Ken Griffin, founder of the $26 billion Citadel hedge fund, has increased the fund’s exposure to three very interesting stocks: DryShips Inc. (NASDAQ:DRYS), Tesla Inc (NASDAQ:TSLA), and Apple Inc. (NASDAQ:AAPL). Griffin is tracked by investors around the world keen to replicate his investing success: he is the 166th richest person (and the richest person from Illinois) with a net worth of $8 billion.
The fund manager, who made $600 million in 2016, began trading during his Harvard university days when, while still a sophomore, he installed a satellite dish on his dorm roof for convertible-bond trading. By the time of his graduation he had received enough backing to start his own Chicago-based investment firm. Griffin founded Citadel in 1990 with $4.2 million assets under management (AUM). The fund, which has a focus on advanced quantitative analysis, exploded reaching $16 billion by the end of 2013.
However, the fund’s fortunes collapsed when it felt the full force of the financial crash in 2008 with a loss of -55%. Investors nonetheless stuck with Griffin who personally held a conference call with them to defend Citadel. Since 2008, the fund has made a serious comeback- as reflected by the fact that it now has its greatest AUM yet of $26 billion. Last year was also challenging for the fund with 5% returns for its Kensington and Washington funds, but clients are in it for the long-haul with many having known Griffin for decades.
“Throughout our history, we have been consistently focused on delivering strong risk-adjusted returns over the long term to our investors,” Citadel spokesperson Zia Ahmed says. “This has been a significant part of our growth story.”
Now let’s explore some of the fund’s recent moves in three key stocks:
In Q1, Griffin initiated a new position in highly controversial shipping stock DryShips. But don’t panic too much- due to the company’s numerous share dilutions- his 170,195 shares only cost the fund about $281,000.
DryShips is sinking by the day. Shares fell by 8% to an all-time low of $2.53 after the company announced the filing of a 6-K for a $150 million debt commitment from ABN Amro Bank and the Korean Export Import Bank. The deal, which is still subject to final documentation, has a six-year maturity period and 12-year amortization period which means that DryShips will need to pay back approx. $12.75 million per year.
The money will be used to finance four very large gas carriers (VLGCs) from South Korea’s Hyundai Heavy Industries. Each of the VLGCs costs $83.5 million (total $334 million) and should be delivered from late June until the end of the year. However, the $150 million clearly falls someway short of covering the full cost of the VLGCs. DRYS has already made an option exercise payment of $87,600 meaning that, with the credit facility, the funding gap on the VLGCs is now $67.4 million.
The fall in share price reflects the market disappointment about the size of the facility and skepticism about DRyShips’ plans going forward. CEO George Economou- who it is fair to say is despised by shareholders- made a statement that, with 32 unencumbered vessels, DryShips can raise a further $250 million of additional debt capital which he says is approx. 50% of the assets’ market value.
Shareholders blame the self-made Greek shipping magnate for numerous suspicious decisions which have seen shares plunge from their all-time high of $42 million/ share, and even from the $1,400 price at the end of 2016. The company has had to endure death spiral financing, multiple reverse splits, huge share dilution – and along with the pending $150 million credit facility there is also a $2 billion mixed shelf offering going on. Economou- who appears to be extracting as much value as possible from DryShips via several privately-owned companies – has already seen his company Ocean RIG file for Chapter 15 bankruptcy at the end of March. For many investors, it’s just a matter of time before DryShips follows suit.
Griffin substantially ramped up Citadel’s position in much-hyped automaker Tesla by 422% to $35,580,000.
Tesla has experienced a meteoric rise of 54% from the beginning of this year alone- which in terms of market cap equates to about an extra $20 billion in five months. Even Tesla CEO Elon Musk says the market cap right now is too high given that Tesla only produces about 1% of General Motor’s output, and GM has a market cap of $50 billion vs Tesla’s $56 billion (although ultimately, he believes the market cap will one day be greater than Apple’s).
Top Morgan Stanley analyst Adam Jonas recently downgraded his Tesla stock rating to hold with a 12-month price target of $305 (-10% downside from the current share price) because he wants to “pause for breath” on the stock. Jonas sees Tesla as capable of disrupting the $10 trillion mobility industry rather than just the $1.5 trillion light vehicle industry. He says Tesla is now being understood as having a small chance of success in the larger market of electric transport networks, data and artificial intelligence rather than a high chance of success in the bigger car/ machine market. Artificial intelligence and the role it can take in real-life situations is expanding very rapidly, and Tesla already has its foot in the door.
But this also means that Tesla is at risk from tech giants like Apple, Alphabet or even Amazon muscling in on Tesla’s space. Alphabet’s autonomous car company Waymo is now multiplying its existing fleet by six while Apple has just received a permit to trial autonomous vehicles. Jonas is a top-ranked analyst with a success rate of 53% and an average return of 11.7% per recommendation. We can see that TipRanks ranks Jonas at #450 out of 4,569 tracked analysts.
Overall the market is cautious about this unpredictable stock. According to TipRanks, analysts have published 5 buy, 7 hold and 6 sell ratings on the stock in the past 3 months. The average analyst price target of $273 is now a 20% downside from the current share price of $341.
Griffin upped the fund’s position in Apple by 80% to over 4 million shares worth $585,307,000. This equates to approximately 0.61% of the fund’s total portfolio size.
Citigroup analyst Jim Suva recently named six companies Apple could buy with its incredible $256 billion cash holding (of which only 7% is held in the US). For Suva, potential acquisition targets include Netflix, Disney and Hulu. On the video game developer front he lists Activision, Electronic Arts and Take-Two. Most intriguingly, the sixth name is Tesla. Apple has made very few large acquisitions, the exception being the $3 billion paid for Beats Electronic back in 2014. According to Suva, Apple could gain 20% from acquiring Disney or 7% from Tesla or Netflix. From the Tesla perspective, Adam Jonas says Tesla should consider if it would have a much greater disruption potential (and with less risk attached) if it became part of a larger entity- which could be Apple.
We can see that Suva, ranked #1,490 out of 4,567 analysts on TipRanks, has a 54% success rate and 2.9% average return per recommendation measure over a 1-year basis.
With a ‘strong buy’ analyst consensus, Apple has received 26 buy and 4 hold ratings over the last 3 months. Analysts believe that the stock has 7.6% upside potential over the next 12 from the current share price of $153.