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Billionaires Love These 3 Stocks -- but Should You?

By Jason Hall, Travis Hoium, and Brian Feroldi - Apr 2, 2017 at 9:17AM

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Sometimes the richest investors make bad investment decisions, too.

A great place to look for investing ideas is in the quarterly 13F SEC filings of some of the biggest, most successful investors. But just because a big name has invested in a company doesn't mean it's necessarily a stock you would want to buy. 

As a matter of fact, our contributors think these three stocks, Herbalife Ltd. (HLF 5.43%)J.C. Penney Company Inc (JCPN.Q), and EP Energy Corp (EPE), are probably best to be avoided, despite the huge success of the billionaire investors who currently own shares in them. 

Woman with her hand extended, as if to say, "stay back."

Our contributors don't think these stocks would love you back. Image source: Getty Images.

Keep reading to learn why our contributors think, despite the love from billionaire investors, these stocks may not be deserving of your love. 

A battleground stock with a questionable business model

Brian Feroldi (Herbalife): I have a lot of respect for Carl Icahn, but I must admit that I'm scratching my head as to what he sees in Herbalife. Icahn has been engaged in a multiyear battle with fellow billionaire Bill Ackman over the future of this company, with Icahn taking the bull side. Ackman famously accused Herbalife of being a pyramid scheme a few years ago and shorted more than $1 billion worth of stock. Icahn eagerly refuted that claim and has been rapidly accumulating shares. In fact, Icahn recently received permission from the Federal Trade Commission to buy as much as 50% of the entire company! 
Despite Icahn's clear bullishness, Bill Ackman has done a lot of digging on Herbalife and has uncovered a number of egregious business practices. Ackman has even produced a series of videos that claim that 99% of Herbalife's distributors earn less than minimum wage and 86% of distributors earn nothing at all. Those figures are why he believes Herbalife is nothing more than a pyramid scheme -- and why he continues to short the company's shares. 
I don't have any special insight into who is right or wrong here, but what I do know is that more than 52% of Herbalife's shares have been sold short. Meanwhile, Icahn's penchant for gobbling up shares is likely a big reason the stock has held up so well over the last few years. That suggests that this company isn't really trading based on its business fundamentals, but is instead being propped up by this dispute. That's why I think retail investors are probably best served by watching this drama unfold from the sidelines.

Betting on a retail recovery

Travis Hoium (J.C. Penney): One billionaire investor I like to watch is David Tepper, who runs Appaloosa Management, a hedge fund with some $17 billion in assets, according to Forbes. The one buy by Tepper that caught my eye in Appaloosa's latest filing was J.C. Penney. Appaloosa began building a position in the fourth quarter, adding 5.08 million shares and making it one of its biggest buys in the quarter. 

J.C. Penney is a strange pick because it's in a highly competitive retail market that's being disrupted by the internet, and it's one of the weakest competitors in the space. Presumably, this is a bet on a recovery for the retailer, but even that's a little hard to see happening. You can see in the chart below that while net income and cash burn are off their 2013-2014 lows, they're far from positive for the company. 

JCP Net Income (TTM) Chart

JCP Net Income (TTM) data by YCharts.

Tepper comes from a background in fixed income, and he often makes bets on investments with mispriced assets or cash flows, but this is a recovery play. Given the struggles in retail and the decline of J.C. Penney's sales and brand, this is a recovery I don't see happening. Tepper is a billionaire with a history of success, but this is a stock I don't think investors should love as much as he does right now.

When being a major shareholder gives you other advantages

Jason Hall (EP Energy Corp): At last count, Billionaire Leon Black's Apollo Global Management LLC (APO) owned just under 45% of EP Energy, having retained that stake in the company after taking it public in early 2014, only a couple of years after acquiring it for more than $7 billion. Since then, EP Energy has seen its market value plummet sharply, falling 80% from its post-IPO high. On paper, this has cost Black and Apollo billions in investment losses. 

Over the same time, the company has faced many of the same cash-flow and debt challenges many other independent oil producers have dealt with, adding to the company's struggles. 

Does having a major backer like Apollo and Leon Black make EP Energy the rare oil producer stock to like? After all, Apollo has already demonstrated a willingness to help support the company's efforts, having reached an agreement with EP Energy to finance 60% of the drilling costs to develop up to 150 wells in the Permian Basin in exchange for a 50% interest in those wells. 

But even that may be more about Apollo using its leverage to get a sweet deal than simply supporting a company it's heavily invested in. Compared to what other companies are paying for similar assets, Apollo could be getting a steal of a deal, while EP Energy is giving up maybe too much for what it will get. Apollo is able to factor the value of these side deals in its ownership of EP Energy, while you and I never will. 

For that reason, I think it's probably best to consider other producers first. Sure, Apollo's major stake in the company should mean some alignment of interests with other common shareholders, but pushing up the stock price is not the only way Apollo can make money from EP Energy, as its recent deal shows. That's a very different situation from the one in which the rest of us find ourself. 

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Stocks Mentioned

J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
Herbalife Ltd. Stock Quote
Herbalife Ltd.
$21.56 (5.43%) $1.11
Apollo Global Management, LLC Stock Quote
Apollo Global Management, LLC
Enterprise ETE LLC Stock Quote
Enterprise ETE LLC

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