Personally, even idiosyncratically, I run my money in an ultra concentrated format. There are 5% to 15% positions, some through appreciation became 30% positions, Gilead Sciences, for example.
I find myself over 60% invested in biotechnology. Aside from Gilead, there's Biogen Idec, Celgene and Endo International which bought out my original holding, Auxilium Pharmaceuticals. The 13Fs of honchos show much speculation in mid-cap pharma, embracing names you probably never heard of. Consider: Salix Pharmaceuticals, Keryx Biopharmaceuticals, Forward Pharma, Prima BioMed, Cubist Pharmaceuticals and Zoetis.
Biotech ain’t no bubble because the big names carry defined earnings trajectories the next 3 years.
Berkshire Hathaway owns DaVita Healthcare but no racy pharma. Mid-cap is pricey, but overripe for takeovers. Big cap names like Pfizer work valiantly to transform themselves from also-rans with no blockbuster drugs coming out of Phase II and Phase III testing protocols.
Celgene is a 20% grower for a couple more years based on its Revlimid cancer drug and then we’ll see. Biogen is a studied speculation on their Alzheimer's drug slowing down this malady’s progression, and capable of regenerating cognitive capacity. Think of stretching longevity and the growing cohort of the world’s population in the 70 to 85-year bracket.
Nobody can sharp pencil Gilead. Over half Gilead's earnings is its hepatitis C market, now shared with others, prices coming down by big percentages. Gilead boils down to what management can do with $30 billion in free cash flow next 3 years. Acquisitions and share buybacks are due.
I'm overweighted in banks, namely Bank of America and Citigroup. Near term, this is a pure play on an upwardly sloping yield curve that just started. It adds 10% to present earnings power. But, regulators have defanged all the high risk, high return sectors, particularly in trading, hedge fund ownership and commodities plays. The good old days of a 20% return on capital for Goldman Sachs et al are history.
Looking ahead a 10% return on net tangible capital is a more appropriate projection. This puts banks on parity with good operators in insurance underwriting - Ace, Allstate, maybe American International Group. We are talking about a price earnings multiple of 10 times, where they now trade.
Buffett holds 42% of his top 10 in financials. Wells Fargo is 23% of assets, followed by American Express, U.S. Bancorp and now Goldman Sachs. Berkshire exercised warrants tied to its capital transfusion for Goldie during the 2009 financial meltdown. Admittedly, Wells Fargo and American Express are legacy positions, grown big through appreciation, but Buffett did add to Wells Fargo of late. Newer positions like IBM, Wal-Mart and Exxon Mobil are not working, and Exxon recently was kicked out.
Few operators dare run money so concentrated. Cutting to the bone on several high intensity players, you find many think alike, and carry speculation in their bloodstream. They eschew the top 25 largest capitalization properties with exceptions like Apple, Citigroup, Alibaba, Google and Microsoft. (I own them too.)
There is never diversification for diversification's sake. All rate distinguished service crosses for courage, pinned on by the Wizard of Oz. To invest in small and mid-cap properties and take out candidates you gotta do the work or risk blindsiding by bad numbers in quarterly financial reports. Hopefully, you like management and the sector they function within.
Paulson, for example, sustained big quarterly shrinkage in Shire, but this was offset by gains in Allergan and Time Warner Cable. A gutsy portfolio: Mylan, Salix and DirecTV. The SPDR in gold shares leaves me cold, but I like not seeing energy or financial houses herein.
Strangely, Micron Technology shows up more frequently than Apple. Allergan and Actavis all worked out, but not Alibaba. There's little speculation in airlines, a big winner. Appaloosa Management made General Motors its top position at 12%. I'm at 3%. Practically everything that can go wrong is in GM's price except a recession. I feel like I'm standing alone. Consumer Reports just capped Buick Regal as number 7 in their top 10 auto ratings for sport sedans.
For Greenlight Capital, Micron and Apple comprise 27% of its top 10. I was surprised to see how diversified Soros Fund Management positioned itself. Alibaba is at 5%, but then you scroll down to a bunch of valuation plays like Teva Pharmaceuticals, Dow Chemical, LyondellBasell Industries and American Airlines, all 2% to 3% holdings.
Icahn got hurt in energy properties, CVR Energy and Chesapeake Energy, but Apple and Hertz Global more than made up for such shrinkage. With recent appreciation, Apple must be a $7 billion position, over 20% of Icahn Associates. Carl got there early and bet a bunch.
Icahn couldn't know more than any of us, but his judgment that this was the great value property, bar none, paid off in spades. Aside from eBay, which I chose not to own, the remainder of Carl's portfolio leaves me cold. I've no opinion on Herbalife, Hologic and Federal-Mogul Holdings but wish him luck and pesetas.
The takeaway from perusing high octane portfolios is none of the players, with the exception of Buffett, believes you can make serious money in most big capitalization names. Only a few own Apple, Microsoft and Google. Nobody's pounding the table on international oils, financials, even major industrials. There's mucho dinero in pharma, particularly Actavis and mid-cap biotech (acquisition bait). Almost everyone has steered clear of Facebook, Twitter and Alibaba - too rich for their blood.
Operators like Third Point lace portfolios with activist bait: Amgen, Dow Chemical, Sotheby's and possibly Dollar General. Mid-cap pharma shows in most portfolios. I don't see much gunslinging, anywhere. Reasonable valuation is a deep basic along with room-for-improvement stories like AIG and General Motors.
Most everyone passes on basic industrials, utilities and viciously cyclical materials properties covering iron ore, copper, steel and coal, a moribund commodity. Autos and airlines stay light.
Because of their portfolio concentration, I'd use the NASDAQ 100 Index as their rating benchmark because it's comparably boiled down and volatile. The exception is Buffett who should be rated against a mix of 60% S&P 500 and a relevant bank stock index.
The NASDAQ 100, year-to-date up 5%, is opening up a couple of lengths on the S&P 500. Likewise growth is gapping value indices. The downdraft in energy, utilities and materials is accountable. In the interest of full disclosure my top 10 starts with Gilead, followed by Actavis, Biogen and Citigroup. I'm carrying outsized positions in Endo International, Delta Air lines, Apple, Micron, Boeing and Bank of America. Year-to-date my doggies show good foot, up 8%. They’re all controversial which is what’s to like about them.
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Sosnoff owns personally and / or Atalanta Sosnoff Capital, LLC owns for clients the following investments cited in this commentary: Gilead Sciences, Biogen Idec, Celgene, Endo International, Bank of America, Citigroup, Allstate, American Express, Apple, Alibaba, Google, Microsoft, Allergan, Time Warner Cable, Micron Technology, Actavis, General Motors, Teva Pharmaceuticals, Dow Chemical, American Airlines, Facebook, Amgen, Delta Air Lines and Boeing.
mts@atalantasosnoff.com
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