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%.
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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.
Good friend to our website, and legendary hedge fund allocator, Mark Yusko was on CNBC yesterday and made the bold statement that the Fed should move rates back to normal in one swoop. As we’ve talked about many times, and contrary to the broad sentiment, the first rate hike by the Fed is a celebratory event. After nine plus years of crisis and near global economy apocalypse, the Fed thinks the economy is robust enough to begin removing emergency policies. Article from CNBC.com below with Mr. Yusko’s sentiments…
Morgan Creek Capital Management CEO Mark Yusko said Wednesday the Federal Reserve should raise interest rates to 3 percent in one fell swoop.
“Get back to normal,” Yusko told CNBC’s “Squawk Box.”
“Just reload the gun, 300 basis points.”
Acknowledging a move like that would shock the markets, he argued, “it would send a message of confidence and saying the economy is strong [and] it can handle normal interest rates.”
The Fed’s two-day September meeting begins Wednesday, with a decision on whether to raise rates for the first time in more than nine years Thursday afternoon, followed by a news conference by central bank chief Janet Yellen.
Read More Fed’s market dependence is troubling: David Darst
“If you think about … 100-plus years of history, the short-term rate has been equal to the nominal GDP growth rate. Nominal GDP is around 4 percent. So 3 [percent] would even be below that,” said Yusko whose Morgan Creek Capital, currently with $4.5 billion in assets under management, is primarily a hedge fund allocator, which means it invests in other funds on behalf of clients. The firm also makes its own bets on certain stocks.
“This artificial period of rates has been harmful,” he said. “It’s like water behind pipe. If you hold it back, hold it back, hold it back. When it finally releases, it’s going to be much worse.”
Morgan Creek was founded in July 2004 by Yusko, a former chief investment officer of The University of North Carolina at Chapel Hill Endowment. He has close ties with investment legend Julian Robertson, who provided seed funding.
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.
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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In the face of all of the fear and confusion surrounding China’s sharp stock market decline in June, and the recent moves by its central bank to weaken the Chinese currency, one billionaire has been using the opportunity to load up on Chinese stocks.
His name is Chase Coleman. He runs Tiger Global, a hedge fund that was seeded by billionaire Julian Robertson.
Few have had the performance over the past fifteen years that can compare to Coleman’s. According to an investor letter from Tiger Global, his hedge fund has returned 21% annualized on long positions since 2001. That compares to a 4.5% annualized return for the S&P 500. This run has made Coleman a billionaire before the age of 40.
Not only does Coleman have more than 20% of his hedge fund invested in Chinese companies, but he has been aggressively building those big stakes over the past two months as China’s stock market slid.
At Billionairesportfolio.com, our strategy is rooted in following the moves of the world’s best billionaire investors. This strategy can be even more powerful when we are able to “buy the billionaire on a dip.” In all of five of the stocks listed below, we can follow the wunderkind billionaire hedge funder, Chase Coleman’s lead, into his plays on China. In three of the stocks, we can buy them cheaper than the price Coleman paid for his shares.
1) JD.Com (JD)- JD.com is currently Chase Coleman’s biggest position in his hedge fund, making up nearly 7% of the fund. This stock has been slammed recently, which offers an attractive entry point into one of the fastest growing e-commerce stocks in China.
2) Alibaba (BABA) – Coleman has 6% of his hedge fund invested in Alibaba. Alibaba was hit hard on a weaker earnings report today, but is a dominant company in China, with huge potential growth. Baba shares are 40% off of the highs of just nine months ago, and trading cheaper than where Coleman bought his shares.
3) Vipshop Holding (VIPS) – This is Coleman’s third largest position in China and he is down on his investment. VIPS also happens to be one of billionaire hedge fund manager John Burbank’s top positions at his fund Passport Capital. VIPS has been a highly volatile stock, going from $19 to $30 this year and back to $19 today.
4) 58.com (WUBA)- In recent weeks, while the rest of the world was panicking about China’s stock market volatility, Chase Coleman added to his positon of the Chinese internet company, 58.com, and now owns more than 6.3% of the company. WUBA sold for $83 just months ago, and now trades at $51, offering huge upside if the stock bottoms here.
5) eHi Car Services (EHIC)- In June, Coleman and Tiger Global initiated a brand new position, (21.5% ownership) in EHIC, the “Uber of China.” He is now down on this position, so you are able to buy eHi at a cheaper price than one of the best hedge fund managers on the planet.
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.
Overnight, China openly devalued its currency. And it may be only the first step in a return to the “weak currency” policies that catapulted its economy to one of the biggest in the world. Such a policy reversal would have huge implications for Chinese stocks, and the geopolitical landscape.
China has slowly and modestly appreciated its currency (vis a vis the dollar) over the past decade, in compliance with the pressures from major trading partners and global economic leaders (namely the U.S.). As a result, China’s economy has slowed, its exports have fallen in competitiveness and Chinese leadership is under pressure.
