Friday, September 17, 2010

Goldman Sachs VIP List & Hedge Fund Trend Monitor: Stocks That Matter Most to Hedgies

Every quarter, Goldman Sachs releases a list of stocks predominantly owned by hedge funds. The aptly named Goldman Sachs VIP list (or 'Very Important Positions' list) aggregates positions held by hedge funds utilizing fundamental strategies. This is just one part of the data aggregation found in Goldman's quarterly Hedge Fund Trend Monitor and we'll detail the latest findings below.

These positions are derived from 13F filings that hedge funds file with the SEC and those of you with Bloomberg Terminals can find this compilation at: GSTHHVIP. First, some background performance of their VIP list. Goldman writes that the VIP list, "contains the 50 stocks that appear most frequently among the top 10 holdings of fundamentally-driven hedge fund portfolios. The basket of stocks that 'matter most' has outperformed the S&P 500 by 71 bp on a quarterly basis since 2001, with a Sharpe Ratio of 0.26. The VIP list underperformed the S&P 500 during 2Q 2010 by 268 bp (-14.1% vs. -11.4%). Since then VIP list has outperformed the S&P 500 by 247 bp (8.8% vs 6.3%)."

Last quarter, we posted up the previous iteration of the Goldman Sachs VIP list and for Q2 there are a few new additions to the list this time around including: Fidelity National Information (FIS), a stock many hedgies added after the company announced a leveraged recapitalization plan. Another new stock on the list, Comcast (CMCSA), has been a favorite of Columbia's University's value investing professor, Bruce Greenwald.

Two other stocks just added to the VIP list have been favorites of 'Tiger Cub' hedge funds as Andreas Halvorsen's Viking Global has a sizable position in Tyco International (TYC), and Stephen Mandel's Lone Pine Capital is bullish on Cognizant Tech Solutions (CTSH). Other stocks added to Goldman's VIP list in Q2 include: Barrick Gold (ABX), Viacom (VIA.B), Covidien (COV), Freeport McMoran (FCX), Covanta (CVA), Davita (DVA), Schlumberger (SLB), US Bancorp (USB), Halliburton (HAL) and General Electric (GE). These stocks previously did not have enough hedge fund ownership to make the cut, so it's apparent that hedgies were buying those names in Q2.

Without further ado, here are the top 10 stocks on the VIP list ranked by the number of hedge funds with the stock as a top 10 holding:

1. Apple (AAPL): 75 funds
2. JPMorgan Chase (JPM): 42
3. Pfizer (PFE): 36
4. Bank of America (BAC): 34
5. Microsoft (MSFT): 34
6. Citigroup (C): 32
7. Alcon (ACL): 30
8. Google (GOOG): 24
9. Exxon Mobil (XOM): 23
10. Mastercard (MA): 22

In our brand new quarterly newsletter, hedge fund wisdom, we highlighted that many hedgies had been adding Alcon (ACL) in Q2 and the stock consequently has now garnered a place in the top 10 of Goldman's VIP list. What's interesting is that 8 out of the 10 stocks above have seen negative returns year-to-date. Despite Apple's solid performance this year, the weakness in other top holdings could potentially be why so many hedgies are struggling. Mastercard (MA) recently hit a new 52-week low and many hedgies were buying at higher levels in Q2. This stock just broke into the top 10 of the VIP list this quarter.

On a sector basis, hedge funds had their highest weighting in consumer discretionary at 17% followed by information technology at 16%. One interesting find in Goldman's data is that stocks with the least hedge fund ownership have actually outperformed stocks with the highest hedge fund ownership concentration. This just ties into the notion of the hedge fund herd mentality that we've discussed before. Sometimes it's best to head in the opposite direction of the pack.

Embedded below is Goldman Sachs' Hedge Fund Trend Monitor report in its entirety for the second quarter. It includes the VIP list and much more:

You can download a .pdf copy here.

Keep in mind that you can receive complete portfolio updates on 20 of the top hedge funds in the industry via hedge fund wisdom by market folly, our brand new quarterly publication. Readers can receive a free sample issue here.

