It appears that most hedge fund managers chose to do little buying or selling last week, when the stock market went on its four-day, 400-point pogo-stick ride following Standard & Poor’s downgrade of U.S. Treasury debt.
According to a sampling of managers and investors in a wide range of hedge fund strategies, the turmoil did not inspire many of them to make any bold moves.
“It was not a time to be aggressive,” says Leon Cooperman of Omega Advisors, who now figures that the probability of recession has climbed to 25 to 30 percent from just 10 percent.
Sources say Appaloosa Management’s David Tepper, known for his eclectic, opportunistic investing style, sold some of his financial holdings and overall did a good job of moving around his book, leaving him essentially flat for the year through August 12.
According to investors, long-short Tiger Cub Stephen Mandel Jr. of Lone Pine Capital did a little buying and some incremental shorting, but otherwise his net gross exposure did not change.
Portfolio managers at Israel Englander’s Millenium Partners multistrategy fund... were actually selling all last week, reducing positions to avoid losing even more money than they would from standing pat. Through last Friday, the fund was down about 1 percent for the month, but it remained up 5 percent for the year.
The selling underscores Englander’s general preference for avoiding losing money rather than making big gains from outsize bets. He likes to tell people he is not in the get-rich business. Those who know Englander say he believes it will take a number of years for the global debt and economic problems to be resolved, but that doesn’t mean you can’t make money trading during this period.
One investor who was aggressively buying the dips: activist hedge fund manager Jeffrey Ubben of ValueAct Capital Partners. Ubben, who has sold about $2.8 billion worth of stock in the past year or so, bought as much as $100 million of stock on some days in the past couple of weeks.
In fact, Ubben says he is about to file 13Ds with the Securities and Exchange Commission showing that he holds at least 5 percent of two core holdings in which he took initial stakes during the second quarter — Rockwell Collins and Fidelity National Financial — and added to his sizable holdings in CR Bard, Moody’s Corp., and VeriSign.
Ubben says that no matter what happens to the economy, holdings like Bard, Adobe Systems and Motorola Solutions will see earnings go up. “They are too visible and stable,” he points out. “They are not cyclical.”
He says Bard is interesting because of its low stock price and strategic asset base — it is No. 1 or 2 in 80 percent of its product lines.
Ubben, who now owns just 20 stocks, bought shares of Rockwell when it dropped $10, to $48, and picked up more of Valeant Pharmaceuticals International after watching it drop from $55 to $42.
The downward moves in the stocks may have provided Ubben with a good entry point. But they also indicate that his portfolio took quite a hit in the sell-off, halving his year-to-date return to 12 percent from 25 percent.
It did not help that shares of British software maker Misys tanked when Fidelity National Information Services abandoned its acquisition of the company.
Even after all of his buying, Ubben still has $700 million in dry powder to spend.
So what are these two new core holdings? Rockwell, a specialist in avionics, gets half its business from defense and half from commercial customers. It is providing all of the electronics for Boeing Co.’s new 787, while its defense business is benefitting from the modernization of fleets of government helicopters and tankers.
Ubben thinks Rockwell’s earnings before interest, taxes, depreciation and amortization will grow by 8 to 10 percent and earnings per share by 13 to 14 percent. Its stock, however, has dropped from 75 to 47, nearly halving the price-earnings ratio to 11. Ubben says the company generates so much cash that it could afford to buy back 6 percent of its stock from its free cash flow this quarter alone.
Fidelity is a title insurer that has a strong residential and commercial business. Ubben is a big fan of its management team, citing, for example, its purchase of several title-underwriting subsidiaries from bankrupt LandAmerica Financial Group several years ago.
According to Ubben, the stock is trading at about book value, which he believes is way understated, noting that it is overreserved. It recently used $75 million in proceeds from a debt offering to buy back stock. “Fidelity National gets it,” Ubben says.
Meanwhile, Ubben is about to report that he has raised his stake in debt rating agency Moody’s. He earlier said in a regulatory filing that he may engage in discussions with management or directors, other shareholders, industry analysts, existing or potential strategic partners or competitors, investment and financing professionals, sources of credit and other investors.
Since 2001, ValueAct has made at least 60 core investments. During that time its partners or other key people have sat on 27 boards of directors and helped to sell 18 businesses.
