Among all stocks listed on the Standard & Poor’s 500 index, technology stocks have high ownership among gurus, according to the S&P 500 Guru Grid. With a combined rating of 169%, Microsoft Corp. (MSFT, Financial) has the highest combined weighting of all gurus among S&P 500 stocks. Alphabet Inc. (GOOGL) and Apple Inc. (AAPL, Financial) have the second- and third-highest combined weightings. Although these technology companies are heavily owned by gurus, the top two technology stocks featured major sellouts during the first half of the year.
More than just a grid of stocks
While it is not really a screener per se, the S&P 500 Guru Grid organizes the top 500 stocks based on one of four “guru parameters”: guru ownership, buys, sells and net buys, for the previous three months. GuruFocus users can access the grid in two convenient ways: within the home page to the right of “Investing Ideas” or under the “Screeners” tab. Upon access, the grid displays the top 500 stocks based on guru buys, the default guru parameter for the S&P 500 Grid.
The “Buys S&P 500 Stocks” grid organizes the stocks based on the number of guru buys. Stocks that have a higher number of buys are featured toward the top-left corner while stocks that have a low number of buys appear toward the bottom right. Additionally, the stocks are highlighted in various shades of green: stocks that have the highest number of buys get darker green shades. Similarly, the “Sells S&P 500 Stocks” grid lists the stocks with high number of sells toward the top-left corner. The stocks with high numbers of sells get the darkest red shades.
Like the “Buys” grid, the “Own S&P 500 Stocks” grid only features green shades. Stocks that have the highest guru ownership are featured toward the top left and receive deeper green shades. Lastly, the “Net Buys S&P 500 Stocks” grid organizes stocks with the highest net buys toward the top left and stocks with the highest net sells toward the bottom right. The “Net Buys” grid features both green and red shades.
The above descriptions of the four grids assume that the grid is ordered by number of gurus. Among the guru parameters, the “net buys” parameter does not work when the grid is ordered by combined weightings. This results in a scattered grid of green and red stocks, as shown in the screen shot below.
While Microsoft has the highest combined weighting, the Washington-based application software company had 21 net sells in the past three months, suggesting that gurus are losing interest in the company. Based on its 15-year financials, the software company is a potential value trap.
Although Microsoft’s current operating margin outperforms 84% of global software – infrastructure companies, the software company experienced contracting operating margins during the past five years. Furthermore, Microsoft’s gross margins have declined during the past seven years, suggesting that the company is losing market share to its competitors. In its recent 10-Q, the management of Microsoft observed that their industry is “dynamic and highly competitive”: technological advances can happen very frequently and often without notice. Unfavorable foreign currency impacts further decreased the company’s revenues.
Currently, Microsoft has a financial strength rating of 7, likely due to healthy interest coverage and returns on invested capital. However, the Washington based company has a modest Piotroski F-score of 4, its all-time low. Since the 2008 financial crisis, Microsoft had volatile F-scores, which generally have decreased year over year. While the company has strong Altman Z-scores, they have decreased since the past 10 years.
With low valuation ratios, Microsoft appears to have some value. However, based on its financials and warning signs, the software company is a potential value trap. As the financials continue to weaken, many gurus have reduced their positions in Microsoft despite having a 169% combined weighting in the company. Among the gurus that have over 20 million shares of Microsoft, four of them trimmed their positions. Dodge & Cox and First Eagle Investment (Trades, Portfolio) pared their positions by 20.48% and 21.33%.
Gurus sell Apple as economic situation worsens
While Apple has the highest number of guru buys, the company also has the fourth-highest number of guru sells according to the S&P 500 Grid. Reduced net sells, especially from the Chinese market, likely steered gurus away from the computer hardware company.
Established in 1977, two years after Microsoft, Apple designs and sells an eclectic variety of products and services. With its ability to invent new products frequently, the computer hardware company has higher operating margins than 98% of global consumer electronics companies. However, Apple’s economic situation faltered in early 2016 after the Chinese government censored Apple’s iBooks and iMovies. The hardware company’s management detailed the woeful second quarter in its recent 10-Q: net sales overall tumbled 13% during the second quarter of 2016 compared to the same quarter in 2015. In Greater China alone, Apple’s net sales dropped 26%, probably due to Chinese government restrictions. Additionally, management also reported an 18% decrease in iPhone sales and a 19% decrease in iPad sales, likely due to iPhone upgrades, long iPad repurchase cycles, and overall macroeconomic hardship around the world.
As the California-based hardware company faced economic hardships in the Greater Chinese market, activist investor Carl Icahn (Trades, Portfolio) eliminated his position in Apple April 28. With the transaction, Icahn pared 16.36% of his portfolio. Julian Robertson (Trades, Portfolio), David Tepper (Trades, Portfolio) and Jim Simons (Trades, Portfolio) also wiped out their Apple positions during the first quarter. Additionally, Chase Coleman (Trades, Portfolio) knocked off 46.63% of his investment in Apple.
Grid features other technology stocks as well, especially United Technologies
Besides Apple and Microsoft, the S&P 500 Grid features other technology stocks. For example, Cisco Systems Inc. (CSCO, Financial), Qualcomm Inc. (QCOM, Financial) and United Technologies Corp. (UTX, Financial) all have more than 20 guru buys in the past three months, according to the “Buys S&P 500 Stocks” grid. Among these stocks, United Technologies has the highest number of net buys.
While the company is not directly in the information technology sector, United Technologies provide high technology products and services to aerospace companies. Currently, the aerospace technology firm’s operating margin outperforms 83% of firms in its sector. Additionally, United Technologies has expanding operating margins, suggesting that the firm has upside potential in value.
As financials strengthen, gurus with high ownership in United Technologies increase their positions in the company stock: First Pacific Advisors (Trades, Portfolio) added 9.35% while Steven Romick (Trades, Portfolio) added 8.32%. Additionally, Mason Hawkins (Trades, Portfolio), who currently owns 7.1 million shares of United Technologies, increased his position by 29.95%, resulting in a portfolio increase of 1.58%.
Broadest Owned Strategy outperforms the market; Most Weighted Strategy does not
The Most Weighted and Broadest Owned strategies contain several stocks listed on the S&P 500 Grid. As of Jan. 3, the model portfolios feature Apple, Google and Microsoft.
For the backtesting period from 2006-2016, the Broadest Owned strategy had a total return of 105.88%, the highest total return among all guru strategies listed in the following chart. While the Most Weighted strategy outperformed the S&P 500 benchmark in most years, the strategy lost significant capital in 2008 and in 2011.
One of the popular features on the GuruFocus website, the Aggregated Portfolio of Gurus lists the 50 stocks that have the highest combined weightings among gurus. This feature allows users to get investor insights and look for hot guru stocks. The Aggregated Portfolio can be customized in two different ways: users can either choose which gurus should be aggregated or which industry should be considered.
Among the default group of gurus (69 in total), Google and Microsoft have the third and fourth highest combined weighting, respectively. Apple is near the middle of the pack with the 24th-highest combined weighting among gurus. Well-known tech company International Business Machines Corp. (IBM, Financial) comes in sixth on the aggregated portfolio list.
See also
GuruFocus users can view technology stocks meeting certain criteria using the All-in-One Guru Screener. An earlier article summarizes the many filters that the screener contains and its features within the screener. Additionally, users can view the consensus picks of gurus and industry trends of gurus.
Disclosure: I currently do not own any stocks discussed in the article.
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