With another November comes another quarterly disclosure of the holdings of institutional money managers with assets of at least $100 million. The Securities & Exchange Commission (SEC) requires these managers to report their stock holdings via Schedule 13F within 45 days of the end of each quarter.
In August, when these investors last updated their holdings (as of the end of the second quarter of 2013), we highlighted four picks from each of four different investment gurus—Seth Klarman, David Einhorn, Julian Robertson and Daniel Loeb—to see what they can tell us about which stocks may be moving up—or down.
In that article, we discussed David Einhorn's new position in Rite Aid (NYSE: RAD). Since we published that piece on August 20, Rite Aid has soared from $3.48 to today's level of $5.07—for a 45.7% gain in just three months.
These updates also give us a chance to stack these investment pros up against one another and see how their picks compare.
In the last three months, 8 of the 16 stocks highlighted (50.0%) in our August article made a profit (a sold stock is considered profitable if it went down in price). Making a profit is different from outperforming a stock index, however. Of the 10 stocks the gurus bought in the second quarter, six (60.0%) have beaten the S&P's 8.2% gain in the past three months. Of the six stocks sold, two (33.3%) underperformed the S&P 500, so the gurus were better bulls than bears.
In addition to Rite Aid, "buy" winners included Seth Klarman's Micron Technology (NasdaqGS: MU) (+38.1%) and BP plc (NYSE: BP) (+14.8%) and Daniel Loeb's Walt Disney Co. (NYSE: DIS) (+11.7%), Coca-Cola Enterprises (NYSE: CCE) (+11.0%) and CF Industries Holdings Inc. (NYSE: CF) (+14.2%).
Losing trades included Seth Klarman's new position in Yamana Gold (NYSE: AUY), which has slumped 20.9% in the last three months. On the sell side, David Einhorn missed out on a big gain by getting out of Seagate Technology (NasdaqGS: STX), which has jumped 22.0%, and Julian Robertson is likely regretting exiting his position in HCA Holdings Inc. (NYSE: HCA), which has gained 13.5%.
Daniel Loeb was the standout this time around, posting a perfect four winning trades out of four (winning trades being buys that outperformed the S&P 500 or sells that went on to be outpaced by the benchmark index). Einhorn and Klarman each had two winners, while Robertson was shut out. Besides the missed gain on HCA, he made an ill-timed move into car-rental firm Hertz Global Holdings Inc. (NYSE: HTZ), which dropped 6.7%.
Miscues like these illustrate how important it is to do your own research and not merely follow the actions of investment pros, no matter how distinguished they may be; in addition, it's important to keep in mind that these 13F filings are usually out of date by the time they are released and likely don't paint an up-to-the-minute picture of each investor's holdings.
Nevertheless, they remain a gold mine of information as to what the smartest investors are buying and selling. A timely review of them can make you money. With that in mind, here are some highlights from the just-released 13F filings of Klarman, Einhorn and Loeb.
In addition, this time around we've replaced Julian Robertson with Warren Buffett, who made a couple of headline-grabbing moves in Q3, particularly in the oil and gas sector.
Note that the following is not a full account of these gurus' transactions, just a few that are worth noting. If you're keen to see what picks the cream of the investment crop are making these days (and who isn't?), read on.
1. Seth Klarman
% Change in Holding
Average Price Per Share
PBF Energy (NYSE: PBF)
PBF recently built a second terminal at its Oklahoma City refinery to handle crude shipped by rail from the Bakken shale and the Canadian oil sands.
American International Group (NYSE: AIG)
Klarman exits his stake in the insurer, which he first took out in the fourth quarter of 2012 at an estimated average price of $33.95 a share.
Micron Technology (NasdaqGS: MU)
The memory-chip maker, which was a new addition in the second quarter, is now Klarman's largest holding, at 32.0% of his total portfolio.
Theravance (NasdaqGS: THRX)
The company and European drug maker GlaxoSmithKline recently received approval from the European Commission for their new asthma treatment.
2. David Einhorn
% Change in Holding
Average Price Per Share
Tempur-Sealy (NYSE: TPX)
The mattress maker closed its $228.6-million purchase of rival Sealy in March and is up 19% since reporting strong Q3 earnings.
WPX Energy (NYSE: WPX)
Another play on shale development, WPX produces gas, NGLs and oil in the Marcellus and Bakken formations, as well as Colorado's Piceance basin.
Aetna (NYSE: AET)
Einhorn reduces his position in the health insurer ahead of the Oct. 1 rollout of Obamacare. He also trimmed his stake in Cigna (NYSE: CI).
NCR Corp. (NYSE: NCR)
Einhorn pares his interest as the ATM maker's stock surged 52% from Jan. 1 to Sept. 30. It has since fallen 13% after missing revenue expectations in Q3.
