Since February, Wall Street and investors have had their resolve tested like never before. The proliferation of the coronavirus disease 2019 (COVID-19) pandemic pulled the rug out from under the U.S. economy and stock market at an unprecedented rate. The benchmark S&P 500 shed 34% of its value in a mere 33 days, while the U.S. unemployment rate has skyrocketed from a 50-year low of 3.5% to highs not seen since the Great Depression nearly nine decades earlier (13.3%, as of June 2020).
Generally speaking, stock market corrections and bear markets have always been a good time for investors to put their money to work. After all, every previous correction in the S&P 500 has eventually been erased by a bull market rally.
While most billionaires were, indeed, putting money to work in high-growth businesses during the COVID-19 pandemic, some were actually selling brand-name value stocks. Based on 13F filings with the Securities and Exchange Commission, we can see that the following three value stocks were on the chopping block as the COVID-19 crisis unfolded.
The first surprise on the list is that billionaires showed ad giant Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), the parent company of Google and YouTube, little love during the first quarter. David Tepper at Appaloosa Management reduced his position in Alphabet by 17%, while Omega Advisors, headed by Leon Cooperman, reduced its stake, too.
Why the exodus from Alphabet? The prime reason looks to be that the company is predominantly reliant on advertising for revenue -- $33.8 billion of the company's $41.2 billion in sales was derived from ads in the first quarter. While this is great during periods of economic expansion, businesses tend to pull back on their ad spending during recessions. Given that numerous states shut down nonessential businesses for weeks or months to stem the spread of COVID-19, the expectation is that search engine Google will take a substantive revenue hit in the very near term.
However, the important thing to realize here is that Alphabet benefits from the fact that the U.S. and global economy spend a far greater length of time expanding than contracting. This means long periods of advertising strength that are occasionally interrupted by short-lasting economic hiccups.
Furthermore, the company's other sources of revenue are growing considerably faster than its ad business. For instance, Google Cloud, which is capable of generating substantially juicier margins than Alphabet's core ad segment, grew sales by 52% during the COVID-19-impacted first quarter from the prior-year period. It's these ancillary operations that'll likely lead Alphabet's cash flow significantly higher over the next three years, and is what makes this company a value stock, at least with regard to its future operating cash flow.
Another value stock be shown the door by billionaires during the first quarter was automaker General Motors (NYSE:GM). David Einhorn at Greenlight Capital closed out his firms' position in the company by selling all 6.16 million shares, with Jim Simons' Renaissance Technologies following suit with a 1.33-million-share exit. Ken Griffin's Citadel Advisors dumped 2.16 million shares of GM, thereby reducing its stake by 22% to 7.81 million.
Why press the brake pedal on General Motors? While most retail segments suffered during the aforementioned nonessential business shutdowns, GM was a bigger worry for two reasons. First, its products are pricey and not an everyday purchase, which is of concern with the unemployment rate skyrocketing. Despite the Federal Reserve pledging to keep lending rates low through 2022, consumers may not be willing to buy big-ticket items.
The second concern is that General Motors' balance sheet is far from pristine, and the COVID-19 pandemic had the company burning through an estimated $130 million for each day it was shut down, according to automotive equity strategist David Whiston of Morningstar Research Services in an interview with the Detroit Free Press. This pandemic could seriously crimp GM's plans for near-term reinvestment.
Maybe the worst part is that the coronavirus crisis struck when the auto market was already rolling over. There's no question that GM remains inexpensive on a forward-price-to-earnings basis and even historically. However, it could be years before we see Detroit's automakers hit the gas again.
Lastly, money-center bank Wells Fargo (NYSE:WFC) found itself on the first-quarter chopping block by billionaire money managers. Larry Fink's Blackrock sold more than 2.9 million shares, with Soros Fund Management, run by George Soros, completely selling out of his firms' 285,630-share stake.
Next to oil and gas, there wasn't an industry hit harder during the coronavirus crash than bank stocks. Banks are cyclical businesses that tend to do poorly during recessions. With the Federal Reserve choosing to keep its federal funds rate at a record-tying low through 2022, it caps the net interest income potential for banks at a time when loan delinquencies are likely to rise. It's this combination that's sent the likes of Wells Fargo much lower.
But similar to Alphabet, there's value to be had here for patient investors. Even though Wells Fargo is still in damage control mode following its 2016-2017 fake accounting scandal, banking customers have historically shown that they have short-term memories when it comes to PR issues. I fully expect Wells Fargo will have no trouble attracting affluent clientele in the foreseeable future, which is its specialty among money-center banks.
Additionally, value seekers can buy into the Wells Fargo story for just 69% of its book value, which is the cheapest it's been relative to book value since the financial crisis more than a decade ago. Also, even if Wells Fargo were to halve its dividend at these levels to conserve cash, investors would still be netting 3.7% annually. In short, I expect these billionaire sellers to be disappointed with their decision.