Source: Kimco Realty via Flickr.
It's that time of year again when 13F filings begin to hit the Securities and Exchange Commission's desk, and investors like you and I can get a sneak peek into what the world's best and largest hedge fund managers bought and sold last quarter.
Clearly, the hedge fund business remains lucrative. According to a biannual analysis conducted by Absolute Return, a whopping 305 firms had a minimum of $1 billion in "hedge fund strategy assets" as of July 1, with total assets under management increasing from $1.71 trillion at the beginning of the year to $1.84 trillion.
Standing atop that mountain within the U.S. is Ray Dalio's Bridgewater Associates, which has around $150 billion in assets under management. Dalio and his team have spread their investments in the U.S. across dozens upon dozens of stocks. Diversity is one of the many keys to success, and Bridgewater's knack for spreading around its wealth and seeking out good values has made it a top commodity among hedge funds.
However, that doesn't mean Bridgewater's latest 13F SEC filing isn't without a few questionable investments. In fact, a quick glance at Bridgewater's holdings turned up three potentially scary stocks.
Rite Aid (RAD 20.00%)
Based on the latest 13F filing, Bridgewater Associates owns 2.1 million shares of drugstore Rite Aid's stock, worth a total of $11.6 million. Admittedly, Rite Aid has experienced an exceptional run higher over the past two years, coming back from penny stock territory and reversing the ongoing losses of more than half a decade to finally turn a profit.
However, I'm not convinced this turnaround is on solid footing. In September, Rite Aid lowered its full-year fiscal guidance on the heels of weaker-than-anticipated pharmacy margins, which are being hampered by an increase in generic prescriptions.
Source: Rite Aid via IMS National Sales Perspectives.
I also suspect Rite Aid's multiple years of struggles gave its drugstore competitors more than enough time to steal some of the company's lucrative pharmacy market share.
Let's also not forget that Rite Aid's front-end (i.e., non-pharmacy) margins are being threatened by aggressive competition, advertising, and loyalty reward discounts by its peers. Tack on $5.6 billion in debt that Rite Aid seems in no hurry to pay down, and you have a recipe for a stock to avoid, not buy.
Staples (SPLS)
Trust me: If there were an "easy" button, don't you think Staples would have used it by now?
Faced with the prospect of increasing online selling pressure from the likes of Amazon.com and the consolidation of its two largest foes into a single company, Staples has had to completely reinvent itself. Part of this reimaging campaign involves ditching some of its bulkier large stores for smaller and more specialized stores. In addition, Staples' stores will focus on carrying traffic-driving items such as phones and tablets. Lastly, it plans to place more emphasis on Staples.com, as convenience is key to winning over customers nowadays.
Source: Staples.
On paper, this plan sounds like a winner. In reality, Staples is spinning its wheels. In the third quarter, Staples did deliver 9% growth for Staples.com, but because its online sales make up such a small percentage of its total sales, that didn't save the company from a 2.5% overall revenue decline. What really concerns me is that the only way Staples can win over customers is to undercut its competitors in price. Amazon's business model is naturally cheaper than a brick-and-mortar model like Staples, meaning Staples' margins are likely to suffer for a long time.
Though Staples' stock looks inexpensive, it could wind up being nothing more than a value trap. Bridgewater owned about $813,000 worth of Staples' stock as of last Friday's closing price.
IAMGOLD (IAG 0.55%)
Lastly, Bridgewater counted 345,700 shares of gold miner IAMGOLD in its portfolio as of the end of the third quarter. Normally, you'll find me in full support of gold miners, but IAMGOLD might be one of the worst investments within the industry.
If falling commodity prices haven't been a big enough concern for miners, IAMGOLD's operating costs are among the highest in the industry. This can be blamed on IAMGOLD's African mines, which have significantly higher labor costs and are much more prone to politically-based production disruptions than mines elsewhere in the world. In the third quarter, the company did manage to lower its all-in sustaining costs for a third straight quarter, but at $1,115/oz. they are still among the highest in the industry. A mere dip in gold prices could have IAMGOLD struggling to retain profitability without hefty cost-cutting.
Source: IAMGOLD.
While IAMGOLD may look cheap at 32% of its book value, the company's $641 million in debt could grow if gold prices don't stage a significant rebound in the coming quarters.
One thing to remember
Of course, one thing you should keep in mind with regard to Bridgewater Associates' hedge fund is that it owns a lot of stocks -- so many that these three are only drops in its bucket of total assets. So even if these three remain scary investment opportunities, Dalio and company are clearly doing something right to attract all of that cash under management.
