GuruFocus provides tools and screens to look at 13-F filings in the aggregate and discover lots of information about the famous gurus of value investing. I used the aggregated portfolio tool to sort guru holdings on combined weighting percentage. Basically it shows us which stocks value investment gurus have allocated the most funds to.
Since J. L. Kelly Jr. gave us the Kelly criterion in 1956, we know that means these are the highest conviction picks of these super investors. This is not quite true, however, because there are a few things messing up that logic. First, the U.S. tax code and long term capital gains tax and some stocks have multiple securities listed under different names.
Alphabet, aka Google, is a prime example. It is listed with the GOOG and GOOGL ticker. One has voting rights and the other does not. GOOGL is 21st on this list. Warren Buffett (Trades, Portfolio)’s Berkshire also has two listings and they are actually both in the top 10. If it did not have two listings, AIG (AIG) would also have made the top 10. If you add up both Google tickers, it gets to a combined weighting of about 95%, and if you add up the Berkshire tickers, it gets to 158 and has the highest combined weighting of all stocks within guru portfolios.
Before you copy this list
GuruFocus is designed with the premise that coattailing famous investors with proven track records makes sense, and I believe it does. However, there are a few things to consider before buying the entire top 10 and calling it a day.
Because of tax considerations, hold decisions do not confer as much information as buy decisions, but sell decisions are probably more important. Because a tax is incurred when a security is sold, many gurus emphasize the importance of holding on for the long term. They are likely to hold on even when a stock is somewhat overvalued. What this means in practice is that buying into a holding of a guru is not as effective as following their buys. Although the teachings of the Kelly Criterion imply that larger holdings are higher conviction bets, that is not necessarily true because of tax considerations.
What I like to do is look at the ratio between buys and sells by gurus in the quarter. A pattern emerges where gurus are only net buyers in Apple (AAPL, Financial) and Allergan (AGN, Financial). In all the other stocks, more gurus have been selling than buying. This certainly does not mean the other stocks are overvalued, but it does make Apple and Allergan the more attractive stocks to look at.
Another thing to consider is that a few gurus such Bill Ackman (Trades, Portfolio) and Ruane Cunniff have an extremely high allocation to Valeant Pharmaceuticals (VRX). Valeant is a pharmaceutical company that was the subject of some major controversy because of a specialty pharmacy it owned. Given the nature of the media coverage around this event, and the way these gurus actively defended their holding, I don’t think they are entirely free to sell out. If they did, it would have a major impact on the stock and I suspect they wouldn’t be able to get out without incurring severe losses. Therefore, they may be less inclined to trade out than they would be in a world without laws around disclosure. This is my long-winded way of saying that before copying Valeant, investors should take note of the small number of gurus owning it and the extreme allocations.
Because Apple and Allergan are currently selling like hotcakes with the gurus, I want to highlight these two companies. Interestingly they were also two out of four stocks guru Scott Black (Trades, Portfolio) recently talked about on CNBC.
Apple
Apple has been such a growth monster over the past decade, that it is surprising to see it is so widely held by a crowd of super value investors and it is actively being bought. The fact that it sold off about 20% over the past few months likely plays a role in that.
One of the reasons the stock sold off is that Apple missed one of its earnings forecasts. This is something the company very rarely does.
The bull case is predicated on Apple’s enormous overseas cash hoard. The idea that the tax code may be out of touch with the times is slowly taking hold, and it is not impossible Apple will be able to bring some of it home at a lower than the current applicable rate. If you back out cash, short- and long-term investments, the company trades at a very modest adjusted EV/EBITDA multiple of 5.2x. Clearly the market is expecting the company’s performance to get into a major slump.
The company getting into a slump is not unfathomable to me, but I have been something of a consistent Apple bear since the iPod, and have been proven wrong time and time again. The reason I actually deem it a reasonable prospect is because of the company’s short product cycles. Every year it has to come out with superior products, while there is a host of competitors out there trying to beat them every way they can. The company has some solid competitive advantages like its premium brand, economies of scale and superior app ecosystem, but slowly the competition has been whittling away at it.
However, gurus are buying into it in droves and it is hard to argue with their results. David Einhorn (Trades, Portfolio) and Carl Icahn (Trades, Portfolio), two of my all-time favorite gurus have allocated no less than 20% of assets under management to the company.
Allergan
Allergan is something of a special situation. Gurus apparently are en-masse betting that Pfizer (PFE) will succeed in de facto taking over Allergan and its shareholders will end up with a stake of $142 billion or something near that before the end of next year. The market is skeptical because the company trades at $123 billion. That’s a 15% gap which would be a more than adequate return if the deal closed near the end of 2016, but an amazing return if it closed early in the second half of 2016.
The market is skeptical because elections are coming up and politicians are fuming because the reverse merger is tax incentivized. Allergan is based in Dublin and Pfizer could potentially save tens of billions of dollars per year on its tax bill after the merger.
Meanwhile, the company isn’t that expensive to begin with. According to Black’s earnings estimate, the company trades at approximately 15x earnings since the bid. That’s certainly not outrageous if you look at the S&P 500 and sector average of 19.3x and 64x. Although there is some additional risk because the deal is in all stock, that is mitigated by the tax component of the deal. If it goes through but the share price of Pfizer has gone down for some reason, there is the cushion of the combined company’s earnings that will automatically get a boost through lesser tax.
It is interesting that there is a tax component to both of these gurus' top holding, but then again, not that surprising. Value investors tend to like tangible and real benefits, and paying less taxes is a tangible benefit that doesn’t require many leaps of faith like high rates of adoption of the product.
Gurus are buying in en-masse including Paul Singer (Trades, Portfolio), George Soros (Trades,Portfolio) and Kyle Bass (Trades, Portfolio) to Jana Partners (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and many others.
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