It's that time again, folks. Four times a year, money managers with more than $100 million in assets under management are required to disclose their holdings to the Securities and Exchange Commission for the previous quarter. This Monday, May 15, was the deadline for that paperwork (13F) to be filed.
Why do Wall Street and investors wait so eagerly for this data, you wonder? The simple reason is that it gives us insight into what the more successful money managers are doing with their clients' money. Understanding why they're buying or selling certain stocks could clue us into broader trends that we might have otherwise been ignoring.
Of course, it's also important to recognize that 13F filings are a bit imperfect. The snapshot we're being given of hedge fund portfolios is already 45 days old, so we're limited in our capacity to understand what active money managers might be up to. Nonetheless, 13Fs are an important asset that can keep investors abreast of big swings in stock or industry sentiment.
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Billionaire money managers dumped these household names in the first quarter
If there was a theme for the first quarter, based on the 13Fs that have been filed, it's that a number of brand-name companies were exiled by high-profile money managers. For some of them, it could simply be a matter of valuation and locking in gains. For others, we could be seeing billionaires throwing in the towel for good reason.
Here are three brand-name stocks that got the ax in Q1.
1. Apple
No, your eyes aren't deceiving you. Tech giant Apple (AAPL 2.15%) was among the companies that high-profile billionaires parted ways with during the first quarter. Some of the most notable sells include Julian Robertson's Tiger Management, which sold all 171,000 shares of Apple it had purchased during the fourth quarter of 2016, and Daniel Loeb's Third Point, which disposed of 1.85 million shares of Apple that it had owned since the third quarter of 2016. It's also worth pointing out that David Einhorn's Greenlight Capital sold 1.84 million Apple shares, reducing its position by 31%.
Why on earth are billionaires selling a company with $256.8 billion in cash? My best guess is that it has to do with Apple no longer being valued at a steep discount. Over the trailing year, its shares have risen by 67%, which is a massive move for a company that now sports an $812 billion market cap. Companies with market caps above $500 billion have not historically been treated well, and these money managers might be cashing in their chips on that account.
Image source: Apple.
Another idea is that we've witnessed a full revaluation of the company on the expectation of a strong iPhone 8 launch (which is presumably coming up in the next few months), as well as the belief that tax reform could allow Apple to repatriate some of its $239.6 billion in overseas cash at a relatively low tax rate. These billionaires may want to take a step back and see Apple deliver on its iPhone 8 promise, and wait for Republicans in Congress to pass tax reform, before pushing Apple's stock any higher.
As for me, the thesis for buying and holding the most dominant technology company of our day remains the same. With Apple, you get strong product demand, a loyal customer base, excellent pricing power, a boatload of cash, top-notch innovation, and organic growth. There don't seem to be any red flags to suggest that Robertson, Loeb, and Einhorn made the right move.
2. Macy's
One company that clearly wasn't a star performer in the first quarter was department store giant Macy's (M +0.42%). Shares of the retailer have been throttled by Wall Street following each of its last two quarterly reports.
During the first quarter, Jeff Smith's Starboard Value jettisoned all 3.01 million shares of Macy's stock it had held for nearly two years, while James Simons' Renaissance Technologies hedge fund ditched all 2.06 million shares it had been holding.
Why is Macy's suddenly finding itself on the clearance rack? While there are probably a confluence of answers, many lead back to the growth of e-commerce giants like Amazon.com. Online shopping is more convenient, the inventory selection can be infinitely larger, and the overhead is much lower compared to brick-and-mortar stores. The end result is companies like Amazon can undercut in price what's now viewed as a stodgy retailer like Macy's.
Image source: Macy's.
However, Macy's does have a plan. Obviously, it involves aggressively investing in its e-commerce platform, but that's not the end of it. Macy's is also implementing a number of fixes within its stores that it believes can reinvigorate sales. For example, in women's shoes, the company is tinkering with the idea of allowing consumers to grab their own shoe size and box. This eliminates the need for waiting for a sales associate. It's also creating a section in its stores called "Last Act," which will feature off-brand merchandise on clearance. This, management believes, will help Macy's avoid losing sales to its discounting peers.
Macy's isn't going to turn itself around overnight, but there's still plenty of reason to believe it can rejuvenate its business.
3. Valeant Pharmaceuticals
OK, so Valeant Pharmaceuticals (VRX 1.78%) may not be household names like Apple or Macy's, but it's been a fixture in the bad PR column for more than a year and a half. If you're an investor, you're probably very familiar with Valeant and its numerous issues.
During the first quarter, billionaire Bill Ackman of Pershing Square Capital Management raised the white flag and sold all 18.1 million shares of Valeant stock that his fund had held. Ackman and his fund took about a $4 billion bath on Valeant since it first began purchasing the stock in the first quarter of 2015.
What went wrong for Ackman? Basically everything.
Image source: Getty Images.
For starters, Valeant's pricing practices came under fire from regulators, causing it to lose much of its pricing power on mature medicines. Buying older pharmaceuticals and increasing the price on these medicines had been one of Valeant's core growth strategies until its run-in with regulators.
Valeant had also been using debt to finance deals to grow its product portfolio. Debt-financed acquisitions were fine and dandy when the company had excellent pricing power. However, once its image was tarnished and its pricing power floundered, its ability to grow as a company ground to a halt. This left Valeant with more than $32 billion in debt and a lot of worried secured lenders.
Today, Valeant has managed to repay about $3.6 billion in debt from its peak, but the company is arguably in no better shape. Its EBITDA has come way down, which is worrisome considering that EBITDA is what its secured lenders use to determine if the company has enough profit potential and cash flow to cover its interest expenses. Even with multiple debt restructurings, Valeant is dangerously close to violating its debt covenants.
Long story short, Ackman swallowed a bitter pill and salvaged what remained of his investment, and it'll probably turn out to be the smartest move he's made with Valeant.
