News and Views

The Official Blog of WhaleWisdom.com

Microsoft Corp. (MSFT) has been one of the hottest stocks in the market during 2019, rising by more than 36%. That is 16 percentage points higher than the S&P 500 return of 20%. The strong stock returns have been driven by the company’s healthy cloud and software as a service product and are likely one reason why investors have been flocking into the stock.

WhaleWisdom compiled data across 49 of the most well-known and followed Hedge Funds. Of those, WhaleWisdom found that 16% or 8 funds owned the stock at the end of the first quarter.

The Smartest Funds

Some of the most well-known and smartest hedge funds have piled into Microsoft’s stock, and in some cases own significant amounts of it. For example, TCI Fund Management Ltd. has over 13% of its portfolio invested in Microsoft, while Tiger Global Management, Joho Capital LLC, and Hound Partners LLC have allocated about 8% of their respective portfolios. These investments are followed by Viking Global Investors, Coatue Management LLC, and Maverick Capital, with each investing between 5% to 6% of their portfolio in the company.

(WhaleWisdom)

The Rest Were Wrongly Dumping

Interestingly, overall hedge funds were selling their shares of Microsoft, with the total number of 13F shares falling by almost 5% to 343 million from 360 million. During the last quarter, 23 funds created new positions, while 111 funds added to existing holdings. Meanwhile, 28 funds closed out their holdings and 148 reduced their positions.

Fiscal Fourth Quarter Results

The company is scheduled to report quarterly results on July 18. Analysts are forecasting fiscal fourth quarter revenue to rise by 9% to $32.8 billion, while earnings are expected to have climbed by 7% to $1.21 per share. Meanwhile, analysts are expecting the company to guide first quarter revenue to $32.06 billion, and earnings to $1.19 per share.

More important may be what the company says about the growth of its cloud computing business units, which have had a blistering growth rate in the past. For example, in the fiscal third quarter, Intelligent Cloud revenue increased by 22%. Microsoft’s cloud business has become one of the chief rivals of Amazon.com Inc.’s (AMZN) Web Services business unit.

Cheap Compared to Peers

Microsoft is currently trading at 22.7 times fiscal 2021 earnings estimates of $5.87 per share, which comes at a reasonable valuation when compared to many of its technology peers. For example, the average PE ratio of the top 25 holdings in the Technology Select Sector SPDR ETF (XLK) is about 22.5 times one-year forward earnings estimates. However, stocks such as Intuit Inc. (INTU) and Adobe Inc. (ADBE) trade at over 30 times earnings estimates.

When looking at Microsoft on a peer analysis basis, it’s no wonder why some of the most well-known hedge funds have been piling into and holding shares of Microsoft in the most recent quarter, and despite Microsoft’s sharp rise, the stock may still be cheap with the potential for further upside.

Starboard Value Wins Big with Symantec

Posted on July 8th, 2019

Symantec Corp.’s (SYMC) stock rose by over 18% the week of July 1, after Broadcom Inc. (AVGO) said it would buy the software company for $15.5 billion. This was Broadcom’s second big purchase of a software company in the past year. The biggest winner in all of this may have been Starboard Value LP.

Symantec was a stock that was hot among institutional investors during the first quarter of 2019. The equity was added to the WhaleWisdom WhaleIndex 100 on May 15, and it has risen by more than 27% since the addition. The stock was particularly active among hedge funds during the first quarter.

Institutions Were Selling as Hedge Funds Were Buying

Overall, the aggregate 13F shares held among institutions fell by 1.4% to 566.68 million. During the first quarter, there were a total of 51 institutions that created new positions in the stock, while 183 added to existing positions. There was a total of 55 firms that exited the stock and 153 that reduced their holdings.

However, hedge funds were active, with the total number of 13F shares held climbing 17.5% to 84.7 million from $72.1 million. In total, 13 funds created new positions, as 14 added to existing holdings. There were 19 funds that sold out of the stock and 19 that reduced their holdings.

