According to Investopedia, a Form 13F is:
An SEC reporting form filed by institutional investment managers in accordance with the provisions of section 13(f) of the Securities and Exchange Act of 1934, which states that all institutional investment managers who are managing over $100 million on the last trading day of any month of the calendar year must disclose their holdings on a quarterly basis.
Due to their value tilt, I have highlighted changes in Warren Buffett's, John Paulson's, and Bill Ackman's holdings below.
Warren Buffett
There were no key additions to Berkshire Hathaway portfolio of publicly traded companies during Q4 2010. Instead, most of the major changes came from the elimination of core holdings in the portfolio. Key eliminations included the entire share of Bank of America, Comcast, Loews Companies, Nalco Holdings, Nestle and Nike. Other positions that were reduced some include Bank of New York Mellon.
Most of the positions that were eliminated were in the $200-$300 million range. These are the typical size of the stakes managed by Lou Simpson, the former GEICO stockpicker. Some of these holdings included Bank of America, Comcast, and Nike. Essentially, as some analysts have pointed out, Buffett is simply eliminating the positions he is not comfortable with as other portfolio managers will begin to take over the Berkshire portfolio.
The largest stake that was eliminated included Bank of America, which was purchased in 2007. Mr. Buffett did not approve of the "crazy price" Bank of America paid for Merrill Lynch. As Buffett said, "He could have bought them the next day for nothing because Merrill was going to go when Lehman went."
Buffett Closes Out His Bank of America Stake (click here)
Berkshire Hathaway Form 13-F (click here)
John Paulson
In an earlier post, I commented on the annual letter sent to investors in the Paulson & Co funds. Several of the additions and reductions in positions represent the themes that were stated in the letter.
Merger arbitrage positions - Mr. Paulson stated he expected M&A activity to be high in 2011, thus creating a strong environment for merger arbitrage. Two key merger arbitrage trades by the fund right now include J. Crew Group and Del Monte foods.
Distressed situations - As borrowing costs continue to decrease for lower rated companies, these firms valuations continue to look more attractive; this creates a lower cost of capital and higher firm value. In addition, Mr. Paulson stated companies that were formerly in distressed situations have repaired their balance sheets, so the upside risk is much larger than the downside risk. One position that illustrates this point is the addition of Alcoa Inc. bonds into the portfolio. Leading up to the financial crisis, Alcoa management engaged in a significant stock repurchase program using leverage to do so. When the economy went into a recession, the demand for aluminum fell and the company experienced losses. Because of the increased leverage and decreased equity, the rating agencies downgraded Alcoa many levels. The weakened credit picture forced Alcoa to have problems accessing the short-term debt markets (i.e. commercial paper). As a result of all these factors, Alcoa's credit spreads have widened greatly creating value in their bonds. Finally, the extension of the Bush-era tax cuts, Mr. Paulson is more bullish in the U.S. economy. Thus, if the economy improves, Alcoa's future improves and the company credit spreads should decrease causing the bond's value to increase. This is a pure play of an improving economy helping poor credits improve
Other examples of these type of positions include Lear Corporation (i.e. the auto industry) and International Paper.
Financials - Key reductions include reducing the common stock position in Bank of America and Citigroup. Mr. Paulson increased his position in Wells Fargo and Capital One, while adding a position in Royal Bank of Scotland. Key positions that were maintained included JPMorgan Chase, Northern Trust, and State Street.
In my opinion, Mr. Paulson saw the earnings powers of these banks diminish and had some "profit-taking" over the past quarter. JPMorgan Chase is a solid franchise that is just as strong or stronger than before the crisis. In addition, Northern Trust, State Street, and Wells Fargo are well positioned if inflationary pressures cause a large increase in interest rates; this should increase the net interest margin, thus profitability.
Inflation trade - Mr. Paulson's portfolios are positioned for the inflation trade. For example, key trades in Gold Fields Ltd, IAMGOLD, and the SPDR Gold Trust were all maintained.
John Paulson Trims Citigroup and BofA Stakes (click here)
Paulson & Co. Form 13F (click here)
Bill Ackman
Bill Ackman's Pershing Square portfolio saw a good amount of change. Positions in Automatic Data Processing (ADP), Citigroup, Kraft Foods, and Target Corp were all down. Positions in Fortune Brands and JCPenney were up.
Fortune Brands - Recently, Fortune Brands announced in its Q4 2010 earnings release that it would split itself into three brands: the spirits group that owns Jim Beam whiskey; the golf equipment unit that owns Titleist; and the home products operations that own the likes of Moen faucets.
Regarding the golf equipment part of the business, the company is seeking out large bidders (i.e. Nike) or private equity firms. If the company cannot get the right price for the golf part of the business, the firm intends for an IPO. Regarding the home products part of the business, the firm intends an IPO by late 2011. The intent is that increasing home starts will lead to an increase in demand for home products, thus creating the most value of shareholders. So, what is left of the spirits business? If firms like Diageo can overcome antitrust issues, the spirits business will be a likely target.
Fortune Brands on Track For Breakup (click here)
Video: Fortune Brands Big Breakup (click here)
Pershing Square Adds GM, Almost Triples General Growth Holding (click here)
Pershing Square Form 13F (click here)
What does this mean?
Overall, I think the investment community is very bullish on financials going forward. These three investors all reduced their positions in financials that faced the brunt of the crisis (i.e. Citi and Bank of America). If positions were added or maintained, they were to more traditional lenders (i.e. Wells Fargo) or service providers (i.e. Northern Trust or State Street) with earnings that are levered to higher interest rates and increase mortgage origination. These stocks have not performed well against the general market. To position a portfolio, I think these are great names. Other names include Bank of Hawaii (BOH) or Hudson City Bancorp (HCBK). Finally, JPMorgan should continue to deserve a look.
Overall, these investors are very bullish on the U.S. economy. One such area is in housing. For example, Mr. Paulson holds a large position on Beazer Homes. Mr. Ackman is the major driver of the Fortune Brands break-up, including pushing for an IPO for the home security business predicated on an increase in new home starts. Thus, another area to look to value right now is housing.
An area of concern I have is in the area of M&A. Although the economic picture is looking brighter for the U.S., large multinationals are going to struggle for organic growth. Instead, they will need to look at acquisitions to have earnings growth, particularly in emerging market economies. To help get a foot in these markets, buyers will often overpay for companies and may never receive the benefits. While this is good from a merger arbitrage perspective, it is bad from a value investor's perspective that looks at companies to either grow organically or allocate capital efficiently.
This information is for educational purposes only, and the opinions expressed do not constitute a recommendation to buy or sell. Author may have a position in the companies discussed, subject to change at any time. Information on this website obtained from reliable sources, but there is no guarantee of accuracy. Please consult your financial advisor before making investment decisions. Past performance is not indicative of future success.
I am long JPM.
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