The fourth quarter of 2022 marked a slight recovery for equity markets as they recouped some of their losses from the rest of the year. The S&P 500 climbed 7.6% for the quarter to end the year with a loss of 18.1%, while the Nasdaq narrowed its loss to 0.8% for the quarter to end the year down 32.5% and the Dow Jones Industrial Average popped 15.3% for a full-year drawdown of just 8.7%.
However, there were still plenty of stocks that investors were bearish on. According to GuruFocus’ Hot Picks, a Premium feature which allows investors to screen for the stocks that had the highest number of guru buys or sells based on the most recent regulatory filings, here are the five stocks that gurus were most bearish on in the fourth quarter, as determined by net sells.
Investors should be aware that the data in this article is based on 13F filings for investing firms and portfolio updates for mutual funds, which do not provide a complete picture of a guru’s holdings. The 13Fs include only U.S. common stocks, while the mutual fund updates typically include both U.S. and foreign common stocks. Neither include other assets or investments such as bonds, credit, etc. All numbers are as of the quarter’s end only; it is possible the gurus may have already made changes to the positions after the quarter ended. However, even this limited data can provide valuable information.
Merck & Co Inc.
Merck & Co Inc. (MRK, Financial) had 25 guru sells during the quarter versus six buys, resulting in 19 net sells. Sellers include Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Murray Stahl (Trades, Portfolio) and Charles Brandes (Trades, Portfolio), while buyers include Jeremy Grantham (Trades, Portfolio), Ron Baron (Trades, Portfolio) and Jefferies Group (Trades, Portfolio). Gurus have become increasingly bearish on the stock over the past year.
Merck is a pharmaceutical giant based in Kenilworth, New Jersey that focuses its research primarily on vaccines, oncology, infectious diseases and cardio-metabolic disorders. It also has an animal health division which represents about 10% of its sales.
Following years of rapid growth, Merck is expected to see declines in sales of its Covid treatments as the pandemic eases. It is also set to lose patent protections for its blockbuster drug Keytruda in 2028, and while Merck is making efforts to extend its patents on the drug, investors can’t ignore the possibility of biosimilar competition emerging in a few years’ time. Given these concerns, some may see the stock as too pricey, even though it looks fairly valued based on some measures like the GF Value chart.
Microsoft Corp
Microsoft Corp. (MSFT, Financial) had 34 guru sells and 17 buys during the quarter for a total of 17 net sells. Those selling the stock included Baillie Gifford (Trades, Portfolio), Catherine Wood (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio), while buyers included First Eagle Investment (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Al Gore (Trades, Portfolio). Gurus have mostly been selling Microsoft in recent years, with the exception of the third quarter of 2022.
Microsoft is an American tech giant best known for its Windows operating systems, Microsoft Office suite and web browsers. It also has gaming operations through Xbox and has tapped cloud computing, internet of things and artificial intelligence for growth avenues.
The main bear case on Microsoft centers on it potentially being sensitive to worsening economic conditions. Just when it seemed like Microsoft’s growth might be slowing down purely due to the massive size of the company, it turned its cloud business into one of the industry’s giants, but tech-focused growth stocks have come under pressure due to the high-inflation environment, and Microsoft has been no exception. Moreover, some worry that the planned $68.7 billion acquisition of Activision Blizzard (ATVI, Financial) will come at a poor time as the company tries to cut costs elsewhere. According to the Peter Lynch chart, Microsoft is cheaper than it was in 2021 but hasn’t quite fallen back to undervalued territory.
Mastercard Inc.
Mastercard Inc. (MA, Financial) was sold by 21 gurus and bought by five during the quarter, resulting in 16 net sells. Sellers of the stock included Chuck Akre (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Steve Mandel (Trades, Portfolio), while buyers included Tiger Management (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio). Gurus have been net bearish on the stock in recent years.
As a dominant credit card provider in the U.S., operating a duopoly with rival Visa Inc. (V, Financial), Mastercard has an incredibly strong business moat due to economies of scale. The company makes money by charging interest on credit card balances as well as by taking a percentage of the profits from each transaction from businesses, which provides built-in inflation protection and allows the company to directly benefit from economic growth.
Of course, this business model also means that Mastercard falters in the face of major economic downturns as people spend less money on fewer purchases. Any extra gains from customers having to carry larger credit balances due to a floundering economy are mitigated by bankruptcies. We can see this in the chart below showing the company’s earnings and revenue per share (the grey bars represent U.S. recessions).
Cisco Systems Inc.
There were 19 gurus selling shares of Cisco Systems Inc. (CSCO, Financial) while five bought the stock during the quarter for a total of 14 net sells. Joel Greenblatt (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Tweedy Browne (Trades, Portfolio) were among the sellers of the stock, while John Hussman (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and Baillie Gifford (Trades, Portfolio) were among the buyers. The fourth quarter marked a sharp uptick in guru sells.
Cisco Systems is a multinational technology company and worldwide leader in IT, networking and cybersecurity solutions. Based in San Jose, California, the company develops, manufactures and sells networking hardware, software, telecommunications equipment and other tech products.
Despite the growth of its cybersecurity business, Cisco is far from a growth stock, falling more in the value basket with its slow but steady growth, a solid dividend yield of 3.1% and a Piotroski F-Score of 6 out of 9 indicating a strong balance sheet. However, the company’s growth has slowed down even more in recent years with a three-year revenue per share growth rate of 1.8% and a three-year earnings per share growth rate of 2.6%.
Visa Inc.
Visa Inc. (V, Financial) was sold by 22 gurus during the quarter while nine bought the stock, resulting in 13 net sells. Those selling the stock included Frank Sands (Trades, Portfolio), Primecap Management and Philippe Laffont (Trades, Portfolio), while buyers included Andreas Halvorsen (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Caxton Associates (Trades, Portfolio). Gurus have become increasingly bearish on the stock over the past few quarters.
Visa is the main rival of Mastercard Inc. (MA, Financial). From the customer’s perspective, these two American credit card giants are practically interchangeable, offering nearly identical services and global merchant acceptance, though Visa is the larger of the two in terms of transactions, purchase volumes and cards in circulation.
That means Visa’s headwinds are also mostly the same – it likely won’t do well if there is another recession and its customers’ purchase volumes drop. Some differences between these two from the investor’s perspective are that Visa’s margins tend to be higher, and that Mastercard theoretically has more room to grow since it’s currently smaller than its rival.
