Hedge fund manager Kenneth Tropin, founder of the $14.4 billion Graham Capital fund, has turned bullish on three key stocks in Q2: Tesla Inc (NASDAQ:TSLA), Micron Technology, Inc. (NASDAQ:MU) and Bank of America Corp (NYSE:BAC). The trades, revealed via 13F forms filed with the SEC, will be part of Tropin’s strategy to turn the fund around.
A recent Business Insider article revealed that the fund lost money on 13 of its 14 strategies this year after accessing the fund’s July client letter. Tropin ascribes the losses to weak performances in agriculture and energies futures which eroded gains from currencies and equities. However, the fund is still attracting client money, and has now raised a further $1.5 billion from clients with quant strategies proving particularly popular. These clients are confident that Tropin can deliver the returns and have faith in his strategy of diversification. According to Tropin, it is even more crucial to be diversified in the current environment where stocks are trading at record highs and volatility is notably absent.
He remains defiant despite the losses: “While performance on a year-to-date basis may be disappointing, it is well within the expectations and risk-return profile for both our systematic and discretionary strategies,” Tropin says. “In fact, in Graham’s twenty-three years since inception, these periods have often been followed by strong performance and we remain committed to capitalizing on the shifting market environment to generate compelling risk-adjusted returns over the long-term.”
Tropin himself grew up near New York in a family focused on the not-for-profit section. He says their priority was not making money, but helping society. He actually began work very far away from Wall Street in a small construction firm before moving to a small firm called Rosenthal Group in search of excitement. Still his dissatisfaction continued- a problem which he resolved by founding his own hedge fund. To achieve his goal, Tropin learnt how to write programs and algorithms for his own trading ideas in just nine months.
Now let’s take a closer look at these three intriguing stock trades and the Street’s outlook on these key stocks:
In Q2, Tropin bought 33,000,000 Tesla notes worth $41,536,440. The purchase represents a significant 27% increase in the fund’s Tesla holding. All eyes firmly focused on the development of this controversial auto stock right now. Not a week goes by without a new Tesla announcement hitting the market. And this week proved to be no exception. On September 6, the news broke that Tesla is planning a new autonomous semi-truck this month.
According to Morgan Stanley analyst Ravi Shanker, the move could seriously disrupt the trucking industry, which has seen few major changes over the last decade. The new electric and autonomous trucks are expected to retail at $100,000. Shanker applauds the move which he says is a logical extension from Tesla’s expertise of consumer autonomous cars. It would be relatively simple for Tesla to autonomize trucks which often drive huge stretches of relatively empty, straight roads. He also projects that although Tesla will start by leasing the batteries, ultimately it will build battery swapping stations for every 300 miles of battery-usage.
But it will take a while for the roll out to occur says Shanker, who sees Tesla commencing with a limited number of partner preorders before turning to a wider rollout program in approximately 2020. He is forecasting that Tesla will produce around 25,000 trucks – a sufficient number to shake up the trucking industry although relatively small fish for Tesla in comparison to its much larger consumer automobile market. Demand is likely to be strong because the autonomous vehicles will be roughly 70% cheaper than employing human drivers. As a result, Shanker is confident that Tesla can ultimately capture about 10% of the total truck market. However the more successful Tesla is, the more likely it is that rival automakers will release their own autonomous truck vehicles. (To watch Shanker’s track record, click here)
Overall analysts display a very mixed sentiment on the stock. In the last three months, Tesla has received 5 buy, 7 hold and 5 sell ratings. Meanwhile the average analyst price target of $311 stands at a downside of -13% from the current share price of $357.
Micron Technology, Inc.
Tropin also initiated a new position in fast-growing semiconductor stock Micron. He picked up 35,500 MU shares which are valued at just over $1 million. Top Mizuho Securities analyst Vijay Rakesh would no doubt approve this move. He reiterated his buy rating on the stock with a price target of $38 on September 7, and recommends buying MU ahead of Q3 fiscal earnings on September 26. He says expectations for the earnings are conservative and is forecasting an earnings beat.
According to Rakesh, memory pricing and demand trends are very encouraging for the stock through into 2018. He believes an uptrend in DRAM contracts will ensure that prices remain elevated. Rakesh explains, “MU feels good about DRAM contract on a steady uptrend and still below the stronger DRAM Spot, a positive heading into 2H build season. While mobile DRAM demand had been a little weak with the China handset weakness, the situation continues to improve. Server DRAM demand remains strong with increasing content tailwinds.” (To watch Rakesh’s track record, click here)
TipRanks reveals that the stock has a Strong Buy analyst consensus rating. In the last three months 16 analysts have published buy ratings on the stock vs just 2 hold ratings. And these analysts are predicting plenty of further upside potential for the stock. Indeed, the $42 average analyst price target translates into 28% upside from the current share price.
Bank of America Corp
Tropin initiated a new position in Bank of America in Q2 with the addition of 49,500 stocks. The fund’s total position in the stock has a value of approximately $1.2 million. There are a host of different factors impacting the stock right now- making it difficult to assess whether the bull or bear case is more convincing. Unsurprisingly, this sentiment shifting can cause volatility in stock prices.
On the bullish front: President Trump seems determined to reduce strict regulations implements following the subprime crisis. This is one of the reasons why bank stocks in general are up 25% since the election last year. (See the financial services ETF the iShares Dow Jones US Financial Svc of which BAC is the No. 2 holding). The bank’s top and bottom lines are improving and the bank is doing well on the wealth-management, trading and credit cards fronts.
On the other hand, investors note that lending is slowing down. This is concerning because lending is, after all, the core business for banks. Indeed, the Federal Reserve’s Economic Data repository shows that in the last two quarters, loan demand has stayed flat on a year-over-year basis despite a notable slow-down that begun back in 2015. On this basis does BAC begin to look overvalued, especially given the $8 rise year-to-date? Any signs that President Trump is struggling to pass his regulation changes could also be negative for the bank. It will also be interesting to see how BAC copes with its CEO’s plans to cut spending from $55 billion to $53 billion, having already chopped spending by $2.7 billion in 2016.
BAC does have the backing of the Street. This ‘Strong Buy’ stock has received 9 buy and 3 hold ratings in the last three months. From the polled analysts, we can see that the stock has big potential upside of nearly 18% from the current share price.