Everyone has an opinion about hedge funds. Most of the time the title has a somewhat negative connotation among other investors. Maybe it is because they are so extremely aggressive and unregulated. Or because they short good companies, and cater to the "super rich". Even though the very first hedge funds shorted a bear market to reduce risks, they are now very speculative and are considered riskier than the rest of the stock market. With more risk comes more reward (or not):
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies. It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.
But now according to an article in Thursday's WSJ, PIMCO the world's largest, most conservative bond fund manager (by assets) is considering "riskier alternative investments". This is due to the SEC lifting restrictions on hedge fund activities next month on September 23:
The SEC moved last month to lift a restriction prohibiting hedge funds, private-equity firms and other businesses from publicizing shares in private offerings as part of the Jumpstart Our Business Startups Act, effective Sept. 23. That allows Pimco and others to pitch alternative products more directly to institutional investors as well as wealthy individuals. "The world is going to change here because of the JOBS Act," PIMCO CEO Douglas Hodge said.
Last week I wrote about a Goldman Sachs study on the 50 companies that were most shorted by hedge funds. However as a whole, those 708 hedge funds in the Goldman Sachs study invested twice as much money in long positions as they did in short positions. The long positions were $1 trillion versus $500 billion in short investments. Here is another list from the study via the Wall Street Journal Moneybeat which shows the 50 stocks that those hedge funds "loved" the most:
|Company||Ticker||Market Cap Millions||# of Hedge Funds Owning Stock||Total Return YTD|
|Google Inc. Class A||GOOG||235,494||192||22%|
|American International Group, Inc.||AIG||69,448||174||33%|
|General Motors Company||GM||47,822||133||20%|
|JPMorgan Chase & Co.||JPM||200,594||121||24%|
|Bank of America Corporation||BAC||153,842||116||24%|
|Visa Inc. Class A||V||89,502||105||15%|
|Anadarko Petroleum Corporation||APC||44,841||101||20%|
|Hertz Global Holdings, Inc.||HTZ||9,925||100||52%|
|Cisco Systems, Inc.||CSCO||130,856||89||26%|
|MasterCard Incorporated Class A||MA||71,770||89||26%|
|Schlumberger N.V. (Schlumberger Limited)||SLB||108,488||87||19%|
|Twenty-First Century Fox, Inc. Class A||FOXA||48,270||86||42%|
|Express Scripts Holding Company||ESRX||52,084||86||18%|
|Gilead Sciences, Inc.||GILD||87,077||86||55%|
|Delta Air Lines, Inc.||DAL||16,756||85||65%|
|Liberty Global Plc Class A||LBTYA||16,912||85||20%|
|Wells Fargo & Company||WFC||228,268||82||29%|
|Occidental Petroleum Corporation||OXY||70,093||81||15%|
|Freeport-McMoRan Copper & Gold Inc.||FCX||33,129||80||-1%|
|Liberty Global Plc Class C||LBTYK||12,011||80||23%|
|CBS Corporation Class B||CBS||29,390||79||37%|
|General Electric Company||GE||244,411||79||16%|
|DISH Network Corporation Class A||DISH||9,665||78||22%|
|Comcast Corporation Class A||CMCSA||91,756||78||16%|
|EOG Resources, Inc.||EOG||42,658||76||30%|
|Johnson & Johnson||JNJ||252,359||76||30%|
|Zoetis, Inc. Class A||ZTS||15,010||76|
|HCA Holdings, Inc.||HCA||17,177||76||27%|
|LyondellBasell Industries NV||LYB||38,758||76||21%|
|The Procter & Gamble Company||PG||220,415||75||21%|
|Exxon Mobil Corporation||XOM||388,048||74||4%|
|Merck & Co., Inc.||MRK||140,378||74||19%|
|The Williams Companies, Inc.||WMB||24,151||73||10%|
|The Coca-Cola Company||KO||173,292||73||9%|
This list could be used by investors to find long or short positions. Right now Google is the hedge fund's top pick for a long position. And Apple is number 2. Both companies are headed higher or lower depending on who you listen to. According to Fusion Research Google dominates the digital ad market and 88% of its revenue comes from ads which specifically target Google search engine users based on what they are searching for. This will add a lot of new ad revenue:
Google has been eating up Yahoo!'s (NASDAQ:YHOO) search market share, which declined from 11% in 2008, to 4.9% in 2012. Google's expertise in monetizing search AdWords has resulted in the company's dominance in the search ad market, and 88% of its total advertising revenue in 2012 came from this market. The company is also known for its various search engine technological upgrades; these enhance the search experience and benefit marketers. In July this year, Google rolled out an important update to its AdWords called Enhanced Campaign. This update allows advertisers to better target their audience...
