How Does This $500 Million Hedge Fund View the Stock Market?
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Akanthos Capital is a mid-sized $500+ million hedge fund run by former Goldman derivatives trader, Michael Kao. Kao holds a degree in computer science and engineering from Berkeley and an MBA from Wharton. Given the pedigree of the manager, it’s easy to expect his top five stock picks to be equally as impressive. Kao doesn’t hold a particularly large percentage of his assets in stocks—about 7% worth—though it’s crucial to take a look at his equity investments to gauge which sectors of the economy he’s most bullish on.
Topping the list is General Motors (NYSE: GM), in which Akanthos owns 600,000 shares. The stock has put in an uninspiring performance this year, rising only 0.8% since the first of the year. GM recently reported sales were up 3.6% for 1Q 2013 compared to the same period last year. Although sales of the Chevrolet brand were still rather anemic (+1.0%), the gain came amid a lingering economic slump in Europe. GM is trying to beef up demand for Chevrolet in Europe to offset waning demand in the US. Earnings for the most recent quarter fell to -$0.48 from +$0.93 from 3Q and net income fell 32%. But looking forward, earnings for 1Q 2013 are expected to improve to +$0.59 with revenues remaining relatively flat.
At number two is American International Group (NYSE: AIG), the international insurance company with a $58.4 billion market cap, and a new addition to the hedgie’s equity portfolio with 202,400 shares. The federal bailout of AIG in 2009 inspired the not-so-endearing moniker “Too Big to Fail.” But AIG has actually managed to redeem itself in the years following: it shed much of its non-core businesses and returned to a much more conservative approach to funding its operations. Although AIG will have persistent competition from the other giants of the insurance industry – Hartford, Berkshire Hathaway, Allianz – AIG is priced at 0.6x book value (industry average of 0.9x) with a trailing earnings ratio of 8.7x compared to the sector average of 17.5x.
Third of the top five is Goldcorp (NYSE: GG). Since adding Goldcorp in early 2011, Akanthos’ position has swelled by 11,070%, a true sign of endorsement for the gold producer and a bet by Kao that gold will revisit $1,800 resistance. Unfortunately, the recent plunge in gold prices (down 26% since October 2012) has caused a corresponding 41% drop in the price of Goldcorp shares. And although Goldcorp trades at 10x trailing earnings versus a sector average of 20x, the company saw net income decline $200 million and earnings decline to $1.95 from $2.18.
The best of the rest
Fourth on the list is Microsoft (NASDAQ: MSFT), another new addition to the portfolio with 100,000 shares. As users begin moving away from the PC and towards smartphones and tablets, Microsoft is looking like a dinosaur in the lightning-paced world of mobile computing. It doesn’t help that Vista was a major disappointment and Windows 7 came at a time when consumers were strapped for cash at the height of the recession. Fortunately, Microsoft leads the pack in cloud computing and servers, which is why Morgan Stanley gave the stock a rating of “Overweight.” The stock is up 9% since the start of the year and recently posted a 5-month high of $30.32.
Last is Allegheny Technologies (NYSE: ATI). The company recently announced that it was expecting weak 1Q sales and earnings as prices in raw materials depressed income. Allegheny said that earnings would be only $0.09 per share versus estimates of $0.23 share. Although the company has shifted from stainless steel to specialty alloy products, the transition has not translated into higher revenue as falling raw material prices, short lead times and higher inventory costs caused the earnings adjustment. Allegheny’s percentage of sales devoted to costs increased almost 2% for the most recent quarter and net income fell 26%. Further deteriorating in the company’s financials could depress the stock price for Allegheny, already down 14% since the start of the year.
What conclusion can we take from this list?
Judging by the relatively unimpressive gains in most of these positions, it may appear that Kao is picking stocks based on name recognition rather than strong fundamentals; of course, critics should be aware of the size of Akanthanos, and realize that year-to-date analysis is rather short sighted. We’ll wait a bit longer before judging these positions. Of these, Microsoft is the best bet to appreciate further, and it’s hard to see much upside from Goldcorp. The rest are hobbled by weak commodity prices, anemic economic conditions and more aggressive competitors. See how the rest of the “elite” hedge fund industry is playing the stock market.
This article is written by Amy Thielen and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has long positions in MSFT and MS. The Motley Fool recommends American International Group and General Motors. The Motley Fool owns shares of American International Group and Microsoft and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!