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News and Views

The Official Blog of WhaleWisdom.com

Walt Disney Co.’s (DIS) stock has surged since the middle of June by more than 13 percent, as investors begin to focus on the company’s direct to consumer streaming media future. Hedge Funds were buying shares of Disney during the second quarter making the stock the third hottest stock among the 150 hedge funds WhaleWisdom tracks for its heat map. As a result, WhaleWisdom added the stock to its WhaleIndex 100.

Disney plans to release a streaming service later in 2019 to compete against Netflix Inc. (NFLX) and Amazon.com Inc. (AMZN). In preparation for the release of that service, the company has strengthened its current content library by acquiring assets from 21st Century Fox (FOX) for more than $71 billion, including the movie studio.

The Heat Map

The stock’s ranking moved significantly higher during the second quarter on the WhaleWisdom Heat Map rising to 3 from its previous position at 39. As of the completion of the second quarter, 33 different hedge funds held the stock in their portfolios, and in 3 cases it was among the top ten holdings.

(WhaleWisdom)

Adding Across Funds

It wasn’t just the top 150 funds WhaleWisdom tracks for the heat map; other funds were starting new positions or adding shares of Disney to their holdings. During the quarter the number of aggregate 13F shares held among hedge funds increased by more than 11 percent, with 75 funds adding to existing positions, while 35 created new ones. Meanwhile, 60 funds reduced their holdings, while 18 exited.

Analysts Have Doubts

Analysts do not share the same bullish sentiment for the stock, like investors. Analysts have reduced their earnings and revenue growth forecast for the company. Estimates are forecasting growth of 24 percent in fiscal 2018,  slowing to just 6 percent in 2019 and only 2 percent in 2020. Revenue forecasts aren’t much better over the next couple of years, slowing from 7 percent in 2018, to 3 percent in 2019 and 4 percent in 2020.

Not Much Upside

The average price target on the stock has increased to nearly $119 since mid-June from roughly $116, earlier this year. However, that also suggests that analysts do not see much upside in the stock from its current price of approximately $112.50.

The divergence between investors and analysts is glaring. For Disney’s stock to keep rising investors will need to continue looking to Disney’s future and the significant opportunities the streaming service might be able to generate.  If not, then hedge funds may start rushing for the exits.

There may have been no greater casualty of the trade war between the US and China than NXP Semiconductors NV (NXPI). The stock was to be acquired by Qualcomm Inc. (QCOM)  for $44 billion, but the Chinese regulators would not approve the deal. Finally, after two years of trying to get approval, Qualcomm pulled the offer to buy NXP at the end of July.

With the deal completion in doubt for most of the second quarter, shares of NXP traded at a steep discount to Qualcomm’s offer price of $127.50.  It gave Daniel Loeb’s Third Point, LLC a chance to add nearly 11 million shares of stock to its portfolio, making it the funds second largest holding, accounting for roughly 8 percent of the total portfolio.

Big Buyback

Because of the failed takeover, NXP received a $2 billion break-up fee from Qualcomm. The company immediately put that money to work, announcing a $5 billion share repurchase agreement. It amounts to nearly 15 percent of the companies total $32.6 billion market capitalization.

(WhaleWisdom)

Significant Opportunities

NXP is a powerhouse when it comes to automotive chips and near field communication. Additionally, the company is a growing player in artificial intelligence and the industrial internet of things. NXP’s dominant position in automotive chips is a huge positive for the company and could work in its favor as society moves closer to self-driving cars. Third Point is likely looking at the company’s positions within these different sectors and the enormous opportunities ahead.

Solid Growth

Analysts see revenue growth of roughly 5 percent in both 2019 and 2020. Meanwhile, earnings are forecast to accelerate, rising by 13 percent in 2019, and then by 24 percent in 2020. Although analysts don’t currently predict the stock to rebound to $127.50, they do see shares rising by about 14 percent to approximately $108, nearly 14 percent higher than the current price of $94.50.

Are Other Tiger Cubs Involved?

Lone Pine’s stake in NXP is significant,  valued at nearly $1.2 billion. What would be more interesting is to see if other Tiger cubs – a group of hedge funds that trace their origins back to Julian Robertson’s Tiger Management, LLC, took a stake in NXP. The rest of the second quarter 13F filings will be completed by August 15.

The big wager by Lone Pine to add NXP to its portfolio seems like a big vote of confidence. Lone Pine and all investors are hoping shares can not only climb back to $127.50, but even higher.

Gentherm Inc.’s (THRM) stock has surged by more than 43 percent in 2018, and nearly 28 percent since being added to the WhaleWisdom 100 Index on May 16. Hedge Funds were adding shares of the stock to their portfolio’s throughout the first quarter.

The maker of climate control seats for cars and trucks is in the middle of a huge stock repurchase program, buying back $300 million worth of stock, nearly 20 percent of the stock’s market capitalization of $1.6 billion. However, when diving deeper into the fundamentals of the company, we find a surging number of short-sellers betting the company’s lackluster earnings and revenue growth overpower their big buyback, sending shares sharply lower.

Hedge Funds Load Up

Hedge Funds were actively adding to their positions in the stock during the first quarter, with the number of aggregate 13F shares held climbing by nearly 7 percent to roughly 5 million shares. Five funds created new positions in the stock, while four added to existing ones. Interestingly, two funds exited, while 9 reduced their stakes.

Growth?

The big run-up in the stock appears to be the function of the company buying back a massive amount of its stock. The outlook for the actual business is not all that impressive. Earnings are expected to be flat in 2018. Even worse, the company recently lowered its outlook for gross margins at a investor strategy day update at the end of June. Earnings growth is expected to accelerate in 2019 and 2020, to 14 percent and then a whopping 34 percent, respectively.

