Everyone has read news in the past about a big buyout in the stock market. And often the news will report that the stock in the company that is being acquired skyrocketed on the day. Envy tends to follow.
Generally, companies that are bought, are bought for a significant premium. Otherwise, shareholders would likely reject the offer. So when you hear of a big takeover, it’s not unusual to hear of a 20%,30%, even a 100% pop for shareholders on the day of the announcement.
So how to you identify the next big takeover? One of the easiest ways is to follow big, influential shareholders into stocks where they are pushing companies to sell themselves.
This week, we owned a stock in our Billionaire’s Portfolio, MedAssets (MDAS), that was taken over for a 33% premium. We held this stock for only two months, following the lead of one of our favorite activist investors, Starboard Value.
Starboard is one of the best at articulating recommendations for management and helping them execute on it. We followed Starboard Value into Office Depot and doubled our money. Starboard is run by the Wharton educated Jeff Smith, who is a tenacious and detailed activist investor. He has one of the best activist track records in the business. Since inception almost 13 years ago, Smith’s fund has made money on 82% of their activist campaigns (prior to MDAS). That’s one of the highest win rates in the industry.
Starboard took a huge activist stake in MedAssets in August and wrote a detailed letter to the company, outlining a plan to unlock value, which included strategic alternatives (such as the sale of the company).
Fast foward just two months: MedAssets was the second biggest winner in the entire stock market on Monday.
There has been a lot written about billionaire investing and activism over the past couple of years. It’s become a very hot topic. And the investors themselves, which once coveted anonymity, now utilize the spotlight to their advantage. Twitter, the internet and the media obsession with their wealth gives them the platform to spread their message about underperforming companies, and garner support from fellow shareholders. Still, finding the right investors to follow, and identifying the right opportunities is paramount.
Out of the 29 campaigns we’ve exited in our Billionaire’s Portfolio since the inception of our service, in August of 2012, five of the stocks were acquired.
That’s 17% of the stocks we’ve selected, and exited, that have been taken over for big premiums – so, strong anecdotal evidence that following influential shareholders that are pushing for a sale works!
Last week we heard from three top billionaire investors, publicly, and for different reasons. In all cases, they gave us some valuable nuggets.
On Friday, Bill Ackman held a conference call defending his multi-billion dollar position in Valeant. In the face of the scrutiny, he predicted Valeant shares would trade $448 in three years — a quadruple from recent prices.
Dan Loeb wrote released his quarterly investment letter last week describing his weak performance for the year and the challenging investment climate, yet expressing his high conviction for two stocks (a good read and good game plan outlined): Baxter International and Seven & i Holdings.
And billionaire David Tepper, who famously coined the Bernanke put and sparked a broad stock market rally back in 2010, said on Friday that he thinks China needs to ease more and faster, and that could set up for a situation where the Fed has to tighten quicker and more aggressively. He likes GM as way to lever the U.S. economy. He also said he has added to HCA Holdings.
Today, at the DealBook Conference, we heard from two other influential and legendary billionaire investors, Carl Icahn and Stanley Druckenmiller. Druckenmiller said he is short euros. He thinks the currency move underway will last for years, not months. He is long Amazon and is short “a bunch of value companies that buy back stock and need cyclical growth.” He used IBM as an example of one of those companies (owned by Warren Buffett).
Icahn weighed in on the controversial Valeant (sort of), implying he was involved but not saying whether it was from the long or short side. Rather than talk specifics on stocks, he dropped some interesting perspectives on investing and his success. He admitted he wasn’t a brilliant stock picker, nor does he think anyone is. He’s in the business of finding problems and fixing them. He has famously said he makes money “studying natural stupidity.” Today he added that he’s made so much money over his career because there are people running companies that are in over their heads and have bad incentives, he makes money holding these people accountable.
What about the weak spots in his portfolio? He says “activists get caught in cycles, you need staying power, ability to buy more when they drop.”
Full disclosure, at BillionairesPortfolio.com, our subscription-based premium online portfolio service, we own Transocean (RIG) and Freeport McMoran (FCX), piggybacking Stanley Druckenmiller and Carl Icahn’s investments.
This morning, the European Central Bank primed global stocks by telegraphing more action (more stimulus) to respond to the recent shake up in global economic activity and sentiment.
It had to happen. In the grand scheme of things, the ECB’s sentiment manipulation this morning was the bare minimum of what had to be done.
