One of the most anticipated dates of the first quarter has come and gone. This past week marked the deadline for money management firms with more than $100 million in assets under management to file Form 13F with the Securities and Exchange Commission.
Think of Form 13F as investors' exclusive look under the hood at what the brightest minds on Wall Street were up to during the fourth quarter. Although the data contained in 13Fs is at least 45 days old, it can useful in deciphering which trends, sectors, and industries have the attention of successful money managers.
FAANG stocks were a popular sell by money managers in Q4
These 13Fs also tend to be full of surprises.
For example, you might be shocked to learn that the "FAANG stocks" -- that's Facebook (META 1.70%), Apple (AAPL 2.14%), Amazon.com (AMZN 2.07%), Netflix (NFLX 2.72%), and Google, which is now a subsidiary of Alphabet (GOOG 2.36%) (GOOGL 2.39%) -- were all pared down pretty significantly by big-time money managers during the fourth quarter.
According to 13F data aggregator WhaleWisdom.com, the total number of FAANG stock shares held by companies or individuals required to file Form 13F fell by the following in Q4 from the sequential quarter:
- Facebook: 201 million shares (minus 11.1% from Q3 2019)
- Apple: 121 million shares (minus 4.6%)
- Amazon: 20.2 million shares (minus 7.3%)
- Netflix: 70.5 million shares (minus 19.9%)
- Alphabet: 24.7 million shares (minus 10.6% for Class C shares (GOOG))
Not only did all five of the FAANG stocks see notable selling among 13F filers, but a number of billionaire money managers cut back their stakes in these growth stocks.
For instance, Chase Coleman of Tiger Global Management and Ken Griffin's Citadel Advisors sold 2.9 million and 2.1 million shares, respectively, of Facebook stock during the fourth quarter. Meanwhile, Andreas Halvorsen's Viking Global and Coleman's Tiger Global Management reduced their stakes held in Netflix by 801,931 and 595,813 shares, respectively. Even Warren Buffett got in on the action, with Berkshire Hathaway selling 3.68 million shares of Apple.
Why are money managers selling the FAANG stocks?
Why on earth would professional money managers flee the historically successful FAANG stocks, you ask?
The most logical explanation would be the valuations of these companies. Considering how much these businesses disrupt their respective industries, and taking into account just how much they're willing to spend and reinvest to continue expanding their reach, the FAANG stocks aren't necessarily paying much heed to their bottom lines. Amazon is valued at 93 times its trailing earnings per share (EPS), Netflix at 92 times trailing EPS, and Facebook at 33 times trailing EPS. Investors who favor traditional fundamental metrics are unlikely to find these valuations appealing.
Another possible reason money managers decreased their holdings in the FAANG stocks in Q4 could be the numerous warning signals we've witnessed from the stock market or economy in 2019. For instance, in August, we observed a brief inversion of the yield curve. Each of the past five recessions has been preceded by a yield-curve inversion, though not every yield-curve inversion is followed by a recession. Other factors, such weak U.S. manufacturing data, slowing growth in China, and U.S.-China trade tensions, may also have played a role.
Recency bias may also have come into play. As a reminder, the stock market fell off a cliff during the fourth quarter of 2018 and came dangerously close to ending a long bull-market run. The fourth quarter of 2018 was also when the Shiller P/E ratio -- a price-to-earnings ratio based on average inflation-adjusted earnings from the previous 10 years -- hit its second-highest level in history. We're nearing that Shiller P/E level, once again, and money managers might have chosen to book some profits and play it safe in Q4 2019.
Money managers are probably going to be sorry they sold
Of course, there's a pretty good chance that these big-time money managers who sold are going to regret their decisions.
In particular, the selling in Amazon looks to be completely unfounded. While Amazon does boast an exceptionally high P/E ratio, traditional metrics like P/E and forward P/E have never been a particularly good way of evaluating Amazon. Rather, with the company becoming ever more reliant on higher-margin cloud services (Amazon Web Services) and utilizing its cash flow in multiple new ventures, Amazon's cash flow is far more important than its profit per share. After the company delivered $76 in operating cash flow per share in 2019, Wall Street is looking for $192 in operating cash flow per share by 2023. If Amazon is simply valued at its average cash flow multiple over the past decade of 28.6, this could easily be a $5,000 stock in less than four years.
The same can be said for Alphabet, which has been investing in faster-growing segments, such as YouTube and Google Cloud. Along with Alphabet's already dominant online ad business, these faster-growing operations should help the company's operating cash flow grow from $78 per share in 2019 to between $135 and $140 per share by 2023. This would make Alphabet historically inexpensive, relative to its cash flow.
Perhaps the one FAANG stock money managers might be wise to pare down is Netflix. Although Netflix has shown little concern with the uptick in competition from new domestic streaming services, and its international subscriber numbers have wowed Wall Street, it's the only FAANG stock that continues to burn cash. Until Netflix is generating positive operating cash flow, a higher level of skepticism, relative to the other FAANG stocks, seems warranted.