Keeping an eye on what billionaire investors have been buying and selling can be a great way for individual investors to generate ideas. The wealthy, after all, tend to spend ample time researching a business before they buy, so following in their footsteps can sometimes make sense.
With that in mind, we asked a team of Fools to highlight a stock that a famed money manager has been buying. Following is a look at three companies -- Sears Holdings (NASDAQ:SHLD), Apple (NASDAQ:AAPL), and Antero Resources (NYSE:AR) -- that caught their attention. Should you follow the big boys into these three businesses? Read on to find out more and judge for yourself.
Too risky to touch
Brian Feroldi (Sears Holdings): The rise of e-commerce has flipped the retail world upside down, and many former giants have struggled to keep up. Sears Holdings has been hit particularly hard by changing consumer behavior, and its revenue and net income have been falling for more than a decade. In turn, its stock has been utterly crushed.
Despite the company's struggles, famed money manager Bruce Berkowitz of Fairholme Capital Management has amassed a big position in it. His rationale is that the company's stock price doesn't properly credit Sears Holdings' huge base of assets.
Berkowitz is betting that the company's billionaire CEO, Eddie Lampert, will turn Sears Holdings into a successful investment from here by cutting costs, selling off assets, and focusing on returning cash to shareholders. If it works, that could make the stock a worthy holding, especially from today's depressed price.
Still, I continue to see several reasons to stay away. The company has been losing money for years, and the losses are expected to continue. It is also hard for me to believe that this company will ever become profitable again, given the company's waning brands and shifting retail environment. Meanwhile, its balance sheet is loaded with billions in debt, and the company has only $258 million in cash. That situation hints that any gains from asset sales might only be used to delay the inevitable, instead of providing shareholders with gains.
In all, I view Sears as a potential turnaround story that is far too risky to touch. That's why I plan on avoiding this stock like the plague and would suggest that other retail investors do the same.
An $8 billion bet
Tim Green (Apple): Warren Buffett's Berkshire Hathaway first bought shares of iPhone giant Apple last year. The purchase came from one of Buffett's deputies, both of whom are free to make investment decisions without approval from the Oracle of Omaha.
Berkshire doubled down on that Apple bet in a big way during the fourth quarter. The company's regulatory filing showed that it owned 57.4 million shares at the end of 2016, up from 15.2 million shares at the end of the third quarter. At the current price, Berkshire's Apple stake is worth nearly $8 billion, making it one of the company's largest holdings.
There's a lot to like about Apple. The company has an extremely strong brand, and its iPhone has been viewed as the best smartphone since its inception. Apple produced $45.7 billion of net income in fiscal 2016, down substantially from the previous year but still a staggering sum. The company also has $158 billion in net cash on the balance sheet. With a market capitalization of roughly $715 billion, the valuation is certainly attractive.
There's also a lot not to like about Apple. The company is heavily dependent on the iPhone, and a combination of smartphone market saturation, improving mid-range phone quality, and lengthening upgrade cycles have the potential to wreak havoc on its biggest cash cow. Apple needs to keep coming up with new ideas to spur upgrades each year, and a failure to do so could lead to further earnings declines.
Buffett seems to be betting that Apple's strong brand and quality products will be enough for the company to maintain its exceptional profitability. But I'm not so sure.
This niche natural gas producer has a big value investor on board
Jason Hall (Antero Resources): Most people have never heard of Seth Klarman, but he's proved to be one of the best value investors working today. Klarman runs Baupost Group, and its most-recent 13F filing had Antero Resources, the small independent natural gas producer, listed as its fourth-largest holding. As of the end of December, Klarman's Baupost owned over 19 million shares of Antero, worth over $460 million. That accounts for over 7.5% of Baupost's $7.7 billion in stock holdings at year's end.
Is Antero a good stock for you? If you're looking for a solid natural gas-focused producer, with great low-cost assets, adequate liquidity, and dependable cash flows, it could be worth a closer look. The cash-flow aspect is definitely something that makes Antero appealing, as the producer has 96% of its 2017 production hedged at $3.47 per thousand cubic feet equivalent, far above the current market price of $2.63 for April delivery.
In other words, Antero's hedging activity helps it avoid the biggest risk to oil and gas producers: commodity price volatility. While other producers could end up selling gas for less than it costs them to produce it, Antero knows what its cash flows will be for the full year. That's great for investors.
Antero also has a pretty decent balance sheet, with plenty of access to liquidity, most of its debt at reasonable costs, and no major maturities before 2021.
Brian Feroldi owns shares of Apple. Jason Hall owns shares of Apple and Berkshire Hathaway (B shares). Timothy Green owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.