3. Warren Buffett
% Change in Holding
Average Price Per Share
ExxonMobil (NYSE: XOM)
As Investing Daily's Jim Fink noted in a March 2012 article, Buffett must invest in large caps because smaller firms can't absorb the amount of cash Berkshire needs to deploy to move the needle on its performance. Buffett's new $3.45-billion ExxonMobil investment is the latest example.
Suncor (NYSE: SU)
Buffett made his first move into the oil sands with his initial Suncor investment in Q2. It was the first time he's ever invested in a Canadian firm.
ConocoPhillips (NYSE: COP)
Buffett has said that buying COP in 2008, when oil and gas prices were near their peak, was a mistake. He continues to pare back his holding.
GlaxoSmithKline (NYSE: GSK)
Buffett sharply cuts his stake as the drug maker has endured five straight quarters of declining profits due to delayed development of new treatments.
4. Daniel Loeb
% Change in Holding
Average Price Per Share
FedEx (NYSE: FDX)
The delivery firm's ground service is benefiting from rising online shopping, while its air service adjusts to fewer deliveries as cash-strapped customers seek cheaper options.
Google (NadaqGS: GOOG)
The search giant recently posted better-than-expected earnings thanks to a big jump in the number of paid clicks on its ads. The stock broke over $1,000 on Oct. 18.
Activision-Blizzard (NasdaqGS: ATVI)
The video game maker has soared 54% since Investing Daily contributor Greg Pugh recommended it in a June 20, 2012 article, citing the popularity of its titles. It released a new edition of its Call of Duty game on November 5.
Tiffany & Co. (NYSE: TIF)
Loeb takes profits after taking an initial position in the jewelry retailer in the first quarter of 2013 at an estimated average price of $63.83 a share.
"True genius resides in the capacity for evaluation of uncertain, hazardous, and conflicting information." --Winston Churchill
It has become the ultimate corporate management question of the post-2008 financial crisis era: Will executives who enjoyed the abundance that prevailed prior to the downturn successfully adapt to a new period of scarcity, hyper-competition and technological change?
That's the question we had in mind when traveling last week to the 48th-annual Edison Electric Institute Financial Conferencein Orlando, Fla., which is typically attended by most of the US energy utility industry's CEOs, bankers and analysts.
In the aftermath of the 2008 financial crisis, your correspondent, as part of his studies at graduate business school at Oxford University, spent a great deal of time analyzing the leadership mistakes that helped precipitate the crisis, as well as identifying universal principles of leadership throughout time that have built great companies.
What has to be remembered is that the corporate leaders that were swayed by unsustainable consumer demand due to the credit bubble failed to ask basic questions, had poor knowledge of the firm's operations and risks, and negligently delegated too much authority. In fact, in practically every case, these leaders had a poor command of their firm's overall strategic direction.
But what's most alarming is that there's evidence, which we'll detail below, that executives at many US firms remain just as oblivious to strategy as they were before the crisis. This means investors must continually scrutinize corporate management to ensure proper stewardship.
From this perspective, we evaluated energy utility CEOs' strategic presentations (or lack thereof) to determine which firms offer the best possibility of delivering long-term shareholder value, and which should be avoided.
Avoiding a Repeat of History
A 2011 McKinsey & Co. study found that during both the boom of the mid-2000s and the financial crisis that followed, many companies did not make critical portfolio choices and trade-offs. In a survey of senior management, more than a quarter of executives at multi-business companies said their corporations lack a consistent process for developing strategy.
A similar pattern emerges with regard to the amount of time a company's senior-executive team actually spends on developing corporate strategy in a typical year. According to McKinsey, "No more than one in seven respondents say their companies' senior leaders currently spend more than 15 percent of their time on this activity, but nearly three times as many describe that as the ideal time commitment."
Chart A: Strategic Options--Utility CEOs Have Some Hard Choices to Make
This, of course, could explain why trillions in cash are idling on the balance sheets of US corporations, as they have yet to determine how they will be competitive in the post-crisis era. Clearly, energy utilities do not have the luxury of sitting on their cash until an obvious trend emerges, as they have significant amounts of aging infrastructure to replace and face structural risks from new technologies, declining electricity demand, and low-priced natural gas.
And we know from history that hoarding capital offers only the illusion of safety. During the Great Depression, for example, many firms that failed to invest in their business, or take definitive, strategic action, eventually went bankrupt or were swallowed up by more nimble competitors. At the Edison Electric Institute's (EEI) conference, we heard a wide range of management views on what strategic action must be taken, though there was consistency in what most see as threats to their business model.
Hard Decisions on Tech
We believe those utility CEOs that select the right mix of technology will prove to be the winners in delivering long-term value. But the future of one major energy technology, nuclear power, is currently uncertain because of the high costs of development in a marketplace where pricing power is being impacted by renewable technologies.