On the July Conference Call, Google SVP and Chief Business Officer Nikesh Arora said that Google Play has been a huge success. Digital ads and content are really growing and beginning to pay off. More than 50 billion apps have been downloaded from Google Play in over 190 countries:
In the last year Google Play digital content like music and movies has launched in 21 new countries including India, Mexico, Russia, with eight more European countries launching Google Play books this week. Publishers like Penguin, Random House, Time Inc. movie studies like Disney and NBC Universal, and app developers like King and Square Enix are creating terrific experiences for our users. We've also collaborated with all the major record labels to launch a new music subscription service that users seem to be enjoying really -- enjoying a lot.
The company has had an amazing year, solidly beating the rest of the market indices:
The P/E ratio is 25 with a forward P/E of 17, and revenue expected to hit almost $60 billion for 2013. However, EPS is only estimated to be $43.54 compared to $39.82 for 2012:
|Earnings Est||Current Qtr. |
|Next Qtr. |
|Current Year |
|Next Year |
|No. of Analysts||40.00||40.00||42.00||43.00|
|Year Ago EPS||9.03||10.59||39.82||43.54|
|Revenue Est||Current Qtr. |
|Next Qtr. |
|Current Year |
|Next Year |
|No. of Analysts||27||27||32||31|
|Year Ago Sales||11.33B||12.16B||42.72B||59.62B|
|Sales Growth (year/est)||30.80%||37.10%||39.60%||17.00%|
The new Moto X should bring in a lot of new revenue without alienating other Android partners. It is rumored that Google's marketing budget for this sexy new phone is going to be $500 million. Google CEO Larry Page said that they are very excited about it. The phone does not need to "wake up" for you to check the time or notifications because everything is always on and showing. It is currently available at AT$T (NYSE:T) for $199 with a two year contract.
According to Slate Magazine on Thursday, Google's recent investment in Uber has more potential than most analysts realize:
Google's eye-popping $258 million investment in the car-hailing app company Uber made headlines last week. It's the search giant's biggest-ever venture capital investment, and it gives a much-discussed but rather small-scale company a delirious $3.5 billion valuation. But so far, the commentary on the deal-which has been mostly focused on bubble speculation and startup mania-has missed the real story. Google's interest in Uber is likely connected to their ongoing investments in driverless or autonomous cars, and it shows that the potential of this technology is much greater than is commonly realized.
But not everyone is bullish on Google. The shares dropped from a 52 week high of $928 after the July earnings report. Bill Maurer predicted this drop and advised shorting the stock due to the way that Yahoo Finance had originally used non-GAAP numbers for Google, and then switched to GAAP. And now he maintains that the estimated gains YOY (chart above) in Google growth for 2013 are still overestimated by Yahoo:
Thanks to the revenue and earnings misses, analysts have taken down their estimates on Google since the Q2 report. The 2013 revenue average has been cut from $60.24 billion to $59.62 billion, and the 2014 revenue number has been trimmed from $69.85 billion to $69.75 billion. The revenue numbers are GAAP, but Yahoo's showing for the prior year period (2012) number is non-GAAP, so the 2013 growth figure is wrong, but the 17% growth number for 2014 is right.
Recommendation Trends For GOOGLE:
Data provided by Thomson/First Call
So where is Google headed now? Currently 32 analysts recommend it as either a Buy or Strong Buy. While 12 say to Hold, no one is saying that it will underperform or that it should be sold. That does not mean that they are right. However, the company has a lot of good products and services that continue to pay off. The revenue is there if they can just rein in the expenses. The hedge funds love it, but they live and breathe risky speculation. A lot of investors are waiting for a stock split to jump in, but I think the price will take off before that if there are solid sales with the Moto X, and mobile ads.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.