What We're Reading ~ 9/17/10

Time weighted versus absolute dollar returns [AbnormalReturns]

10 get-paid-to-wait Dow stocks [YCharts]

Great site for up-to-the-minute financial links [eWallstreeter]

Agriculture plays: the beans or the business? [ReformedBroker]

Contrarian value portfolio update [Greenbackd]

Buffett's article on Geico: a template for growth stock investing [Greg Speicher]

Video on Steve Eisman's latest thoughts on the for-profit education space [CNBC]

If you missed it, we posted Eisman's original thesis: Subprime Goes to College [MarketFolly]

Buy & hold, asset allocation and rebalancing [Capital Spectator]

Buffett rules out double-dip recession amid growth [Bloomberg]

Five pieces of advice from the top 5 financial advisors in the world [FINS]

Falcone making coin on distressed credit trading [Teri Buhl, Forbes]

Citadel opens Boston seeding office [FINalternatives]

Credit Suisse to take stake in hedge fund York Capital [Dealbook]

Hedge fund stars shine above the crowd [FT]

PIMCO makes $8.1bn bet against lost decade of deflation [Bloomberg]

An interview with Bill Fleckenstein [MadHedgeFundTrader]

How Goldman Sachs makes (& unmakes) its partners [Dealbook]

Renaissance will keep RIEF and RIFF funds open [WSJ]

Thomson Reuters launches next-gen desktop to rival Bloomberg Terminal [NYT]

Entrepreneurship as disease [Harvard Business Review]

Richard Branson's 5 secrets to business success [Entrepreneur]

Thursday, September 16, 2010

Stocks vs Bonds & Risk vs Reward: Value & Risk in the Eye of the Beholder

Herbert Abramson and Randall Abramson's Trapeze Asset Management is out with their second quarter market commentary and in it they touch on two choices that often confound investors: stocks versus bonds and risk versus reward. They argue that both stocks and bonds involve risk but given the current potential reward each offers, the choice is a no-brainer: stocks. Given the low rates associated with bonds these days, they believe these vehicles are more akin to cash than investments.

In particular, Trapeze (like many other value investors) have shifted their focus to undervalued large-cap stocks. The interesting dynamic here is that this is essentially the first time investors have been able to purchase such high quality companies at what many are deeming cheap prices. You'll recall that during the panic, cyclical and leveraged businesses declined the most and then subsequently rallied the most during 2009. High quality stocks were seemingly left behind and this theme has been highlighted by numerous managers and strategists including Jeremy Grantham, Legg Mason's Bill Miller, hedge fund manager Whitney Tilson, and many more.

Trapeze interestingly intertwines compelling valuations with contrarianism by highlighting the current investor distaste for equities. Just yesterday we highlighted how market strategist Jeff Saut viewed massive equity fund outflows as a possible contrarian indicator. Investors are fearful of numerous economic factors ranging from unemployment, to a double-dip recession, to deflation. This resulted in a stampede into bonds. Such positioning requires a dose of macro outlook and Trapeze's viewpoint appropriately falls in line with the "no double-dip" crowd.

Trapeze writes, "It has been argued that, if one takes a longer term horizon to smooth out the fluctuations, equities can be viewed as long-term bonds with an earnings yield in lieu of a bond yield and often with a fixed dividend yield, mostly reliable, mostly growing. In the current environment if one takes, say, a 5-year horizon to even allow for the possibility of an interim double-dip recession with a lower stock market from a poorer outlook for earnings, stocks should still be the preferred asset class in that extended period."

Many investors have often quoted Warren Buffett in saying, "Be greedy when others are fearful." Investors certainly seem more fearful of equities than they have been in quite some time. While equities haven't experienced extreme declines in absolute value, many investors have traded in their stocks for the supposed safety of bonds. And the problem with that, Trapeze argues, is that cash is desperately searching for return and yield; something that is currently better found in stocks than bonds. They feel that eventually all of the cash and fixed income parked on the sidelines will seek higher returns, eventually ending up back in equities.

In terms of specific stocks, Trapeze offers Clorox (CLX), Aflac (AFL), Kroger (KR), Aetna (AET), Hewlett Packard (HPQ) and Jack in the Box (JACK) as some of the large-cap stalwarts that they've been playing. Additionally, they also continue to hold positions in Oracle (ORCL), IBM (IBM), Walgreens (WAG), Wal-Mart (WMT), Mastercard (MA) and more.

