Every quarter, large money managers have to disclose what they've bought and sold via "13F" filings. While Fools don't always follow what the big money does, we can often glean an idea or two by tracing their footsteps.
Kyle Bass, founder of Hayman Capital Management, is best known for shorting the subprime mortgage securities that nearly crippled the economy, effectively "calling" the economic recession and making a boatload of money at the same time. Hayman Capital only manages around $1.1 billion -- relatively small by some standards -- but his track record on subprime mortgages and history as a real-estate expert makes it worthwhile to have a look at Hayman Capital's quarterly trading activity. Can we learn anything from Bass' latest moves?
Don't count on a comeback
At first glance, one might wonder whether Hayman's 5.6 million-share investment in struggling retailer J.C. Penney (NYSE:JCP) was a play on the company's potential asset value if it went to liquidation. But massive dilution from the 86 million-share public offering to raise capital threw water on any chance of a fire sale paying off if the company couldn't turn things around. That leaves investing in the turnaround, right?
Not so fast. In an interview with CNBC, Bass had this to say:
I'm not going to tell you what we are going to do with our position. But I'll just tell you that we are very disappointed with 38% dilution overnight, and the fact that there was a severe miscommunication problem by management. ... So I'm not investing in the turnaround. I think that they might be able to stabilize the decline. If they can stabilize the decline -- same store sales comps were down so far year-over-year due to the prior CEO's mis-management -- all they have to do is stabilize to see double-digit comp gains.
Not exactly a ringing endorsement for a Penney recovery.
Making money on the recovery after cashing in on the crash?
Hayman Capital's 3.6 million-share investment in PennyMac Mortgage Investment Trust (NYSE:PMT) is a contrarian approach to the bearish investments that made Bass famous, but it's certainly more in line with his expertise than J.C. Penney. PennyMac Mortgage Investment Trust owns and services high-quality mortgages, but it focuses on acquiring distressed mortgages at a discount and makes efforts to keep homeowners in the home via loan restructuring or other incentives. This is effectively betting on the same sort of low-quality loans that Bass bet against a few years ago.
Given that Bass has said he expected the Fed to slowly let interest rates rise over "three to five years," this one may not have played out how he expected so far. The company's latest earnings were down 30% from the year-ago quarter and 33% sequentially, mostly due to mortgage rates in the quarter rising and putting the squeeze on the trust's rate spread. CEO Stanford Kurland did say that the trust's distressed mortgage securities are performing well, and that additional investments in this area would pay off down the road. This is Hayman Capital's largest holding, so Bass is clearly bullish on the rate environment at least for the interim.
Investing in another sort of turnaround?
Hayman Capital also bought 1.5 million shares of Microsoft (NASDAQ:MSFT), making the nearly $50 million investment in the tech titan its fourth-largest holding. Microsoft is twice as profitable and generates nearly three times the sales it did when CEO Steve Ballmer took the reins in early 2000, but the hyper-inflated market of the dot-com era never allowed the results to reflect in the share price. Ballmer's departure within the next year is coming in large part because of the company's failure (as of yet) to establish a foothold in the "post-PC" era, dominated by mobile devices from competitors like Apple, Samsung, and Google.
In a recent interview with The Wall Street Journal, Ballmer indicated that he felt his leaving would allow for the company, led by a new face, to more quickly accelerate the changes necessary to remaining relevant in a quickly changing tech world. Following Bass and Hayman Capital into Microsoft would be putting faith in Microsoft's board to find that new leader and turn the page.
Blindly following money managers is no guarantee of strong returns. The deep losses at Penney show that even big money makes mistakes. With that said, seeing an expert in a field (as Bass is in real estate) take a large position in their area of expertise makes a case for further research. But remember to invest in stocks for reasons of your own -- not those of a money manager whose motivations (and unloading of stocks) aren't public until well after the fact.