You may not realize it, but one of the most-important data releases of the third quarter occurred two weeks ago today.
August 14 was the final day for investment managers with at least $100 million in assets under management to file Form 13F with the Securities and Exchange Commission. A 13F provides an under-the-hood look at what Wall Street's most prominent and successful money managers were buying and selling in the most recent quarter (in this instance, April 1, 2023-June 30, 2023).
Although 13Fs have their drawbacks -- they're at least six weeks old when filed, meaning fund managers may have added to or sold off published positions -- they provide insight into the stocks, trends, industries, and sectors that are piquing the interest of Wall Street's top investors.
Image source: Getty Images.
What the latest round of 13Fs show is that billionaire investors weren't shy about reducing or eliminating a handful of Dow Jones Industrial Average (^DJI 0.40%) stocks from their respective funds.
The 127-year-old Dow Jones is comprised of 30 generally profitable, time-tested, multinational businesses. In other words, it's full of companies that tend to be widely owned and sought after by investors during periods of instability. But that hasn't stopped prominent billionaires from selling three of these widely owned Dow components.
Johnson & Johnson
The first Dow Jones Industrial Average stock that billionaire investors have been seemingly selling en masse is healthcare company Johnson & Johnson (JNJ -0.46%), which is better known as "J&J." Five prominent billionaires were big-time sellers of J&J stock in the June-ended quarter, including (number of shares sold in Q2 in parenthesis):
- Jim Simons at Renaissance Technologies (1,963,442 shares)
- Jeff Yass at Susquehanna International (627,550 shares)
- Ray Dalio at Bridgewater Associates (406,023 shares)
- John Overdeck and David Siegel at Two Sigma Investments (366,440 shares)
The reason this perennial winner has found itself on the chopping block by a number of successful money managers likely has to do with outstanding litigation concerning its now-discontinued talcum-based baby powder. Johnson & Johnson has twice attempted to settle the roughly 100,000 outstanding suits that allege its baby powder causes cancer. Both times J&J has had its plan rejected in court. As a general rule, unknown financial overhangs tend to make investors unhappy.
However, this looks to be a short-term concern that won't derail J&J's long-term growth trajectory. While paying out billions of dollars to settle these claims may be a temporary speed bump for Johnson & Johnson, it has a relatively pristine balance sheet and ample cash flow to cover whatever financial liability it ultimately faces.
What's far more important for investors to focus on is the company's continued revenue shift toward pharmaceuticals. Brand-name drugs offer juicy margins and strong pricing power, which is what's been fueling J&J's adjusted operating earnings growth. If not for the COVID-19 pandemic, we might be talking about J&J having a four-decade uninterrupted streak of annual adjusted operating earnings growth right now.
Furthermore, healthcare is a defensive sector. This is to say that demand for drugs, devices, and healthcare services is pretty much inelastic. No matter how well or poorly the U.S. economy performs, people will still need prescription drugs. For a company like J&J, this inelasticity of demand means it generates highly predictable cash flow each year.
Salesforce
A second Dow stock prominent billionaires have been decisively selling is cloud-based customer relationship management (CRM) software solutions provider Salesforce (CRM 0.42%). A half-dozen billionaire fund managers have been sellers, including (number of shares sold in Q2 in parenthesis):
- Steven Cohen of Point72 Asset Management (1,328,167 shares)
- Israel Englander of Millennium Management (1,221,081 shares)
- Dan Loeb of Third Point (800,000 shares)
- Stephen Mandel of Lone Pine Capital (340,300 shares)
- David Tepper of Appaloosa Management (290,000 shares)
- Philippe Laffont of Coatue Management (279,723 shares)
Of the above, Loeb, Tepper, and Laffont all sold their fund's entire stakes in Salesforce during the second quarter.
The factor that likely fueled this selling activity is a slowdown in the company's sales growth. Even though Salesforce has been strongly profitable on an adjusted basis, Wall Street is accustomed to seeing the company grow sales by 20% to 30% annually. With the near-term outlook uncertain for most sectors of the U.S. economy, Salesforce clocking in with full-year sales growth of 10% to 11% in fiscal 2024 and 2025 may not whet billionaires' whistles.
Additionally, Salesforce has long been reliant on acquisitions to complement its organic growth. Some of its biggest acquisitions include MuleSoft, Tableau Software, and Slack Technologies. As interest rates climb at the fastest pace in decades, the incentive to finance big deals is being quickly taken off the table. This further supports a slower near-term growth rate for Salesforce.
Nevertheless, Salesforce is the undisputed king of cloud-based CRM solutions. According to IDC, it held a 23% share of the global CRM market in 2022, which was more than four percentage points higher than the combined market share of its four closest competitors. Cloud-based CRM is a long-term double-digit growth opportunity, and Salesforce remains firmly in the driver's seat.
Image source: Getty Images.
Intel
The third Dow stock prominent billionaires are selling is none other than semiconductor stalwart Intel (INTC -9.20%). Five billionaire money managers aggressively pushed the sell button in the June-ended quarter, including (number of shares sold in Q2 in parenthesis):
- Ken Griffin at Citadel Advisors (9,761,970 shares)
- Steven Cohen at Point72 Asset Management (8,617,416 shares)
- Jim Simons at Renaissance Technologies (1,053,463 shares)
- John Overdeck and David Siegel at Two Sigma Investments (902,555 shares)
The abundant selling pressure on Intel's stock can be directly traced to its abysmal recent operating performance. The company's first-quarter results, reported on April 27, showed respective year-over-year sales declines of 38%, 39%, and 30% for its Client Computing Group, Data Center and AI division, and Network and Edge segment. Things improved but were still relatively ugly in the second quarter, with double-digit year-over-year sales declines reported in these same segments.
In addition to a challenging environment that's seen personal computer (PC) sales taper, Intel is facing stiff competition from Advanced Micro Devices. Pardon the absolutely necessary pun for this situation, but AMD has been successfully "chipping away" at Intel's market share in central processing units (CPUs) for PCs and data centers for years. CPUs are a foundational cash-driver for Intel, so there's obvious concern about its core cash-flow segments.
There is, however, a proverbial light at the end of the tunnel. Despite abandoning plans to acquire Tower Semiconductor, Intel broke ground on two chip-fabrication plants in Ohio last year, and it recently agreed to build a chip-fab plant in Germany, with a third of the cost covered by the German government. By 2030, Intel could well become the world's No. 2 foundry services provider.
What's more, Intel plans to enter the artificial intelligence (AI) space in a big way come 2025. The release of the Falcon Shores graphics processing unit (GPU) for high-compute data centers should allow Intel to grab market share from Nvidia, which currently dominates the high-compute GPU arena.
