New York hedge fund manager Louis Moore Bacon (Trades, Portfolio) invests in companies with a global macro strategy. Since the 1990s, Bacon has been among the top 20 “money earners.” The guru axed his entire stake in Citigroup Inc. (C, Financial) and JPMorgan Chase & Co. (JPM, Financial) and nearly eight-ninths of his stake in Bank of America Corp. (BAC, Financial). With the proceeds, Bacon invested in MasterCard Inc. (MA, Financial), Alphabet Inc. (GOOGL, Financial) and The Priceline Group Inc. (PCLN, Financial).
Guru dumps global bank empire
The Moore Capital Management manager sold 1,500,216 shares of Citigroup, 4,444,557 shares of Bank of America and 925,000 shares of JPMorgan Chase. These three companies averaged $45.49 per share, $14.89 per share and $65.20 per share. With these three transactions, Bacon trimmed 7% of his portfolio in the aggregate.
As discussed in a previous article, Citigroup reported weaker earnings performance during the third quarter compared to the prior quarter. Third-quarter earnings underperformed second-quarter earnings by 11 cents per share as revenues decreased 4%, likely due to a 49% revenue decrease in Citi Holdings. Additionally, Citigroup’s net income dropped 8% during the quarter ended Sept. 30. Likely due to decreasing net incomes, Citigroup’s profitability rank is a modest 5 out of 10. The global bank’s return on equity ranks lower than 66% of its competitors.
Several gurus, including Seth Klarman (Trades, Portfolio), eliminated their Citigroup position. Citigroup was one of Klarman’s largest sells in the third quarter.
Like Citigroup, JPMorgan also realized an 8% decline in net income for the third quarter. The earnings report discussed likely reasons for the lower net income. These include higher provisions for credit losses and income tax expense with the former increasing $682 million from the prior-year quarter due to reserve increases and higher net chargeoffs.
JPMorgan’s three-year revenue growth of -0.40% is near a 10-year low and underperforms 67% of global banks. As the company exhibits low growth potential, Arnold Schneider (Trades, Portfolio) also eliminated his stake in JPMorgan.
Although the bank reported strong third-quarter earnings, Bank of America still has a modest profitability rank of 5. The bank’s operating margin and return on equity underperform 61% and 73% of competitors. Additionally, the company’s per-share revenue growth has declined, with a three-year revenue growth of -1.4%.
Among the gurus that reduced their stakes in Bank of America, Bacon had the second-largest negative impact to his portfolio. Only Bruce Berkowitz (Trades, Portfolio), who knocked off 10.29% with his Bank of America transaction, had a larger portfolio impact.
MasterCard
While Bacon significantly reduced his positions in global banks, the Moore Capital manager invested in credit services company MasterCard, purchasing 245,184 shares at an average price of $95.88 per share. The guru increased his portfolio by 0.86%.
MasterCard has a financial strength rank of 7, and its profitability ranks a strong 9 out of 10. The company has high F and Z scores, the latter implying almost no distress. The company generates high value potential as its return on invested capital significantly outperforms its WACC.
The credit services company reported solid third-quarter performance, including a 21% increase in net revenues and a 26% increase in diluted earnings per share from third-quarter 2015. Increases in processed transactions, cross-border volumes and gross dollar volume all contributed to the high increase in net revenue, which further led to expanding operating margins. As of Nov. 17, MasterCard’s margins and returns are all near a 10-year high, with margins outperforming 82% of competitors and returns outperforming 98%.
As the company exhibits high value potential to investors, several gurus expanded their positions in MasterCard. Tom Russo (Trades, Portfolio) and Andreas Halvorsen (Trades, Portfolio), who own the two largest stakes in the company, added 0.37% and 19.46%.
Alphabet
Bacon purchased 74,569 Class A shares of Alphabet, an online media company based in California. The stock averaged $782.19 per share during the third quarter, and Bacon increased his portfolio about 2% with the transaction.
As discussed in a previous article, Alphabet has a robust business operation and produced a solid third-quarter performance. The company has consistent per-share revenue growth and abundant interest coverage. Additionally, Alphabet’s price-earnings (P/E) ratio and price-book (P/B) ratio are near 52-week lows.
Several gurus invested in Alphabet as the company offers high value potential. Steven Cohen (Trades, Portfolio) purchased 419,288 shares of Alphabet, the largest stake among gurus that took a long position. Stanley Druckenmiller (Trades, Portfolio) and Eric Mindich (Trades, Portfolio) also invested in Alphabet, purchasing 25,000 and 37,000 respective shares.
Priceline
The guru invested 14,500 shares of Priceline, an online travel service company. The stock averaged $1,393.91 per share during the third quarter.
Priceline has a five-star predictability rank, and its profitability ranks 9 out of 10. The company’s margins and returns outperform over 88% of competitors, even though the latter is near a 10-year low.
The company produced solid third-quarter financial results, including a 25% increase in gross travel and a 22% increase in gross profit. Company gross margins sharply increased during the past 10 years, reaching 97.25% as of September.
CEO Jeff Boyd praised the company’s strong execution during the peak summer travel session with global bookings increasing 29% from third quarter 2015 to third quarter 2016. The acceleration of hotel reservations demonstrates the company’s favorable market and diverse global platform, and Boyd expects these trends to continue in the fourth quarter.
Even though the company trades at significantly high prices, Priceline still offers high value potential to investors. Several gurus, including Julian Robertson (Trades, Portfolio) and Druckenmiller, invested in Priceline. The top three Priceline guru holders all expanded their stake in Priceline, as summarized in the table below.
| Guru Name | # of Shares Purchased | Percent of Increase from Prior Quarter | Shares as of Sept. 30 |
| Frank Sands (Trades, Portfolio) | 174,583 | 14.78 | 1,355,801 |
| Chase Coleman (Trades, Portfolio) | 170,669 | 22.76 | 920,669 |
| Dodge & Cox | 132,580 | 19.65 | 807,358 |
See also
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Disclosure: The author has no position in the stocks mentioned in the article.
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