Kenneth Tropin, founder of the $2.4 billion Graham Capital Management fund, has boosted the fund’s Advanced Micro Devices, Inc. (NASDAQ:AMD) and Tesla Inc (NASDAQ:TSLA) positions in the fourth-quarter, according to 13F forms filed with the SEC and recently made public.
The fund, which is weighted towards the basic materials sector, has struggled in recent times. Back in the summer of 2014, Graham Capital made headlines when it fired more than 10% of its staff (about 20 employees) according to people close to the matter, who said that six of the firm’s funds had posted declines of as much as 5.9% that year.
Strategies of the fund include trend-following, quantitative macro and risk management strategies which utilize multiple trading signals to capture alpha. Kenneth Tropin recently gave this interesting analysis of trend trading, which gives some insight into the firm’s investing philosophy: “The ability of trend following strategies to succeed depends on two obvious but important assumptions about markets. First, it assumes that price trends occur regularly in markets… Secondly, it assumes that trading systems can be created to profit from these trends. Trend following has had positive returns over a 20 year period because trends occur in virtually all markets some of the time.” In particular, says Tropin, the fund’s systems are designed to risk modest amounts of capital, exist losing stocks and stay with winning stocks as long as possible.
Now let’s examine two stocks that Tropin appears to believe are “winning” stocks, according to his recent Q4 trades:
Advanced Micro Devices, Inc.
Tropin ramped up the fund’s AMD holding by over 300% to 40.5 million shares with a value of close to $64 million. The chip giant is now the fifth biggest stock in the fund’s portfolio.
AMD’s main products include graphics processing units (GPUs) which power the PS4 and Xbox One as well as PCs. Now the US International Trade Commission (ITC) has announced that it will investigate LG, MediaTek, Sigma Designs and Vizio for allegedly violating AMD’s graphics patents. AMD’s filing specifically refers to infringing concepts such as unified shaders, parallel pipeline graphics system and an in-progress patent with these two concepts combined. AMD is pressing for a sales ban on products utilizing this patented technology.
Commentators on the investigation have pointed out that it is much easier for AMD to sue the product manufacturers rather than the third-party GPU developers who license the tech to the manufacturers. Consequently, should AMD be successful in the ruling then the impact will not just be felt by the manufacturers but also by developers competing with AMD such as ARM and Imagination.
The US ITC says it will make a final determination on the investigation as soon as possible, and that the date of the ruling will be set within 45 days of the investigation’s start date. A similar case with GPU designer Nvidia in late 2014 was ultimately settled out of court which means that no clear legal precedent came from the case.
Financial accountability engine TipRanks has a moderate buy analyst consensus rating for AMD stock, with 9 buy, 9 hold and 1 sell rating published on the stock in the last three months. Due to recent share gains, the average analyst price target of $11.56 now represents a -19$ downside from the current share price of $14.40. Interestingly there is a significant spread between the price targets from $4 (-70% downside) on the low to $17 on the high (18% upside).
In Q4, Tropin upped the fund’s holdings of stock in controversial electrical carmaker Tesla by 88%. The fund now holds 58.2 million Tesla shares with a $54 million value.
Tesla has just announced that it plans to stop selling the cheapest models of its Model S sedan on April 16, ahead of the much-anticipated Model 3 launch. The Model S 60 costs $68,000 while the Model S 60D sells for $73,000- significantly more expensive than the $35,000 selling price for the all-electric Model 3 due to go into limited production in July.
In fact, Tesla recently raised further finance to boost its liquidity ahead of the Model 3 production. Tesla raised $250 million in common shares and $850 million in convertible notes, which was actually towards the low end of what the Street had been predicting (approx. $1-2 billion).
Following the financing, Deutsche Bank’s Rod Lache reiterated his hold rating but raised his price target $20 to $240 as he anticipates that the company will have a more significant liquidity cushion of $1.8 billion in cash by the end of 2018. Lache wrote “We are adjusting our DCF framework to reflect continued rapid growth through 2030, at which time we assume volumes level off at ~2MM units per year (for reference, BMW group sells 2.26MM per year and Mercedes achieves 2.27MM per year).”
In other words, Lache expects that by 2030 Tesla will sell roughly the same number of vehicles as BMW and Mercedes. Lache has a 68% success rate and 17.4% average return according to TipRanks which ranks him at #268 out of 4,564 Wall Street analysts.
In terms of the majority analyst perspective on Tesla, TipRanks reveals a hold analyst consensus rating with 6 buy, 5 hold and 6 sell ratings published by analysts in the last three months. With a price target range of over $200, the average analyst price target of $244.94 represents a -6.5% downside from TSLA’s current share price of $261.92.