Cliff Asness is the founder and Chief Investment Officer of the $72.4 billion AQR Capital Management fund. A billionaire himself, Asness is running one of the “fastest-growing asset managers on Earth” according to Forbes who holds Asness responsible for the latest investing craze. In this article, we track three of the fund’s most intriguing Q4 portfolio moves in Advanced Micro Devices, Inc. (NASDAQ:AMD), Micron Technology, Inc. (NASDAQ:MU) and Valeant Pharmaceuticals Intl Inc (NYSE:VRX), as revealed by 13F forms filed with the SEC. However let’s first examine what makes this fund manager so worth following.
With a PhD in finance from the University of Chicago, where he studied under Nobel Prize winner Eugene Fama, Asness used his dissertation thesis to prove that it is possible to beat the market, consistently, by exploiting the fundamental value and momentum of a stock. He capitalized on this idea at Goldman Sachs where he was a director of the Asset Management Division, before going on to co-found quant fund AQR Capital Management in 1997 with several other colleagues.
In combining passive and active investing strategies, AQR is a quant fund with a difference. Following a tough financial crisis, (apparently, the fund lost more than 50% in 2007 and 2008 according to insidermonkey.com) AQR bounced back due to its preference for lower-fee, liquid and transparent products such as mutual funds which can drive hedge fund returns using computer-generated models. In particular, it was this low-fee strategy that catapulted the firm into the spotlight, especially as it came at a time when investors were reluctant to continue paying very high fees to funds struggling to generate above market returns.
The firm, which now over 750 employees, says its investment philosophy is based on three core principles: extensive research; diversification across multiple dimensions; and creating additional alpha through portfolio construction, risk management and proprietary trading technology. Unlike other well-known hedge fund managers, Asness is far from being a recluse and further insights can be gathered from his regular AQR posts- most recently he discusses the deceptive difficulty of his favored factor-investing approach.
Now let’s turn from the general to the specific with three of the fund’s key Q4 trades:
Advanced Micro Devices, Inc.
In Q4, Asness reduced the fund’s holding in semiconductor company AMD by 14% to 3.27 million shares worth $37.16 million. AMD shares have exploded over the last year with a whopping 400% increase. It’s no surprise that some investors are looking to take some profits now. Indeed, SVP James Robert Anderson sold 20,000 AMD shares on March at an average price of $14.05 per share, giving a total transaction value of $281,000. The senior vice president still has a significant AMD holding with 340,334 shares valued at close to $5 million.
On the other hand, following the successful launch of its Ryzen 7 processor earlier in March, AMD is now due to launch the cheaper Ryzen 5 version on April 11 which will cost between $169 and $249. And, worryingly for larger rival Intel (INTC), AMD has just announced collaboration with Microsoft (MSFT) to incorporate the cloud delivery features of AMD’s next-generation “Naples” processor with Microsoft’s Project Olympus- an open source cloud hardware design project. The result: AMD is upping its game with impressive developments on both the consumer and enterprise fronts. After many years, AMD may now be making good its potential to erode some of Intel’s almost complete dominance of the server market.
According to financial accountability engine TipRanks, AMD has a Moderate Buy analyst consensus rating with 9 buy, 9 hold and 1 sell rating published on the stock in the last three months. Notably, due to the consistent stock gains, the average analyst 12-month price target of $11.75 now stands at a -19.24% downside from the current share price of $14.55.
Micron Technology, Inc.
Asness ramped up the fund’s holding of this hot stock by 357% to 3.5 million shares valued at $77.6 million. The company announced stellar fiscal Q2 results on March 23- with 64% of the $4.65 billion revenue from DRAM (mostly from mobiles, PCs and servers). Micron is now predicting even stronger results for the next quarter that come in well above market forecasts with EPS of $1.57 up from $0.90 this quarter.
Micron is currently enjoying an “ultra-super cycle” with limited supply and high demand for its DDR3 and DDR4 memory modules. The DRAM market is booming as consumers upgrade smartphones following a glut of smartphone redesigns in mid-2016. Indeed, CEO Mark Durcan commented that the company benefited from increases in DRAM pricing as well as significant cost reductions and that together this led to much improved DRAM margins.
In an encouraging move, Micron is also looking to increase production of 3D NAND which has a higher performance rate than planar NAND and- due to the time required for companies to scale up production- is also forecast for tight supply in 2017. Micron is hoping to produce 90% of its total bit output as 3D NAND by FY 2018.
UBS analyst Stephen Chin has now raised his price target from $30 to $32- close to 11% upside from the current price- to better reflect his increased confidence in Micron’s performance. Chin is predicting a series of further EPS beats based on the double-whammy of DRAM and NAND potential. In particular, he points out that Micron forecast bit sales of NAND in F2H17 to be up 30% versus F1H17 and that DRAM gross margin at 44% is very encouraging. Chin concludes that Micron is finally shaping up as a real competitor to its larger rivals.
Overall, Micron has a very bullish outlook according to TipRanks with a Strong Buy analyst consensus rating. In the last three months only one analyst has published a hold rating on the stock. At the same time, the average analyst price target of $35 translates into serious upside potential of 23% from the current share price of $28.9.
Valeant Pharmaceuticals Intl Inc
Asness trimmed the fund’s holding in controversial pharma Valeant by 15%. The fund’s remaining holding now stands at 354,661 shares worth $5.1 million. Valeant has just announced that it has closed its balance sheet refinancing transactions as it attempts to reduce its $30 billion debt load. These transactions include its offering of $1.25 billion of 6.50% senior secured notes due 2022, $2 billion of 7% senior secured notes due 2024, and borrowing of $3 billion new term loans maturing in 2022. With these proceeds, Valeant repaid- among other things- all term loans under its credit facility for the next three years.
RBC Capital analyst Douglas Miehm reiterated his hold rating but with a bullish $18 price target- an incredible 63% upside from current levels. He believes that the refinancing- which involved the modification of financial maintenance covenants- will enable Valeant to have greater flexibility in its strategy going forward. Miehm sets out a new model incorporating the refinancing which posits 2017E year-end net debt of $26.6B (a slight increase from the previous estimate of $26.4B) and 2018E year-end net debt of $25.3B (again, slightly greater than the previously expected $24.8B).
Interestingly, Miehm also adjusted his outlook for Siliq, the company’s plaque psoriasis drug to a 60–70% peak profit margin, while pointing out that a slower launch could see revenues decrease from $39MM to $34MM in 2017E but that this will be balanced out by an increase in 2018E of $170MM to $200MM. However, TipRanks shows that Miehm’s track record on Valeant leaves a lot to be desired- he has a success rate of 27% and average profit on VRX of -21.4%.
The stock has a Hold analyst consensus rating on TipRanks with the majority of analysts sidelined on the stock. Due to the plunge in prices, VRX’s average analyst price target of $15 now stands at 36% above the current share price of $11.