One way that we Fools generate investment ideas is by poring through SEC filings of billionaire investors. These filings track the recent buy and sell decisions of some of the smartest money managers in the world, so keeping an eye on what these investors are up to makes a lot of sense.
With that in mind, we asked a team of Fools each to highlight a stock that a billionaire investor has been selling recently. Read on to see why they chose Cheniere Energy (NYSEMKT:LNG), Activision Blizzard (NASDAQ:ATVI), Suncor Energy (NYSE:SU), MGIC Investment Corporation (NYSE:MTG), and Extended Stay America (NASDAQ:STAY).
A big bet on LNG
Tyler Crowe (Cheniere Energy): One of the least-talked-about billionaire hedge-fund managers out there is Seth Klarman at the Baupost Group, which is a shame, because he is also one of the most successful hedge-fund managers of all time. Over the past couple of years, he has assembled a very large position in LNG (liquefied natural gas) exporter Cheniere Energy, but that position was reduced this past quarter.
Selling some of the fund's position isn't that big of a deal, really. If you look at Baupost's holdings, Cheniere is its largest public position by a wide margin. Cheniere Energy is 17.5% of the fund's total public holdings; the next closest is 12.3% of the fund. With so much of Baupost's capital tied up in Cheniere, it's possible that the recent reduction in holdings was more of a portfolio rebalancing than a loss of confidence in the stock. After all, Klarman is known for his long-term horizon.
The reason that Klarman is making such a large bet on this company is that it has the potential to be an absolute cash cow. More than 85% of Cheniere's LNG liquefaction capacity is already subscribed under fixed-fee contracts, which means its facilities will always have some demand to fill. This suggests that an investment in Cheniere will be a pretty stable one for a couple of decades.
For investors who are looking at this recent sale as a sign, though, it's not an easy one to figure out. Clearly, Klarman still sees value in this stock, so the need to sell is overstated. However, Cheniere's stock does have a valuation that looks pretty frothy, even when you use Cheniere's earnings estimates for when the whole LNG facility is up and running. For now, it's probably best to take a wait-and-see approach, unless an opportunity arises to buy shares on the cheap.
Soros is cutting ties with this video-game maker
Brian Feroldi (Activision Blizzard): Billionaire investor George Soros is one of the most widely followed investors in the world -- and for good reason. Soros' Quantum Fund generated an average annual return of more than 30% while he was calling the shots. That's an unbelievable track record of success that helped to turn him into a billionaire.
Soros' latest SEC filing shows that he recently sold off more than half of his position in Activision Blizzard, one of the largest video-game makers in the world. I find this decision to be a bit of a head-scratcher since Activision has been knocking the cover off the ball recently. In fact, the company just reported results that crushed its own guidance, sending shares up more than 16% in a single day.
While Soros may be cashing out, I can't help but be bullish on this business. Digital channel revenues -- which are very high-margin -- grew 126% year over year. Engagement remains strong, and the company is testing monetization strategies for its King Digital games. Add in plans to buy back another $1 billion worth of stock and pay down $500 million in debt, and I can't help but feel that this company is well-positioned to keep delivering for shareholders.
Just because Berkshire sold Suncor doesn't mean you should too
Jason Hall (Suncor Energy): The most recent SEC disclosure of Berkshire Hathaway's stock holdings showed that the company completely exited its position in Canadian oil producer Suncor Energy sometime in the third quarter of 2016, selling the 22.3 million shares it held. Not only was this -- in hindsight -- likely terrible timing to sell the stock (which has rebounded by double-digit rates from its lows in that quarter), but also a bad time to exit what events have shown to be an improving company.
As I wrote back in December, Suncor is in a strong position today. Over the past year, the company has taken major steps to lower its production costs while also increasing its output, refocusing its business on core assets while divesting non-core holdings. Add it all up, and today's Suncor is in an excellent position, producing oil more cheaply and in higher volume than it was even a year ago -- exactly at the same time global oil demand is strengthening, and OPEC's production is tightening. Factor in a refining operation which provides some predictable cash flows for the company and hedges its exposure to oil price swings, and Suncor isn't an oil stock I'd be looking to sell right now.
Bottom line: Whether it was Warren Buffett, Ted Weschler, or Todd Combs who pulled the sell trigger at Berkshire, their reasoning for moving on (whatever it may have been) doesn't correspond to Suncor being a bad investment right now. Suncor is one of the few oil producers that's on my shopping list.
Turning cold on real estate
Jordan Wathen (Extended Stay America): Billionaire hedge-fund manager John Paulson made a fortune betting against real estate in 2008. His funds have recently dumped shares of Starwood Hotels & Resorts Worldwide ahead of a merger with Marriott International, and twice trimmed a position in Extended Stay America.
The Blackstone Group, which recently listed a single-family home REIT in a cash-out IPO, and Centerbridge Partners also owned a sizable stake in Extended Stay. The group of three investors reduced their holdings in unison as part of a secondary offering in which 12.5 million shares were sold at $16.41 in December 2016. This came shortly after the three sold 12.75 million shares in October 2016 for $14.67 per share.
With prominent investors cashing out at prices well below Extended Stay's 2013 IPO price -- and twice at discounts to the current price -- this suggests that perhaps those who know the company best don't think all that highly of its prospects.
Another Paulson bet against housing
Chuck Saletta (MGIC Investment Corporation): As part of John Paulson's souring on the housing market, he also sold his entire stake of 114.5 million shares in private mortgage insurance company MGIC Investment Corporation. Private mortgage insurance is what most lenders make borrowers buy if the borrowers put down less than 20% on their mortgages; it helps make the lender whole if the borrower defaults on the loan.
Paulson's move is an incredible bet against the housing market. After all, the way most mortgage insurance works is that, for it to pay off on a conventional loan:
- The borrower would have to default on the loan.
- The bank would have to foreclose and try to resell the house.
- Upon reselling the house, if the bank couldn't get back what it's owed, the mortgage insurance would make up the difference.
That's a lot that has to go wrong before mortgage insurance kicks in, so Paulson's sale of the company's stock strongly suggests he's expecting tough things to come in the housing market. MGIC Investment Corporation currently trades for less than five times its trailing earnings but more than ten times its expected forward earnings, which is a sign that the market does expect some struggles this year. Still, while the housing market may not always move upward, I'm not sure we're headed for an imminent repeat of the last decade's housing crash. I'd proceed with caution, maybe, but not with an eye to sell it all.