News and Views

The Official Blog of WhaleWisdom.com

Apple Inc. (AAPL) shocked investors when the company pre-released its fiscal first quarter revenue, noting it would come in lower than previous guidance. The news sent shares sharply lower, plunging 10% on January 3. Through January 4, Apple’s stock has now fallen 36% from its October highs.

Not all investors were caught off guard by the recent declines though, as hedge funds were actively selling the phone maker in the third quarter. Investors’ worries have centered around the trade war’s potential impact on Apple and fears of declining iPhone sales. In September, Apple hosted an annual event revealing its latest iPhone models.

Reductions

During the third quarter, hedge funds started selling Apple, with the number of 13F shares held falling 5.7% to 107.6 million shares. Also, during the quarter, 31 funds created new positions, while 92 added to existing ones. Meanwhile, 19 funds exited the stock while 109 funds reduced their holdings.

iPhone Worries

It would seem to some extent that some investors got ahead of the stock’s steep decline. Apple released its newest iPhones in September. iPhone sales represented about 63% of Apple’s total revenue in 2018 and make the phone a critical piece of Apple’s business.

When Apple revealed its newest iPhones in September, before the end of the third quarter, the stock was trading at its all-time high around $230. Perhaps these investors were unimpressed by the newest phones or the price points. The three new iPhone models were Apples most expensive yet, with the cheapest starting at $750.

Investors Get Spooked

With the stock trading at its all-time high, investors were spooked when the company told them during its fiscal fourth quarter conference call in November that it would no longer break out its iPhone unit sales. The fear among investors quickly shifted to the potential for declining iPhone revenue, sparking the stock’s steep decline.

Apple reduced its revenue on January 2 to $84 billion for the first quarter, which came in below the company’s prior guidance and 8% below analysts’ estimates. The company noted much of the weakness was a result of an economic slowdown in China. This weakness further fed into investors’ fears that the trade war between the U.S. and China was having a significant impact on the company.

it is not clear at what point during the third quarter hedge funds started reducing their holdings in the stock, however, it is likely a trend that continued throughout the fourth quarter.  It is clear now why they started to reduce their holdings. It will be important to note when the tide turns, and these hedge funds start buying the stock once again.

 

Hedge Fund Interest in Verizon

Posted on December 31st, 2018

Verizon Communications Inc. (VZ) has put together a stellar 2018, rising over 4% versus the S&P 500, which has fallen 7%. The stock has even outperformed the broader index during the latest period of stock market volatility, with shares falling 9% from their highs versus the S&P 500, which has fallen 15%. The stock’s strong performance may be a result of investors seeking safety during volatile times, or it is because investors see significant growth opportunity ahead for the company.

Hedge Funds and institutions started to buy the wireless provider well before the recent stock market sell-off. During the third quarter, the stock’s ranking increased from 25 to 12 on the WhaleWisdom Heat Map.  Additionally, the buying activity helped the stock earn a place on the WhaleWisdom 100 Index in the middle of November.

Buying the Stock

Of the 150-hedge funds WhaleWisdom tracks for its heat map, 30 hold the stock in their portfolio. Meanwhile, during the third quarter, 13 funds increased their positions in the stock, while 10 lowered their holdings. Overall, institutions were neutral on the stock during the third quarter; total shares held among institutions increased by about 20 basis points, bringing the total 13F held to 2.68 billion. In total 112 institutions created new positions in the stock, while 65 closed them out. Meanwhile, 963 institutions added to their holdings, while 815 decreased them.

(WhaleWisdom)

5G

Investors appear to be looking to the launch of the fifth-generation of wireless technology, also known as 5G. The new technology will offer wireless users download speeds that are up to 20 times faster than the current 4G LTE network. Additionally, it promises to reduce downtime and delays, which may usher the use of more connected devices in the home and throughout businesses.

Pure Play

Verizon offers investors a pureplay on the new technology over rivals such as AT&T. Remember that AT&T owns assets such as the satellite TV provider Dish Networks and the recently acquired media company, Time Warner. Those assets created additional uncertainty for AT&T, especially given Dish’s loss of subscribers in recent quarters.

Where’s the Growth

Analysts do not anticipate much revenue growth for Verizon in 2019, as earnings are forecast to rise by 1% to $4.72 per share and estimate that revenue will rise by 1% to $132.3 billion. Currently, analyst estimate that earnings and revenue will grow about 1% in 2020. Future estimates appear to make the prospect for 5G uninspiring if they remain unchanged. It is worth noting that 5G technology is just beginning to roll out, and the adoption rate is likely to be slow as wireless devices are upgraded.

If 5G lives up to the promises for blazing fast download speeds and low latency, it is likely to be a boost for Verizon and its stock. It seems Hedge Funds are starting to place their bets in anticipation of this new technology.

 

The stock market slide has gone from bad to worse over the past few weeks. Major indexes such as the Russell 2000 and the NASDAQ composite are now in a bear market, down more than 20%. Meanwhile, the S&P 500 and Dow Jones Industrial Average have fallen 16 and 17% respectively. Surprisingly, hedge funds and institutions may not have seen this sudden downturn coming.

During the third quarter, which ended on September 30, hedge funds and institutions were adding to the ETFs that are designed to replicate and act as proxies for the major indexes. The SPDR S&P 500 ETF Trust (SPY), the Invesco QQQ Trust (QQQ) – a proxy for the NASDAQ 100, and the iShares Russell 2000 ETF (IWM)  all witnessed hedge funds and institutions piling into the ETF. Perhaps a reason for the steep declines as these same investors rush for the exits.