The global central banks (led by the Fed) have spent, committed and promised trillions of dollars to manufacture the tepid recovery that’s underway, in hopes that they can bridge their way to the point where economies begin to organically grow again. That bridge has not yet reached the point of organic growth. And it’s not even that close. With that said, the recent collapse in oil prices, and the threat to an implosion of the energy sector was getting narrowly close to undoing what the central banks have done to this point. And, not only is another downturn unpalatable, but it’s apocalyptic. The bullets have all been fired. Fiscal and monetary policy would have no shot to ward off another global destabilization.
The plan for the continuation of the global central bank-led (and manufactured) economic recovery has been clear. And the evolution, where the U.S. economy began leading global growth, while Europe and Japan were just embarking on big and bold stimulus is likely the reason Bernanke felt comfortable enough to exit. Think about it, the Fed hands off of the QE baton to the ECB (Europe) and the BOJ (Japan). Meanwhile, the Fed can make the first step in moving away from emergency policies. Europe and Japan have all of the ingredients to execute on their big QE promises to continue providing fuel for global growth and stability (they need a weaker currency).
The Fed’s exit from emergency policies shows their confidence in the economic recovery. And the ECB and BOJ can “print away”, suppressing global market interest rates (which helps the Fed), fueling higher global stock prices (which helps everyone), and fueling capital flows into the U.S. to further bolster U.S. recovery.
The question is often asked, when referring to QE, “what is the transmission mechanism?”
Here’s the answer: 1) Stability – QE assures people that the central bank(s) are there, acting, and ready to do more, if needed, to defend against any further shocks to the global economy and financial system. That creates stability. And with that stability backdrop, major central banks promote incentives for people to borrow again, to spend again, to hire again. 2) Risk-Taking – Ultra-low interest rates and a stable environment promotes the rebirth of housing activity, and encourages investors to reach further out on the risk curve for more return. That means more demand for stocks, and higher stock prices. Higher stocks and higher housing prices create paper wealth. Paper wealth gives people comfort to borrow again, to spend again and to hire again.
That has been the recipe. And it has worked! The key ingredients continue to be higher stocks and higher housing prices (even if at a modest growth rate).
Central Banks Need You To Buy Stocks
With the ECB doubling down on their commitment to do “whatever it takes” and with the architect of the massive
QE program in Japan, Prime Minister Abe, uttering those same words in the past month, the pressure valve on the Fed has been released and should clear the path for the Fed to make its first move on interest rates in nine years this coming December.
When we consider where we’ve been (fighting back from what was potentially the Great Apocalypse of economic crises), and how the economy is performing now, the fact that the Fed thinks the economy is robust enough to remove emergency policies is, indeed, a time for celebration.
And with that, there are plenty of reasons to buy stocks, not just because central banks need you to. But frankly, most people don’t seem to understand this central bank dynamic anyway. And that’s precisely why sentiment has been gloomy on stocks for the entire recovery, dating back to the 2009 bottom.
Given this negative sentiment, with respect to the economic outlook and the outlook for stocks, it’s not surprising that the declines in stocks along the way have been sharper and more slippery because of this pervasive fear in the investment community. Along the way that has created great buying opportunities. This recent decline is no different. Often market sentiment tends to over emphasize events. And it tends to be wrong (contrarian). Nonetheless, when events pass, as we’ve seen along the way, regardless of the outcome, the fog lifts, and the underlying fundamentals return to dictate performance.
From a valuation standpoint, when rates are “low,” historically, the P/E ratio of the stock market tends to run north of 20. And, of course, we are not just in a low interest rate environment; we are in the mother of all low interest rate environments, even with the Fed ready to begin moving. North of 20 is precisely where the valuation on stocks has gone in the past year. Now, based on next year’s earnings estimate, the market is valued at just 15x. A move to 20x earnings would mean an S&P 500 around 2,600 by next year. That’s 30% higher than current levels.
Why would a low rate environment tend to mean higher valuations for stocks?
Economics are about incentives, and when rates are ultra-low, people are incentivized to switch out of bonds and into stocks, to seek higher yield/higher returns. When we think about the direct implications of this incentive dynamic, we look no further than the amount of cash that big funds are holding, and where that might find a home.
