Between earnings season and a constant barrage of economic data releases, it's easy for investors to feel overwhelmed by the amount of information thrown their way. What you might not realize is that one of the most important information releases of the entire quarter occurred just a few days earlier.
No later than 45 days following the end of a quarter, money managers with at least $100 million in assets under management are required to file Form 13F with the Securities and Exchange Commission. A 13F provides a neat-and-tidy snapshot that investors can use to determine what stocks the brightest minds on Wall Street have been buying and selling. Monday, May 15, marked the deadline for asset managers to file their 13Fs for the first quarter.
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Amid this vast sea of 13Fs, the filing from billionaire money manager Jim Simons of Renaissance Technologies stands out. Simons is an active fund manager with $106 billion in assets under management and stakes in thousands of companies. But it's what he and his team were busy buying and selling during the first quarter that should catch investors' attention.
In spite of the FAANG stocks leading the broader market higher in 2023, billionaire Jim Simons has been an active seller in all but one component.
Billionaire Jim Simons couldn't hit the sell button fast enough with three FAANG stocks
When I say FAANG stocks, I'm talking about:
- Facebook, which is now a subsidiary of Meta Platforms (META 2.98%)
- Apple (AAPL 0.64%)
- Amazon (AMZN 1.30%)
- Netflix (NFLX 4.17%)
- Google, which is now a subsidiary of Alphabet (GOOGL 1.27%) (GOOG 1.25%)
The FAANGs are undisputed market share leaders within their respective industries, and they have an extensive history of outperforming the benchmark S&P 500 over long periods. It's why everyday and professional investors typically flock to the FAANGs. But this hasn't been the case with Simons' Renaissance Technologies.
During the first quarter, Renaissance completely exited its position in Alphabet by selling more than 4.21 million Class A shares (GOOGL) and around 588,000 Class C shares (GOOG). Additionally, Simons' fund sold 7.09 million shares of Apple (nearly its entire stake), and close to 2.35 million shares of Amazon.
AAPL PE Ratio data by YCharts.
Why sell stakes in these amazing businesses? One of the likeliest reasons has to do with the expanding valuations of these three FAANG stocks. On a trailing-12-month basis, Amazon, Apple, and Alphabet were commanding price-to-earnings (P/E) ratios of 263, 29, and 25, respectively, as of this past weekend. That's up considerably from where all three began the year. During a bear market, investors tend to pay more attention to valuation.
To add to this point, tech stocks are as pricey as they've ever been, relative to the S&P 500. Though tech stocks like Apple and Alphabet have led the way over the trailing decade, higher interest rates, coupled with high tech stock P/E ratios, suggest this outperformance may come to an end.
Lastly, the Federal Reserve is now modeling a mild recession into its outlook for later this year. Alphabet, Amazon, and Apple are all cyclical stocks at risk of seeing their sales slump if a recession materializes. Alphabet generates the bulk of its revenue from advertising; Amazon's biggest revenue generator is its e-commerce platform; and despite a big surge in services revenue, Apple still logs the majority of its sales from physical products, such as the iPhone.
Some combination of the above factors likely encouraged Jim Simons and his team to be aggressive sellers of these three FAANG stocks in the first quarter.
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The one FAANG stock Simons bought hand over fist in the first quarter
However, you'll note there are two other FAANGs I've yet to discuss: social media stock Meta Platforms and streaming services behemoth Netflix. During the first quarter, Renaissance modestly reduced its Meta stake by close to 78,700 shares, and it absolutely piled into Netflix by purchasing more than 624,000 shares.
The reasons Renaissance chose to buy shares of Netflix while selling stakes in the other four FAANGs probably has to do with some combination of profitability, cash flow, and innovation.
Netflix is dealing with plenty of competition in the streaming space from the likes of Walt Disney, Warner Bros. Discovery, and Paramount Global. However, these legacy media companies all share one thing in common: steep losses associated with their streaming segments. After focusing on subscriber growth, Disney, Warner Bros. Discovery, and Paramount all need to turn their attention to streaming profitability. Meanwhile, Netflix has been profitable on a recurring basis for more than a decade.
Netflix has also shown improvements in its cash flow. Following years of cash outflows tied to its international expansion, Netflix logged more than $2.1 billion in free cash flow (FCF) in the first quarter and upped its full-year forecast to at least $3.5 billion in FCF.
There's also Netflix's innovation, which ranges from its mile-long list of original series to its recently launched ad-supported tier that comes with a lower monthly price. The company's willingness to adjust its operating model to fit the demands of consumers is helping to push earnings forecasts higher.
However, I'd be remiss if I didn't also point out that Netflix is, arguably, the priciest FAANG stock relative to its cash flow. Whereas Alphabet and Amazon are valued at well below their historic cash-flow multiples for 2023 and 2024, investors are respectively paying 35 and 25 times forecast cash flow for shares of Netflix in 2023 and 2024. It may be an industry leader, but it's far from cheap.
