It’s that time again. The Direxion iBillionaire Index ETF (NYSEARCA:IBLN), which follows the trading moves of billionaire investors, is doing its quarterly rebalancing. Eleven of the ETF’s 30 stock positions are getting the boot.
What’s in? Consumer discretionaries and tech, each of which will now make up 30% of IBLN’s portfolio.
Getting kicked to the curb are energy and financial stocks. After the rebalancing, energy will make up just 7% of the portfolio, and financials will not be represented at all.
While I would never recommend blindly following the moves of other investors, I’m a big fan of guru-following strategies and consider them a great starting point for further research.
The brains at iBillionaire have their own unique take on guru following. They start with narrowing their pool of gurus to the 10 billionaire investors whose public, S&P 500-listed stock positions have generated the highest returns over the past three years. They then build a portfolio of the 30 “highest conviction” S&P 500 stocks owned by these 10 billionaires and rebalance quarterly.
This makes IBLN a high-quality subset of the S&P 500. And unlike most guru ETFs, which are often invested in small- and mid-cap stocks, the S&P 500 is actually the appropriate benchmark. Year-to-date, IBLN is up about 2.7%, keeping pace with the S&P 500.
With no further ado, let’s take a look at five hot stocks the masters of the universe are buying.
Hot Stocks to Buy — Google (GOOGL)
Apple Inc (NASDAQ:AAPL) has been an IBLN holding for a long time, due in no small part to Carl Icahn’s massive, high-conviction investment in the company. But now archrival Google Inc (NASDAQ:GOOGL) joins the portfolio too, due mostly to a high-conviction buy by David Tepper.
Tepper runs a concentrated portfolio of 28 stocks at Appaloosa Management, of which Google is one of the largest. Tepper owns both the A shares (GOOGL), which have voting rights, and the C shares (NASDAQ:GOOG), which do not. Between the two share classes, Google is Tepper’s second-largest holding. Only General Motors (NYSE:GM) — which is also an IBLN holding — has a larger allocation.
I’ve never been the biggest fan of Google, as the company is notorious for burning shareholder money on quixotic projects that rarely pan out. I prefer Apple and Microsoft Corporation (NASDAQ:MSFT), both of which have evolved into disciplined, shareholder-friendly companies over the past decade. But given his conviction, Tepper clearly sees value here.
Hot Stocks to Buy — Yahoo! Inc. (YHOO)
Also joining the portfolio is Yahoo! Inc. (NASDAQ:YHOO), a company that has really struggled to compete in recent years with search rival Google. Value investors have been attracted to Yahoo’s large cash position and its stake in Alibaba Group Holding Ltd (NASDAQ:BABA). Yet the question remains open as to what Yahoo intends to do with its Alibaba windfall.
Yahoo makes the cut due to high-conviction buying by David Einhorn of Greenlight Capital. Einhorn made a major new purchase of Yahoo last quarter, and Yahoo now makes up about 1.4% of his portfolio.
Einhorn has 42 publicly traded hot stocks in his portfolio, 56% of which is in the tech sector. Like Icahn, Einhorn also owns a lot of Apple, which makes up about 13% of his portfolio.
Hot Stocks to Buy — Time Warner Inc. (TWX)
Another recent Einhorn pick is Time Warner Inc. (NYSE:TWX). This pick surprises me, as I see paid TV as a sector ripe for upheaval. I expect Dish Network’s (NASDAQ:DISH) introduction of Sling TV, an internet-based “Netflix-like” cable service, to be a major disruptor in the coming years, encouraging cord cutting and pushing down the prices paid to all content providers. Yet Einhorn clearly sees value here, as Time Warner has quickly become his sixth-largest portfolio holding.
And he’s not alone. Leon Cooperman and Steve Cohen also were busily buying shares last quarter.
I should point out that Time Warner Inc. is a media company, not a cable company — the cable company is Time Warner Cable (NYSE:TWC). TWX owns, among other properties, HBO, Cinemax, CNN, TBS and TNT. And the successful introduction of HBO GO as a standalone paid service could very well be the catalyst that sends this stock higher. (Interestingly, TNT, TBS and CNN are all included in Dish’s basic Sling TV package.)
Whether all of this compensates for the slow decline in cable news and marginal cable channels remains to be seen.
Hot Stocks to Buy — Mohawk Industries, Inc (MHK)
Americans will put some of the money they’re saving on gas into improving their homes. At least that seems to be the rationale for flooring manufacturer Mohawk Industries’ (NYSE:MHK) addition to the IBLN portfolio. Brazilian billionaire Jorge Lemann has been a high-conviction buyer of Mohawk.
You might not be familiar with Lemann, but you should be. He’s the wealthiest man in Brazil and is ranked by Forbes as the 34th richest person on the planet. Bloomberg also called him “the World’s Most Interesting Billionaire,” in a tongue-in-cheek comparison to the “Most Interest Man in World” of Dos Equis beer commercial fame.
The title is deserved on two counts. Not only is Lemann a fascinating man of the world — a five-time national tennis champion who splits his time between Brazil and Switzerland — he’s also in the beer business. Lemann and his partners at 3G Capital dominate Anheuser-Busch Inbev SA (ADR)’s (NYSE:BUD) Board of Directors.
Ironically, Dos Equis is not a BUD product; it is owned by rival Heineken (OTCMKTS:HEINY)
Hot Stocks to Buy — Goodyear Tire & Rubber Co (GT)
And finally, we have one last consumer discretionary pick from David Tepper, Goodyear Tire & Rubber Co (NASDAQ:GT). Goodyear joins General Motors as a play on falling gasoline prices leading to more spending and more driving by American consumers.
We’ll see if the American consumer comes through; I’m personally a little skeptical on that front. Still, Goodyear trades at a very reasonable 13.5 times earnings and 0.4 times sales.
Goodyear has seen better days; its per share revenues have been declining for years, even while its debt burden has continued to grow. Still, Tepper seems to see something in the company he likes. Tepper owns a 3.7% stake in the company that accounts for fully 7.2% of his assets under management.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long AAPL, GM and MSFT. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.