Duke Energy Corp (NYSE: DUK) and Exelon Corp (NYSE: EXC) illustrate how resource mix and degree of presence in competitive or regulated markets can influence management's view on nuclear, as well as how much time they have to take strategic action.
Duke CEO Lynn Good noted that the firm's ultimate challenge is deciding how to replace its biggest nuclear plants, which are slated to be shuttered over the next 10 years. Though supportive of nuclear power, she has taken what could be described as a technology-agnostic approach by advocating energy diversity. Because Duke's nuclear power plants are in a regulated service territory, she has some time to make an informed decision.
But her comments were in stark contrast to Exelon CEO Christopher M. Crane, whose firm's large investment in nuclear power is being undermined by competition from renewable technologies. He voiced various approaches the firm is taking, including advocacy to remove renewables subsidies, or might be taking, such as shutting down non-performing power plants, in what he described as a "shrink to grow" strategy.
There are two potential successes and pitfalls to these approaches. Duke's CEO may not have to make a decision immediately, but she should be aware that outlining a strategy now will be necessary, or the firm risks complacency and perhaps might be too slow in responding to a disruptive technological threat.
Though in this regard, we do believe she's ahead of the curve. Your correspondent's inference solely is that Duke Energy may be thinking about owning natural gas resources, which is a retro move that goes back decades, as utilities have in the past owned coal and natural gas resources.
The moderator at one panel, IHS CERA consultant Dr. Lawrence J. Makovich, asked how well protected utilities are from a rise in natural gas prices, citing past examples where the so-called experts were wrong about natural gas pricing and its abundance. Dr. Makovich is considered one of the most brilliant minds in the energy industry, and his line of questioning suggests fuel diversity should be a strategic imperative.
Meanwhile, Exelon's CEO might benefit from being more technologically agnostic. Mr. Crane's intense focus on making nuclear economic in the present market environment poses the risk that the firm could face a disruptive technological threat, perhaps even greater than renewables. As such, he should lay out an alternative strategic direction that would reduce the firm's reliance on nuclear--if for no other reason than to assure investors that Exelon's value is not tied to any one technology, but to management's effectiveness and command of the energy marketplace.
The Cost Challenge
Many of the CEOs at various conference panels noted the biggest risk is not necessarily new technologies, which in many cases are still not competitive with utility pricing. Instead, they're worried that in replacing aging infrastructure and meeting future environmental requirements and other mandates, utilities' cost structures will be so high as to make new technologies more competitive.
This was particularly the view of Leo Denault, CEO of Entergy Corp (NYSE: ENT). Mr. Denault and his fellow panelist, James Robo, CEO of NextEra Energy Inc (NYSE: NEE), offered rather refreshing perspectives on the industry's challenges, as they are pursuing strategies that are directionally opposed.
Whereas Mr. Denault is focusing on cost leadership and plans to simplify the structure of Entergy as a way to remain competitive against potential market entrants, Mr. Robo intends to make NextEra the industry's technology leader. Mr. Robo said he is committed to new technologies, enhancing NextEra's longtime strategy of building the largest renewable fleet in the country.
These types of approaches have been well documented and analyzed by the preeminent thinker of corporate strategy, Michael Porter, in his classic book "Competitive Advantage."
As explained by Mr. Porter, a decision to be a cost leader (such as Entergy) is essentially to be a technology follower. A decision to be a technology leader (such as NextEra) is to become a cost leader in time through the adoption of advanced technologies or through differentiation.
"Firms tend to view technological leadership primarily as a vehicle for achieving differentiation, while acting as a follower is considered the approach to achieving low cost. If a technological leader is the first to adopt a new, lower-cost process, however, the leader can become the low-cost producer. Or if the follower can learn from the leader's mistakes and alter product technology to meet the needs of the buyer better, the follower can achieve differentiation," according to Porter.
Entergy's Denault and NextEra's Robo stood out at the conference for their grasp of the market dynamics of their business, the clarity with which they described their vision, and the strategic initiative they have taken. It stands to reason that if their operating environments change, then each of these utility chiefs would be ready to meet the challenges. Accordingly, we believe these two firms have an excellent chance of delivering long-term, sustainable shareholder value.
Moreover, Duke Energy's Good and Exelon's Crane lead companies that have gone through dramatic transformations in the last few years. Most longtime observers of these companies remember their status prior to the downturn as the elite of the industry. But since these companies now have different management teams and face new challenges, that status is no longer a given. And while both of their CEOs are asking the right questions, what investors want to know is whether they'll make the right decisions.
This past summer, Warren Buffett poured a half-billion dollars into Canadian oil sands. One energy expert proclaims, "If Buffett's bullish, it's good across the board for Canadian oil companies." Buffett must believe production and prices will soar. His $500 million bet just punched your ticket for profits.
