By Kevin Cook
I last wrote about Sotheby's (NYSE:BID) as the Bear of the Day in mid-April. Since it remains in that cellar I thought I would revisit the piece. About the only thing that has changed since then is that the stock went through another mediocre earnings cycle (-$0.09 missed the consensus by 1-cent and analysts lowered estimates further).
Well, there was one other catalyst that might have investors interested: the long-running battle between Sotheby's and activist hedge fund Third Point reached some degree of closure after the 270-year old auction house announced in May before that earnings report that it was ready to let Dan Loeb appoint three members to its board.
My April piece gives some good background on Loeb's campaign to build a sizable position in BID shares, as well as the bear case from Jim Chanos.
Sotheby's, the eponymous luxury auction house, became a Zacks #5 Rank (Strong Sell) on March 4 when the stock was trading around $47.50. After a consistent string of earnings misses, including a whopping 175% miss one year ago (-$0.33 reported vs. expectations of -$0.12), estimates continue to get pushed lower.
In the past 60 days, full-year 2014 consensus EPS projections have fallen from $2.51 to $2.37. That still represents 33% growth over last year (not a high hurdle after so many misses), but investors have not been impressed. The stock has dropped over 15% since it became a Zacks #5 Rank.
But it's possible that two other market forces are impacting the stock price besides downgrades in the company's earnings outlook: a bear theme about BID and an activist who's getting in his own way.
Speculative Bubble... Going Once, Going Twice
Earlier this month, famed short-seller Jim Chanos appeared on CNBC to make the case for hitting the BID, so to speak. Jeff Morganteen, in a summary article of the interview titled "The best indicator you've never heard of," wrote...
Closely watched hedge fund manager Jim Chanos says he has the best barometer for gauging where 1 percenters are putting their money, given the Federal Reserve's easy money policies that have been fueling their portfolios to record highs. During an interview Thursday (April 3) on CNBC's "Squawk Box," he pointed to the stock chart of Sotheby's.
The chart shows that shares of Sotheby's have peaked before every major financial bubble since 1987, starting with the leveraged-buyout spree that fueled the stock market before the Black Monday crash that year.
The contemporary art market has gone "bonkers" under the Fed's easy money policies, Chanos said. Many credit those policies for creating a "wealth effect" that has increased the prices of all asset classes, stocks and art included.
It's as if the Fed now includes asset prices as part of its mandate, Chanos said. Record selling prices at auction houses don't trickle down to the 99 percent, however, Chanos said. "This is still driven by art, which is socially acceptable conspicuous consumption," Chanos said. "It's one of the ultimate barometers of the 1 percent, or the one-tenth of 1 percent."
Buying the Art Bubble Seemed Like a Good Idea
I know a little about Sotheby's. I bought the stock last fall for my Follow The Money portfolio where I track institutional buying. I was "following" activist investor Dan Loeb of Third Point Asset Management after he kept accumulating enough shares to become the largest holder.
Loeb also became an outspoken critic of the company's management, using his shareholder leverage to demand changes that he believed would realize more growth and value.
Here's a recap of his buys last year when he started his campaign, with the quarter's average share price in parentheses...
Q1 '13: 500,000 shares ($36.75)
Q2 '13: 2 million addition brings total to 2.5 million ($36.42)
Q3 '13: 3.65 million add raises total to 6.15 million, about 7.4% of Third Point AUM ($44.61)
Q4 '13: 200k add bumps stake to 6.35 million ($51.52)
And in the first quarter of 2014, from various 13D filings, we see Mr. Loeb has added about 300k shares bringing his total stake to roughly 9.5% of the company. From a quick glance, it looks like he might be losing money on this deal so far with the stock's 25% drop this year.
At $40, BID is about 10% lower than his biggest purchase in the mid-$40's in Q3 of last year, when I followed him. Where did I get out? We sold our $51s in November for a paltry 2% gain after I read more about all the squabbling between Loeb and company management.
It was a fight I didn't want to have my money in when there were so many other good things happening in the market. And right now, as attractive as the shares might look at levels not seen since July of last year, it's best to wait and see if the earnings estimate picture turns around before raising your auction paddle for BID.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.
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