45 days after quarter end, large institutional investors have to report their holdings to the SEC, which are then made available to the investing public. So as of late last week, we now have updated visibility into the trading machinations of the masters of the universe.
Of course, the usual caveats apply. No matter how successful a manager is, it’s never a good idea to blindly follow their investment moves. By the time you or I get access to their trading moves, the data is as much as 45 days old. And for all we know, they may be selling it by the time we buy. Plus, as managers are not required to report short positions or options and derivatives positions, we also have no insight as to whether a stock might be a part of a long/short pair trade or some broader strategy.
So, as always, I recommend that we use guru trades as a starting point for further research rather than as a pre-scrubbed buy list.
With all of that said, today we’re going to focus on the latest trading moves of Warren Buffett, David Dreman, Bruce Berkowitz, Mohnish Pabrai, Bill Ackman, Prem Watsa and Daniel Loeb.
We’ll start with the granddaddy of value investing, the eminent Mr. Warren Buffett himself.
While Buffett’s investing career is the stuff of legend, some of more recent picks have…shall we say, “not lived up to the Buffett mystique.”
As a case in point, consider International Business Machines Corp. Buffett added 2.6 million shares last quarter to his already large position in Big Blue. He’s been steadily building the position since 2011, and it is now his third-largest holding after Wells Fargo & Co and The Coca-Cola Co. IBM now makes up about 112% of Berkshire Hathaway’s stock portfolio.
For a man as astute as Buffett, IBM seems like an odd choice. Big Blue’s revenues have been in stark decline, dropping for twelve straight quarters on a trailing-twelve-month basis. That’s three years of shrinkage in a period when most of the world economy was growing. IBM has also been levering its balance sheet in order to fund share repurchases. This has helped to keep EPS afloat, but in the absence of revenue growth it is mostly smoke and mirrors. This is one guru trade I might avoid.
IBM aside, Buffett certainly hasn’t lost his mojo. The Oracle took advantage of the selloff in all things energy related to snap up shares of crude oil transporter and refiner Phillips 66 on the cheap. Buffett boosted his position by 14% last quarter after increasing it by almost 6% in the fourth quarter of last year.
Phillips 66 trades for just 11 times earnings and yields a respectable—and growing—2.8% in dividends. Phillips 66 grew its dividend by 12% last quarter and has nearly tripled it since mid 2012.
Next up is legendary contrarian value investor David Dreman. If you are a serious student of the markets and you’ve never read Dreman’s classic Contrarian Investment Strategies…well, let’s just say you might not be as serious as you thought you were.
Dreman was one of the first big-name value investors to take a systematic approach to incorporating market psychology into his methods, and he is a dependable source of solid, sober advice. Dreman’s firm manages the Dreman Contrarian Small Cap Value Fund as well as separately managed accounts.
So, what has Mr. Dreman been buying?
One stock he’s been trading fairly actively is Spanish banking giant Banco Santander SA. Dreman initially purchased Santander in 2010 and has grown his share count from 111,820 shares to 631,135 as of last quarter. I’m not surprised at all to see Dreman buying Santander. Financial stocks make up fully 29% of his portfolio, and Spanish stocks are some of the cheapest in the world.
Another interesting addition, particularly since the sector has been under pressure of late, is diversified medical REIT Medical Properties Trust. Dreman bought 672,805 shares last quarter at an average price of $14.85. Today, shares trade hands at $13.87, so you can enjoy a better price than Dreman while also collecting the sweet 6.4% dividend.
Next up we have Bruce Berkowitz, manager of the $5.7 billion Fairholm Fund. Berkowitz is known for managing a highly concentrated portfolio. The top ten holdings of his flagship fund make up fully 83% of the portfolio. That would be considered highly concentrated even for an aggressive hedge fund, let alone a mutual fund available to the general public.
You have to be confident and immune to criticism—or perhaps just crazy—to make bets that concentrated. But Berkowitz pulls it off. Despite having an annus horribilis in 2011 in which he lost 32 percent in a year in which the S&P 500 eked out a small gain, Berkowitz has absolutely crushed the market over the past 15 years. Over that span, Berkowitz’s flagship fund has returned 11.7% per year, leaving the S&P 500’s 4.2% annual returns in the dust.
So, what’s Berkowitz up to these days?
Actually, he’s been doing more selling than buying. Over the past several quarters, Berkowitz has been unloading the shares of American International Group that he originally purchased in 2010. He’s also been reducing his position in Bank of America Corporation, which, like AIG, he bought on the cheap starting in 2010.
Of Berkowitz’s largest holdings, the only one he appears not to be selling at the moment is Sears Holdings Corp, Eddie Lampert’s pet project. I’ve written about Sears before, calling it Lampert’s Berkshire Hathaway. And believe it or not, that actually not a compliment.
Berkowitz currently has about 20% of his portfolio in Sears, and he’s been adding to the position aggressively since 2012. As much as I respect Berkowitz, I wouldn’t be in a hurry to follow him into this trade. Sears continues to struggle in a very difficult retail environment, and I question whether Lampert will be able to squeeze the value out of the company before it hits real financial distress.
So, is there any insight we can glean today from Berkowitz’s portfolio?
Absolutely. Berkowitz currently has about 13% of his portfolio sitting in cold, hard cash. As a value investor, he likes to have dry powder on hand to take advantage of selloffs. That’s something we might all consider, particularly with the U.S. market sitting near all-time highs.
