4 Questionable Hedge Fund Picks From Q1

by James Brumley | May 23, 2013 2:36 pm

Dead Dow Stocks[1]The official reports are in. The nation’s biggest hedge funds recently disclosed their first-quarter buys and sells, as required by the SEC.

Of course, investors as well as the media have scoured the filings up and down, looking to glean one or two hot trading ideas. And why not? After all, these guys are professional stock-pickers. Surely, copying one or two of their best picks would be a great way to find a winner.

Well, maybe. Just because hedge fund managers get paid to pick ’em doesn’t always mean they bet on the right companies. Here’s a closer look at four of last quarter’s most questionable hedge fund investments:


Walmart (NYSE:WMT)[2]How can you go wrong with the world’s largest retailer? For that matter, how can you doubt the stock-picking prowess of Warren Buffett’s Berkshire Hathaway (BRK.B[3])?

Yet, there it is. The $85 billion fund owns nearly $4 billion worth of Walmart (WMT[4]) after Q1’s addition of 1.7 million shares, making it Berkshire’s sixth-largest holding.

On the surface, Walmart seems like the quintessential Buffett/Berkshire pick. It’s an easy-to-understand business, it has been in business for decades, and the trailing ROE of 23.6% is more than adequate. But WMT might finally be failing to meet another of the Oracle’s important rules. Because customer service and merchandise management have been handled so badly[5], the company might well no longer have favorable long-term prospects.

That’s not to say Walmart’s going anywhere. But Walmart’s foot traffic actually fell in the fourth quarter of last year. It wasn’t by much, but all big trends start as small ones. And we just found out that first-quarter revenues and profits came in under the bar[6].

In this case, it’s likely a sign that customers are fed up enough with empty shelves and poor service to actually alter their shopping habits.

Sears Holdings

Sears Holdings (NASDAQ:SHLD)[7]Although Fairholme Capital has made good money with its 19.5 million shares of Sears Holdings (SHLD[8]) — about a tenth of which were added in the first quarter — it’s still an ill-advised bet[9].

Sooner or later (probably sooner), the market’s going to figure out that hedge fund manager and Sears biggest shareholder Eddie Lampert has no business acting as the CEO of the retailer. He simply doesn’t get it, thinking consumers behave rationally, and treating the art of retail like it’s a science.


Transocean185[10]Shares of Transocean (RIG[11]) were scooped up by two different funds … Icahn Associates and Appaloosa Management. Both already had positions in the oil and gas explorer, but felt the need to add more. But why?

To give credit where it’s due, a bunch of Transocean’s drilling rigs have renewed their leases at rates higher than the recently-ended contracts were yielding. The problem is, day-rates on rigs are likely to slide again in the foreseeable future, as a great deal of capacity — globally — is close to becoming available.

Meanwhile, the state of Texas has filed a lawsuit against BP and Transocean over the 2010 oil spill in the Gulf of Mexico. That could mean up to a $350 million fine payable between the two companies, and the case is fairly damning. Even if Texas doesn’t prevail, court cases can nag a company to its knees. Throw in the fact that Carl Icahn is now Chairman of the Board, and there’s more than enough disruption to accelerate the downtrend that RIG started this week.


Amazon AMZN[12]As if SAC Capital doesn’t have enough to worry about right now, its $235 million position in Amazon (AMZN[13]) — the fund’s second-biggest holding — is suspiciously weakening while the rest of the market has rallied to new highs.

Yes, this is the same SAC Capital that’s been implicated in an insider trading investigation of nine current or former employees, four of which have already plead guilty.

That’s an academic detail as far as the portfolio is concerned, though. Investors with money being managed by SAC might want to contemplate the fact that Amazon is no longer getting the huge berth the market had been giving it when the promise of future growth was enough to make a frothy P/E irrelevant.

Truth be told, the market tolerated swelling capital expenditures from Amazon for more than a decade, largely because the top and bottom lines were increasing the whole time. After two years of shrinking income though, traders are understandably starting to wonder if AMZN is out of opportunities to simply buy growth and produce a positive ROI.

Fans and followers will point out that Amazon is projected to grow per-share income from 2012’s 9-cent loss to a gain of $1.32 this year and $3.31 next year. But that presumes the company won’t find a new project to justify a huge capex next year. If it actually does cut back on capital spending, it would be the first time in more than ten years. (Though it rarely actually planned on spending more in a subsequent year — the spending seems to just happen anyway.) So why would we expect 2014 to be any different? Besides, Amazon has missed as often as it has hit earnings targets for the past couple of years. Dependability is too low to gamble on it.

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

  1. [Image]: https://investorplace.com/wp-content/uploads/2011/08/Thumbs-Down.jpg
  2. [Image]: https://investorplace.com/wp-content/uploads/2011/02/walmart.jpg
  3. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  4. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  5. customer service and merchandise management have been handled so badly: https://investorplace.com/2013/04/walmart-is-learning-the-hard-way-that-service-matters/
  6. first-quarter revenues and profits came in under the bar: http://slant.investorplace.com/2013/05/are-walmart-best-days-behind-it/
  7. [Image]: https://investorplace.com/wp-content/uploads/2012/10/Sears185.jpg
  8. SHLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=SHLD
  9. it’s still an ill-advised bet: https://investorplace.com/2013/01/lampert-is-sears-ceo-here-we-go-again/
  10. [Image]: https://investorplace.com/wp-content/uploads/2013/05/Transocean185.jpg
  11. RIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIG
  12. [Image]: https://investorplace.com/wp-content/uploads/2011/04/amazon1.jpg
  13. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN

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