For the bullish case on equities, we highly recommend reading Trapeze Asset Management's second quarter letter to investors in its entirety, embedded below:

You can download a .pdf copy here.

In the end, it's an epic and ongoing debate: stocks versus bonds, risk versus reward. Add in your stance on the macro environment and the decision is essentially made for you. However, what Trapeze is trying to illustrate is that such extreme pessimism (among other factors) can be interpreted as an opportunity for contrarian optimism. We'll end with another quote from Trapeze's letter: "Like beauty, value and risk too are often in the eye of the beholder."

To see what stocks prominent hedge funds have been investing in, head to our brand new quarterly newsletter, hedge fund wisdom by market folly (receive a free sample here). And if the above article is just too bullish on equities for you, last month we presented the opposite side of the coin with David Gerstenhaber's hedge fund Argonaut Capital who thinks that deflation is the greater risk.

Hedge Fund UK Positions Update: Eton Park, Lansdowne, & Odey

While Market Folly typically focuses on that of equities traded on US exchanges, we also like to track the UK holdings of the top hedge funds. Today we'll summarize the latest moves in the UK from some of the biggest managers due to regulatory filings.

First, Crispin Odey's hedge fund firm Odey Asset Management has increased their position in Pendragon (LON: PDG) two times in recent months. Due to portfolio activity on August 8th, Odey boosted their stake from a 14.56% stake to 16.35%. Then, on the 9th of September, Odey again raised their stake, this time to the current 17.79% ownership level. Pendragon is a UK car dealer and Odey has actually been involved in this sector/industry for much of the year.

Back in February, we posted up an investor letter from their flagship Odey European fund in which Odey disclosed a position in another UK car dealer, Lookers (LON: LOOK). We can't confirm whether or not Odey still have the Lookers stake as they've not crossed above the UK"s mandated 3% disclosure threshold. However, Odey has revealed their thesis behind the car dealer play writing,

"I have bought well managed businesses, where management have taken the necessary action to live in a world in which demand remains excessively weak. Where management have demonstrated the ability to take advantage of further dislocation - for instance if interest rates were to rise, they would be able to exploit this as an opportunity to buy their rivals. In the UK this has put me into the likes of Lookers and Pendragon, both car dealers. Current new car sales are running 1.8 million cars a year, some thirty per cent below the replacement rate of 2.8 million cars. Money is being made in used car sales and servicing, both of which are benefitting from the ageing of the fleet. On a P/E for this year of 5x, I find shares that are on discount to a level of profitability which already discounts the worst. That double discount gives me a great deal of comfort."

For more thoughts from this hedge fund, head to Crispin Odey's recent market outlook.

Second, we see that Eric Mindich's Eton Park Capital has disclosed a brand new position in Goldenport Holdings (LON: GPRT). They own 5.57% of the shares outstanding and this was due to portfolio activity on September 8th, 2010. Taken from Google Finance, Goldenport Holdings is "an international shipping company that owns and operates a fleet of container and dry bulk vessels that transport cargo worldwide." In terms of other activity from Eric Mindich's hedge fund, we revealed their new stake in Doral Financial (DRL) in August and also detailed some of Eton Park's portfolio as well.

Third, we'll turn to portfolio activity from Steven Heinz and Paul Ruddock's Lansdowne Partners. The major UK hedge fund reduced their position in Petropavlovsk (LON: POG) below the regulatory threshold of 5% ownership in a company. Petropavlovsk is involved in the development and mining of gold. Previously, the hedge fund owned greater than a 5% stake but now we no longer can view their stake due to portfolio activity on August 5th. Conversely, Lansdowne increased their position in RGI International (LON: RGI) to a 4.76% ownership stake due to portfolio activity on August 20th. RGI is involved in property development in Russia. Other past portfolio activity from Lansdowne includes covering their Old Mutual short position.

Last, we wanted to touch on a few merger arbitrage related plays. Eric Mindich's Eton Park has been in Dana Petroleum (LON: DNX), a company in takeover talks with a Korean company. Also, John Paulson's hedge fund Paulson & Co has been in SSL which is in takeover talks with Reckitt Benckiser.

