The computer hardware group, including manufacturers of computing devices and peripherals, fared well in the first quarter, but has since retreated, and remains in a consolidation pattern, due to doubts over whether the expected rebound in IT spending will happen in the second half of the year. The U.S. economy, while on the brink of recovery, is still weak with unemployment numbers still hovering in the high single digits, and the crisis in the Eurozone continues unabated, while in China there are fears of a slowdown. In this article, via an analysis based on the latest available Q1 institutional 13-F filings, we identify the computer hardware company stocks that are being accumulated and those being distributed by the world's largest fund managers.
These mega fund managers, such as Fidelity Investments, Goldman Sachs (GS), BlackRock Inc. (BLK), Vanguard Group, and 22 others, manage between $100 billion and over $1 trillion each, and together control about 40% of the assets invested in the U.S. equity markets. Together, these mega fund managers are bearish on the computer hardware group, cutting a net $3.10 billion in Q1 from their $275.07 billion prior quarter position in the group. However, overall they are still under-weight the group by a factor of 0.8; that is, taken together, the 25 mega funds have invested 4.0% of their assets in the group, less than the 4.8% weighting of the computer hardware group in the overall market (for more general information on these mega funds, please look at the end of the article).
The following are the computer hardware companies that these mega fund managers are most bullish about (our coverage of the group for the prior quarter can be found here):
Fusion-IO Inc. (FIO): FIO is engaged in the development, marketing and sale of storage memory platforms for data centralization in the U.S. Its platforms enhance the processing capabilities within a datacenter by relocating process-critical or active data from centralized storage to the server where it is being processed. Mega funds together added a net 10.38 million shares in Q1 to their 16.49 million share prior quarter position in the company, and taken together mega funds held $500 million or 28.8% of the outstanding shares.
The top buyer was the world's largest and most prominent asset manager, Blackrock Inc., with over $3.5 trillion in assets under management, that purchased 3.18 million shares. Other large mega fund purchasers included mutual fund powerhouse Fidelity Investments (2.30 million shares), with $555 billion in 13-F assets, Morgan Stanley (0.81 million shares), with $186 billion in 13-F assets, and Vanguard Group (0.80 million shares), with $1.7 trillion in assets under management. Overall, institutional investors added 11.2 million shares to their 60.3 million share prior quarter position.
In its latest Q3 (March), FIO beat analyst revenue and earnings estimates (6c v/s 2c), and guided Q4 and FY 2012 revenues above consensus. Its shares, though, have taken a 20%-plus tumble since that late-April Q3 report, mostly over concerns that the IT spending slowdown related to worsening macro-economic conditions in the Eurozone and a possible slowdown in China would thwart demand for its products. Its leading customers include the bluest of blue-chip names, including International Business Machines (IBM), Hewlett-Packard (HPQ), Dell Inc. (DELL), Cisco Systems (CSCO), Apple Inc. (AAPL) and Facebook (FB), and a global slowdown will hurt demand for their products (perhaps with the exception of FB), in turn impacting FIO revenue and earnings going forward.
However, as much as this is recognized, it is also important to remember that in the long-term the pace of data center virtualization is likely to continue unabated, and as a leader in the space, FIO revenue and earnings growth should continue for many years to come. Moreover, the recent trend, as in plans announced recently by both NFLX and FB to build their own content delivery networks (CDN) should further spur demand for products from FIO and its peers.
At current prices in the $18 range, the company still trades at a hefty 57 times forward earnings, and at 6.3 times book value, and does not appear to be a bargain based just on those numbers. However, the valuation can be justified on future earnings beyond 2013, based on the excellent long-term prospects for the firm's technology in helping enterprises manage the ever-increasing huge amounts of data that are being constantly generated and that need to be processed to help them monetize their business models. Furthermore, buyout rumors of the company earlier by INTC at $40, and recently by DELL at $33, have consistently put the value of the company well above current prices in the $18 range, and we believe it is a speculative buy at these levels.
Other computer hardware companies that mega fund managers are bullish about include:
- Hewlett Packard Co. , a Silicon Valley marquee company, that is a leading provider of IT and outsourcing services, PCs and peripherals, printers and scanners, and servers and storage devices, in which mega funds together added a net 8.35 million shares to their 601.35 million share prior quarter position in the company;
- NCR Corp. (NCR), a world leader in providing products for the self-service revolution, including ATMs, cash dispensers, self-service kiosks, and point-of-sale and self-check-in/out systems for various industries, in which mega funds together added a net 5.53 million shares to their 33.24 million share prior quarter position in the company; and
- MICROS Systems Inc. (MCRS), a provider of enterprise information management systems for the global hospitality and specialty retail industries, in which mega funds together added a net 1.83 million shares to their 28.70 million share prior quarter position in the company.
The following are computer hardware companies that mega funds are bearish about (see Table):
- Apple Inc. , probably among the most innovative companies the world has ever known, and the maker of the iPhone, iPod and iPad, is one of the world's largest manufacturers of personal computers, mobile communication devices, and portable digital music player, in which mega funds together cut a net 4.13 million shares from their 357.43 million share prior quarter position in the company;
- Seagate Technology (STX), that manufactures hard disk drives for the enterprise, desktop, mobile computing and consumer electronics markets, in which mega funds together cut a net 25.30 million shares from their 132.68 million share prior quarter position in the company;
- Data storage vendor EMC Corp. (EMC), in which mega funds together cut a net 10.64 million shares from their 854.93 million share prior quarter position in the company;
- Teradata Corp. (TDC), a company focused on raising intelligence through data warehousing and enterprise analytics, in which mega funds together cut a net 1.92 million shares from their 60.58 million share prior quarter position in the company;
- Dell Inc. , that provides desktop PCs, mobility products, servers and networking products to individuals, businesses and governments, in which mega funds together cut a net 7.74 million shares from their 538.44 million share prior quarter position in the company; and
- Logitech International SA (LOGI), a Swiss manufacturer of mostly computer peripheral products, including mice, trackballs, keyboards, interactive gaming devices, multimedia speakers, headsets, webcams, and many other products, in which mega funds together cut a net 6.36 million shares from their 21.53 million share prior quarter position in the company.
Furthermore, the following are additional computer hardware companies that are among the top holdings of mega funds in the group (see Table):
- Netapp Inc. (NTAP), that manufactures integrated network storage and data management hardware for corporations and government agencies, in which mega funds together hold 160.35 million or 44.2% of the outstanding shares;
- Western Digital Corp. (WDC), that manufactures hard disk drives for the enterprise, desktop, mobile computing and consumer electronics markets, in which mega funds together hold 69.32 million or 26.7% of the outstanding shares; and
- Research in Motion Ltd. (RIMM), the Canadian manufacturer of BlackBerry handheld devices for the mobile communications market, in which mega funds together hold 61.22 million or 11.7% of the outstanding shares.
General Methodology and Background Information: The latest available institutional 13-F filings of the largest 25 mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.