Additionally, since late 2012, Japan has delivered a massive blow to China through its outright devaluation of the Japanese yen. Japanese goods have become 40% cheaper than Chinese goods, on a relative currency basis, since Japan first telegraphed its massive QE and yen devaluation plans. Japanese growth in exports have nearly doubled that of China over the past three years.
With that, it’s no surprise that China is beginning to fight back.
Longer term, a return to weaker currency, in an effort to reclaim its global export dominance, would create major political turbulence with its leading trading partners. But short term, it could give China’s economy and its stock market a huge shot in the arm.
At BillionairesPortfolio.com, we like to follow the lead of billionaire investors that have large stakes in companies and, as such, the ability to influence outcomes.
Below are five U.S. exchange traded Chinese stocks, each owned by top U.S. billionaire investors:
1) eHI Car Services (EHIC) – Billionaire Chase Coleman of Tiger Global recently initiated a 21.5% stake in EHIC in June. eHi Car is considered the “Uber” of China. The stock hit a high of $19 this year and currently trades at $11.45. A return to its 2015 highs from here would mean a 65% return.
2) JD.Com (JD) – Billionaire Steven Mandel, who runs the hedge fund Lone Pine Capital, owns nearly 3% of JD.com, or almost $900 million worth. JD.com has been called the “Ebay” of China.
3) Alibaba (BABA) – Alibaba is a billionaire hedge fund hotel. Billionaires’ Julian Robertson, Chase Coleman and George Soros all own Alibaba. BABA is billionaire Julian Robertson’s second largest position. The stock’s 52-week high is $120 or 53% higher than its share price today. Alibaba reports its highly anticipated earnings on Wednesday, August 12th.
4) Baidu (BIDU) – Baidu is another stock that is a Billionaire hedge fund hotel. Billionaires Stephen Mandel, Julian Robertson and George Soros all own Baidu. Baidu sold as high as $251.99 over the past year — about 50% higher than current levels.
5) iShares China Large Cap ETF (FXI) – Billionaire Louis Bacon who runs the top performing global macro hedge fund, Moore Capital, recently added to his nearly $200 million position in FXI. The exchange traded fund, FXI, is one of the most liquid and diverse ways to get exposure to Chinese stocks.
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.
Stocks have been on a great run and with the European Central Bank and Bank of Japan pumping money into the global economy–picking up where the Fed left off–expect it to continue.
Given the low global inflationary environment and the ultra-easy global central bank activity, bond yields in the U.S. have remained subdued, despite the expectation that the Fed will be raising rates for the first time in nine years later this year. The 10-year note is yielding less than 1.9% this morning.
Meanwhile, we’re seeing a rare occurrence in stocks, and an extremely bullish one. For one of the few times in history, stock dividends are paying a yield greater than U.S. Treasurys. The yield on Dow stocks is 2.25% and the yield on S&P 500 stocks is 1.99%.
This positive yield differential for stocks has only happened five other times in history; each time stocks went up big one-month and three-months later.
If that’s not enough, April happens to be the single best month for Dow stocks over the past 50-years.
With this all in mind, here are a few ways to play it:
You could buy the Dow Jones Industrials Average ETF (DIA) or the three times leveraged Dow ETF (UDOW). Or, our favored way at BillionairesPortfolio.com is to invest alongside an influential investor that has huge skin in the game. This gives you an extra layer of protection, a fellow shareholder that has the power and influence to control his own destiny. With that, you could buy these four Dow component stocks, each controlled by one of the top billionaire investors in the world:
1) Apple: Billionaire activist legend Carl Icahnowns Apple. He says it’s worth $200, and he’s recently been adding to his position. Apple has multiple catalysts in April. The company is launching its watch. Apple reports earnings this month, where we could potentially see another stock buyback announcement and/or an increase its dividend.
2) Dupont: Billionaire activist investor Nelson Peltz has nearly 20% of his hedge fund’s assets in Dupont. He owns nearly 1.8% of the company and has asked Dupont to grant him and his team Board seats, as he wants DuPont broken up to unlock value.
3) Dow Chemical: Billionaire activist hedge fund manager Dan Loeb is also agitating for change at Dow. Loeb owns more than $1 billion of Dow shares and the company has just agreed to split off its chlorine business, a byproduct of Dan Loeb’s activist efforts.
4) Coke: Everyone knows Warren Buffett owns Coke. The interesting part is that Buffett has recently orchestrated a huge merger between two of the largest big-brand food companies, Heinz and Kraft. Kraft shareholders made a 35% premium on their shares overnight. Applying the same takeover multiple to Coke, Coke could be worth as much 40% on a private equity buyout.
BillionairesPortfolio.com helps average investors invest alongside Wall Street billionaires. 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, beating even the great Carl Icahn’s record for the same period.
Billionaire investor, Bill Ackman, CEO of Pershing Square Capital Management, has one of the best investing track records in the world.
When you add back fees, Ackman has returned 1,199% since starting his fund in 2004. That compares to 119% in the S&P 500 for the same period. That’s ten times better than the S&P 500.