For all our other coverage of stocks in this market, head to our posts on UK positions taken by hedge funds.

Wednesday, September 15, 2010

Equity Risk Premium 'Exceptionally Large' & Investors Shun Stocks: Jeff Saut

It's been a while since we've checked in on what market strategist Jeff Saut has to say so let's examine his latest commentary. In his weekly investment strategy, Saut points out the high correlation in markets these days, as pair trades don't seem to be working. He also highlights somewhat of a contrarian signal in the fact that money flows out of equity mutual flows are quite gargantuan. Everyone favors bonds and 'safety' these days as retail investors haven't been this unwilling to talk about stocks since the fourth quarter of 1974. As evidenced in the chart below, investors have shunned stocks and the equity risk premium (ERP) has been exceptionally large.

(click to enlarge)

Given the increased fear and pessimism in equity markets over the past few weeks/months, Saut believes that many people are ignoring corporate profitability. He feels the S&P 500 will climb to around 1120 (current market levels) and then stall out/ pause before rallying even higher. Needless to say, this is the most bullish we've seen him in quite a while.

So, what stocks to buy? The Chief Investment Strategist at Raymond James feels that technology is the sector to be in. He likes Intel (INTC) here as the company has taken steps to gain exposure to the booming cellular market. Interestingly enough, Saut also likes smartphone plays American Tower (AMT) and Crown Castle (CCI). We actually featured an in-depth analysis of one of these companies in our brand new quarterly newsletter: hedge fund wisdom. Hedgies have definitely favored the wireless tower operators and we examined the investment thesis to take you inside the head of a hedge fund manager. Lastly, Saut also offers CA Technologies (CA) as a play.

In summary, Saut acknowledges that the economy is slowing but he thinks we avoid the dreaded 'double-dip'. Given the recent encouraging market action, Saut thinks we're headed above the early August highs of 1130 after the market pauses to catch its breath first. He would turn negative if the market found a way to break below its 50 day moving average at around 1085.

Embedded below is Jeff Saut's latest market commentary:

You can download a .pdf copy here.

For previous commentary from the market strategist, you can head to his piece on how he thinks the March 2009 lows will hold. For more theoretical and application based discussions, Saut outlined his risk management principles as well as the businessman's risk portfolio.

Warren Buffett's Berkshire Hathaway Sells More Moody's (MCO)

Warren Buffett's Berkshire Hathaway just recently sold shares of Moody's (MCO). Per a Form 4 filed with the SEC, we see that Berkshire sold 1,350,550 total shares at prices ranging from $25.1006 to $25.193 on September 10th, 13th, and 14th. After their sales, Berkshire was left holding 29,433,326 shares of MCO.

Buffett's company has sold Moody's shares numerous times this year. And as we've previously pointed out, it seems that Buffett and company are keen to sell MCO shares anytime they reach $25 per share or higher. In terms of other portfolio activity from the Oracle of Omaha, we saw in July that Buffett bought more Tesco. To view a complete summary of Buffett's latest investments as well as the portfolios of prominent hedge fund managers, head to our brand new publication: hedge fund wisdom by market folly.

Taken from Google Finance, Moody's is "a provider of credit ratings; credit and economic related research, data and analytical tools; risk management software, and quantitative credit risk measures, credit portfolio management solutions and training services."

To learn how to invest like the legend himself, head to Warren Buffett's recommended reading list.

Lee Ainslie of Maverick Capital ~ Quote of the Week

Continuing our 'quote of the week' series here at Market Folly, we turn this time to Lee Ainslie of hedge fund Maverick Capital on the topic of buy/sell/hold:

"There are no 'holds.' Everyday you're either willing to buy more at the current price, or, if you aren't, you should redeploy the capital to something you believe does deserve incremental capital."

~ Lee Ainslie

The topic of incremental capital is one Ainslie has repeatedly focused on over the years. Essentially, he wants Maverick to always be allocating capital to investments trading at compelling prices. Ainslie will be presenting investment ideas on October 12th at the Value Investing Congress in New York City. You can save on registration by clicking here. Also, if you want to take an in-depth look at Maverick Capital's portfolio, we've detailed their positions in our brand new quarterly newsletter: hedge fund wisdom.