While we Fools tend to trade far less often than the average hedge fund manager, we still find it useful to keep track of what the big boys have been buying and selling. After all, the top hedge funds are run by some of the smartest financial minds in the world, so keeping tabs on their recent actions can help reveal something about their market insights, of course you shouldn't make a trade based solely on the 13-Fs of other investors.
We recently asked a team of contributors to highlight a stock that has been sold by a well-known hedge fund tycoon. They singled out NXP Semiconductors (NXPI 1.29%), Bank of America (BAC -1.07%), and Barrick Gold (GOLD 3.39%). Here's why.
Image Source: Getty Images.
NXP Semiconductors: Some funds aren't playing the waiting game
Anders Bylund (NXP Semiconductors): As NXP Semiconductors moves closer to becoming a part of Qualcomm, it should come as no surprise that major shareholders are adjusting their positions in that stock. That's exactly what's happening these days.
Two of NXP's largest owners are reducing their holdings dramatically, according to records from NASDAQ. Investment giant FMR LLC, best known as the parent company of Fidelity Investments, sold 10.1 million NXP shares in the fourth quarter of 2016. The firm seems uninterested in playing the value gap between NXP's then-current prices and Qualcomm's firm all-cash offer of $110 per share, reducing its holdings by 45% right away and moving those assets elsewhere.
T. Rowe Price is taking a similar approach to its substantial NXP holdings. The mutual fund titan sold 13.4 million NXP shares last quarter, or 29% of its still-massive stake.
These are still NXP's two largest shareholders as of the end of 2016. T Rowe Price owns 9.8% of the company's outstanding shares, while Fidelity hung on to 3.6% of the embedded chip specialist. No other investment firm had more than a 2.6% interest in NXP at the latest reckoning.
These figures are likely to change again in April when hedge funds and investment banks send in their updated Form 13F filings. Only 15% of NXP's stock stubs have been tendered to Qualcomm's official tender offering so far, leaving lots of room for movement in major shareholder positions. Some will have sold large chunks of their NXP stock if they expect the deal to fall apart. Others will have picked up more, expecting to cash in a solid return at a guaranteed price when Qualcomm gets its final go-ahead from Chinese, Dutch, and American regulators. Those value plays should show up as submitted and accepted in the next tender offer update, due near the start of March.
Common shareholders have the same trading options available, of course.
Buy NXP today if you expect the deal to close and would like a near-certain 7% return by the end of 2017. You could also buy the stock if you see the deal faltering -- but feel that NXP should be worth more than $110 per share even without the Qualcomm combination (and with a potential $1.25 billion breakup fee from the larger chip company). Some hedge funds and mutual fund managers are taking this route by collecting NXP shares from the skeptics and the growth seekers in the next category.
Sell or stay away if the 7% payoff seems weak or uncertain, and you'd rather employ your capital elsewhere. Fund managers with this attitude should be happy to reduce or eliminate their NXP holdings today, letting other traders wait for the yea or nay on the Qualcomm deal.
David Tepper cashes in his Bank of America chips
Brian Feroldi (Bank of America): Self-made billionaire investor David Tepper is one of the most widely followed hedge fund managers on Wall Street -- and for good reason. Tepper's Appaloosa Management has generated 30% annualized return since its founding in 1993, which is an unbelievable track record of success.
Tepper's phenomenal returns have come from his knack for buying mispriced assets from companies that are in trouble. He made a killing off of the Enron and Worldcom bankruptcies in the early 2000s. He also minted his investors a fortune in 2009 as he gobbled up shares of the countries biggest banks for pennies on the dollar.
That's why I found it curious to note that Tepper recently completed sold out of his position in Bank of America. With interest rates finally poised to rise, Bank of America looks well positioned for net income growth from here. That's especially true now that Republicans are calling the shots and could wind back some of the regulations from the Dodd-Frank act.
My hunch is that Tepper has already made such a killing on his Bank of America stock that he is looking to cash out while the times are good. After all, bank stocks have been on a huge run since President Trump won the election. That's caused Bank of America's stock to finally trade up to its book value, so it is no longer the bargain that it once was.
While Tepper has bailed on Bank of America, it is worth remembering that this company still has a number of bulls behind it. Including in that list is Warren Buffett. Berkshire Hathaway still holds a substantial amount of Bank of America's preferred stock and warrants, making it one his company's top holdings. Thus, if you are optimistic about this bank's future, you should know that you are still in good company.
Soros Fund and a major gold miner part ways
Cory Renauer (Barrick Gold): The eponymous tycoon of Soros Fund Management LLC is hedge fund legend that once boasted 30% average annual returns for a period of 30 years. This is why I was taken aback when the $2.4 billion fund dumped all of its Barrick Gold shares last quarter. In fact, the $56.7 million transaction was the largest stock sale Soros Fund reported during the last three months of 2016.
In hindsight, the sale may have been a big mistake. So far this year the price of gold has risen about 8.4%, which helped lift shares Barrick Gold about 26% higher.
Rising commodity prices aren't the only reason smaller investors are scratching their heads at the Soros Fund's closed out position in the big mining stock. It's fourth quarter earnings report contained several nuggets of encouragement. At the top of the list, the company generated a record-breaking $1.51 billion in free cash flow last year from just $8.56 billion in revenue. With its all-in sustaining costs of $730 per ounce last year expected to remain in a range between $720 and $770 per ounce this year, that record might not last very long.
Free cash flow is measured as cash from operations minus capital expenditures necessary to keep those operations running, but you can think of it as funds available to pay down debts, make acquisitions, or return to shareholders. Last year Barrick cut its total debt level by 20% or $2.04 billion and intends to pay down another $2.9 billion this year. It also bumped the dividend up 50% to $0.03 per share. With higher margins pumping up profits, perhaps this is one stock the Soros Fund wishes it had held on to.