Mohnish Pabrai, a self-professed disciple of Warren Buffett, is another guru with a reputation for running a concentrated portfolio. At any given time, he may own 10 or fewer stocks in his portfolio. I absolutely love Pabrai’s deep-value style, and I consider his book, The Dhandho Investor, to be a modern investing classic. I keep a copy in my office and browse it on days when I feel I need a little perspective.
Like Berkowitz, Pabrai has been selling down some of his long-held large positions. He sold most of the Citigroup Inc and all of the Bank of America Corporation that he started accumulating in 2011, both at substantial profits.
Pabrai made a few modest additions last quarter. He more than tripled his position in Korean steel mill POSCO, buying 681,910 shares in the quarter. He also bumped up his position in WL Ross Holding Corp by about 26%.
You’ve probably never heard of the WL Ross Holding Corp. There is a reason for that. It’s not really a company, and it doesn’t really “do” anything. WLRH is essentially a “blank check” company, or more formally a “special purpose acquisition company.”
In a nutshell, this is a vehicle for corporate restructuring master Wilbur Ross to use to buy a business of his choosing to fix. If he can’t find one he likes by June of next year, the holding company is simply dismantled and cash is returned to shareholders.
This is classic Pabrai. Heads, he wins; tails, he doesn’t lose too much. Pabrai’s average purchase price was $10.04. So, if Ross never invests a dime, Pabrai will get $10.00 back a year from now at a negligible loss. And if Ross actually finds a business to fix, Pabrai’s upside is potentially unlimited.
At time of writing, WL Ross Holding Corp trades for $10.60. If you want to follow Pabrai’s lead, I might suggest waiting for a better entry point closer to $10.00. If by chance it dips below $10.00, back up the truck and buy every share you can.
Bill Ackman made quite a splash at this year’s Ira Sohn Conference when he compared Valeant Pharmaceuticals International Inc to a young version of Warren Buffett’s Berkshire Hathaway, calling both “platforms” for investments in other businesses.
Right or wrong, Ackman is certainly one to eat his own cooking. Ackman’s Pershing Square Capital Management initiated a massive position in Valeant in the first quarter. This pharma “platform” now makes up fully 26% of his long portfolio. He’s also enjoyed a fantastic profit in a very short period of time. He bought at an average price of $177 per share, and as of this writing shares traded hands at $227.
Is there still any upside left?
Maybe. In Ackman’s Ira Sohn presentation he suggested the company was worth $250 per share or more. While Ackman is a brilliant investor, I might wait for a pullback before following him into this trade.
Valeant failed last year in its attempt to buy Botox maker Allergan Inc, which was, until this quarter, Ackman’s largest holding. Allergan was instead acquired by Actavis PLC, which, coincidentally, is a new holding of Ackman’s. Pershing Square initiated a new position in Actavis last quarter, and the stock now makes up about 2.7% of the portfolio.
If there is a theme to Ackman’s investing this year, it is healthcare. More than 40% of his fund is currently dedicated to health and pharmaceutical stocks.
Up next is Prem Watsa, a Canadian value investor with a fantastic long-term record that has hit something of a rough patch of late. Called the “Warren Buffett of Canada” both for his value style and his use of an insurance company as his investment vehicle, Watsa has beaten the pants off the S&P 500 over his career. He’s boosted the book value of his company, Fairfax Financial Holdings, at a 16.9% annual clip over the past 25 years. By comparison, the S&P 500 returned 9.6% annually.
Unfortunately, Watsa bet big on BlackBerry Ltd, and it has been an unmitigated disaster for him. BlackBerry now makes up 29.3% of Watsa’s stock portfolio.
Perhaps falling victim to the home-market bias, Watsa has been a consistent buyer of the battered Canadian communications company and erstwhile smartphone leader. Watsa started buying the stock in the $50s and been averaging down ever since. As of this writing, BlackBerry traded for $10.13 per share.
I’m not going to recommend we follow Watsa into BlackBerry. From what I can see, Watsa has lost all objectivity when it comes to this stock. Either that, or he has reasons for buying it that we cannot understand or that do not apply to us, such as keeping a Canadian icon under Canadian control.
Instead, I want to highlight Watsa’s largest current holding, Resolute Forest Products Inc, which makes up 35% of his stock portfolio. Resolute makes paper products and lumber, and business has not been particularly good. The stock trades at less than half its early 2011 high and is down by 36% from its recent highs set earlier this year. Still, the stock trades for just 0.6 times book value and 0.29 times sales. The stock is anything if not cheap at these prices.
And finally we get to veteran activist investor Daniel Loeb of Third Point LLC.
I pity the poor CEOs that find themselves in Loeb’s crosshairs. He is known for writing scathing—and very public—letters to the boards of companies he targets, and he doesn’t mince words. They tend to read like a letter listing demands.
But while Loeb might be blunt, I can’t say I argue with him…or his returns. Over the past 20 years, Loeb has generated returns of 19.6% per year, more than double the return of the S&P 500.
So, what’s Loeb up to?
Interestingly, he made two major portfolio moves last quarter that were both essentially plays on China. He sold out of Alibaba Group Holdings Ltd and initiated a new position in Yum Brands Inc.
YUM, of course, is the parent company of KFC, Taco Bell, and other iconic American fast food restaurants. But as the American fast food market has been saturated for years, China has emerged as YUM’s most strategic market. YUM gets the overwhelming majority of its revenues from emerging markets with China being the largest.
YUM is not cheap in a strict value sense. It trades for 41 times trailing earnings and 23 times expected forward earnings. But if you believe in the long-term emergence of China’s middle class—and in Loeb’s abilities as a stock picker—then its shares might be worth a stab.