Summary: Leading hedge fund and mutual fund managers that have a long-term track record of generating high alpha are seriously under-weight in the automobile industry. Their best buy ideas in the group are automotive component suppliers Wabco Holdings Inc. (NYSE:WBC), Johnson Control Inc. (NYSE:JCI) and Visteon Corp (NYSE:VC); and automotive tire manufacturer Goodyear Tire & Rubber (NASDAQ:GT). Their best sell idea in the group is auto component supplier Magna International Inc. (NYSE:MGA).
What are the top new buy and sell ideas of high alpha generating funds in the automobile industry? In this article, through research of the latest available institutional 13-F and 13-D/G (5% ownership) filings (as recent as ten days old), we identify the stocks in this group that were most bought and sold by a select group of high alpha generating funds numbering less than 100. This select list represents less than one-half of one percent of the total number of U.S. equity investment funds, but together these high alpha or guru funds control almost ten percent of total U.S. equity discretionary fund assets. The credentials of each high alpha fund that justify its inclusion in this elite group were detailed in our previous articles, many of which can be accessed by clicking on the hyperlinks referencing them in this article.
The savvy investor may consider leveraging this information either as a starting point to conduct his own due diligence or even go as far as constructing a model diversified portfolio based on the high alpha fund best picks. The argument is that institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When high alpha generating or guru institutional investors by virtue of their fund performance, low volatility and elite reputation in the investment community, invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation.
This series is a follow-up to our previous series that identified top guru holdings by industry group. It updates that information for the most recent quarter, and identifies the stocks in the group most bought and sold by guru funds during the quarter, their top holdings in the group, and the number of guru funds that hold the stock. Based on this analysis, we determined that guru funds are seriously under-weight in the automobile industry by a factor of 0.42, i.e. gurus would have to hold two-and-a-half times as much in the group to be equal-weighted. The following are their top buys, sells and holdings:
- Wabco Holdings Inc. (WBC) manufactures electronic and electro-mechanical products for automotive OEMs, aftermarkets and auto manufacturers. Hedge fund Lone Pine Capital LLC filed a 13-G on June 20th regarding exceeding their 5% ownership in WBC. Specifically, they bought $165 million of WBC since the end of the quarter in addition to the $24 million they bought during the March quarter. Besides Lone Pine Capital LLC, Balyasny Asset Management LLC bought $3 million, and three other hedge funds added less than $1 million each to their positions in WBC. Currently, WBC trades at a forward price-to-earnings (P/E) ratio of 12, in the top 1/3rd of its historic P/E range. Analyst targets are in the mid-$80s, still giving it a significant upside above its current $68 price; and of the seven analysts covering the stock, five rate it a buy/strong buy and two rate it at a hold. Although the stock is up almost eight-fold from its $9 lows in early 2009, fundamentals, and the story continue to be impressive, the company continues to beat analyst estimates by wide margins and guide upward, and analysts continue to raise their targets. While there is the opportunity, there is also significant risk to the downside given the huge run-up recently, so we would follow the gurus and start to accumulate on a dip into the mid- to high-$50s, to which the stock is likely to correct as it consolidates near-term the impressive gains from the last two years.
- Ford Motor (NYSE:F) manufactures automobiles under the Ford and Lincoln nameplates and offers vehicle financing, leasing and insurance. Guru funds unloaded a massive $562 million of their $862 million position from the prior quarter. However, most of the selling was from Capital Growth Management LP cutting $620 million from its position in the stock, taking a profit on the position that it had opened in the $5 range in mid-2008. Six guru funds actually added a total of $89 million to their positions, including SAC Capital Advisors LP ($22 million), Kingdon Capital Management LLC ($19 million), Perry Corp. ($13 million), Legg Mason Capital Management ($9 million), and GAMCO Investors ($3 million).
- General Motors Company (NYSE:GM) is a global automaker that produces cars and trucks and sells them under the brand names Baojun, Buick, Cadillac, Chevrolet, GMC, Daewoo, Holden, Opel, Isuzu, Vauxhall, Jiefang, FAW, and Wuling. Twelve guru funds unloaded $507 million while four funds added $136 million to their positions, resulting in a net cut of $371 million from the $769 million position in the prior quarter. Further, guru funds only own 0.9% of the outstanding shares, indicating their bearish outlook on GM’s stock. The major sellers included Pershing Square Capital Management LP ($223 million), Kingdon Capital Management LLC ($93 million), Appaloosa Management LP ($52 million), Blue Ridge Capital Holdings LLC ($47 million), Glenview Capital Management LLC ($32 million), Balyasny Asset Management LLC ($22 million) and Capital Growth Management LP ($13 million). The firms adding to GM positions included Greenlight Capital Inc. ($106 million) and Perry Corp. ($17 million).GM trades at a forward P/E of 6, near the bottom of its historic P/E range. Analyst targets are in the mid-$40s; and of the 19 analysts covering the stock, 15 rate it a buy/strong buy, three a hold, and one rates it at underperform. The stock has corrected significantly since the March 2011 quarter when guru funds cut their stake in GM, down almost 25% from the $39.48 high, and it appears fairly priced at this level.