Historically, one of the most predictive indicators of stock market bottoms is how much cash fund managers are holding. Right now, cash is at levels only seen during the 2008-2009 Great Recession period. Fund managers are holding 5.5% of their portfolio in cash and their allocation to stocks are at the lowest levels since 2012. Furthermore, 35% of all funds are now overweight cash.
When you see fund managers so pessimistic on stocks, while holding so much cash, it has historically been a signal for a huge move in stocks. These managers are paid to invest, and cash has always been the dry powder that’s fueled every rally in stocks throughout history. When fund managers are not holding cash and are fully invested, they have no powder left to buy stocks. The only way they can buy a stock is to sell another stock, which usually occurs at market tops.
The last two times fund managers held this much cash while being so underweight stocks was 2009 and 2012.
What happened? A huge rally! Between 2009 and 2011, the S&P rose 41%. Between 2012 and 2014, the S&P 500 rose 46%.
Sign up for our Free ebook, The Little Black Book of Billionaire Secrets, and learn how to follow the “best ideas” of the world’s top billionaire investors. You don’t have to be rich to take part. You don’t have to pay the hefty 2% management fee and 20% profit share to a hedge fund. You can follow the lead of powerful billionaire investors by simply buying the same stocks they do, in your own brokerage account.
Last week the Wall Street Journal published a report on 70 activist campaigns, looking back over the past six years. No surprise, in evaluating these campaigns, they found that activism works.
With the ability to buy controlling stakes in public companies, we know that activist investors can influence outcomes in the stocks they buy. They have the unique privilege of controlling their own destiny. With that edge, these investors have proven to produce a significant return over what the broader market gives you over time, on average.
When we follow these activist investors into stocks, piggybacking their moves, not only do we get to participate in their performance, for free, but we get an investor on our side that has a lot of money on the line (both their investor’s money and often a lot of their personal money). With that, we get to follow the lead of someone with power and influence, and with every incentive to see the campaign succeed.
Given their record of success, when an activist investor takes a position in a stock and publicly gives a price target for the stock, we take note.
In each of the five stocks listed below, a billionaire investor or hedge fund is calling for a double:
1) Macy’s (NYSE:M) – Starboard Value, a top $4 billion activist hedge fund, said at the Ira Sohn Hedge Fund Conference that Macy’s could be worth $125 a share if the company would sell or spin off its real estate. The stock today sells for $50.36. If Starboard is right, the stock has a 172% potential return.
2) NCR (NYSE:NCR) – Marcato Capital, a $3 billion activist hedge fund run by Bill Ackman’s protégé, Mick McGuire, said that NCR could be worth as much as $51 to $59 a share. The stock is $25 today. If McGuire is right, NCR has a double in it (or more).
3) Bob Evans (NASDAQ:BOBE) – Sandell Asset Management, a top billion dollar plus activist hedge fund, said that Bob Evans could be worth as much as $90 a share if it sold or spun off its real estate. Bob Evans sells for $44 a share. A move to $90 would be a 105% return.
4) Yum Brands (NYSE:YUM) – Carl Icahn protégé, Keith Meister, who runs the $8 billion activist hedge fund Corvex Management, said at Ira Sohn this year that YUM could be worth as much as $130 a share, if the company spun off its Chinese operations. With the stock selling at $70 that is an 86% potential return.
5) Brookdale Senior Living (NYSE:BKD) – Billionaire Larry Robbins of the $15 billion hedge fund Glenview Capital Management has said that Brookdale could double, as the company’s real estate was worth as much as its share price. That is when the stock was trading at $30. Today Brookdale sells for $22.87 which would imply a 161% potential return.
Sign up for our Free ebook, The Little Black Book of Billionaire Secrets, and learn how to follow the “best ideas” of the world’s top billionaire investors. You don’t have to be rich to take part. You don’t have to pay the hefty 2% management fee and 20% profit share to a hedge fund. You can follow the lead of powerful billionaire investors by simply buying the same stocks they do, in your own brokerage account.
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.
In the past month, U.S. stocks had the biggest one day spike in volatility on record, and while the percentage swing in stocks didn’t rank in the top five of biggest days, it wasn’t far off.
Since then, there have been violent swings across global stocks, and heightened uncertainty about what lies ahead.
Keep in mind, there was a lot of damage to investor psychology in the early days of this decade-long economic downturn. That has created a contingent of investors that have been fearing another shoe to drop.
