News and Views

The Official Blog of WhaleWisdom.com

Alibaba Group Holding Ltd.’s (BABA) stock has soared in 2019, rising a stunning 42%. The strong stock performance followed a horrid fourth quarter when the shares plunged on trade war worries and fears of slowing global growth. However, the tides have turned and it seems that investors are now aggressively buying the stock given its sharp rise, ahead of the company’s fiscal fourth quarter results on May 15.

Despite the horrible fourth quarter stock performance, the shares landed on the WhaleWisdom heat map at 87, up from its previous position of 124. The heatmap tracks the top 150 hedge funds using the most recent WhaleScore calculation.

Scooping Up Shares

Fourth quarter holdings revealed that 32 of the 150 hedge funds tracked for the heat map held shares of Alibaba, while 12 of the funds held the stock among their top-10 holdings. Additionally, 13 funds increased positions and 25 funds decreased holdings. However, what’s more interesting is that overall total institutions were buying the stock, with the number of total shares rising by 4% to 1.03 billion.

(Whale Wisdom)

Betting on Better Results

With the earnings just a couple of weeks away, the stock has been on the rise. Since April 30, the shares have increased by over 5%. It follows a period between the beginning of March and the end of April that saw the stock rise less than 1%. Also, helping to fuel that rise is renewed hope that the US/China trade war may soon come to an end. The stock has often been used as a proxy for the trade war.

Opportunity Is There

Analysts currently estimate that revenue increased by more than 40% in the fiscal fourth quarter to $13.7 billion. However, earnings are expected to have grown by around 9% to $0.98. The company has been investing back into the business in recent quarters, causing margins to contract, which has produced weaker earnings. It does set up an opportunity for the company to top results on the bottom line. It may be another reason why the stock has suddenly started to rise recently.

If it is the case that earnings are better than expected, it may result in the stock rising to even higher prices. It could cause a melt-up scenario, as investors that may have missed the first quarter rally begin to pile into the name. The big question will be what the investors that bought the stock at lower levels will be doing? Profit taking could undoubtedly be a genuine possibility.

Advanced Micro Devices Inc. (AMD) has been on a wild ride over the past year, with the stock rising by over 150%.  The big test for the company will come on April 30 when it reports first quarter results. It follows disappointing guidance from Intel Corp. (INTC), which is seeing weakness in some of its end markets.

Shareholders of AMD appear to be resilient, with several institutions increasing their holdings during the fourth quarter stock market downturn. It may mean that even if AMD posts weak results, the stock may not stay down for long.

Buying the Stocks

During the fourth quarter, the total number of 13F shares held by institutions increased by 8% up to 636 million from 590 million in the third quarter. Additionally, there were a total of 113 institutions that created new positions, while 232 added to existing ones. Meanwhile, just 172 institutions reduced their holdings, while 111 liquidated.

(Whale Wisdom)

Taking Advantage of Weakness

Since the beginning of the year, AMD’s stock has risen by 51%. Weak earnings results may provide institutions the opportunity to scoop up the shares at lower prices as they did in the fourth quarter when the economic environment appeared to be deteriorating. The last round of economic data from the US and China would suggest that is not the case.

Intel did note that data center business was experiencing a slowdown during its first quarter conference call, which may also weigh on AMD’s results. However, it could also mean that AMD is capturing market share away from Intel. Either way, it seems there may be buyers waiting regardless of the news.

What Analysts Expect

According to the data from Ycharts, analysts estimate that earnings for the chipmaker will drop 48% to just $0.06 per share. Meanwhile, revenue is forecast to decline by 23.6% to $1.26 billion.  The company has reasonable success topping earnings estimates but has often missed out on revenue expectations.

Big Levels of Uncertainty

The options market is pricing in a massive amount of volatility for the stock following results. The long straddle options strategy suggests that the stock may rise or fall by as much as 14% by expiration on May 17 from the $28 strike price. It places the stock in an enormous trading range between $24 and $32, which would suggest that there is a tremendous amount of uncertainty surrounding the stock’s results.

Just how good or bad the results may be, it seems that there are plenty of investors willing to suck the stock up should it fall to the right price; at least that is what the heavy buying in the heat of the fourth quarter stock market sell-off would indicate.

AT&T Inc. (T) has been one of the most embattled stocks in recent memory. The big purchase of Time Warner, Inc. was supposed to help transform AT&T from a stodgy old wireless phone company, into a newly created media giant with a cutting edge direct-to-the-consumer strategy. Instead, the stock has been plagued by slow growth and cord-cutting from its DirecTV business unit, which has worried investors.

It is no wonder why investors were fleeing this stock at an alarming pace in the fourth quarter. The number of sellers outweighed the buyers by a ratio of nearly 1.5 to 1 as they rushed for the exit, based on data from WhaleWisdom. Judgment day comes on April 24, when AT&T reports first quarter results.

Judgment Day

Analysts forecast no earnings growth when it reports results at $0.85 per share. Meanwhile, revenue is estimated to rise by about 18.5% to around $45.11 billion. The significant revenue growth is a result of the company’s acquisition of Time Warner.

Investors Rush for the Exit

The number of institutions that were selling down their positions during the fourth quarter was 1,292, while 103 sold out entirely. Compare that to only 739 institutions that were buying the stock and 236 that started new positions, and it is no wonder why the stock fell 15% in the fourth quarter alone, to finish 2018 down nearly 27%.

