It's that time of the year again, folks. And no, I'm not talking about the post-Valentine's Day period when you receive your credit cards bills and decide you need to work 70 hours a week to pay off what you've purchased for your significant other. Rather, this past week was the deadline for large money-management firms to submit their 13F filings to the Securities and Exchange Commission (SEC).
Think of a 13F filing as a detailed look under the hood for top investment funds. Investment firms with more than $100 million in assets under management are required to file a 13F with the SEC 45 days after the end of the previous quarter. Although there are obvious limitations -- i.e., looking at data that's around 45 days old -- it nevertheless gives Wall Street and investors an intricate look at what the brightest and most successful money managers have been up to over the previous quarter (Oct. 1, 2018, to Dec. 31, 2018).
What made 13F filings particularly interesting this go-around is that the fourth quarter featured the steepest correction in the stock market (just barely touching bear market status on an intraday basis) since the Great Recession a decade ago. Would we see billionaire money managers derisking their portfolios in the wake of the stock market sell-off, or would the 13F filings show that they aggressively bought what appeared to be deeply discounted companies?
We now have that answer, and it isn't pretty.
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Billionaire money managers ran from tech stocks in Q4
If there was one theme for the fourth quarter, it would be "tech wreck." That's because a quick glance at the actions of top money managers revealed plenty of selling of Wall Street darlings and brand-name companies in the technology space. Here's a brief -- but not all-encompassing -- summary of some of the notable selling activity during the fourth quarter.
- Apple (AAPL 0.01%): Warren Buffett's Berkshire Hathaway modestly reduced its stake by about 2.9 million shares (just over 1%); Jana Partners dumped 173,000 shares (63% of its stake); and both Soros Fund Management and David Tepper's Appaloosa Management sold their entire stakes in Apple of 89,300 shares and 100,000 shares, respectively.
- Alibaba Group (BABA 0.27%): Appaloosa Management disposed of its entire 1.5 million-share stake in Alibaba, with activist investor Daniel Loeb's Third Point selling more than 4 million shares. Ken Griffin's Citadel Advisors also sold 964,600 shares, leaving the fund with only 65,700 shares.
- Facebook (FB +0.23%): Appaloosa, an active seller in Q4, sold more than half of its stake in Facebook (1.875 million shares), with Leon Cooperman's Omega Advisors completely exiting its position of around 88,000 shares of the social media giant.
- Microsoft (MSFT 0.60%): Third Point sold its entire stake in Microsoft (4.1 million shares), which had represented 3.3% of its portfolio in the previous quarter. Jim Simons' Renaissance Technologies followed suit by liquidating its 1.65-million-share stake. Finally, Citadel Advisors parted ways with more than half of its position in Microsoft (1.95 million shares).
- Netflix (NFLX +0.96%): Loeb's Third Point and Griffin's Citadel were also active sellers of streaming service Netflix, with Citadel dumping close to 1.4 million shares and Third Point shedding 1.25 million (its entire position). Tiger Global Management also sold more than 680,000 shares during the quarter.
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Four reasons for the fourth-quarter "tech-xodus"
Why such heavy selling of tech stocks during the fourth quarter? One logical reason was simply the cycling out of what's considered to be a higher-growth and more volatile industry. When the stock market heads higher, tech is often a leader. But when corrections occur, tech stocks have a tendency to overextend to the downside. Once the 10% correction level was hit on the Nasdaq Composite, money managers may have hit that panic button and run for the exit.
Another possible reason for the "tech-xodus" is the Federal Reserve. Even though Fed Chair Jerome Powell has made amends with investors following commentary in the early part of 2019, the nation's central bank wound up hiking its federal funds target rate for a fourth time late in 2018. Powell and the Fed also maintained a hawkish stance on inflation and interest rates during the fourth quarter. Since the high-growth tech sector tends to be reliant on debt financing for expansion, billionaire money managers might have thought that, with financing costs on the rise, tech growth would slow.
Speaking of slowing growth, a third reason billionaires might have lightened their load on tech stocks has to do with economic growth prospects. Last year, the passage of the Tax Cuts and Jobs Act arguably put a little extra pep in the U.S. economy's step, as well as provided a modest boost to an already downtrending unemployment rate. More importantly, it permanently cut peak corporate income tax rates, which coerced a number of companies to buy back stock and up their dividends. These are all very temporary positive catalysts, and money managers might foresee weaker growth for the overall economy in 2019.
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Lastly, the China-U.S. trade war can be blamed. China is arguably more important to the tech industry than to any other for its manufacturing of inexpensive electronic components and assembly work. If uncertainties over tariffs weren't enough to scare away billionaire money managers, China's slowing GDP growth might be the straw that broke the camel's back (and sent billionaires fleeing from China-focused e-commerce giant Alibaba).
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Trying to time the market may cost money managers big-time
Although hindsight is 20/20, and we know the stock market has been on fire over the first seven weeks of 2019, the writing was on the wall for billionaire money managers to hang onto a number of brand-name tech stocks last quarter.
For instance, Facebook has certainly dealt with its fair share of privacy concerns, as well as higher expensing as it rolls out new initiatives. But at the end of the day, there simply isn't a social media platform that gives advertisers a means to reach 2.32 billion monthly active users. In addition to Facebook, the Messenger platform, WhatsApp, and Instagram represent four of the top seven most-visited social websites. In other words, Facebook is a social media juggernaut, and a short-term correction or some near-term higher expenses aren't likely to change that.
To build even further on this point, Facebook has traded at an average price-to-cash flow of 30.6 over the past five years. But according to Wall Street's consensus figures, Facebook is valued at just a 13 multiple of its projected 2020 cash flow per share of $12.38. In other words, Facebook looks to be historically cheaper than it's ever been.
As for Apple, it's been valued at roughly 11 times its cash flow per share and 13.4 times forward earnings, on average, over the past five years. But looking ahead to 2020, Apple is currently valued at closer to 10 times cash flow and is trading right on the nose at its five-year average forward P/E ratio of 13.4. Even with slowing sales growth, Apple is a cash cow that still looks to be an intriguing value.
If, however, there were one tech stock about which I'm in agreement with this billionaire "tech-xodus," it's Netflix. While it's impossible to argue against Netflix's subscriber growth in the U.S. or abroad, the company continues to bleed cash. Of the tech stocks sold heavily in Q4, it looks to be the most likely to take it on the chin due to its cash burn and ultra-premium valuation, especially if we undergo a further correction.
