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Third Point, LLC was active during the fourth quarter of 2018, that’s for sure. The hedge fund run by famed investor Daniel Loeb liquidated some large holdings during the quarter in some rather well-known stocks. However, what appears to be just as impressive is the companies the hedge fund decided to buy, or the lack thereof. It would suggest the fund may be hoarding quite a bit of cash, waiting to deploy.

Throughout the quarter, the hedge fund sold their $1.2 billion holdings of United Technologies Corp. (UTX), a $666 million position in Alibaba Group Holding Limited (BABA), and a $470 million position in Microsoft Corp. (MSFT). While it isn’t clear why the firm sold Microsoft, it is obvious why they sold United Technologies and Alibaba, to cut exposure to China and a slowing economy. The total value of those three stocks at the end of the third quarter was over $2.2 billion.

(WhaleWisdom)

Reducing Holdings

The hedge fund also cut nearly a quarter of its stakes in Baxter International Inc. (BAX), DowDuPont Inc. (DWDP) and Constellation Brands Inc. (STZ). Additionally, the fund sold about 40% of their position in the American Express Co. (AXP) and over 50% of its stake in PayPal Holdings Inc. (PYPL).  In total, Third Point sold out of 10 stocks and reduced their holdings in 12.

Not Many Purchases

More interesting is that the firm only made one new purchase while adding to 4 existing holdings. One of the stocks that Lone Pine Third Point upped their stake in was Campbell Soup Co. (CPB). An interesting choice, considering the stock has fallen 39% over the past three years. It is also apparent that hedge funds saw the opportunity to profit. The hedge fund was pushing for the company to restructure or put itself up for sale.

The newest position added to the portfolio was in Cigna Co., and about $109 million worth. This is a small amount for the fund and is likely the start of something that may continue to grow.

Raising Cash?

With all the sells, reductions in positions and the lack of purchases, the fund was apparently in a period of moving to the sidelines. It appears to have been a smart decision given the stock market’s volatility.

However, what may be more interesting is learning where all those extra dollars turns up. There is a good chance we made need to wait until next quarter to find out the answer. Then again, it will be important to keep an eye on those 13G’s, as it seems highly likely that a sizeable new position is bound to show up eventually.

Redfin Corp.’s (RDFN)  stock has fallen nearly 14% over the past 52-weeks, but it has been on the rebound in 2019. The shares of the online real estate brokerage fell sharply in August, after the company reported weak third quarter results due to a slowing housing market. Now, that may all be changing.

Institutions and hedge funds were buying the stock throughout the third quarter, and as a result, the shares were added to the WhaleWisdom WhaleIndex 100 on November 15. Since being added to the index, the stock has risen a shocking 16%, easily topping the S&P 500’s decline of about 1%.

Institutions Buy the Stock

In total, hedge funds increased their total 13F holdings in the quarter by 24% to 9.1 million shares. Additionally, all institutions increased their total holdings by 23% to 83.6 million shares. In total, 31 institutions created new positions in the stock, while 57 added to existing ones. On the other hand, 34 institutions exited, while 27 reduced their stakes.

Housing Sector Is Recovering

The housing sector suffered throughout much of 2018, as rising interest rates sent mortgage rates soaring to a level not seen in 5 years. As a result, the PHLX Housing Sector Index (HGX) started to fall sharply in August, dragging shares of Redfin along with it.

By the middle of November, the housing index was nearly 35% off its 2018 highs, while Redfin had fallen by as much as 45%. However, by that time interest rates began falling as investors started to anticipate a Federal Reserve which may back off its path, for as many as three interest rate hikes in 2019.  Since that time, the sector index has rebounded nearly 21% from its Christmas Eve lows while Redfin has risen by 26%.

Should the housing sector continue to recover, Redfin is likely to be a big beneficiary of that recovery. It would appear that the move into the stock by investors is a bet on a strong housing sector.

The Company Is Still Losing Plenty of Money

That doesn’t mean it is going to be an easy bet, because analysts see revenue rising 25% in 2019 to $602.35 million, but the company’s loss is widening to $0.85 per share from $0.53 in 2018. However, revenue estimates for 2019 have been dropping since July from $612 million, while estimates for 2020 have fallen from $762 million to $732 million.

It would seem based upon the stock’s strong performance, that buying among these investors continued throughout the fourth quarter and the start of the first quarter. Redfin’s shares appear to be well positioned to continue to rise as long as the housing sector continues to strengthen.

SendGrid Inc. (SEND) has been hot over the past 52-weeks, with the stock more than doubling to over $50 a share. The cloud-based email service provider has seen its shares gobbled up by institutions and hedge funds over the past few quarters, helping to send the stock soaring on the promise of massive earnings and revenue growth.

In the third quarter, the stock was aggressively being added to the portfolios of institutional investors. As a result, the stock was placed in the WhaleWisdom 100 Index on November 15 as a result of the aggressive investor’s activity.

Holdings Soar

During the quarter, institutional investors increased their holdings in the stock by nearly 50%, with the total aggregate 13F shares rising to over 40 million shares from 26.9 million shares in the prior quarter. Of those institution buying the stock, 50 of them created new positions, while 47 added to existing ones. Only 19 institutions exited, while 25 reduced their holdings.

Hedge funds were also active in the third quarter, with the number of total 13F shares held rising by 50% to 6.8 million from 4.5 million in the prior quarter. During the quarter, 20 funds created new positions, while six added to existing holdings. Meanwhile, just six funds exited the stock, while 11 reduced their stakes.