That fear leads to under participation in stocks, and it also leads to weak hands in the stock market. The “weak hands” are those that may own stocks, but have little conviction (and likely a lot of fear). It’s this dynamic that has created the sharp swings we’ve seen a few times in recent years, and this most recent decline fits the bill. While the current decline was sharper and more extreme than anything we’ve seen since 2008, the reasons are far from the same. Bear markets in stocks are driven by recession or a major economic event that can lead to recession. We have neither.
In the U.S., fundamentals are solid and improving. For those that argue the economy is fragile, the bond market disagrees with you. The yield curve is the best predictor of recessions historically. Yield curve inversions (where short term rates move above longer-term rates) have preceded each of the last seven recessions. Based on this analysis, the below chart from the Cleveland Fed shows the current recession risk at virtually nil.
With no recession risk on the horizon, this dip in stocks looks like yet another valuable buying opportunity. We’ve had seven declines of close to 5% or more in the S&P 500 since late 2012. In each case, the decline was fully recovered in less than two months. In most cases, the decline was recovered inside of one month. This is an amazing fact, yet many people have been trying to pick tops, rather than preparing to buy the dip. We still have global central bank policies that continue to defend against shocks and promote global recovery (from Japan and Europe) and the Fed should continue its plan to slowly remove the crisis-driven emergency policies that have been in place for the better part of 10 years. Moving away from emergency policies is positive! With that, this broad correction looks healthy and could kick off another leg of a strong run for stocks.
Warren Buffett has famously said a simple rule dictates his buying: “Be fearful when others are greedy, and be greedy when others are fearful.” No surprise, he publicly said today that he’s on the prowl to deploy $32 billion of fresh capital to buy stocks on sale.
At Billionairesportfolio.com our specialty is following the lead of billionaire investors. Many will speculate on what Buffett might buy with a fresh $32 billion. But to find stocks on sale, we look no further than his current portfolio. There, we find stocks that have the “wide moat” characteristic Buffett covets. And after the recent sell-off, some have dividend yields higher than treasury bonds, and P/Es well below the market average.
Below are four blue-chip stocks owned by the great Warren Buffett, each of which is cheap, and with a catalyst at work that can reprice the stock higher:
1) American Express (AXP) is one of Buffett’s “four horseman,” yet American Express is down 20% over the past year, leaving it with a current P/E of only 13. Recently one of the top activist hedge funds, ValueAct Capital (an $18 billion hedge fund run by Jeffrey Ubben) took a $1 billion position in AXP. ValueAct takes a private equity approach to investing and many are predicting that ValueAct will shake up the current management of American Express. The last blue chip stock ValueAct targeted, Microsoft, is up almost 50% since ValueAct took a position — a good sign for American Express investors.
2) IBM (IBM) is another one of Buffett’s core holdings. Buffett owns 8% of IBM or almost $13 billion worth. Right now you can buy IBM at a much cheaper price than Buffett paid for his shares (Buffett paid around $162). Buffett rarely makes mistakes, so this is a once in a lifetime opportunity being able to buy Buffett at a discount. IBM is also dirt cheap with a P/E of 9 (almost half the P/E of the S&P 500) and has a dividend of 3.6%, well above the current yield on the 10-year Treasury note. The stock is so cheap any positive news could send IBM flying. Earnings could be the big catalyst for this stock. They report in October.
3) Wal-Mart (WMT) – Buffett currently owns more than $4 billion of Wal-Mart. The stock is down 24% in 2015. It trades at only 13 time earnings with a dividend yield of 3%. One could argue Wal-Mart is the cheapest “blue chip stock” at a price-to-sales of .42 (the lowest of any Dow component). Consumer discretionary is the strongest sector in the market this year, the only sector that has a positive gain for the year. With unemployment nearing “normal” levels, and with gasoline prices at 11-year lows it is only a matter of time before consumers start spending more, and Wal-Mart is usually one of the biggest beneficiaries of this trend.
4) General Electric (GE) is another large Buffet stake that has a huge dividend (3.8%) and sells for a forward P/E of 15. The real catalyst with GE is that the company expects to return a whopping $90 billion to shareholders over the next couple of years, which will mean a dividend increase and a stock buyback, all positive catalyst’s to reprice GE higher in the future.
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It’s widely known in the mutual fund community that poor performing stocks which are heavily owned by institutional money managers can be targets of ”window dressing” at the end of a quarter.
