News and Views

The Official Blog of WhaleWisdom.com

Shares of TJX Companies, Inc. (TJX) have had a solid run in 2019, rising by almost 27% compared to an S&P 500 that has jumped by 20%. The strong stock performance comes despite significant headwind for the company, including the US-China trade war and tariffs that have been placed on imports in from China. Still, hedge fund investors are moving into the stock, placing the company on the WhaleWisdom Heat Map.

The stock ranked ninth on the heat map, which was up from 48 previously. The heatmap looks at the activity of the top 150 hedge funds based on the Whalescore calculation. The significant increase in the heat map rank came at a time when overall institutions and hedge funds were reducing their holdings of the stock.

Heat Map Ranking

During the quarter, there were 16 hedge funds out of the top 150 that held TJX in their portfolio. Out of those 16, two of them held the stock among their top 10-holdings. Additionally, there were 6 funds that were adding to their positions, while there were 8 decreasing their positions.

Institutions Reducing Holdings

Overall, hedge funds were reducing the number of shares that they held. During the second quarter, the number of 13F shares held fell by 9.7% to 66.8 million from 74 million. Additionally, the total number of shares held among institutions fell slightly to 1.07 billion from 1.08 billion.

Fundamental Questions

More broadly there has been a great deal of concern among investors as to how tariffs and the trade war may impact many retailers. To this point, those worries have proven warranted. TJX reported revenue for the fiscal second quarter of 2020 that was $9.78 billion, lower than estimates for $9.9 billion. Additionally, the company lowered its third quarter earnings guidance to $0.64 at the mid-point, versus estimates for $0.68. Further, revenue estimates for the next quarter came down at the mid-point to $10.25 billion from $10.37 billion.

Full year guidance for the company has fallen as well. Now it sees full year 2020 earnings in a range of $2.56 to $2.61, versus consensus estimates of $2.62 per share. Also, the full-year revenue estimates fell to a range of $40.9 billion to $41.2 billion,  versus estimates for $41.33 billion.

It is entirely possible that many of the top funds buying the stock during the second quarter abandoned it following weak results and guidance. However, based on the performance of the stock since the end of August, the rising price would indicate otherwise.

It isn’t the first time we have seen a stock rise sharply on the heatmap, only to be followed by the rest of the investing crowd at a later date; it likely won’t be the last either.

 

 

Surprisingly, Alibaba Group Holding Ltd.’s (BABA) stock has risen by nearly 30% so far in 2019, which is better than the S&P 500’s gain of 19%. The better than expected results come despite the escalating trade tensions between the US and China, and the significant devaluation of the Chinese currency, the yuan. Still, the stock was very popular among investors during the second quarter.

Among stocks that have 1000 13F filers or more, Alibaba had nearly two investors increasing their position for every one reducing their holdings. Based on data compiled by WhaleWisdom, 709 institutions increased their positions, while 411 reduced their holdings.

Buying the Dip

During the second quarter, the total number of 13F shares held by institutions increased by about 6% to 1.1 billion. Additionally, 134 institutions created new positions in Alibaba and 709 added to their existing holdings. During that time, 119 institutions closed their holdings and 411 reduced positions. Hedge funds were active too, with the total number of 13F shares rising by roughly 10.2% to 122 million shares held.

Trade War

The stock has found itself in the middle of the US-China trade war, as its shares have largely been used as a proxy, rising during periods of calm and plunging during periods of escalation. The second quarter provided investors with a period of rising tensions and a slumping stock. During the quarter, the stock slipped by as much as 18%, providing investors an opportunity to pick up shares at a steep discount.

Yuan Devaluation

Another wrinkle was the falling value of the Chinese Yuan. During the quarter, the value of the yuan fell to 6.96 to the dollar from 6.70; a rising value indicates that the yuan is weakening in comparison to the dollar. A weaker yuan can pressure Alibaba’s earnings and revenue lower. Alibaba reports its quarterly results in dollars, although the company is generating revenue and profits in yuan. The currency conversion can have a material impact on the actual results and also damage the consensus that analysts forecast.

It is yet to be seen how investors greeted the sharp pullback in August as tensions increased once again. However, given the sharp stock recovery at the end of August and early September, it would seem that the August pullback was met with aggressive buying.

The whipsaw nature of the stock is likely to continue for some time longer as investors continue to have to deal with the US-China trade battle, and the proxy for that trade battle that the stock has become.

Coca Cola Co. (KO) seems like a strange stock to be hot among hedge fund investors. However, that is exactly what Coke was during the second quarter. The stock has risen by more than 16% in 2019 and is keeping pace with the S&P 500, which has increased by about 16.5%.

As a result of the strong performance and hedge fund activity, the stock was added to the WhaleWisdom WhaleIndex 100 on August 15. One reason why the stock may be so strong is its attractive dividend yield of about 2.9%.

Hedge Funds Pile In

During the second quarter, the total number of 13F shares held by hedge funds increased by about 7% to 74 million total shares. Overall, the total number of hedge funds creating new positions increased by 15, while the number of hedge funds adding to their holdings increased by 49. Additionally, 18 funds sold their positions and 56 reduced their holdings.

(Whale Wisdom)

Attractive Yield

The stock offers investors an attractive dividend yield, which comes at a significant premium to the US 10-Year Treasury rates, which are around 1.5%. Currently, the spread between Coke’s dividend yield and the 10-Year Treasury is at one of widest points in over the past 10 years, at 1.4 percentage points.