The outlook for revenue is less than stellar, seen growing by 8.3 percent in 2018 and 6 percent in 2019, then surging by 10 percent in 2020.

Short-sellers Loading Up

Most of the big earnings gains are likely to come from the stock buyback, as the number of shares outstanding fall. The company projects gross margins of 30-32 percent through the year 2021 and revenue growth in the high single digits. It suggests revenue growth and cost savings alone will not fuel the big earnings growth analysts are forecasting for 2020.  Short-sellers appear to be betting the high-flying stock crashes back to earth, with the number of shares short surging to its highest levels in 10 years, to 2.7 million shares as of July 13, about 10 percent of the total float.

With the release of the newly updated 13F’s due by August 15, it will be interesting to see if hedge funds were continuing to buy up shares of the climate control company, or if they were using the stock’s price rise as an exit strategy.

Two Investors Big Bets on Tesla

Posted on July 30th, 2018

When one of the largest shareholders in a company increases its position in a stock, it is best to pay attention. Baillie Gifford & Co. recently filed its 13F for the second quarter, and through that filing, we learn that the investment firm upped its holding in Tesla Inc (TSLA).

It wasn’t only Baillie Gifford adding to Tesla stock that should catch your attention. Another famous investment shop, Baupost Group, LLC., didn’t buy the stock, but they did buy the convertible bonds, paying anywhere between $10 to $20 above par value for the bonds in the first quarter.

Betting Big

The big bets between the two firms come at an exciting time for the stock, as it ramps up the production of its all-new electric four-door sedan Model 3. Tesla’s future success and its path to profitability hinge on the company’s ability to produce these cars at scale, while also at a price that appeals to the mass market.

Baillie Ups its Stake

Interestingly Baillie Gifford upped its holdings of Tesla in the second-quarter by nearly 400,000 shares. It now has a position of about 13.2 million shares and owns about 8 percent of the company. It is not a small investment either with the price of the stock at roughly $300, the market value is about $3.95 billion, representing nearly 5 percent of the firm’s total portfolio.

(WhaleWisdom)

Baupost Buys the Bonds

Much has been made about the rising cost to insure against a potential default on Tesla’s bond payments. However, it sure didn’t stop Baupost Group from buying $50 million worth of Tesla 2.375% Convertible Notes due in 2022. These bonds are currently trading at a premium of about $110, versus par value at $100, according to Market Insider, and traded between $110 and $120 for most of the first quarter, but as low as par near the end of the quarter. One reason why Baupost is playing these bonds is that they may be a less risky way to acquire a position in the stock in the future. In this case, the owner of the bonds can convert its position into stock at a price of $327.50.

(Markets Insider)

Much at Stake

Tesla does have a lot at stake this coming quarter, and results will likely not be as significant as guidance when it reports results on August 1. What Tesla says about gross margins on the Model 3 and how it plans to earn a profit in the third and fourth quarter will be critical to where the stock price goes over the coming months.

However, sometimes watching what the biggest holders in a company, and one of the smartest investors around are doing, isn’t a bad indication either of which way the stock may be going.

MasterCard Inc. (MA) and Visa Inc. (V)  have been all-star performers in 2018, with the two stocks up by 37 percent and 24 percent, respectively. One never would have guessed either stock was having a good year, based on hedge fund activity in the first quarter. According to the WhaleWisdom Heat Map, both stocks were in the bottom half of the top 100 stocks.

Both payment processors stocks have gone into overdrive since the end of the first-quarter rising by 18 percent each. The companies reported stellar results for the first quarter and both play vital roles in the heart of the e-commerce ecosystem.

The Rankings

(WhaleWisdom)

Visa’s ranking on the heatmap fell by 31 spots to 55, while MasterCard rose by eight places to 47. Out of the 150 hedge funds tracked for the heatmap, only 39 of them held MasterCard in their portfolio, and only 11 of them had it in their top-ten holdings. For Visa 48 funds owned the stock, while 16 of them held the shares in their top-ten.

Broader Cutting

When looking outside of the funds that make up the heat map, institutions were also dumping shares of Visa. During the first quarter, the total number of aggregate 13F shares fell by 3 percent. Hedge funds cut their holdings by just over 6 percent.

MasterCard’s stock was also trimmed in the first-quarter, with aggregate 13F shares among institutions falling by over 2 percent.  Hedge funds were also slashing their holdings,  cutting the number of shares held by over 14 percent.

Sentiment Turns

Not only has the sentiment around both stocks changed materially since the end of the first quarter, but the outlook for the two businesses have improved substantially as well. Together, the improving fundamentals and sentiment have led to an impressive run in both stocks over the past three months.

Analysts Turn Bullish

The bearish sentiment on the companies seems surprising given the performance of the stocks in 2018. However, analyst’s estimates for both companies has increased significantly since the start of the year. MasterCard’s earnings estimates have climbed by over 17 percent, while Visa’s have increased by nearly 10 percent. The revenue outlook has improved as well, with MasterCard estimates rising by almost 7 percent, and Visa’s by 2 percent.

Price targets on both stocks have increased dramatically as well since the start of 2018.  MasterCard’s price target has increased by nearly 29 percent, while Visa’s has increased by almost 17.5 percent.

Based on the performance for each stock during the second quarter, and the start of the third-quarter, both Visa and MasterCard’s ranking among institutions and hedge funds has likely improved substantially since the end of the first-quarter.