Window dressing is a tactic where portfolio managers sell their worst performing stocks and buy more of their best performing stocks into the end of the quarter. When they report the quarter-end holdings of their portfolios, after a little window dressing, they tend to look a little smarter when they have a book of nicely performing stocks, after purging the weaker performers.
At BillionairesPortfolio.com, what’s most interesting about this practice to us is that it can create an opportunity for us to buy billionaire-owned stocks at a price cheaper than what the billionaire paid for his shares.
Below is a list of four of the highest conviction stocks of four of the top billionaire investors in the world. Each of the stocks listed got a little cheaper in the past couple of weeks, likely due to some mutual fund window dressing, along with a dose of some broad market risk aversion:
1) Qualcomm (QCOM) – Billionaire Barry Rosenstein’s activist hedge fund Jana Partners owns $2 billion worth of Qualcomm. It’s the fund’s largest holding. Jana paid around $66 to $68 for their QCOM shares. That’s about 10 % higher than what it is selling for today. Qualcomm dropped six straight days into the end of June, typical behavior of window dressing selling. Qualcomm now has 3.05% dividend yield and sells for just 14 times earnings with one of the best balance sheets of any S&P 500 company.
2) Monsanto (MON)- Billionaire Larry Robbins of Glenview Capital was named the number one hedge fund manager by Barron’s with a 57% annualized return over the past 3 years. Monsanto is Glenview Capital’s largest position, and the fund’s average cost for Monsanto is around $112 a share. That’s 5% higher than what Monsanto sells for today. Robbins stated at hedge fund conference that Monsanto could be worth $220, or a double from its price today.
3) Chesapeake Energy (CHK) – Billionaire Carl Icahn owns 11% of Chesapeake at $17 a share, and recently added to his stake in March at $14. Chesapeake has been hammered ever since. The stock is down 25% over the past month and 10% this week alone. CHK now has a 3.2% dividend yield and sells at just two-thirds of its $15.50 book value.
4) Micron Technology (MU) – Micron is David Einhorn’s second largest position in his hedge fund Greenlight Capital. Einhorn paid around $21 a share for his nearly $1 billion position. The stock now sells for $18.78 – about 11% cheaper than what Einhorn paid. MU sells for just 6 times earnings and 4 times cash flow. Micron looks like the classic window dressing stock as it dropped 22% over the past week.
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 27% gain since 2012.
First, let me say this: Most people lose money trading options.
It’s a very difficult game. But if you can find an edge, the returns can be huge. One of the best option-trading hedge funds in the business, Cornwall Capital, has averaged 51% annualized over the past 10 years. That turns a mere $20,000 investment into $1.2 million, in less than 10 years.
Two of the best option strategists that have ever worked on Wall Street are Keith Miller, formerly of Citigroup, and John Marshall, of Goldman Sachs. Both Miller and Marshall happen to be Blue Jays (i.e., Johns Hopkins University grads), like me. If you can ever find any of their research studies, print them out and examine them closely. They are excellent — and will give you an edge.
Below are the rules the best hedge funds use when trading options:
Rule #1
Options are like a coin toss; you’ll be lucky if half your option trades are profitable. That is why you have to make sure you get paid for the risk you take.
Only trade an option if your projected return is a triple or better. To do this you will have to buy an out-of-the-money option. And you should go out at least two months, preferably longer. Now, here’s the math:
Let’s say you make 40 option trades a year. Odds are at best you will only make money on 50% or half of these trades. Therefore, if you had 40 options trades and 20 of those trades expired as worthless, and the other 20 option trades averaged a triple or more, you would still make 50% a year. For example, on a $40,000 account taking 40 trades a year, if 20 option trades lose everything and the other 20 trades give you an average return of 200%, your account would be worth $60,000, giving you a 50% return.
So $20,000 would go to zero on the option trades that expired worthless. The other $20,000 would go to $60,000 on a 200% return.
Rule #2
Price predicts a stock’s earnings and fundamentals 90% of the time. According to Keith Miller of Citigroup, a stock will start to move one to two months ahead of its earnings date, in the direction of the earnings report. This means if a stock starts trending higher or breaks out higher before the company reports earnings, the earnings report will be positive 90% of the time.