For those who may not know, each month we host a joint web chat for subscribers of The Energy Strategist (TES) and MLP Profits. The chat is conducted by Igor Greenwald, managing editor for TES and chief investment strategist for MLP Profits, and myself.
We place a priority on answering questions about portfolio holdings and recommendations during the chat, but often we get questions about companies we don't currently recommend. Sometimes we may get questions that require an extended answer, or there may just be so many questions we can't get to them all. For the most recent chat there were three MLP questions that warrant some elaboration.
Q: Do you anticipate any impact on MLP share prices in a rising interest rate environment?
We got a couple of questions about the effect of interest rates on expected MLP unit performance. Igor's view is that the spring/summer MLP correction sort of inoculated against a repeat, and further that the economy isn't strong enough to support significantly higher rates for a good long while. And as the economy strengthens, it should generate plenty of demand for new energy infrastructure, helping the MLP sector grow, he argues.
I would add that those MLPs that are highly leveraged will be most at risk as rates rise. I would further avoid those that have had a significant run-up that has depressed the yields to low levels. A low-yielding MLP like Phillips 66 Partners (NYSE: PSXP), which had a very big rally from its initial IPO price, could be particularly vulnerable to higher interest rates.
Q: What are the pros and cons of holding an MLP in a retirement account? And which would you recommend?
Opinions on this are split. A big advantage of MLP investing is the potential for deferring taxes on earnings. However, the income in retirement accounts is already tax deferred. Further, it is possible that the retirement account could end up owing additional taxes on MLP distributions, reducing the potential return to investors. Retirement accounts are taxed on "unrelated business taxable income" (such as partnership income) in excess of $1,000 in the aggregate. As a result, many financial planners recommend that you not complicate your retirement account with MLPs.
Others argue that the steady cash distributions are a safe, conservative way to build up the value of the retirement account over time, even if the account ends up having to pay some taxes. The fact that the MLP isn't paying corporate income taxes is a significant advantage over time with respect to its ability to generate higher income over time than would be possible for a corporation.
My view is that you first want to make sure that any of your fully taxable investments are protected in retirement accounts to the greatest possible extent before you start to consider putting MLPs in your retirement account. For example, investors with both taxable and tax-deferred investment accounts would generally be better off holding MLPs in the taxable accounts, where their tax deferral benefit would be more valuable, and where they would not generate a liability for unrelated business taxable income.
Of course, some MLP affiliates and/or sponsors are tax-paying corporations, and their shares can be held in a retirement account. MLP Profits portfolio picks suitable for IRA accounts include Kinder Morgan (NYSE: KMI), Williams (NYSE: WMB), Targa Resources (NYSE: TRGP) and Navios Maritime Partners (NYSE: NMM), all of which pay dividends and issue the 1099 miscellaneous income forms, rather than the more complicated K-1's from partnerships.
Q: Linn Energy (NYSE: LINE) seems to have gotten thru the SEC looking them over. The merger with Berry seems to be on track, although at a higher purchase price. Do you think Linn is a good investment going forward?
This particular question was answered in the chat, but it warrants some additional commentary. We got half a dozen queries on Linn Energy during the chat, so there is obviously still a lot of interest there. Igor's answer to this question was "All of that is true, and I expect the merger to close by year's end, but I think Linn has some structural issues that go beyond Berry with its debt load and past acquisition quality, so I'm steering clear. There are better upstream MLPs in our portfolios."
I would add that we have been pretty steadfast in believing that the SEC inquiry wouldn't turn up anything substantive. However, we couldn't recommend Linn with that inquiry hanging over the partnership. MLP investors in general are not looking to take on that kind of risk, and I suspect most didn't think it was possible to see Linn drop like it did (down ~40 percent over the summer). This kind of volatility might be acceptable for aggressive speculators, but that doesn't fit the profile of most MLP investors.
Now that the SEC cloud appears to be lifting and the merger with Berry looks to be imminent, we have taken another look at Linn. But after comparing to peer upstream MLPs, we feel that there are safer options, especially given the higher purchase price Linn had to pay for Berry, and Linn's relatively high debt level. The present dividend yield of nearly 10 percent is certainly attractive, but our view is that the downside risk will continue to be unacceptably high for conservative investors.
Buffett just ditched millions of shares in familiar giants like Procter and Gamble. Bill Gates just dumped 90 million shares of Microsoft. Why? They're scared. Obama's economic policies scare them. Don't listen to what they say. Watch what they do. Gates just invested $571 million in this special 'back-to-basics' company. Buffett followed suit to the tune of $300 million. What do they know that you don't? Don't let Buffett and Bill make all the money. There's still time. Buy this stock in America's oldest and safest industry, hold on to it and let it make you richer for decades. It's what our favorite billionaires are planning.
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