- Johnson Controls Inc. (JCI) manufactures automotive interior systems and batteries for OEMs and control systems for non-residential buildings. Taken together, gurus are bullish on JCI and added a net $486 million to their $70 million prior quarter position. The gurus with the largest additions to their position include Viking Global Investors LP adding $494 million, whereas on the sell side Balyasny Asset Management LLC and SAC Capital Advisors LP both cut less than $10 million. JCI trades at a forward P/E of 12, near the bottom of its historic P/E range. Analyst targets are in the $45-$60 range with the mean and median targets in the high-$40s; and of the 26 analysts covering the stock, 18 rate it a buy/strong buy, eight a hold, and none rates it at underperform/sell.
- BorgWarner Inc. (NYSE:BWA) manufactures engine and drive-train components for light vehicle OEMs. Guru funds sold a net $277 million out of their $521 prior quarter position, including Capital Growth Management LP selling $268 million and GAMCO Investors sold $10 million. There was only one insignificant buy of $1 million by SAC Capital Advisors LP.
- Magna International Inc. (MGA) manufactures automotive systems, assemblies, modules, components and complete vehicles for automotive OEMs. Guru funds sold aggressively out of this automotive supplier as well, cutting $217 million from its $245 million prior quarter position. Capital Growth Management LP sold $202 million, Schneider Capital Management Corp sold $14 million and Driehaus Capital Management sold $2 million of this position, while the only guru adding to this position was SAC Capital Advisors LP adding $0.8 million. MGA trades at a forward P/E of 9-10, about mid-range based on its historic P/E range. Analyst targets are in the mid-$60s; and of the 17 analysts covering the stock, nine rate it a buy/strong buy, seven a hold, and one rates it at underperform. It appears that MGA is fully priced based on the current fundamentals, and we would sell it into strength in the high-$50s.
- Autoliv Inc. (NYSE:ALV) is a Swedish manufacturer of airbag and seatbelt safety restraint systems for the automotive industry. During the quarter, guru funds cut $152 million out of their $160 million position from the prior quarter. The primary seller was Capital Growth Management LP that sold $158 million while Royce & Associates LLC and SAC Capital Advisors LP added insignificant $4 million and $2 million positions respectively.
- Goodyear Tire & Rubber (GT) manufactures tires and rubber-related chemicals for transportation and industrial markets. Taken together, gurus are bullish on GT, and they added a net $122 million to their $160 million prior quarter position. Six gurus increased their position, and none reduced it. The gurus with the largest additions to their position include Appaloosa Management LP ($77 million), SAC Capital Advisors LP ($21 million), Zweig-DiMenna Associates ($12 million), Balyasny Asset Management LLC ($9 million) and Keeley Asset Management Corp ($2 million). GT trades at a forward P/E of 8, about mid-range based on its historic P/E range. Analyst targets are in the low-$20s; and of the eleven analysts covering the stock, eight rate it a buy/strong buy, two a hold, and one rates it at a sell.
- Visteon Corp. (VC) manufactures climate control systems, cockpit modules and chassis products to automotive OEMs. Taken together, gurus are bullish on VC, and they opened new position totaling $98 million. Five gurus increased their position, and none reduced it. The gurus with the largest additions to their position include Yacktman Fund ($21 million), Zweig-DiMenna Associates ($12 million), Wintergreen Advisors LLC ($9 million), and Weitz Wallace R & Co. ($2 million). VC came out of bankruptcy last fall, and currently it trades at a forward P/E of 12-13, while earnings are projected to increase from $2.97 in 2011 to $5.17 in 2012. Analyst targets are in the mid-$80s; and of the four analysts covering the stock, three rate it a buy/strong buy and one rates it at hold.
Market Value of Guru Holdings
Guru New Buys
Guru New Sells
Number of Gurus in Stock
13-G Filing Since End of March 2011 Quarter
Wabco Hldgs Inc.
Top Buys and Sells
Ford Motor Co.
General Motors Co.
Johnson Controls Inc.
Magna Intl Inc.
Goodyear Tire & Rubber Co.
Top Guru Holdings
Honda Motor Ltd.
Tata Motors Ltd. ADR
Other Stocks Held by Two or More Gurus
Dana Holding Corp.
Titan Intl Inc.
TRW Automotive Hldgs Corp.
Cooper Tire & Rubber Co.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.