A little more than a week ago, the 13F filing deadline with the Securities and Exchange Commission came and passed. These filings allow Wall Street and investors to get an under-the-hood look at what institutional money managers with $100 million or more in assets under management were up to during the third quarter. Although data from 13F filings are at least 45 days old, it nonetheless can be useful in helping investors identify if there are any major industry or sector shifts under way. Many billionaires gained their fortune through prudent business management and investment, so it only makes sense to pay close attention to what they're doing with their own money, and with their clients' money.
Although U.S. stocks have had a modestly positive year, billionaires were actively selling select stocks during the third quarter. In fact, three stocks in particular had billionaires running for the exit in Q3.
A surprising growth stock that billionaire money managers were seemingly not thrilled with during the third quarter was content-streaming giant Netflix (NFLX -0.96%). Viking Global and Melvin Capital both reduced their position on the rapidly growing content company, while Leon Cooperman's Omega Advisors sold its entire stake, totaling 372,500 shares. Netflix had previously comprised about 1% of Omega Advisors' portfolio.
The writing was on the wall for billionaires in Q3, after Netflix reported weak second-quarter results back in July. International subscriber growth tallied just 1.52 million, or nearly 25% lower than the company had guided for the quarter, while it tacked on just 160,000 members in the United States, also below expectations. Netflix blamed the weakness on unexpectedly high churn rates and price increases on newer customers, which may have caused pricing confusion for existing clients.
However, there were a number of key components in Netflix's report that should have kept long-term investors firmly in place. Namely, Netflix's management team doesn't consider competition or market saturation to be an issue. Netflix remains a streaming content leader, and it's managed to hold its market share while larger entrants attempt to stake their claim. Furthermore, with the ability to expand to dozens of additional countries in the coming years, saturation isn't even a remote concern for the time being.
Investors who ignored the quarterly noise and paid attention to management's commentary that Netflix's long-term strategy remained on track were rewarded following its better-than-expected Q3 report. The company wound up adding about 3.2 million international subscribers and 370,000 U.S. subscribers during Q3, compared with prior subscriber addition estimates of 2 million and 300,000, respectively. Billionaires who cut bait on Netflix clearly made a poor choice in hindsight.
Arguably no company was more universally disliked during the third quarter than specialty-drug maker Allergan (AGN). Of the 38 widely followed hedge funds that were considered, 10 either parted ways with, or reduced their position in, Allergan in Q3.
As we examined last week, the biggest reason behind this exodus was the likelihood that Hillary Clinton would win the presidential election (remember, 13F filings only account for trades made through Sept. 30, 2016). Clinton had taken a hardline stance toward drug reform during her campaign, and since Allergan recently sold its generic-drug unit Actavis to Teva Pharmaceutical (TEVA 2.68%), it would have exposed Allergan to the full brunt of possible prescription-drug reform.
Another issue for Allergan was the length of time it took to close its deal with Teva. The $40.5 billion cash-and-stock deal ran into multiple regulatory roadblocks since it concentrated such a large share of generic-drug manufacturing in Teva's hands in select countries. Teva wound up appeasing regulators by selling certain assets, but the extra waiting and uncertainty surrounding the sale of Actavis clearly weighed on the debt-riddled Allergan.
One final knock is that Allergan has come up short of Wall Street's consensus profit expectations in two of the past three quarters.
The jury is still very much out on whether these billionaire hedge fund managers are wise for parting ways with, or reducing ownership in, Allergan. Allergan is still an exceptionally good value, with more than $21 in full-year EPS expected by fiscal 2019. However, with some of Allergan's mature products struggling, the cautious approach could wind up being the prudent one for the time being.
Global futures exchange operator Intercontinental Exchange (ICE 1.50%) was also a sell-side target among billionaire money managers during the third quarter. Eminence Capital wound up cutting its position on Intercontinental Exchange, whereas Moore Capital and Viking Global jettisoned all of their shares. For Viking, this amounted to nearly 5.7 million shares, or about 1.2% of its portfolio at the end of Q2 2016, while Moore Capital unloaded more than 325,000 shares.
The likely reason behind this exodus out of Intercontinental Exchange isn't as readily apparent as it was for Netflix and Allergan. Intercontinental Exchange's quarterly results have been quite strong, with the company reporting adjusted earnings growth of 10% in the third quarter. Management credited cost-saving synergies as well as automation and innovation for its solid results.
I suspect the sell-side pressure was probably tied to the expectation that Clinton would win the presidency. Aside from taking a tough stance on prescription-drug reform, Clinton drew a number of lines in the sand with big banks and Wall Street. One such proposal included a financial tax on high-frequency trading. Given that ICE's trading and data-services platforms rely on growing automation to thrive, a high-frequency trading tax could have seriously curbed its near-term growth prospects. With Trump winning and having a generally rosier view of the financial sector, this worry has mostly dissipated.
Intercontinental Exchange isn't exactly "cheap" at its current price, but considering it has double-digit adjusted EPS growth potential throughout the remainder of the decade, its valuation could have modest room to push higher. My suspicion is that Viking Global and its peers could regret parting ways with ICE.