In just six months, Wall Street has come full circle and gone on the ride of its life in the process. Uncertainty and panic created by the coronavirus disease 2019 (COVID-19) pandemic initially stripped the S&P 500 of 34% of its value in a span of 33 calendar days. It then took less than five months for the benchmark index to regain everything it had lost. At no point in history have we ever witnessed volatility like this.
Given the massive disconnect between Wall Street and the U.S. economy, Form 13F filings took on added importance this quarter.
A 13F is regulatory filing with the Securities and Exchange Commission that's required of all money managers and businesses with more than $100 million in assets under management. In short, it allows Wall Street and investors to see what was held as of the end of the most recent quarter (in this case, the second quarter), and most importantly decipher what's been bought and sold over the previous quarter.
With record-breaking volatility, it shouldn't come as much of a surprise that billionaire money managers were active buyers. In many instances, the top-performing stocks over the trailing year saw their aggregate ownership among 13F filers increase during the second quarter. Remember, though volatility can be scary at times, it's actually a great thing since it often allows investors to buy into high-quality businesses at a discount.
But not all billionaire money managers were convinced that the second-quarter rally has legs. As stocks marched higher, these three exceptionally popular high-flying stocks were dumped by billionaires.
You'd hardly know it by the nearly parabolic move in shares of Apple (NASDAQ: AAPL) over the past month that took its valuation to north of $2 trillion, but Wall Street wasn't exactly thrilled with the technology kingpin in the second quarter. Jeff Yass' Susquehanna International sold more than 4 million shares (80% of its stake), while Jim Simons' Renaissance Technologies liquidated its entire 979,033-share position. In total, 13F filers sold approximately 140 million shares of Apple during Q2, reducing their holdings by 5.2% from the sequential quarter.
Why sell a company that's proved time and again that it's virtually unstoppable? The best answer I can offer is its valuation.
In recent years, CEO Tim Cook has emphasized an ongoing transition at his company from a product-oriented business to one that's focused on services and wearables. These latter two categories are considerably higher margin than products, and the revenue recognition for services tends to be very predictable. It also doesn't hurt that services are based on subscriptions, which help to keep consumers loyal to the brand.
The thing is, most pure-play subscription service tech stocks are touting high double-digit or triple-digit forward price-to-earnings ratios on Wall Street. Apple is currently valued at 39 times Wall Street's forecast earnings for 2021, but it only generated 22% of its sales in Q2 from services. It's also historically been valued between 10 and 20 times its forward earnings for more than a decade prior to 2020. This isn't to say that Apple's growth engine has stalled by any means. However, a case could rightly be made that a product-dependent company shouldn't be valued like a pure-play services business.
Advanced Micro Devices
Another highflier stock that made billionaire money managers head for the exit is semiconductor giant Advanced Micro Devices (NASDAQ: AMD), which you probably know better as AMD. Renaissance Technologies dumped over 3.95 million shares of AMD in the second quarter, leaving the hedge fund with a token position of just 16,474 shares, with Ken Griffin's Citadel Advisors selling 1.74 million shares. Overall, 13F filers sold more than 41 million shares of AMD in Q2, reducing their aggregate holdings by 5.1% from Q1 2020.
The way I see it, there are probably two reasons money managers were a bit gun-shy about AMD in the second quarter. First and most obvious is the COVID-19 pandemic. Although people are staying home more and playing video games, which is presumably good news for AMD's graphics processing units (GPU) sales, processing chips for PCs and notebooks have been expected to take a hit from the pandemic.
The second downside catalyst could simply be history. AMD has long played second fiddle to Intel in processing chips, and it's been fighting an uphill battle against NVIDIA in GPUs. Over the past quarter of a century, it became time to sell the highly cyclical AMD anytime it crept over $40 a share. With AMD spending much of the second quarter in the $50+ range, money managers might have felt it smart to side with history and book their gains.
Interestingly, though, AMD continues to chip away at Intel's processing market share, and it's been quite competitive against NVIDIA's perceived-to-be superior GPUs. AMD has also claimed big wins in the gaming console space. Thus far, these billionaires have regretted their decision to sell.
However, the only high-flying stock to see a double-digit decline in ownership among 13F filers in the second quarter is e-commerce behemoth Amazon (NASDAQ: AMZN). Ole Andreas Halvorsen's Viking Global Investors reduced its stake by 30% (267,714 shares), whereas Renaissance Technologies continued its active selling of highfliers by closing its 192,855-share position in Amazon. For the quarter, Amazon saw more than 35 million shares sold by 13F filers, equating to an 11% reduction from the sequential first quarter.
Why sell Amazon? One possibility is very similar to what I suggested above with AMD. You see, Amazon has a tendency to retrace many of its significant moves higher. Think of it this way: Amazon is always taking more steps forward than backwards, but it usually takes three steps back after it takes five steps forward. Money managers might simply be counting on Amazon to stick with its typical response to taking five steps forward (e.g., nearly doubling off of its March 2020 lows) by paring down their positions or heading for the exit.
I know this might sound comical, but billionaires might also be concerned with Amazon's valuation. Though Wall Street hasn't seemed to care about Amazon's forward earnings multiples for two decades, we are talking about a company that generates the bulk of its revenue from low-margin retail. During a recession, valuation typically takes on greater focus among investors.
But as I've previously discussed, selling Amazon because you think it's expensive relative to its earnings would be a mistake. This is a company that should be valued based on its operating cash flow, and over the next four years, Amazon's operating cash flow could nearly triple. With its cloud infrastructure service segment growing by nearly 30% and Amazon controlling an estimated 44% of all U.S. online sales, it's certainly not a company I'd suggest any investor consider selling.
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