One of the most important days of the quarter occurred last Friday, Aug. 14, even if you didn't have it circled on your calendar. For money managers with more than $100 million in assets under management, Aug. 14 marked the filing deadline for Form 13F with the Securities and Exchange Commission.
Form 13F provides a snapshot of the investment holdings for hedge funds and institutional investors, giving Wall Street and retail investors an opportunity to see what the brightest minds on Wall Street have been buying and selling over the previous quarter. Considering that the second quarter was one of the most volatile on record due to the coronavirus disease 2019 (COVID-19) pandemic, you can rightly imagine that investors were very curious to know what billionaire money managers have been up to.
There was obviously plenty of buying, with the stock market rebounding from its fastest bear market correction in history. But there was also quite a bit of surprise selling. Billionaire money managers heavily sold the following three popular stocks during the second quarter.
No, your eyes aren't deceiving you. One of the most heavily sold stocks by billionaires and money managers during the second quarter was e-commerce giant Amazon (AMZN -0.77%). Ole Andreas Halvorsen's Viking Global Investors reduced its stake in Amazon by 30% and Jim Simons' Renaissance Technologies dumped its nearly 193,000-share position. As a whole, the number of shares held by 13F filers declined by nearly 17% (more than 60 million shares) to 297.1 million from the sequential first quarter.
Why the sudden mass exodus from Amazon? The best guess I can offer is that significant leaps higher in Amazon's share price have historically been followed by sizable corrections. In other words, Amazon is a "five steps forward, three steps back" type of stock. This extensive selling could indicate that billionaires foresee a pullback in Amazon's share price, or that they believe the company is too richly valued at 72 times next year's forecast earnings per share.
Whatever the reasoning, I believe money managers will regret paring down Amazon. This is a company that Bank of America/Merrill Lynch estimates is behind 44% of all U.S. online sales. It's the clear go-to for shoppers during the coronavirus pandemic.
What's more, even though retail margins are only mediocre at best, Amazon has had little issue growing its Prime memberships worldwide. The membership model helps Amazon keep users within its ecosystem of products and services, and the associated fees help Amazon undercut brick-and-mortar retailers on price.
Additionally, sellers perhaps aren't paying attention to the incredible growth at Amazon Web Services (AWS). Amazon's cloud infrastructure segment generated $10.8 billion in quarterly sales during Q2, representing 29% year-over-year growth. But the key factor here is that cloud margins are much higher than retail and ad-based revenue, giving Amazon a clear path to explosive operating cash flow growth.
Another popular stock that had billionaires rushing for the exit during the second quarter was money-center bank Wells Fargo (WFC 0.23%). Warren Buffett's Berkshire Hathaway sold more than 85 million shares in Q2, while Two Sigma Investments, which was found by David Siegel and John Overdeck, parted ways with close to 1.59 million shares of Wells Fargo in the second quarter. Among 13F filers, total ownership was down from 3 billion shares at the end of March to 2.74 billion shares by June 30, 2020.
If you're wondering why Wells Fargo isn't getting any love, the answer is twofold.
To begin with, bank stocks are cyclical, and the COVID-19 recession means they're going to be running in place for probably the next one or two years. When the U.S. economy hits the skids, the Federal Reserve responds by lowering lending rates. That's good news for businesses and consumers looking to borrow, but it means less in the way of interest income for banks. Tack on an increased likelihood of rising loan delinquencies during a recession, and you have a recipe that's bad news for bank stocks like Wells Fargo.
The other factor at play here is a loss of investor/consumer trust. As some of you might recall, Wells Fargo fessed up to having created 3.5 million fake accounts between 2009 and 2016 as part of its aggressive cross-selling goals at the physical branch level. Warren Buffett, for instance, is a big believer in trustworthy management teams. With Wells Fargo now on its third CEO in nearly as many years, his faith in management appears to be shaken, if not completely lost.
Personally, I view Wells Fargo as an intriguing value here, despite its many troubles. Historically, banking customers have short memories when it comes to scandals, which should allow Wells Fargo to attract affluent clientele soon enough. It's been more than a decade since the company was this cheap relative to its book value, and it has a history of generating superior return on assets among big banks. Investors should exercise an abundance of patience, but there's definitely value to be had here.
A third popular stock billionaires heavily sold during the second quarter is Canopy Growth (CGC 4.57%). The largest marijuana stock in the world by market cap saw Philippe Laffont's Coatue Management sell its entire 1.31-million-share stake in the company, with Ken Griffin's Citadel Advisors reducing its position in Canopy Growth from roughly 327,000 shares to a mere 10,298 shares. By the end of June, 13F filers had reduced their aggregate holdings in Canopy by 7.2%.
On one hand, there's no denying that the cannabis industry is (pardon the pun) growing like a weed. With tens of billions of dollars in sales being conducted annually in the North American black market, it's certainly not a stretch to assume that, over time, consumers will switch from illicit to legal channels. With Canopy boasting the most cash-rich balance sheet of any marijuana stock, it would appear to have plenty of promise.
On the other hand, the growing pains for the Canadian weed industry have been especially harsh. A lack of dispensaries has led to supply bottlenecks, while high-margin derivative products launched later than initially expected.
More specific to Canopy Growth, the company's operations and balance sheet remain a work in progress. New CEO David Klein is in the midst of some serious belt-tightening, closing in excess of 3 million square feet of licensed indoor greenhouse space to conserve capital and align output with demand. Yet even with layoffs and a significant decline in share-based compensation from the previous year, Canopy continues to produce large quarterly losses.
Just as worrisome, the company's total goodwill of 1.93 billion Canadian dollars represents 28% of total assets. This looks to be a writedown just waiting to happen.
I may not always agree with the actions of billionaire investors, but exercising caution with Canopy Growth is wise.