn every $1,000 invested with Icahn into $325 million today – an incredible number. Buffett, on the other hand, returned 19.5% annualized during virtually the same time period. Buffett’s growth rate over that length of time is indeed amazing too. But due to the power of compounding, the wealth creation of Buffett, from pure investment returns, pales in comparison to that of Icahn. Icahn’s investment skill has created $65 to every $1 created by Buffett.
So how has Icahn been able to outperform Warren Buffett (and the broad stock market) by so much and for so long?
Of course, Icahn is a dogged shareholder activist and often an agitator of corporate management. Key to his playbook is using power and influence to control his own destiny on stocks he invests in.
When we look strictly across the stocks in his portfolio, without necessarily the story-lines, we can see some portfolio traits that have made Carl Icahn the world’s greatest investor.
Trait #1: The media, mutual funds, CNBC, finance books — they all say having a high win rate is paramount to good investing. They tell you that the most important thing is being right. Like many widely accepted adages, it happens to be dead wrong. Billionaire iconic hedge fund investor, George Soros, says “it’s not whether you’re right or wrong, but how much money you make when you’re right and how much money you lose when you’re wrong.”
Over the past 20 years, the stocks in Icahn’s portfolio have a win rate only a tad bit better than a coin toss. But he puts himself in position, so that when he wins, he has the chance to win big! This is the concept of asymmetrical risk to return, a concept often found in the wealth creation of billionaires. They like to invest in opportunities with limited risk and huge potential return.
Among Icahn’s stocks, his winners were almost twice that of his losers.
Trait #2: Icahn became rich by taking concentrated bets throughout his career. As Buffett has famously said, “you only need one or two great ideas a year to get rich.” This is exemplified in Icahn’s portfolio. His big win on Netflix garnered a 463% return in just 12 months, between 2012 and 2013.
Trait #3: Patience is king. You don’t have to go to Harvard or have a Goldman Sachs investing pedigree to have patience. And many times, that can be the difference between making money and losing money in investing. Icahn has an average holding period of over two years.
Trait #4: Risk! When you hunt for big returns, you must be willing to accept drawdowns and losers. Icahn has multiple stocks over the past 20 years that have been full losers (i.e. they went to zero). But when you have a portfolio full of stocks with big potential, in the end the big winners can more than pay for the losers.
With these key themes in his portfolio, Icahn has achieved the greatest track record of any investor alive, and a net worth in excess of $25 billion along the way. And he has done it with a portfolio of stocks that most investors would likely run away from.
Want to invest like the greatest investor of all-time? According to his most recent 13F filings, Icahn’s five biggest stock positions (aside from his holding company) are Apple (AAPL), CVR Energy (CVI), eBAY (EBAY), Federal Modul Holdings (FDML) and Hologic (HOLX).
Billionairesportfolio.com, run by two veterans of the hedge fund industry, helps self-directed investors invest alongside the world’s best billionaire investors. By selecting the best ideas from the best billionaire investors and hedge funds, our exited stock investment recommendations have averaged a 31% gain since 2012.
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The Carl Icahn Effect & How It Can Work For You
If you are managing more than $100 million, you are required to report to your holdings to the SEC within 45 days of the end of the quarter. And tonight we began to see those disclosures hit, for a peek into the activities of the world’s best billionaire hedge fund managers.
Now, 13-F filings provide a ton of information, but you have to know exactly what to look for to make them useful.
With that being said, here is what caught my eye tonight from the quarterly holdings of the world’s best billionaire hedge fund managers.
Every top hedge fund seemed to either buy or increase their position in Apple (AAPL), including billionaire Leon Cooperman. Cooperman initiated a brand new position in the stock, buying more than 1 million shares in Apple last quarter (before it split). We said almost two months ago on this blog that Apple’s 7-for-1 stock split in June would be a positive catalyst to push the stock higher. In an instant, it would make the most widely held stock in the world affordable again for the retail investor. Apple is up almost 25% over since announcing the split, and is currently trading near a significant psychological round number of $100.
Expect a big fuss to be made about the activity in Apple shown in these filings, but this one looks old and tired. Apple was a good buy after its June stock split and was an even better buy when I called the bottom in the stock more than a year ago (see it here). And that was well before Carl Icahn or any major hedge fund owned the stock. Bottom line, I would not buy Apple here and would actually sell it when it hits $100.