Adding Shares

During the third quarter hedge funds increased their exposure by 12% in the S&P 500 ETF, bringing the total number of 13F shares held by funds to 50.3 million shares. Meanwhile, hedge funds were also piling into the small-cap Russell 2000 ETF, with the total number of 13F shares rising 14% to 14.47 million shares. The NASDAQ 100 ETF saw its holdings among hedge funds rise 12%.

Overall institutions were adding to their holdings in each of the ETF’s too. During the quarter the ETF that saw the highest inflow was the NASDAQ 100 ETF, with its total number of shares held rising almost 7% to 159.9 million total shares. The S&P 500 ETF saw the smallest increase rising just 50 basis points, while the Russell 2000 ETF rose 3%.

Caught By Surprise

Overall it would suggest that most investors have been caught completely off guard by the recent stock market sell-off that seems to get worse with each passing day. It would also suggest the herd-like mentality of the steep sell-off may be to blame for this the recent rise of volatility.

Reversal

One is likely to see that trend among funds and institutions change in the fourth-quarter filling especially if investors follow the trends seen during the first quarter sell-off. During that period institutions dumped 10% of their holdings he S&P 500 ETF, while holdings in the Russell 2000 ETF dropped 8%.

As investors turn to more passive investment vehicles that allow them to move in and out of their holdings quickly, volatility is likely to continue to rise in the future. Especially, when events such as the recent sell-off happen unexpectedly.

ServiceNow Inc. (NOW) has been one of the few technology and software as a service (SaaS) cloud companies to have a great 2018. The stock has climbed 40% this year, a solid showing compared to the S&P 500 which has fallen 3%. The stock has been driven higher by strong revenue and earnings growth.

Hedge Funds were very bullish on the stock during the third quarter, increasing their holdings. The buying was so strong among funds that the stock was added to the WhaleWisdom 100 Index on November 15. The stock also moved up to number 26 on the WhaleWisdom Heatmap during the third quarter, from 51 in the second quarter.

 

Hedge Funds Load Up

During the third quarter, hedge funds increased their holdings by 25%, with the number of total 13F shares rising to 20.5 million from 16.4 million. Additionally, 31 funds created new positions in the stock while 34 added to existing ones. Meanwhile, 7 funds exited and 27 reduced their stakes.

Strong Results

One reason for the strong stock performance has been the company’s ability to report better than expected results this year. ServiceNow has topped analysts’ forecasts the past three quarters rather easily. For the third quarter, the company reported earnings that beat analysts’ forecasts by almost 15%. Meanwhile, revenue came in 2% better than estimates.

Even more impressive is that analysts estimate the company’s strong growth in 2018 will carry into 2019 and 2020. Earnings are estimated to rise by 33% in 2019 to $3.13 per share, followed by growth of 34% in 2020 to $4.20 per share.

Revenue growth is forecast to be strong and rise 29% in 2019 to $3.37 billion, followed by growth of 27% in 2020 to $4.27 billion.

Both revenue and earnings estimates have been steadily rising throughout much of this past year.

Analysts See More Gains Ahead

Even with the stock’s sharp rise so far in 2018, analysts see the stock rising even higher. Currently, analysts are forecasting the stock to rise 14% more to an average price target of $211.23. Of the 33 analysts that cover the stock, 88% of them rate the shares a buy or outperform, with 12% rating it a hold.

The strong revenue and earnings growth appears to be the driving force behind the significant rise of the stock in 2018. Additionally, hedge funds accumulating the shares during the third quarter would suggest that some investors see even more significant gains in the quarters to come. If the steady growth and quarterly earnings gains continue, the stock is likely to have a strong 2019.

Baker Brothers Bet Big on Acadia Pharmaceuticals

Posted on December 10th, 2018

The shares of Acadia Pharmaceuticals, Inc. (ACAD) have plunged 40% in 2018. Still, it did not stop the Baker Brothers Advisors L.P. from sharply increasing their holdings in the stock when they had the opportunity. The company filed a $200 million secondary offering on November 26 to raise additional capital as they continue to grow.  The company’s lead drug is NUPLAZID, which is the only drug approved for the treatment of Parkinson disease psychosis.

The stock fell sharply in the Spring after concerns around the safety of their only approved drug NUPLAZID came under fire. The FDA cleared the drug, calling it safe in September. The company received more good news a few weeks later when it reported positive results from a phase 2 clinical trial for the treatment of depression.

The Offering

With investors unimpressed by the positive data, the shares failed to rise. With about $215 million in cash and short-term investments, the company decided it was time to raise capital through a secondary offering on November 26 to sell more stock.  The Baker Brothers, with two seats on the board of directors including one as the chairman, bought a stunning amount of stock on the deal.  Of the 16.1 million shares the company offered to sell, the Baker Brothers bought a total of 11.76 million or roughly 73% of the deal.

A Massive Stake

According to WhaleWisdom’s data, as of November 27, the Baker Brothers owned a total of 39.9 million shares or 32% of the company. That is up from 28.4 million shares or 22.8% of the company as of September 30.  The second largest holder of the stock is Fidelity, with 18.7 million or 15% of the company.  These two holders alone control more than 47% of the total shares, a massive stake between them.

(WhaleWisdom)

Growth Potential

The weak stock performance comes despite what is forecast to be a robust growth profile for the company. Analysts estimate revenue will grow 34% in 2019 to $298 million, and 81% in 2020 to $540 million. Additionally, the company is estimated to see its losses narrow to $1.75 per share in 2019, and $0.09 per share in 2020. It may be one reason why the Baker Brothers are so bullish on the stock.

Additionally, the company currently has many clinical trials it is running for its lead drug candidate. The next potentially significant clinical results may come in January, for the treatment of schizophrenia, according to the website clinicaltrials.org.

With the potential for more positive news on the way, the drug may be on the path to treating more illnesses down the road. That may only lead to more revenue opportunities for the company; it is a bet the Baker Brothers appear to be willing to take.