Many active managers applying a value philosophy run concentrated portfolios that focus on their best ideas. Their tendency to concentrate may be influenced by the model of Warren Buffett, who said in 2008 that in his early days, he would have 80% of his portfolio in five positions, with 25% in the largest. In 1998, he advocated for having six positions with half in the best idea.
David Alan Tepper, president of Appaloosa Management LP, has a massive investment in Micron Technologies. Photographer: Victor J. Blue/Bloomberg *** Local Caption *** David Alan Tepper© 2014 Bloomberg Finance LP
“Very few people have gotten rich on their seventh best idea,” Buffett has said, “but a lot of people have gotten rich with their best idea.”
Data shows that some investors GuruFocus tracks have also channeled funds into a specific holding that spans an outsized portion of their portfolios.
For instance, Buffett has about a quarter of Berkshire Hathaway’s portfolio in Apple, and Seth Klarman has 19% of Baupost Group’s portfolio in Twenty-First Century Fox. Further, Prem Watsa has 21.1% of his portfolio invested in BlackBerry, while Longleaf Partners has a 17.34% portfolio position in CenturyLink Inc.
Two more investors with large top holdings are Daniel Loeb and David Tepper.
Daniel Loeb: Baxter International Inc.
Loeb, the founder of hedge fund Third Point, has 19.4% of his common stock portfolio wrapped up in health care stock Baxter International, with 2.78 million shares, or 6.77% of the company.
He started the $1.5 billion position in the second and third quarters of 2015 around $37 per share and has been selling shares as the price soared throughout 2017. It has remained his largest position since the third quarter of 2015. Baxter’s price was $69.95 Thursday, conferring on Loeb an estimated gain around 72%.
Baxter, a $37.24 billion market cap company, produces a suite of medical care products used in hospitals, surgery, renal treatment and nutrition. Loeb purchased its shares before it spun out its biopharma business, Baxalta, and its former CEO retired. Baxalta also became one of Loeb’s activist plays, with his Third Point associate joining its board of directors in September 2015.
In the two years since Loeb became engaged with Baxalta, the company has increased revenue annually from $9.97 billion in 2015 to $10.56 billion in 2017. It also grew net income to a record $4.97 billion in 2017 from $2.497 billion in 2015 as the new CEO cut costs, exited unprofitable product lines and focused on higher-margin businesses.
The company’s share price tumbled in November, though, when it lowered its guidance for full-year 2018 sales growth on a reported basis to 5% from a previous expected 6%. It also missed third-quarter projections of 3% year-over-year sales growth, increasing revenue instead by only 2%.
The company attributed the miss to “slower-than-expected return to pre-Hurricane Maria purchasing levels across certain businesses, as well as an impact from distributor destocking for select products.” It said the sales forecast adjustment resulted from the “impact of foreign exchange, generic competition for U.S. cyclophosphamide and the benefit from the acquisitions of Claris (full-year only) and the two Mallinckrodt surgical products.”
Loeb’s most recent sale, of almost 8 million shares in its December rebound, was his largest ever. The company’s stock has continued to advance, gaining 6.65% year to date. Pouring money into Baxter turned out to be a positive decision for Loeb, as his gain on the position is the largest of his top five holdings.
David Tepper: Micron Technology
Tepper’s investment in Micron originated in the fourth quarter of 2016 at a price around $19 but took several years to reach its maximum level of 40.53 million shares. Tepper reduced the position for the only time in the third quarter of 2018 to 36 million shares at a price around $50. But the stock’s volatile price ended Thursday at $36.59, placing his estimated loss around 2.36%.
The holding makes up 29.03% of his hedge fund Appaloosa Management’s long portfolio as of third quarter-end, giving it a 3.21% stake.
The memory and storage technology company’s shares fell by about 50% in the last half of 2018 due to investor fears, as discussed by fellow investor Jerome Dodson of Parnassus Funds in his third-quarter shareholder letter:
“Prices for Micron’s dynamic random-access memory chips (DRAMs) stayed flat this quarter, after rising steadily for two years. This stoked investor fears that the cycle had peaked, and this fear was magnified when management lowered their profit forecast, citing weaker PC demand, higher inventory with customers and the potential impact of the U.S.-China trade dispute. Long term, however, strong demand from datacenters and the Internet of Things (IOT) should increase sales of memory chips.”
In its fiscal first-quarter results, reported Dec. 18, Micron reported a 16% year-over-year increase in revenue to $7.91 billion. Diluted earnings per share also increased to $2.91 from $2.19 a year earlier.
Addressing investor questions surrounding the industry’s outlook, Micron president and CEO Sanjay Mehrotra said, “Despite weak near-term industry supply-demand dynamics entering calendar 2019, Micron is well-positioned to deliver healthy profitability throughout the year. We remain bullish on the long-term secular growth trends driving the memory and storage industry.”
Tepper seemed to share his view, saying on CNBC in September:
“The demand side is going to be good for a long time. Servers, cloud and if you have smart cars. I mean there is just a great future for this stuff [memory chips]. There’s a lot of emotion among [traders in] this stock.”
Tepper current owns under the 5% threshold for reporting changes to his position between quarters and will make known whether he bought or sold more in the fourth quarter when he releases his portfolio by mid-February.
Year to date, Micron shares have gained 4.55% and as of Thursday trade at only 1.19 times book and 3.01 times earnings, a historical low.
This article originally appeared HERE.