13Fs Sport Hyperactive Turnover By Wannabe Overachievers

Photocredit: Associated Press

Sleepless in Palm Beach, I gazed out on our lagoon, promising myself to buy more BB debentures carrying five-year duration. Conversely, I benchmarked a typical $10 billion investment partnership against the Nasdaq 100 Index. It’s likewise concentrated and volatile, chock-full of tech paper, e-commerce operators like Amazon and the colossus, Apple.

Nasdaq 100 waxed buoyant past summer months, zipping from 7,000 to 7,700. The autumn correction wiped out the gain. Few of us escaped the flying shrapnel.

Reviewing 13Fs, one by one, I couldn’t understand feverish total turnover at Citadel’s $82 billion portfolio, a non-industrial construct. Top position, just 1.1% of assets, is Morgan Stanley. I own MS, too, selling at 10 times earnings with a rising return on equity. But, the issue of overweighting banks is on the table. If the yield curve holds flattish, there’s no earnings story, leverage from rising net interest margins. This is wait ‘n’ see, and I’m waxing restive.

Bridgewater Associates’ construct perplexed me. No stocks, just ETFs and other indexes tied to the S&P 500, gold shares and other world markets. The static ratio was just 4.5% for the quarter, suggesting a roomful of traders trying to outsmart markets. The equity market value change past quarter was decidedly negative. I don’t know any day traders with 350-foot yachts. This is what you do when you’re 27 years old, thirsting to rule the world.

Coatue Management, near a $10 billion asset base, is concentrated in volatile paper like Activision Blizzard, Facebook, Netflix, Amazon and Alibaba. Activision has traded down from low eighties to low fifties. Its chart looks like an expert ski slope. If you want to shoot for the moon, buy Nasdaq 100. You’ll do comparatively better. The static ratio here is just 10% so they ain’t put it together as yet.

Third Point, a comparably sized house, at least shows a static ratio over 25%. But, its biggest position Baxter International, over 20% of the portfolio, has traded down near its yearly low. United Technologies at 9%, second largest, sits in the middle of its 12-month trading range. Campbell Soup, along with other packaged food houses also is a year-to-date loser. I can’t find a theme embedded in Third Point’s 10 largest holdings, almost 75% of assets. Let’s call ‘em stock pickers trying to raise their batting averages.

JANA Partners, a $3 billion asset house, shows a wild turnover pattern. For the quarter, 40% of assets were banged out. Its major stakes in packaged foods, previously, Pinnacle Foods at 21%, were indifferent value plays. This is a nondurables portfolio. No industrials, tech houses, financials or energy plays. In a stalled-out economy they could do relatively well. Nondurables price-earnings ratios still on the high side starting with Coca-Cola and Procter & Gamble.

Tiger Global Management with a comparatively high static ratio of 57%, hangs in with its compressed list of e-commerce and internet paper. Amazon is numero uno at 11% of assets. No Alphabet but plenty of Microsoft which for me is a reasonable tech play. No Apple. Investors should pose the question to themselves, if I crave growth stocks why not just buy into Nasdaq 100?

This brings up T. Rowe Price Associates with a confirmed history as a growth stock player. Nearly a $700 billion house, they show a static ratio of only 4.6%, a tumultuous number of buys and sells, quarterly. The usual suspects appear here: Amazon, Microsoft and Facebook comprise 10% of assets. I’ve increased Microsoft to a major position because it’s analyzable and reasonably valued on earnings and especially, free cash flow.

Let’s get to high metabolic, go for control players like Pershing Square, down to a $5.2 billion house. This is a special situation portfolio with Restaurant Brands International at 23.7% of assets and Lowe’s at 18.6%. I’d rather own McDonald’s and Home Depot. Certainly, they’ve outperformed while Pershing’s two doggies display scary charts. Restaurant Brands is a classic declining head-n-shoulders tracement. You’re supposed to run for the hills then.

Greenlight Capital stands out for me as the only player with a major position in General Motors at 22% of assets. General Motors, a stock that auto analysts loved to hate, came to life and bounced almost 20% off its low. Dumb bunny analysts grossly underestimated GM’s profit margin and bottom line. Pause and consider: could GM be a leading indicator of a massive shift from growth to value investment? Maybe so. I’ve added to my MLPs and to low multiple financials like Morgan Stanley. Microsoft and Alphabet get more of my money at relatively lower valuation than Amazon.

I see Appaloosa Management as a hard luck house. Tremendous asset turnover with eighth largest position, Pacific Gas & Electric, now problematic, possibly partially involved in the California infernos. What is Micron Technology doing at a 26.6% position? This is a legit speculation, but practically cut in half past six months. A feisty components player in an industry fraught with cut-throat competition and prospective overcapacity.

Let’s digress and examine how the polite investment world structures itself, namely, 180° from high metabolic players.

Scan a pie chart of an investment construct for a typical institutional account run by JPMorgan Chase and its ilk. You’d find a bewildering asset spread, worldwide, in equities and bonds. Domestically, the allocation ranges up to 50% in U.S. equities, some 25% in bonds. Internationally, coverage embraces emerging markets, Japanese stocks, EAFE equities and a smattering in hedge funds and other multi-strategy plays as well as hard assets like gold.

Such a mishmash is unlikely to outperform or grossly underperform by much. Hard for a passive investor to criticize such broadly-based activity. How many clients would know that the Nasdaq 100 widely outperformed all other categories past couple of years?

Net, net, polite money management is designed to keep its providers in business. Clients can come in second. A fair-sized percentage of assets is farmed out to money managers charging handsome fees. So the client pays double fees, usually unaware of this construct which is costly. You can harness Warren Buffett by owning Berkshire Hathaway, no fee attached. But read my last week’s blog on his portfolio construct.

Nobody carries a higher static percentage than Berkshire Hathaway at 63%, just brought lower by the massive play in Apple, now a 26% of assets holding. Financials and Apple pretty much are it for Warren. Nobody dares run OPM money so concentrated unless it’s all your own or nearly so. Luck and pesetas, Warren.

When I parsed Elliott Management’s list, I shook my head because it made me feel obsolete. Yes, I’ve followed Hess, Dell and years ago Peabody Energy, when it was considered an investment grade stock, in coal. Peabody went through the ringer so I guess Elliott’s sharpened its knives seeing recovery coming. Largest position, Altaba, down from the eighties to low sixties, but up from a mid-fifties low. Elliott with a high static ratio is a long-range player in energy and tech. Smart guys. Altaba is a proxy for Alibaba. I own Alibaba, but prefer it as a simple, direct investment.

Carl Icahn, with a static ratio now higher than Buffett’s, holds true to form as a special sit, value operator, mainly in energy. I can’t get excited about CVR Energy, Cheniere Energy, even Herbalife Nutrition and Xerox. Maybe, I’m wrong, but consider this: Street analysts, busloads of ‘em, spent thousands of man hours trying to dope out Apple, Amazon, Facebook and Alphabet, but failed miserably. Throw in Nvidia and Netflix, down over 30% from summer highs. Nobody rushed into print with a “sell” rating. Icahn displays iron pants courage, a laudable trait.

There’s no rose garden blooming now because the market needs to sell at no more than 15 times earnings, not 18. We’ve a healthy valuation correction about halfway done. Volatility persists, a heavy cross to shoulder. Meanwell, AT&T yields nearly 7%. Nobody cares. On Monday, it hung in along with General Motors.

Sosnoff and / or his managed accounts own: Amazon, Morgan Stanley, Facebook, Alibaba, Alphabet, Microsoft, JPMorgan Chase and AT&T. 

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source: forbes.com