3 Brand-Name Stocks Billionaire Investors Sold in the Second Quarter
It's that time again, folks. And no, I'm not talking about the summer doldrums or the upcoming solar eclipse! It's time for the quarterly release of 13F filings with the Securities and Exchange Commission (SEC).
13Fs are documents that money managers with more than $100 million in assets under management are required to file with the SEC within 45 days of the end of the previous quarter. What 13F filings show is a snapshot of what these money managers are holding in their investment portfolios (in this case, as of June 30, 2017). More specifically, it gives investors and Wall Street an inside look at what the most cunning investment minds have been up to over the previous quarter.
Admittedly, these filings are, at minimum, 45 days old, meaning a lot may have happened since then that we don't know about yet. What's more, billionaire money managers, while wealthy, can still be wrong. We're human, and we're all fallible when it comes to investing in the stock market. Nevertheless, taking a peek under the hood can help clue investors into trends that may not be superficially visible, thus 13Fs can sometimes prove to be diamonds in the rough for the retail investor.
Big money headed for the exit with these brand-name stocks in Q2
While most investors are likely focused on what billionaire investors are buying, I much prefer to take a gander at what they're selling. After all, if billionaire money managers are ditching brand-name stocks in leading industries and sectors, it could be a telltale sign that they believe the stock market is fairly valued or due for a correction.
During the second quarter, three brand-name stocks found themselves shown to the door.
General Electric
Perhaps one of the biggest eye-openers during the second quarter was that of Warren Buffett's conglomerate Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) selling all 10.6 million shares of General Electric (NYSE: GE). Buffett's Berkshire Hathaway had bought into General Electric during the financial crisis in 2008 and has made a nice return since then, so it's not as if Buffett and his team are tucking their tails between their legs and heading for the exit. But it raises the question, "why now?"
One postulation could be longtime CEO Jeff Immelt's resignation, which became effective at the beginning of this month. Management changes have the potential to throw a level of strategic uncertainty into the equation. However, Buffett has himself often said that great businesses can thrive without a great CEO at the helm, which makes me believe that the CEO change probably had little to do with Berkshire Hathaway's disposition of GE.
Another possibility is General Electric's increasing focus on industrials, which is truly the company's roots. It divested a number of its legacy businesses, including its business that was formerly known as GE Capital, and has been thoroughly focused on growing the industrial side of its business. Unfortunately, the outlook for the industrial sector is somewhat murky because of inaction in Congress with regard to corporate tax reform and the expectation of a long-term infrastructure spending bill. In other words, slower growth prospects for what remains of GE may have played a role.
Lastly, given that Buffett's Berkshire Hathaway acquired 17.4 million shares of Synchrony Financial (NYSE: SYF) during the second quarter -- Synchrony Financial is the name given to the aforementioned GE Capital spin-off -- it may just be that Buffett's interest in General Electric was derived from its financial arm all along. If I were a betting investor, my money is predominantly on the latter.
Bank of America
Though it's been a darling on Wall Street for much of the past year, Bank of America (NYSE: BAC) found little love from billionaire money managers during the second quarter. Coatue Management, led by Philippe Laffont, jettisoned 8.91 million shares of Bank of America during the second quarter, leaving the hedge fund with 13.85 million shares. Meanwhile, Stanley Druckenmiller's Duquesne fund sold all 2.11 million shares of Bank of America that it had held from the previous quarter.
Why the exodus? Part of the reason could simply have to do with Bank of America's valuation. At one time, a mountain of litigation tied to the mortgage crisis and Great Recession dragged down B of A's valuation and allowed the bank to be valued at a significant discount to its tangible book value (TBV). That discount is no longer there as rising interest rates have boosted B of A's net interest income. Banks are traditionally considered "cheap" below a TBV of 1 and fairly valued at a TBV of 2. Bank of America's price to tangible book value is now up to nearly 1.4. Without much of a discount, some billionaire money managers may have chosen to hit the road.
The other selling point may well have been the Federal Reserve's coyness with regard to raising interest rates. In Bank of America's 10-Q filing with the SEC in the second quarter, it noted that a 100-basis-point increase in short- and long-term rates would boost its net interest income by an estimated $3.2 billion over a 12-month period. While that sounds like great news, lower inflation rates have given the Fed a reason to contemplate being aggressive with rate hikes. This could signal that B of A's EPS growth may not be as robust as expected.
Still, it's hard to argue against the company's growing shareholder yield via stock buybacks and a rising dividend. As a long-term shareholder myself, I see no reason to follow Laffont or Druckenmiller out the door.
Snap, Inc.
Lastly, Snap (NYSE: SNAP), the parent company of popular social-media application Snapchat, found itself being booted out of billionaires' portfolios left and right during the second quarter. Mind you, Snap only went public at the beginning of March, but has moved markedly lower since it debuted. Per the 13F filings, David Tepper's Appaloosa Management completely sold its 100,000 share stake in Snap, while Moore Capital Management exited its entire 1.33 million share position, and Jana Partners dumped its 550,000 shares stake in the company.
If you need reasons behind this pessimism, look no further than Snap's second-quarter results and underwhelming fundamentals to date. Though revenue grew 153% to $181.7 million, its net loss practically quadrupled to $443 million, and the company reported negative $228.9 million in free cash flow. In effect, Snap is paying an exorbitant amount of money to acquire new customers, and its daily active user growth of just 21% year-on-year and 4% quarter-over-quarter was well below what Wall Street was expecting.
In short, there's a real worry that the likes of Facebook will be able to mimic Snapchat's allure and draw users away. Considering Snap's dismal quarterly performance, it's going to have a difficult time mounting a defense against companies that are considerably larger and have deeper pockets. With profitability still looking to be years out (if ever), this is one company that definitely deserves the boot from investment portfolios.
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Sean Williams owns shares of Bank of America. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Facebook. The Motley Fool owns shares of General Electric. The Motley Fool recommends Synchrony Financial. The Motley Fool has a disclosure policy.