(Whale Wisdom)

 

Strong Growth

The convincing activity comes after the company has posted strong results three quarters in a row, easily beating analysts’ earnings and revenue estimates. Analysts are forecasting the fourth quarter to be healthy for the company too, with earnings estimated to increase by 7% to $0.05 per share on revenue growth of nearly 25% to $39.4 million.

Estimates for 2019 suggest earnings growth of 17% on revenue growth of 23%. However, the significant earnings growth is expected in 2020, with earnings forecast to climb 47% to $0.31 per share from $0.21 in 2019. Meanwhile, revenue is expected to rise by nearly 24% in 2020 to $221.8 million from $179.5 million in 2019.

Sky High Valuation

For all the significant growth, the valuation does not come cheap with the stock trading at a nose bleeding 2020 PE ratio of 164. Even when adjusting the PE ratio for its 2020 earnings growth, the PEG ratio is a stunning 3.3, well above a fairly valued level of 1 to 1.5.

There is no doubting that the company offers investors the opportunity for longer-term growth potential based on current estimates. There is also no doubting that the current valuation is very high. However, it also means that the investors that are buying this stock are likely to flee the first moment a sign of trouble comes to the surface.

The shares of Boeing Co. (BA) have nearly tripled over the past three years, but investors were still flocking into the stock in the third quarter. It turned out to be a good bet because the stock has fallen about 7%, outperforming the broader S&P 500’s decline of 9% since the beginning of October. The stock has primarily become a proxy for the U.S. trade war with China, and now with signs of the trade war potentially coming to an end, Boeing’s stock may benefit.

During the third quarter, Boeing made it to number 22 on the WhaleWisdom Heat map, which was up from 40 in the previous quarter. The WhaleWisdom Heat Map tracks the top 150 hedge funds that make up the WhaleWisdom WhaleScore Calculation.

(WhaleWisdom)

Some Buy, Some Sell

By the end of the quarter, 23 funds of the 150 that make up the heat make held the stock in their portfolio and 7 of them had the stock as part of their top 10 holdings. In total, 13 hedge funds increased their positions, while 12 decreased them. Overall, institutional investors were not as enthusiastic about the stock. The total number of 13F shares held by institutions fell in the quarter by 2% to 393.5 million shares, from 402 million shares in the second quarter. In total, 119 institutions created new positions, while 727 added to existing ones. Meanwhile, 103 institutions closed out their holdings, while 763 reduced them.

A Proxy

Boeing stock has become a proxy for the trade war between the U.S. and China since its start in the spring of 2018. However, Boeing gets a small portion of its total revenue from China. Through the first nine months of 2018, Boeing generated total revenue of roughly $72.8 billion. Of that revenue, just $9.4 billion or 13% came from China, making it the second largest market behind the U.S. for the company. The U.S. has contributed $12.2 billion to Boeing over the first nine months.

Betting on an End

However, investors also knew that the tariffs posed a second problem for Boeing, higher cost. Boeing imports parts and materials from China and the tariffs imposed on China can cause prices of parts and materials to rise having a negative impact on margins and lower earnings. Recent signs have emerged that the trade war may soon end. If it does end, it could be a reason for Boeing’s stock to rise.

It would seem unlikely that investors were betting heavily in the third quarter that the trade war would soon end. However, based on the stock’s outperformance it seems likely they have been continuing to buy the stock over the past few months.

Lowe’s Shares Fall as Hedge Funds Flee

Posted on January 14th, 2019

Lowe’s Companies Inc.’s (LOW) stock has had a bumpy road since September, falling 17% from its all-time high. That is in-line with home improvement peer Home Depot Inc. (HD), but worse than the S&P 500’s decline of 12%. The shares of Lowe’s fell with the broader stock market on fears of an economic slowdown and an overly aggressive Federal Reserve. Couple that with rising mortgage rates and slower home sales, it spelled out trouble for Lowe’s.

At least some hedge fund investors saw the downturn coming. The WhaleWisdom Heat Map shows that the stock’s rank fell to 96 in the third quarter from 36 in the second quarter. The Heat Map tracks the top 150 hedge funds as measured by the WhaleScore Calculation.

Stance Shifts

During the third quarter, the number of funds tracked for the heat map owning the stock fell to 18 from 21. Additionally, 9 of the funds decreased their positions in the stock, while 6 increased their holdings. This was a big shift from the second quarter when 13 funds increased their positions and 8 lowered them.

(WhaleWisdom Heat Map)

Differing Opinions

What is amazing is that most other hedge funds were buying the shares in the third quarter.  Total holdings among hedge funds increased 3% to nearly 66 million shares, with 19 funds creating new positions and 36 adding to existing investments. Meanwhile, 69 funds decreased their stakes, while 20 closed out their positions entirely.

Down with Housing

Lowe’s stock peaked in late October around the same time the PHLX Housing Sector (HGX) began to tumble. Perhaps the top hedge funds that make up those in the heat map were paying more attention to the rising mortgage rates and the struggling housing sector.

Fundamentals Remain Strong

Analysts are not looking for much of a slowdown from the company as it starts fiscal-year 2020. Estimates are for Lowe’s to grow its earnings 18.4% in fiscal 2020 to $6.05 per share, on revenue growth of 1.7% to $72.6 billion. Those earnings estimates have fallen about 1% since July, while revenue estimates have dropped about 2.7%, certainly not severe.

In the case of Lowe’s, it would not be surprising to see many of the hedge funds that were selling in the third quarter return to the stock at some point in the future as the shares recover. That is, if the fundamentals continue to remain strong.