5 Head-Scratching ‘Smart Money’ Moves

by James Brumley | August 20, 2012 9:16 am

Question MarkWith the dust settling from the second-quarter earnings season, we’ve also had a chance to review the hedge funds’ key buys and sells from Q2.

More often than not, the guys and gals who manage these portfolios deserve their “smart money” title. After all, they’ve been able to accumulate vast sums through a number of successful trades.

Every once in a while, though, these folks can make a buy or sell decision that raises an eyebrow. Here are 5 of the bigger, more confounding decisions made last quarter:

Warren Buffett: General Electric

General Electric GEIt’s tough to question any choice Warren Buffett makes, but just because Berkshire Hathaway (NYSE:BRK.A[1], BRK.B[2]) portfolio sold about a third of its stake in General Electric (NYSE:GE[3]) last quarter doesn’t mean investors should follow that lead.

To give credit where it’s due, Buffett made good money on the GE trade … an investment that goes all the way back to 2008 when he forked over $3 billion to the struggling company. Remember, however, that he also got a honey of a deal in that he was granted a special breed of preferred shares, a portion of which the company bought back last year. The sale of General Electric last quarter whittles his position down to about 5 million shares. But why is it a mistake to sell some of that position now?

While the stock is up since 2009, the past three years from GE aren’t going to look anywhere near as good as the next three.

After the 2008 drubbing, General Electric began a major overhaul. It got (mostly) out of the risky finance business, and waded heavily into green-energy waters. It was an effort that took three years to complete, however, with the labor just now starting to bear fruit. Translation: Buffett sold out before things got really good. Next year’s expected per-share income of $1.73 is better than this year’s likely $1.54, which is better than last year’s profit of $1.37 per share. By 2014, it’s going to be within striking distance of 2007’s record profit of $2.20 per share. It’s the kind of industrial-based earnings growth that Buffett usually leans toward.

George Soros: Facebook

George Soros has made a large fortune by buying stocks when nobody else wanted them, and selling them when everybody wanted them. On some occasions, though, one has to wonder if the 82-year-old is out of touch with the fact that the way things seem with the Internet aren’t always the way they are. Case in point: Soros’ $10.6 million investment[4] in Facebook (NASDAQ:FB[5]).

From a “buy them cheap” perspective, it’s not a bad bet. Shares of the social networking site declined immediately after the IPO, and they currently are at all-time lows — at $19 — and still falling, through sales as well as earnings were both up last quarter.

Yet, the red flags that don’t immediately show up on an income statement are waving like crazy. Engagement (length of visit) and activity (number of visits) per user are falling, much like those measures did for MySpace before it disintegrated. The gamble might well pay off, but there’s more downside than upside here, which doesn’t make sense no matter who you are.

Westfield Capital: Skyworks Solutions

Skyworks Solutions SWKSWestfield Capital is hardly a household name, even within investor circles. Then again, neither is Skyworks Solutions (NASDAQ:SWKS[6]). Nevertheless, the fact that Westfield Capital sold a big chunk of its Skyworks position is a big deal. It might have been unnecessarily conservative, however.

Skyworks Solutions makes components for smartphones, the advent of which has been a real boon for the company. Yet, when one company makes up such a big portion of your sales, riding coattails also poses a big-time risk; what happens if that customer dumps you as a supplier? And yes, we’re talking about Apple (NASDAQ:AAPL[7]).

Sometimes, though, you just have to “go with it” and appreciate that Apple’s taking over the world. And the forward-looking P/E of 13.8 is unusually low for a company that’s expected to grow its bottom line by more than 30% per year over the next three years.

David Einhorn: Health Care

David Einhorn bought a bunch of health care stocks last quarter, including Aetna (NYSE:AET[8]), Cigna (NYSE:CI[9]), UnitedHealth Group (NYSE:UNH[10]) and WellPoint (NYSE:WLP[11]). The big kahuna last quarter, however, was Coventry Health Care (NYSE:CVH[12]). Greenlight Capital bought about 6.7 million shares of the managed care company — a $212 million investment.

It’s not hard to understand the attraction. Leading up to and shortly after President Barack Obama’s health care overhaul becoming a Supreme-Court-ratified law in late June[13], the health care provider industry’s stocks were pressured lower … perhaps too much, making them bargains now. Of course, Aetna saw things the same way, which is why it acquired Coventry this morning[14] at an 18% premium, making Einhorn look like a genius in the process. (Did he know something?)

Be that as it may, while the increasing number of insured patients looks encouraging for the insurers as well as the hospitals, the flip side is, the same law also cranks up the legal requirements to what some might consider a stifling degree. Although it meant a major boost for Coventry today, it remains to be seen whether Obamacare is going to be a blessing or a curse for the industry. Taking on a health care provider bet at this juncture might not be the best risk-reward decision, even if some more M&A is in the cards as these players seek to share costs.

Bill Ackman: Citigroup

CitigroupBill Ackman’s Pershing Square fund didn’t sell its entire stake in Citigroup (NYSE:C[15]) in Q2, but it sold the bulk of it. The position was whittled down from 21.9 million shares to 1.1 million shares, shrinking the position from just under $1 billion in worth to $32 million.

To be fair, Pershing had to free up some cash to facilitate the purchase of Procter & Gamble (NYSE:PG[16]) — a company to which Ackman is trying to apply his personal brand of “activist investor.” And, Citigroup certainly has gone nowhere fast, currently trading right where it was about a year ago, and frustratingly lower than where it was three years ago, meaning the stock simply hasn’t participated in any of the bull market.

Just because the stock is stuck in the mud right now doesn’t mean the company isn’t doing its part, however. Per-share income is on pace to grow from $3.50 last year to $3.63 this year to $4.09 in 2013.

Though the stock hasn’t been fairly valued (based on profits) since Ackman made the purchase back in the first quarter of 2010, like every other investor, he has to have faith and patience that the market will eventually correct the oddly low P/E of 8.4 against the backdrop of sustainable growth.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. BRK.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.A
  2. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  3. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  4. $10.6 million investment: https://investorplace.com/2012/08/soros-moves-provide-comfort-and-questions-fb-gs-c-wfc-jpm-rf/
  5. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  6. SWKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWKS
  7. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  8. AET: http://studio-5.financialcontent.com/investplace/quote?Symbol=AET
  9. CI: http://studio-5.financialcontent.com/investplace/quote?Symbol=CI
  10. UNH: http://studio-5.financialcontent.com/investplace/quote?Symbol=UNH
  11. WLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=WLP
  12. CVH: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVH
  13. becoming a Supreme-Court-ratified law in late June: https://investorplace.com/investorpolitics/heres-the-effect-of-obamacare-on-your-investments-in-just-1-sentence/
  14. it acquired Coventry this morning: http://online.wsj.com/article/SB10000872396390443989204577600102963766594.html
  15. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  16. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG

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