(WhaleWisdom)

Where is the Growth

Part of the problem that faces AT&T is that analysts forecast little to no earnings growth for this company over the next three years. Through the year 2021, estimates are for growth of just 3.5% to $3.64 from $3.52 in 2018.

Re-Rated Stock

The other major problem is that the market has re-rated the stock, valuing the company as a media company. As a result, the stock’s PE ratio for 2020 has fallen to 8.8. That is more in-line with media rivals CBS Corp. (CBS) and Viacom Inc. (VIA) and less like a phone company such as Verizon Communications, Inc. (VZ).

Cord-Cutting

Additionally, there are concerns over the company’s DirecTV unit which has seen nearly 2 million, or about 10% of its subscribers, flee the service since the first quarter of 2017. The total number of subscribers has dropped to 19.2 million in the fourth quarter from 21.01 million.

(Data from Statista)

It seems pretty clear that investors were fleeing AT&T in the fourth quarter at an overwhelming pace for a reason. Investors will find out if they are right or wrong perhaps as early as this week.

Dexcom Inc.’s (DXCM) stock has risen over 60% over the past year, easily topping the S&P 500’s return of 10%. The company has seen explosive sales growth over the past three years on the strength of its glucose monitoring systems for people with diabetes. It could be one reason why investors were piling into the stock in the fourth quarter of 2018.

The stock was included in the WhaleWisdom WhaleIndex 100 in the middle of February. However, shares are nearly 22% off their 2019 highs and have fallen particularly hard since the middle of March. That was when Spruce Point Capital Management issued a negative report on the company.

Hedge Funds Pile In

During the fourth quarter, hedge funds bought the stock with the total number of 13F shares increasing 17% to 11.3 million from 9.6 million. Twelve funds created new positions for the stock, while 28 added to existing positions. That was in comparison to 19 funds that reduced their holdings and 11 that liquidated them. Overall, the total number of shares held by institutions increased by less than 1% to 88.1 million, up minimally from 88 million shares.

             (WhaleWisdom)

 

Strong Revenue and Earnings Growth

Analysts’ estimates currently suggest that Dexcom’s success will continue well into the future. Revenue is forecast to increase by 66% over the next three years to $1.7 billion in 2021 from $1.03 billion in 2018. That is an 18.5% compounded annual rate of growth during that time.

Earnings growth is expected to be even faster, rising by as much as fivefold to $1.54 per share by the year 2021, up from $0.30 in 2018. It comes to a compounded annual growth rate of 73%.

Steep Valuation

Despite the rapid earnings growth, the stock is currently no bargain, trading with a one-year forward PE ratio of 126.5. Even when adjusting the stock for its forecasted earnings growth rate, the stock trades with a PEG ratio of 1.7, which is considered high. Typically, a stock is considered fairly valued when it has a PEG ratio of around 1. It makes it particularly risky should the company’s results miss those lofty expectations.

One can easily see why hedge funds were buying the shares during the stock market plunge in the fourth quarter. However, one can also understand why the stock has struggled in 2019 due to its valuation. It will likely leave the stock in a period of heightened volatility as the bulls and the bears battle this one out.

Exxon Mobil Corp. (XOM), has seen its stock soar in 2019 by 21%, easily outpacing the S&P 500’s rise of 15.3%. The surge has come as a result of oil’s big rebound, following its steep sell-off at the end of 2018. The outlook for the company is bleak, making the certainty of the recent rally unclear.

What is not unclear is that institutions were dumping the stock in the fourth quarter at a pace of nearly 2 to 1, though the dumping of the shares may have merely been a knee-jerk reaction to a market in turmoil.

The Number of Sellers Outnumbers the Buyers

During the fourth quarter, the total number of 13F shares held by institutions increased by 2.6% to 2.315 billion shares. However, the number of institutions selling the stock far outpaced the ones buying it. During the quarter, 236 institutions created new positions while 739 were adding to them. On the flipside, 103 liquated their holdings while a stunning 1,292 were reducing them. However, it is worth noting that the increase in total shares held could suggest that the buyers, although fewer, were buying more prominent positions in the stock.

(WhaleWisdom)

Not a Good 2019

Still, analysts do not forecast a good year for the oil giant. Earnings are estimated to drop by over 10% to $4.42 per share, while revenue is expected to drop by 4% to $278.7 billion. Those estimates had fallen sharply since November, when revenue estimates were for $340 billion, while earnings were estimated at roughly $5.90.

Future years do not look much better for the company, with earnings expected to climb 26% in 2020 to $5.56. However, analysts forecast earnings to drop 4% in 2021 to $5.36. Meanwhile, revenue is forecast to rise by 14% to $317.1 in 2020, only to fall 12% in 2021 to $278.9 billion

Uncertain Outlook

The only thing one can ascertain from the current earnings and revenue estimates is the tremendous amount of uncertainty in Exxon’s future. That is likely driven by what has become a very highly volatile oil market, that has seen massive ups and downs in recent years. It makes trying to forecast Exxon’s results incredibly hard to do.

With a less than steady outlook, one can see why so many investors were reducing their stakes in the stocks. If there is one thing that the investors hate more than anything, it’s an unpredictable outlook. What does seem clear is that Exxon’s outlook is very uncertain.