His short position on Herbalife has been very well documented. In his interview with Bloomberg on Thursday, he said “it will” go to zero, and he confidently said his fund is “very short.” This comes after the stock has halved since July of last year.
A billionaire face-off on Herbalife started early 2013, following a presentation by Ackman at the Ira Sohn investment conference in New York, where he made the case for his Herbalife short. It included the accusation that Herbalife was running a ponzi-scheme. At that time, the stock was trading the mid $30s. Months later, billionaires Dan Loeb and Carl Icahn both took shots at Ackman’s thesis, and took long positions in the stock, attempting to squeeze Ackman. It worked, for a while. The stock ultimately ran up to $81 in January of 2014.
Ackman says they “bought a lot of put options” on that run up, “in the $70s and $80s.” Now HLF shares are trading back in the $30s, and Ackman says it’s a race to the bottom. He thinks the stock will either hit zero or the government will step in before that, and shut them down.
At this point, Ackman’s campaign against Herbalife is looking quite good.
Love him or hate him, Ackman is one of the best performing investors on the planet, and for average investors, his portfolio might be one of the easiest to replicate. We know about his Herbalife position. Here’s a look at the seven publicly reported core holdings of Ackman’s $18+ billion Pershing Square fund, as of its recent SEC disclosures. These are positions where Pershing owns more than 5% of a company:
Allergan AGN NaN% (AGN) – AGN represents 34% of his portfolio. He has a $6 billion stake in the company.
Air Products & Chemicals APD +0.72% (APD) – APD represents 17% of his portfolio. He has a $3.1 billion stake.
Canadian Pacific Rail (CP) – CP represents a 14% of his portfolio. He has a $2.6 billion stake.
Burger King Worldwide, Inc. (BKW) – BKW represents 8.5% of his portfolio. He has a stake worth $1.1 billion.
Platform Specialty Products Corp (PAH) – PAH represents 5% of his portfolio. He has a stake worth about $940 million.
The Howard Hughes Corporation (HHC) – HHC represents 3% of his portfolio. He has a stake of $510 million.
Zoetis Inc. (ZTS) – ZTS is a relatively new addition to his portfolio. According Pershing’s recent 13d filing, it has a stake representing about 10% of the Pershing portfolio, or a position valued at about $1.8 billion.
Ackman’s Pershing Square fund also holds small stakes in Fannie and Freddie Mac, as well as at least two undisclosed small positions. But Ackman has more than 75% of his fund’s money in just four stocks – long positions. That shows extraordinary conviction, and it also means he can’t afford to lose. That conviction and confidence is present only because he has the ability to gain control of, and influence on, the companies he invests in.
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The magic formula for investing is “risking a little, to make a lot.” When you do this, and spread your risk, you only have to be right a handful of times to make outsized returns.
With this in mind, let’s take a look at two stocks that are among the most widely traded in the world, Facebook and Apple.
The average consensus analyst target price target on Facebook is $90. That’s only 12% higher than current levels. By purchasing Facebook today you are risking a lot to make a 12% potential return. Facebook is trading at 75 times trailing earnings and 37 times forward earnings. High P/E stocks tend to underperform in rising interest rate environments. And that’s precisely where we are headed in the coming months.
What about Apple?
The average consensus analyst price target on Apple is $140, just 10% higher than Apple’s current share price. At best, buying Apple today you will get a potential 10% return. Apple trades at 18 times trailing earnings, and 15 times next year’s earnings estimate. While it’s a stock that is far more fairly valued than Facebook, a 10% upside doesn’t compensate for the downside risk.
So, while Apple and Facebook are the darlings of the stock market, neither offer a potential reward great enough to compensate for the risk to your capital.
On the other hand, here is an example of a stock that does: Chicago Bridge & Iron, symbol CBI.
Chicago Bridge & Iron Company is a Warren Buffett-owned stock. It has an average consensus analyst target price of $72. That’s more than 52% higher than its current share price. The stock trades for just 9 times trailing earnings, and 7 times forward earnings. A low P/E ratio is what Buffett calls a “margin of safety” — it gives him limited downside with potential for big upside. Buffett owns more than 8% of Chicago Bridge and Iron.
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Yesterday, billionaire hedge fund manager Barry Rosenstein, of the activist hedge fund Jana Partners, said that Hertz ($HTZ), the largest rental car company in the U.S. should triple in price. Rosenstein is taking a page from Icahn on two fronts: 1) Using the media to promote his message, and 2) calling for a stock buyback.
Rosenstein’s fund owns more than 8% of Hertz. And Carl Icahn owns 10% as well. Altogether, hedge funds own more than 50% of the Hertz, even as the stock has dropped nearly 25% over the past six months. Rosenstein said Hertz will be able to buy back as much as 25% of their stock, which should juice earnings and cause the stock to triple in price over the next year.
With two of the best billionaire activists in the world controlling almost 20% of Hertz, this stock is a must own stock for investors in 2015. You can see in the chart below, the stock has based just above $20. Icahn owns most of his stake above $28.
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