Looking for trends in hedge fund activity is always an exciting process. We know that over the long term, hedge funds tend to underperform the market, but fees usually make up a good deal of underperformance.
What's more, using the S&P 500 as a hedge fund benchmark overlooks one of the key selling points of funds, which is that they can produce uncorrelated returns. Most hedge fund investors hold a basket of funds as part of a well-diversified portfolio with the goal of producing steady positive returns over the long term.
Owning just one or two funds and hoping they outperform the S&P 500 isn't much of a strategy at all.
Every hedge fund pursues its own strategy depending on the manager, which is why it's so fascinating to look at the stocks they own. In doing so we can gain fascinating insight into the managers' investment strategies.
A big bet
One of the most "added" stocks to hedge fund portfolios over the past six months according to data supplied by GuruFocus and the Securities and Exchange Commission is Micron Technology (MU, Financial).
Value investors appear to love this stock. At the end of the first quarter of 2019, two of the best value investors in the business, Mohnish Pabrai (Trades, Portfolio) and David Tepper (Trades, Portfolio), had both allocated substantial amounts of their portfolios to this one position.
Tepper has been a supporter of the semiconductor business for some time. He first began building a position back in the fourth quarter of 2010, accumulating 14.5 million shares by the end of 2011, before selling the entire position in one fell swoop as Micron's stock price languished around $10.
He returned in the first quarter of 2015, acquiring a total of 3.5 million shares, but then sold the stake as the stock slumped to around $10 from $35. At the end of 2016, Tepper returned. Between the fourth quarter of 2016 and the second quarter of 2018, he accumulated 40.5 million shares in Micron, making it 29% of Appaloosa Management's investment portfolio. During this buying spree, Tepper was paying between $22 and $45 per share. However, after building his sizeable position in the stock, Tepper began selling in the third quarter of 2018, after the shares peaked at around $64. He dumped a total of 24 million shares, before turning around and starting to buy again at the beginning of this year.
Pabrai's Pabrai Investments was also a buyer of Micron during the first quarter of 2019.
Pabrai first starting buying the stock in the last three months of 2018, initially acquiring 550,000 shares at an average price of $31.74. Since then he's boosted the position by more than 1 million shares to 1.7 million shares, making it a 26.5% portfolio weight.
What's interesting about the positions owned by both Pabrai and Tepper is that they've both made the holding such a large weighing in their portfolios. Both of these managers have a history of waiting for the perfect opportunity and then aggressively building a position when the time is right. Buying patterns in Micron stock seem to suggest that this is what they're doing this time around as well.
Other managers also buying
But it's not just Tepper and Pabrai who have been buying Micron over the past six to nine months.
Other value managers have also dipped their toes in. Bill Miller's Miller Value Partners (Trades, Portfolio) owns around 1.9 million shares (more than Pabrai based on first-quarter 2019 13F filings) after increasing its stake by nearly 170% during the first three months of the year, making it a 3.1% portfolio weight. Prem Watsa (Trades, Portfolio)'s Fairfax Financial Holdings acquired a total of 250,000 shares in Micron during the first three months of the year at an average price of around $41, making it a 0.6% portfolio weight. Lee Ainslie (Trades, Portfolio)'s Maverick Capital also owns a few hundred thousand shares.
That these managers are still buying seems to suggest that they believe Micron is undervalued at $40 per share. These big bets are relatively rare in the hedge fund industry, as they can make or break careers. That two highly successful investors have been willing to allocate such a large portion of their investors' funds to Micron tells me that they think the stock is deeply undervalued, has a low risk of a permanent capital impairment and has a wide margin of safety.
Disclosure: The author owns no share mentioned.
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