Starboard Strikes Gold

Starboard added a stunning 11.5 million shares during the quarter, raising their total equity holdings to 36.0 million shares, a market value of $827.6 million. Additionally, Renaissance Technologies LLC added to their existing holdings as well, adding nearly 2.2 million shares and bringing their total to 2.5 million.

Surprise Move

The move by Broadcom was another significant acquisition that came out of left field. It was the second acquisition that the company has made in the past year that didn’t seem to align with Broadcom’s core semiconductor business. Broadcom purchased CA Technologies for $18.9 billion in 2018.

Struggling Chip Business

Broadcom’s chip business has been struggling in recent quarters due to a global slowdown in wireless handsets.  Meanwhile, a trade war between the US and China has weighed down overall sales, as companies hold off placing orders due to tariffs and uncertainty around the potential outcome of the trade war.

Better Margins?

Broadcom’s push into software could be a way to bolt on revenue and earnings growth. Meanwhile, Symantec offers Broadcom the ability to raise its overall gross profit margins. Symantec’s margins are historically in the mid-70% region, while Broadcom’s has traditionally been in the mid-50% region.

The big winners in this deal are clearly the hedge funds that were rightly buying Symantec in the first quarter. It is yet to be seen how things will fare for Broadcom, and how long it will take for the company to see the benefits.

The Baker Brothers Advisors LP have become one of the most followed biotech investors around. As of the end of the first quarter of 2018, it has become incredibly clear that the firm has placed massive bets on just a handful of companies.

The equal-weighted Whalescore for the Bakers fell in the first quarter to 70 from the previous quarter’s ranking of 76. However, it was still higher than the S&P 500’s score of 62, which was unchanged from the previous quarter. Every quarter, WhaleWisdom ranks filers against one another and the S&P 500 based on their ability to generate alpha.

(WhaleWisdom)

The Top 5

The Bakers have massive positions among their top 5 holdings. Based on the data collected through filings, the market value of the Baker’s portfolio is about $15.6 billion as of the end of the first quarter, up from $12.2 billion in the fourth quarter of last year. Of that, about $10 billion or roughly 64% of the holdings are in these five stocks.

(WhaleWisdom)

2 Big Positions

Even more impressive is the total amount of each company they own. Seattle Genetics Inc. (SGEN) is the firm’s largest holding, with a market value of roughly $3.5 billion; the Bakers hold a nearly 32% stake in the company. Incyte Corp. (INCY) is the firm’s second largest holding, with a market value of almost $2.6 billion. The Bakers control nearly 16% of that stock. Approximately $6.1 billion is committed to these two companies and represents almost 40% of their portfolio.

The Next 3

The following three companies have a market value of about $3.8 billion and account for 24% of the Baker’s portfolio. The advisor’s position in BeiGene Ltd. (BGNE) is worth about $1.6 billion while owning about 20% of the company. Alexion Pharmaceuticals Inc. (ALXN)  is next, with a market value of $1.1 billion and ownership of about 4%. Finally, Acadia Pharmaceuticals Inc. (ACAD) is in the fifth position, with a market value of approximately $1.1 billion and ownership of 32%.

Big Risks

With the amount of money committed to the top of the portfolio, the firm is taking a significant risk. The most significant threat is the investment risk. Should an investment turn sour, its price could fall, creating massive losses. Additionally, liquidity is another risk as trying to sell the number of shares accumulated would not be easy. Also, in some cases such an action would require a filing with the SEC, making other investors aware of the firm’s intention to sell their holdings.

It does speak to a large degree of confidence that the Bakers have in these investments too. By in large, they are investments that have worked in the Baker’s favor over the years. It is also one of the reasons why the Bakers are regularly ranked among the best on the WhaleWisdom Whalescore.

Perceptive Advisors, LLC scored big this past week when it was announced that Pfizer Inc. (PFE) was buying Array BioPharma Inc. (ARRY) for $11 billion. Array’s stock rose by more than 50% on June 17 following the announcement. Perceptive is run by Joseph Edelman, which started a new position in Array in the first quarter of 2019.