While it isn’t likely that hedge funds are pouring into Coke for its attractive dividend yield, they may be piling into the stock because they realize that currently the world is flooded with negative interest rates and rates in the US are plunging. Therefore, the opportunity for investors to find strong yield investments may only be left in high yielding blue-chip stocks. Additionally, as the yields on these stocks begin to fall, it pushes the price of the stock higher as well.

Not Cheap

Coke’s stock isn’t particularly attractive from a valuation standpoint. The equity is currently trading around 24 times its 2020 earnings estimates of about $2.29 per share. It means that on a historical basis, Coke is currently trading at its highest valuation since 2016. Since that time, the stock has traded with a one-year forward PE ratio in a range of 18.5 and 24.

The trade for hedge funds is likely to work as long as yields stay low or continue to fall. However, that likely means that as soon as yields begin to rise, or at least show a sign of rebounding, the Coke trade is likely to unwind rather quickly.

 

Qualcomm Inc. (QCOM) saw its stock rise sharply in the second quarter and is having a big 2019, with shares up 29.7% versus an S&P 500 that is up by 13.5%. The strong start to 2019 has landed the stock on the WhaleWisdom heat map in the third position from a previously unranked position.

The strong performance followed news that Apple Inc. (AAPL) would drop its lawsuit against Qualcomm. Meanwhile, the two companies also signed a new licensing agreement.  The news sent shares of Qualcomm soaring by as much as 56% from April 15 through May 3.

(WhaleWisdom)

Smart Funds Were Buying

By the end of the second quarter, 21 hedge funds held Qualcomm in their portfolio. WhaleWisdom tracks 150 of the top hedge funds to use for the ranking of its heat map. Of the 21 hedge funds that owned the equity, nine of the funds added the equity to their holdings, while 11 decreased their positions. Additionally, two of the funds held the stock as a top 10 holding.

The Rest Were Selling

Interestingly, while the top hedge funds were buying the stock, the rest were dumping it. The total number of 13F shares held declined by nearly 17% to 61.6 million. In total, 40 funds created new positions in the equity, as 31 added to their holdings. Meanwhile, 50 were reducing their exposure, as 16 closed out their positions.

The settlement with Apple does remove some of the uncertainty that has been surrounding the stock for some time. Additionally, it does offer some visibility for Qualcomm’s path forward for revenue and earnings growth.

 

 

Growth to Return

Analysts currently estimate that revenue for the business will grow by 15% in 2020 to $22.1 billion. That is expected to be followed by growth of over 20% in 2021 to 26.6 billion. Meanwhile, earnings are expected to grow even faster over the next two years, climbing by 24% in 2020 to $4.30 per share. That is followed by growth of nearly 40% in 2021 to $6.01 per share.

Growth has been hard to find for Qualcomm over the past few years, with years of declining revenue. Suddenly, the company’s fortune has appeared to change, especially as the fifth generation of wireless technology (5G) rolls out, an area where Qualcomm should benefit.

It makes the stock’s current valuation of roughly 17 times 2020 earnings estimates desirable. Based on earnings growth for the year 2020, the stock trades with a price to growth PEG ratio of less than one, at 0.72. It means shares of the company are cheap.

Should revenue and earnings growth prove to be as strong as estimates, then the stock’s recent advance may only be a starting point.

 

Roku (ROKU) Inc.’s stock has risen by more than fourfold so far in 2019, easily making it one of the best performing stocks in the equity market. The streaming media company had seen institutional investors aggressively buying its shares throughout the second quarter.

The strong performance helped the stock to land on the WhaleWisdom WhaleIndex 100 on August 15, making it one of the newest positions to the list. Since inception, the WhaleIndex 100 has risen by nearly 350%, easily beating the S&P 500’s average return of roughly 195%.

(WhaleWisdom)

Buying The Stock

During the second quarter of 2019, the total number of 13F shares held among institutional investors rose by almost 6% to 60.5 million shares from 57.3 million in the first quarter. During the second quarter, 93 institutions initiated positions in the equity, as 91 added to existing holdings. However, 51 sold out of the stock, while 94 reduced.

Roku is known for its streaming media players and the TVs that come preloaded with its software. However, the company has been seeing significant revenue growth recently from its platform business, which generates advertising revenue for the company. This has helped Roku to accelerate its revenue growth beyond the hardware products and TV partnerships.

 

Strong Sales Growth

The robust platform growth has helped the company to post better than expected revenue for seven straight quarters. Additionally, earnings have come in better than expected for six quarters in a row. Most recently, the company not only beat estimates on both the top and bottom lines, but the company also increased its revenue outlook.

Another reason why institutional investors may be piling into the stock is the promise for significant revenue growth. Analysts currently estimate that revenue will rise by nearly 48% in 2019, followed by growth of 35% in 2020 and 31% in 2021. That is a compounded annual growth rate of 38%.

Waiting For a Profit

The one negative for the stock is that it is going to take some time before the company is likely to earn a profit. Analysts estimate that the company will lose $0.47 per share in 2019 and 2020 and will first turn a profit of about $0.51 per share in 2021. It leaves the stock currently at an astronomically high 2021 PE ratio of almost 260.

With revenue growth expected to remain strong for the next several quarters, it is no wonder why the stock has had such a tremendous run in 2019. However, the further the stock price rises, the greater the expectations will be for the company to deliver.