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.

Trade Like No 1 Fund Manager Fred Fern: Tesla Inc (TSLA), General Electric Company (GE), Apple Inc. (AAPL)

A glimpse into Fred Fern’s Q2 key investments.

Fred Fern, founder and CEO of Churchill Management Group, has made some intriguing trades in the last quarter according to 13F forms filed by the fund with the SEC. We can see that Fern is a fan of Tesla Inc (NASDAQ:TSLA) and Apple Inc. (NASDAQ:AAPL), but has now lost patience with General Electric Company’s (NYSE:GE) disappointing stock performance.

Fern is a top fund manager to track. He has just been ranked #1 on Barron’s Top 100 Independent Investment Advisors list- and has been one of the top 10 investment advisors for the last 6 years. Fern, who founded Churchill 53 years ago, says he feels “blessed” to have seen the fund grow from a card table and a couple of chairs to a firm with assets under management (AUM) of $3.9 billion.

Churchill philosophy puts an emphasis on preserving capital. “Churchill’s foundation has always been to attempt to make money and keep it,” says Fern. “In these volatile times, our clients seem to really appreciate having a defensive option.” He says that the firm carefully tracks the market and its cycles on a daily basis which guides its investment decisions. “It has assisted in highlighting how the market goes through high risk and low risk environments” says Fern.

So let’s now take a closer look at how this strategy played out in three of the fund’s key moves in the last quarter:

Tesla

In the last quarter, Fern initiated a new position in this controversial auto stock. He picked up 9,184 shares worth $3,321,000 (which translates into a price of about $362 per share).

In the last year shares in TSLA have soared from $200 to over $342. However, prices have slipped from a high of $385 in mid-September due to production concerns for Tesla’s much hyped Model 3 electrical car. The latest upset comes as the Wall Street Journal reports that since early September, Tesla has been building “major portions” of the Model 3 sedan by hand instead of using the automated production line. Shares subsequently dropped 2.2%.

However, Tesla has now firmly refuted these claims calling them “fundamentally wrong and misleading”. The company says that is still “in the beginning of our production ramp, but every Model 3 is being built on the Model 3 production line, which is fully installed, powered on, producing vehicles, and increasing in automation every day.” Tesla continues by pointing out that every vehicle manufacturing line has both manual and automated processes. It concludes “contrary to the Journal’s reporting, this is not some revelation.”

Nonetheless analysts are still concerned about Tesla’s ability to meet its ambitious Model 3 production targets. Many have been skeptical of Tesla’s plans for a long time and the latest news simply confirms this. For example, in Q3 Tesla delivered only 220 Model 3s versus the FactSet estimated deliveries for the vehicle of over 1,000. These numbers led Goldman Sachs analyst David Tamberrino to reiterate his Sell rating on TSLA last week. (To watch Tamberrino’s track record, click here)

According to Tamberrino: “We believe this likely puts downward risk to the company’s communicated S-curve to the Model 3 production ramp… We continue to maintain our more cautious Model 3 ramp, which is far below company targets.” His $210 price target on TSLA translates into a 39% downside from the current share price. On the flip side Tesla says there are no fundamental issues with their production holdups and they are “confident in addressing the manufacturing bottleneck issues in the near-term.” It could also be noted that Tamberrino has a disastrous track record on TSLA stock with a 38% success rate and -12% average return.

Overall, the Street is undecided about the outlook for Tesla over the next year. We can see from TipRanks that the stock has a Hold analyst consensus rating. In the last three months TSLA has received 6 buy, 7 hold and 8 sell ratings. Meanwhile, the average analyst price target of $317 stands at a -7.6% downside from the current share price.

General Electric

On a more bearish note, Fern gave up on industrial giant GE in the last quarter. He dumped the fund’s entire position of 654,867 shares worth $19,515,000 (about $29.8 per share).

While Fern may be out, the activist hedge fund managers are in. Earlier this week, GE appointed the chief investment officer of the well-known activist hedge firm Trian Fund Management to its board of directors. The new Trian director, Edward Garden, is taking over from long-standing GE director Robert Lane who is now retiring.

Trian, which manages assets of over $14 billion, has had a 1% stake in GE for over 2 years now. However, the fund has been disappointed by the company’s recent poor performance. Indeed, only a few months ago the company appointed a new CEO John Flannery to replace Jeff Immelt and GE’s CFO is also due to depart soon. New board member Garden notes that shares are down (from $28.86 to $23.43 in the last year) but concludes “I continue to believe that GE represents an attractive long-term investment opportunity with significant upside.” Trian wants GE to cut costs by $2 billion and has ensure that corporate bonuses now correlate with profit performance.

Unsurprisingly perhaps, TipRanks reveals that General Electric has a muted outlook according to the Street. The analyst consensus rating on the stock is Hold. In the last three months, GE has received 4 buy, 4 hold and 2 sell ratings from analysts. As shares continue to slide, the average analyst price target on the stock of $26 translates into 13% upside from the current share price.

Apple

In the last quarter, Fern significantly boosted the fund’s position in tech giant Apple. He ramped up the position by 107% to 9,184 shares valued at $3.3 million. In other words Fern snapped up a total of 2,090 Apple shares.

No doubt Merrill Lynch analyst Wamsi Mohan would approve of the fund’s move. He has just reiterated his Buy rating on Apple with a price target of $180 (15.5% upside from the current share price). Mohan is confident that Apple will be a prime beneficiary of The Trump and Republican Congress tax reform plan. The reforms would slash corporate tax from the current 35% figure to just 20%. (To watch Mohan’s track record, click here)

Apple would also benefit from a reduced tax repatriation rate so that it can return its massive cash hoard of around $224 billion back to the US without facing a hefty tax bill.  It is possible that the government will cut the repatriation tax rate from 35% to just under 9% according to Mohan.

Mohan claims that a combination of these two tax reductions will see Apple earnings per share increase by 77 cents in fiscal 2018 and by 89 cents in fiscal 2019. And Apple would have multiple options of how to spend its repatriated cash including increase buybacks, invest in R&D, invest in M&A or pay down domestic debt.

If we turn to TipRanks we can see that analyst Wamsi Mohan is ranked 1,430 out of a total of 4,693 tracked analysts. If we turn to Apple stock specifically we can see that he has a very impressive track record with a 93% success rate and 25% average return across his 15 AAPL stock ratings.

Overall Apple has a cautiously optimistic Moderate Buy analyst consensus rating. This breaks down into 23 buy ratings and 8 hold ratings published on the stock over the last three months. Meanwhile the average analyst price target of $174 suggests that the stock has upside potential from the current share price of close to 12%.