In the fourth quarter of 2013, the S&P 500 hit record highs, while the majority of corporations (95) reported negative EPS guidance, and 12 issued positive EPS guidance, according to FactSet Research. The estimated earnings growth rate for all corporations for the quarter was estimated to be 6.3%, according to FactSet. The Financial sector led growth, increasing earnings by 24.2%. Energy lagged all sectors, with an 8% decline in earnings.
Reported after-tax corporate profits also continued to decline in the quarter. U.S. corporate profits after taxes grew 2% in the fourth quarter, down from 2.4% in the third quarter and 3.5% in the second.
In addition to the broad S&P 500 gain in the face of contracting corporate earnings, GDP data for the quarter gave mixed signals about the growth of the U.S. economy. The Bureau of Economic Analysis in January reported that U.S. GDP grew at an annual rate of 2.6% from the third quarter to the fourth quarter, compared to 4.1% in the third quarter. GDP grew 1.9% for the full year, compared to 2.8% for 2012.
Further, a favorite Warren Buffett (Trades, Portfolio) market valuation indicator, the ratio of market cap to GDP, indicates weak returns for the stock market going forward. The historical ratio of total market cap to GDP is currently 118%, indicating that the market is significantly overvalued, and likely to return 1.6% annually.
Against this backdrop, some prominent investors began to slough shares of popular, high-quality, mega-cap companies. According to the S&P 500 grid, the most-sold stocks of all gurus tracked by GuruFocus were Google (GOOG), Johnson & Johnson (JNJ) and Microsoft (MSFT). Each trade at or near their respective 10-year high stock price.
Google Inc. (GOOG)
In the fourth quarter, 12 gurus sold or reduced their position in Google Inc. The largest current shareholder tracked by GuruFocus is PRIMECAP Management (Trades, Portfolio), with more than 3 million shares, followed by Chris Davis (Trades, Portfolio), who holds more than 2.6 million shares.
Google’s share price in the past year has risen 37% to near a 10-year high at $543.14 a share on Friday.
For the fourth quarter, Google reported a 17% increase in revenue year over year to $16.86 billion, and net income increased to $3.38 billion from $2.89 billion.
Google has a P/E ratio of 28.7, P/B ratio of 4.2, and P/S ratio of 6.4, which is close to a three-year high.
Johnson & Johnson (JNJ)
Twelve gurus also reduced or eliminated their Johnson & Johnson positions in the fourth quarter. Gurus selling out were Louis Moore Bacon (Trades, Portfolio), George Soros (Trades, Portfolio), Vanguard Health Care Fund (Trades, Portfolio), and Joel Greenblatt (Trades, Portfolio). Prem Watsa (Trades, Portfolio) made the largest reduction, selling 97.12% of his stake and retaining 84,700 shares.
Johnson & Johnson’s share price increased 21% over the past year to near a 10-year high at $98.23 on Friday.
Johnson & Johnson’s fourth quarter sales increased 4.5% to $18.4 billion. Net earnings also increased by 37.1% to $3.52 billion.
The company has a P/E ratio of 20.3, close to a one-year low, and a P/S ratio of 4, close to a 10-year high. Its P/B ratio is 3.8.
Eleven gurus reduced or sold out of their positions in Microsoft in the fourth quarter. Richard Snow (Trades, Portfolio) and Kyle Bass (Trades, Portfolio) exited their positions in the company, and George Soros (Trades, Portfolio) made the most drastic decrease, selling 79.64% of his stake and keeping 2,560,900 shares.
In the past year, Microsoft’s stock climbed 39.4%, to almost a 10-year high at $40.99.
For the fourth quarter, Microsoft reported revenue of $24.51 billion, up from $21.46 billion in the year-ago period. Net income increased to $6.56 billion from $6.38 billion.
Microsoft has a P/E ratio of 14.7, P/B ratio of 4 and P/S ratio of 4.1, which is near a three-year high.