We're a little more than a week removed from Valentine's Day, which for investors had a completely different meaning than "amore" this year. Feb. 14, 2017 was the deadline for institutional and hedge fund managers with more than $100 million in assets under management to complete and turn in their Form 13Fs to the Securities and Exchange Commission (SEC). Form 13F provides a portfolio snapshot of an institutional firms' or hedge funds' holdings as of the end of the previous quarter -- in this case, Dec. 31.
The release of 13Fs is an anticipated event on Wall Street because it gives the average investor insight into what the top money managers have been up to, investment-wise. Though there are obvious limitations to what we can learn from a 13F – for example, the snapshot they provide is 45 days old – they can nonetheless clue Wall Street and investors in about stocks and trends to watch.
Billionaires sold off some big-brand stocks in Q4
According to S&P Global Market Intelligence's Hedge Fund Tracker, which tracks the trades of the top hedge funds, four companies individually saw aggregate selling in Q4 that equated to more than $800 million in market value. One of those four was The Williams Companies, a large energy infrastructure player in the U.S. that saw $910 million in aggregate market value selling, but it's not exactly one that would be referred to as a "big-brand stock."
However, the remaining three companies that billionaire hedge fund managers surprisingly sold heavily during the fourth quarter could rightly be called big-brand stocks.
Arguably one of the biggest surprises from the release of 13Fs was that e-commerce giant Amazon.com (NASDAQ:AMZN) was the most heavily sold stock in Q4, with an aggregate of $1.022 billion of its shares being evicted from hedge fund portfolios, according to S&P Global Market Intelligence's Hedge Fund Tracker.
Some of you might be wondering why on Earth some of the smartest money managers on the planet were selling the king of e-commerce? While we can't speak for the billionaires themselves, a probable reason is the weakness seen in brick-and-mortar mall-based retailers.
The problems that Macy's (NYSE:M) has been facing exemplify the issues of retailers broadly; it experienced a 2.1% decline in same-store sales during the holiday season, and has announced it is laying off 10,000 employees and closing approximately 100 stores. Hedge fund managers may have assumed that the weakness in mall-based retail would carry over to e-commerce as well.
Were these billionaires right to sell? The answer is no, considering that Amazon.com hit a fresh all-time high on Wednesday. Based on the company's fourth-quarter report, sales grew on a constant currency basis by 24%, while operating cash flow increased by 38% to $16.4 billion. Amazon can seemingly do no wrong. Its Prime program is keeping its members close to the hip, and its growing pushes into content and high-margin cloud services are providing ample new channels for revenue and profits. Selling Amazon could prove a costly mistake for these hedge-fund managers.
Another big-brand stock that was exiled from billionaire hedge fund portfolios in Q4 was Anheuser-Busch InBev (NYSE:BUD). According to the Hedge Fund Tracker, $902 million worth of AB InBev stock was sold last quarter.
Why did hedge fund managers run from "America's beer" during the fourth quarter? The answer can be found in AB InBev's third-quarter earnings report. The company wound up announcing a 2% year-over-year decline in EBITDA, a 0.2% drop in global beer volume, and a $0.19 drop in year-over-year EPS. The culprit? According to AB InBev, blame Brazil, which has been dealing with commodity-based hiccups and high levels of inflation. Billionaires who sold AB InBev in Q4 clearly expect the company's struggles to last longer than one quarter.
However, if investors look beyond Brazil, which shouldn't be difficult considering that AB InBev is a global brand, they'll see a company with potentially bubbly long-term prospects. For instance, the company's premium branded beers are gaining market share, which is improving its revenue mix and helping to counterbalance some of the weakness in Bud Light sales.
What's more, AB InBev has been outperforming its industry peers in both China and Mexico. Organic growth in Q3 totaled nearly 10% in Mexico, with EBITDA growth of 5.8%. EBITDA margins were lower by 2.6%, but that's understandable given its commercial investments in the region.
Most importantly, the recently completed acquisition of SABMiller gives AB InBev even greater advantages of scale in the beer business, which should ultimately improve its margins and open new doors. SABMiller's businesses Colombia, Peru, and South African are exceptionally profitable, and further cement AB InBev's geographic reach.
AB InBev isn't a screaming value stock after its subpar Q3 report this past fall, but it's a stock that hedge funds may regret parting ways with over the long run.
Teva Pharmaceutical Industries
Lastly, it was a bit of a shock to continue to see billionaire money managers pouring out of Teva Pharmaceutical Industries (NYSE:TEVA) during Q4. According to the Hedge Fund Tracker, $875 million worth of Teva shares were sold off by hedge funds. While Teva doesn't have the same brand-name influence as say an Amazon or AB InBev, it's still the largest generic drugmaker in the world, meaning it's certainly not chopped liver among investors.
So why no love for Teva? It more than likely boils down to two key issues.
First, Teva Pharmaceutical's lead branded drug, Copaxone, an injectable treatment for multiple sclerosis that's responsible for a good chunk of its profits, is set to face generic competition. Wall Street is clearly worried that Copaxone's lost sales could materially impact Teva's top and bottom lines. The other issue is that Teva has recently tempered its earnings forecast, mostly a result of weaker-than-expected sales from newly launched drugs.
However, as a shareholder of Teva, I believe those billionaires are overlooking an exceptionally inexpensive stock that's currently valued at a shade over seven times this year's profit projections.
To begin with, Teva has been masterful at using the legal system to stave off generic Copaxone entrants. Likewise, it's also changed the formulation to a three-times-a-week dosage that's more convenient for the patient than the older once-daily version. It's my expectation that even if a once-daily generic enters the market, Teva will retain a significant amount of its Copaxone sales.
Even more important, its acquisition of Actavis, which made it the largest generic drugmaker in the world, should allow it to save $1.4 billion annually by 2019, while at the same time improving its margins and boosting its generic-drug pricing power.
I suspect that billionaire investors will regret selling Teva as well.