Harriet Lefton

About the Author Harriet Lefton

Harriet originates from the UK where she worked as a journalist specializing in the metal markets. She graduated from the University of Cambridge before becoming a qualified UK lawyer.

Invest Like Subprime Shorter John Burbank: Advanced Micro Devices, Inc. (AMD), NVIDIA Corporation (NVDA), Broadcom Limited (AVGO)

Hedge fund manager John Burbank of the $1.35 billion Passport Capital Management fund has made some intriguing moves in Q1, according to recently released 13F forms filed with the SEC. Most notable was his decision to ramp up position in Advanced Micro Devices, Inc. (NASDAQ:AMD), while slashing the fund’s NVIDIA Corporation (NASDAQ:NVDA) holding. We will look into these moves in greater detail below, however first let’s take a closer look at the man himself and the fund he founded seventeen years ago.

From a young age Burbank had a remarkable work ethic- he was a handy man, sold cookware door-to-door and worked as a hot dog vendor: “My worst job was working twelve hours in a row on a hot dog cart… I did not want to eat a hot dog for a year”. He funded his own studies at Stanford by running a house painting business and began investing age 30 as an experiment after borrowing $50,000 on multiple credit cards.

He founded long-short equity fund Passport Capital in 2000 with just $80,000. The fund’s big success came when Burbank decided to short the subprime mortgage crisis. According to Forbes, the Passport Global Strategy fund made a 219% return for its investors in 2007. However since this date things have not been so easy for the fund.

In April the news broke that Burbank was shutting down one of Passport’s core funds- the Long-Short Strategy Fund which will now return money to investors. The fund had assets under management of $833 million at the end of 2016. Like many hedge funds, the fund had a tough time in 2016 when it lost 11.8%, eradicating the 10.1% gain made in 2015. The fund’s predictions of a falling market backfired due to the “extraordinary” policy-induced rally late in the year.

However, the Passport Global Strategy will stay active. Passport Capital says it “seeks to achieve risk-adjusted returns through a combination of macroeconomic analysis, fundamental research and quantitative tools.” This means that it employs top-down, macroeconomic analysis to “identify durable, secular changes not reflected in asset prices” and then uses quantitative tools to make portfolios with the right risk and liquidity.

Now let’s see how this strategy played out with three particular trades in Q1:

Advanced Micro Devices Ramped Up

Burbank significantly ramped up the fund’s holding in volatile semiconductor stock AMD by 2769%. The stock is now the fund’s seventh biggest holding with a reported value of $58.5 million. Since the last filing date however prices have fallen by 25% after investors were disappointed by the company’s first quarter revenue of $984 million (missing the consensus estimate of $984.5 million).

But, like Burbank, Rosenblatt Securities analyst Hans Mosesmann still has a bullish outlook on the stock- which, even when recent losses are factored in is still trading at $11 vs a share price of just $2 in 2016. Mosesmann is impressed by the fact that AMD Zen chip yields are actually proving to be better than even AMD expected. He says AMD has a 4 core die size advantage of 10% when compared to Intel’s nearest Skylake offering, despite AMD using a “more modest” Global- Foundries 14nm process node.

The analyst is also encouraged by the “Epyc” (Naples) server unveiled by AMD at its annual analyst meeting which could be “quite disruptive to the hyperscale world.” He is impressed by the fact that the Epyc is a single-socket chip versus Intel’s double-socket server chip, even though their performance is equally matched. A single-socket chip could also be much cheaper (30%) than the dual socket says Mosesmann, especially as the price of most enterprise software is based on sockets not cores. The analyst is ranked #457 out of 4,567 analysts according to TipRanks financial accountability engine.

And AMD also has the gaming graphics card, the Radeon RX Vega, in the works, which CEO Lisa Su has just revealed at the JP Morgan conference will be launched in July after the more specialist Radeon Frontier Edition. Overall the stock has a Hold analyst consensus with 6 buy, 8 hold and 3 sell ratings published on the stock in the last three months. Meanwhile the average analyst price target of $11.7 predicts upside for the stock over the next twelve months of 7.5%.

Nvidia Wiped Out

Burbank sold out the fund’s entire NVIDIA holding. Unfortunately for Burbank, since the last filing date Nvidia shares have actually gained by an impressive 27%.  And while the graphics chipmaker may have lost Burbank its gained the support of Softbank Group. Softbank has just revealed that it has bought a whopping $4 billion stake in NVDA, according to Bloomberg.

The Japanese company, via its $93 billion SoftBank Vision Fund, is now Nvidia’s fourth biggest backer. This is a good sign for the stock as the founder of SoftBank, Masayoshi Son, successfully invested in both Alibaba and Yahoo before they became big. The fund said it is targeting several different tech trends including machine learning and AI- both areas in which Nvidia specializes. Shares rose 2% on the news.

At the same time, Nvidia has also brushed off the news that Alphabet’s Google plans to create its own chip to manage artificial intelligence. “Efforts to democratize AI and enable its rapid adoption are great to see,” says Nvidia CEO Jensen Huang.

The analyst consensus rating on the stock according to TipRanks is Moderate Buy. In the last three months the stock has received 12 buy, 6 hold and 2 sell ratings. However the average analyst price target of $133 suggests a correction could be in order as it translates into downside of -4% from the current share price.

Broadcom Initiated

In Q1 Burbank initiated a new $9.39 million position in the semiconductor giant Broadcom Ltd (NASDAQ:AVGO), which has a very positive hedge fund signal. In the last quarter hedge funds actually increased their AVGO holdings by 2.6 million shares with other big name gurus like Andrew Law and Christopher Lord also stepping up positions in the stock.

Broadcom is currently prepping for its $20bn (2.2 trillion yen) takeover bid for Toshiba’s Memory Business, says Bloomberg. To fund its offer, Broadcom has financing in place from four banks, namely: Silver Lake, Mizuho Financial Group, Sumitomo Mitsui Financial Group, and Mitsubishi UFJ Financial Group. It is possible that Broadcom will see a competing $16.36 billion offer from a group consisting of Kohlberg Kravis Robertso, the Development Bank of Japan and the Innovation Network Corporation of Japan. Toshiba is selling its chip unit after its US nuclear plant business turned sour resulting in a multi-billion dollar writedown.

And it’s not just Burbank that is bullish on the stock, so is the market. All seventeen analyst ratings on the stock in the last three months have been buy ratings. Meanwhile the average analyst price target of $253 shows that, according to the analyst average, the stock has upside potential over the next 12 months of 5.6%.