The move by Pfizer to purchase Array will help to broaden Pfizer’s cancer pipeline. Pfizer is buying Array for $48 per share, a nearly 62% premium to the stock’s closing price of $29.59 on June 14. The deal is expected to close in the second half of 2019.

A Big Profit

Perceptive purchased nearly 4.3 million shares of Array in the first quarter, worth almost $105 million. It made the stock the eleventh largest holding in the firm’s portfolio. Based on Array’s closing price on June 21 of $46.20, the value of Perceptive’s position rose to $195.4 million. It gives Perceptive a profit of nearly $90 million and a gain of 90% in under 3 months.

(WhaleWisdom)

In Need of Growth

Pfizer needed an acquisition. The company has struggled in recent years to grow its revenue. Since July of 2016, Pfizer’s revenue has increased by just 3% on a trailing twelve-month basis to $53.9 billion. Additionally, growth for the future was looking bleak too. Analysts were forecasting revenue to grow by just 5% over the next three years to $56.3 billion.

Waiting for the Benefits

The bad news for Pfizer is that the deal is expected to be dilutive to earnings in 2019 and is not expected to be accretive until the year 2022. It means that over the short-term, the Array deal isn’t likely to help boost Pfizer’s growth prospects.

Analysts were forecasting revenue for Array of $273 million in 2019, and it is expected to grow to $664 million in 2021. Additionally, the company is forecast to lose $0.50 per share in 2019 and to not turn a profit until 2021, earning $0.67 per share.

Array currently has two drugs on the market for melanoma, BRAFTOVI and MEKTOVI. Additionally, the company is working on a Phase 3 trial for the treatment of colorectal cancer.

Pfizer is taking a long-term view buying Array, hoping that the company will deliver significant growth in future years. However, Perceptive has the good fortune of being able to cash out early and is reaping the reward in a short period of time. It turned out to be a good bet for Perceptive; only time will tell if Pfizer will have the same luck.

Boeing Co.’s (BA) stock has fallen by 21% since peaking in early March. The sharp decline has come following two crashes of its 737 MAX jets and the grounding of the fleet around the world. The recent developments have hampered the stock as investors have lost visibility into the future of the company.

Institutional and hedge fund investors went from accumulating the stock in the fourth quarter of 2018 to dumping it in the first quarter of 2019. Still, the stock managed to land on the WhaleWisdom Heatmap at 26, up from 84. The stock may have had an even higher ranking if not for the developments at the end of the first quarter. The high ranking is likely to fall further as second quarter filing results start to come in, given that the stock continued to decline since the end of the first quarter.  

Turning Bearish

During the first quarter, the number of aggregate institutional 13F shares fell by 3% to 382.5 million from 394.3 million. That included a decline of more than 10% among hedge funds, which saw the total number of 13F shares fall to 16.3 million from 18.3 million. In total, 202 institutions created new positions, while 761 added to existing ones. Additionally, 123 institutions closed out their positions, while 879 reduced their holdings.

(WhaleWisdom)

Falling Sharply

Shares of the aerospace company fell sharply in March after a second 737 MAX jetliner crashed. It resulted in the grounding of the fleet around the world. That grounding had not been lifted as of June 15, as the company and investigators try to identify the problem with the plane and develop a fix.

As a result of the crash, the company pulled its full-year earnings guidance, which has resulted in analysts cutting their revenue and earnings guidance. Since the beginning of April, analysts have slashed their earnings estimates for the company for 2019 by 22% to $15.73, down from $20.09. Meanwhile, revenue estimates for the year have fallen by as much as 9% to $102 billion from $110.9 billion.

The average analysts’ price target on the stock has fallen slightly since the middle of April to $426 from $431. Meanwhile, the number of analysts rating the stock a buy or outperform has fallen to 14 from 15, while the number of analysts rating the stock a hold has increased to 8 from 7.

Since the end of the first quarter, the stock has declined by over 12%, and the visibility surrounding the future of the 737 MAX jetliner still appears to be uncertain. It has created a tremendous amount of pressure on the stock and given the declines, it seems highly likely that institutions and hedge funds will continue to dump the equity.