The world’s best-performing hedge fund manager, David Tepper, added to his position in Facebook, but again Facebook had a nice run last quarter and is now up more than 40%. So piggybacking Tepper on Facebbook (which usually is a can’t-miss trade) today is again a stale trade. I don’t like it.
Now here is a trade that could be compelling. Patrick McCormack, a Tiger Cub and head of Tiger Consumer Management, initiated a new position in Zynga last quarter at prices much higher than what Zynga is selling for today. By my estimates, Tiger Consumer purchased its new 18 million share stake in Zynga at $4, or 28% above its current price.
After selling off after a bad earnings report, the stock looks like it has found support and a double bottom at the $2.85 area. So Zynga could be a good trade to piggyback from Tiger Consumer.
Warren Buffett and Verizon ($VZ)
Buffett sold his entire position in Starz ($STRZA) and Conoco Phillips ($COP), and initiated a new $365 million position in Charter Comunications (CHTR).
Plus, as we predicted in February in our Forbes piece, he increased his position in Verizon. He now owns more than $700 million dollars worth of Verizon Stock ($VZ) after adding an additional 4 million shares.
The fact that Buffett increased an already huge stake in Verizon, and the stock has been flat over the past four months, makes VZ a very compelling trade to piggyback.
Billionaire Hedge Fund Manager John Paulson, Gold and Biotech
John Paulson initiated and added to positions that were heavily weighted in the biotech and healthcare sectors. Paulson initiated new positions in Allergan ($AGN) and Questcor Pharmaceuticals ($QCOR). And he added to his stake in Vanda Pharmaceuticals (a stock we owned almost two years ago in our Billionaire’s Portfolio service, at $4.50).
As for his gold position, no change. But he doubled his position in Dollar General (DG), and this could be the trade to piggyback. The stock has traded flat over the past four months, it’s rumored to be a merger or takeover candidate, and we have a big influential investor that has upped his stake, dramatically. That’s a good formula for success.
Tiger Global, Viking Global and Netflix ($NFLX)
Tiger Global initiated a nearly $200 million dollar position in Netflix (NFLX), a savvy move given Netflix is up almost 40% over the past four months. Billionaire Andreas Halvorsen of Viking Global also initiated a new position in Netflix, buying almost $600 million worth of the stock last quarter.
Billionaire Dan Loeb of Third Point
Billionaire Dan Loeb of Third point purchased new positions in Rackspace (RAX), IAC/Interactive Corp (IACI), and Ally Financial (ALLY). Third Point owns almost 10% of Ally, which recently started trading in April as a spinoff. Of all these new positions to piggyback, I like Rackspace (RAX) the best. Rackspace is down almost 20% year-to-date and has been rumored to be a takeover candidate.
Bill Ackman and Pershing Square
Ackman trimmed most of his real estate holdings, including Home Properties ($HME) and Apartment Investment and Manangement ($AIV), perhaps signaling that he believes REITs and real estate stocks have topped out. Ackman also increased his already large stake in Allergan ($AGN), showing that many of the top billionaire hedge fund managers are still very bullish on healthcare-biotech stocks, as well as M&A. John Paulson also took a large position in Allergan (AGN), a healthcare stock that is in the process of being acquired.
Billionaire Seth Klarman of Baupost Group
Seth Klarman is probably one of the worst hedge fund managers to piggyback. He prefers to hold a significant amount of cash and prefers illiquid, private investments to pubic ones. Klarman did purchase a new stake in EBAY (EBAY) and Theravanace Biopharma (TBPH), a stock that recently went public and is up more than 30% over the past three months. Klarman sold his entire stake in BP Plc (BP).
David Einhorn and Greenlight Capital
David Einhorn doubled his stake in Sunedison (SUNE) and now owns more than $500 million worth of this stock that we first recommended in The Billionaires Portfolio at $2.50. It sells for more than $20 today.
To sum up
Here are the takeaways from the Q2 filings of the world’s best billionaire hedge funds: First, the best hedge fund managers are still bullish on technology, healthcare and biotech stocks, but are turning bearish on energy stocks.
The top billionaire hedge funds took advantage of the mini crash in technology stocks during the second quarter to add to or initiate positions in some of the best names in technology: Apple, Facebook and Netflix. This bet paid off huge for many of these managers, as all three of these stocks greatly outperformed the S&P 500 over the past few months.
Lastly, many of these investors own the same stocks, the most popular being Family Dollar, Dollar General, EBAY and Apple.