Rule #3
When you are buying options on a stock, make sure the stock is owned by an influential investor or activist. These investors, such Carl Icahn, Barry Rosenstein of Jana Partners and the rest, are always working behind the scenes to push the companies to unlock value; this can come in the form of incremental positive change or big one-time catalysts. This positive announcement or catalyst usually emerges after the stock has moved up in price. So when you see an activist-owned stock breaking out, or trending higher, there is usually a good chance change is coming. Thus, you’ll want to buy calls on this stock immediately.
Rule #4
Only trade an option if there is an event or catalyst that will reprice the stock. This could be an earnings announcement, a company’s Investor Day or an annual meeting.
Rule #5
Only buy options when both implied volatility and historical volatility are cheap. Be a value buyer of options. Watch volatility. Buy volatility only when it’s cheap.
A perfect example of an option trade that fits all of the above criteria is Walgreens ($WAG).
> Jana Partners, run by billionaire Barry Rosenstein — one of the top 5 activist hedge funds on the planet — owns more than $1 billion of Walgreen’s stock. That’s more than 10% of the fund’s overall assets invested in Walgreen’s (Jana has $10 billion under management). Even better, they just added to their position last week, buying $77 million more during the market correction.
> Walgreen (WAG) just broke out of a consolidation pattern, and it looks like it is ready to make a big run (see chart below).
> Walgreen reports earnings on December 22nd. So whichever way the stock moves over the next month or two will predict whether the company’s earnings are positive or negative. Based on the stock’s current price momentum, the report will be positive.
> The Walgreen $65 calls are cheap, especially since they expire only two days before the company reports earnings. You can buy the Walgreen December $65 calls for just $1.10. That means, at $66.10 or higher, you will make money on this option. My price target for Walgreen, based on its recent breakout, is $69. That also happens to be where Walgreen gapped previously.
> If Walgreen stock trades just 10% higher to $69 by December 20th, you will more than triple your money on this option in less than two months. This is the risk-reward profile you want when trading options. Your goal should be to make 50% a year.
Bill Ackman, in his most recent quarterly letter to his investors, just divulged a secret we have been telling our subscribers for almost three years now: If you want to get rich, piggybacking the trades of the world’s best billionaire investors and hedge funds could help you attain this goal.
Ackman stated the following in his most recent quarterly letter to his investors: “In 26 out of 30 of our activist commitments, the day-after price was still a bargain versus the ultimate price achieved from our involvement with the company.”
This means if you bought every stock Bill Ackman bought the day after it was announced, you would have made money on 26 out of 30 stocks (87%). More important, you would have made 21 times your money. That turns $100,000 into $2.1 million, or $50,000 into more than $1 million.
Over the past week, I received hundreds of emails concerning Carl Icahn’s announcement that he took an 8% position in Hertz (HTZ). We know Icahn has already publicly stated he wants to actively engage with Hertz management and its CEO, but there has been no word about Icahn pushing Hertz to merge or sell itself.
Here is why: First, regulators would never approve a Hertz-Avis merger. The two entities represent too large a share of the industry. It would essentially be a monopoly. So a merger with Avis isn’t happening — at least in my opinion.
Though, given the quick 25% run up in Family Dollar (FDO) last month after Icahn forced a merger with Dollar Tree (DLTR), it’s easy to see why investors are hoping for a similar result. Clearly, people don’t want to miss out on the next FDO. On that note, you can read some great analysis of the Family Dollar deal, where my partner and I predicted the merger and picked the bottom in Family Dollar stock (read that here).
But again, this is not going to happen with Hertz. Icahn and numerous other investors are long Hertz. Hertz is actually one of the most popular stocks owned by top billionaire hedge fund managers, because it’s a pure play on the improving economy, and rental car companies have lagged airlines in terms of raising their prices.
So many hedge funds are betting on Hertz increasing its prices, like the airlines did last year, and they are betting that demand will continue to improve with the recovery in the economy. It’s that simple.
Also, this is not a classic Icahn play. He typically comes into a deeply depressed stock selling near its 52-week low or multi-year lows. Icahn purchased Hertz near the stock’s all-time high.
But what Icahn is doing is playing his “change” card. He has recently laid out his evidence, based on his history as an activist investor, of how replacing a CEO is a powerful catalyst for producing shareholder wealth creation. And one of his fellow shareholders in Hertz is already at work on that strategy: Fir Tree Partners is pressuring the board to oust the CEO.
