“Get long and get loud,” or “Go short and get shrill.” These tactics of taking a position in a stock, then spreading the word to persuade others to follow along, is as old as the markets themselves.
Yet this year the jawboning of stocks seems to be happening more often, more publicly, and by bigger-name investors. And it’s no wonder: The world appears to be listening, and acting on the utterances of the do-as-I’ve-done big-money crowd.
When pioneering activist investor and hedge-fund manager Carl Icahn Tuesday disclosed a “large” new position in Apple Inc. (AAPL) shares, the stock added $20.2 billion in market value by the close of trading – more than 13-times the reported $1.5 billion stake and the equivalent of $150 million for each of the 135 characters in his tweet.
As noted here several months ago, the current market cycle has produced an increase in the frequency and volume of outspoken investment views by the sort of accomplished hedge-fund managers who generally used to keep mum on what they were up to.
Icahn’s broadcasting of his Apple position and his message to CEO Tim Cook that the company should pursue an accelerated stock-buyback plan follows a public crusade by David Einhorn of Greenlight Capital to persuade Apple to liberate its huge cash stockpile for shareholders’ benefit.
Daniel Loeb of Third Point bought into Sony Corp. (SNE) and then publicized letters to its board advocating a split of its entertainment division from its electronics business – a strategy rebuffed by Sony management and even ridiculed by actor George Clooney.
And, of course, Pershing Square Capital’s Bill Ackman has been hard to avoid as he detailed an extensive short position in Herbalife Ltd. (HLF) and agitated (unsuccessfully of late) for another executive shakeup at J.C. Penney Co. (JCP). Ackman also coyly sought to raise fresh capital from his investors to take a stake in an unspecified large company with two distinct businesses. This turned out to be Air Products & Chemicals Inc. (APD), in which he has built a 9.8% position.
In each case – even though Ackman’s Herbalife and Penney positions are underwater, the former having drawn Icahn and George Soros to the opposite side of the trade – the stocks at least initially responded by moving in the direction favorable to the chatty investor’s portfolio.
The close attention on the ins and outs of big-money professional investor portfolios is evident in the hoopla on TV and social media networks surrounding the current “13F season” – the time each quarter when large funds disclose their holdings. Much is made of new and liquidated investments – even though the portfolio snapshots are some six weeks out of date.
There seem to be at least four trends behind the recent prevalence of prominent investors “talking their own book” and of the public eagerly hearing them out.
Broadly speaking, U.S. stocks are not cheap, so there’s a growing sense that value needs to be extracted or reasons offered for someone else to come along and pay more for them. The bull market launched in March 2009, and since then the average stock has more than doubled. While the benchmark Standard & Poor’s 500 index’s valuation based on current and forecast corporate profits is not at an extreme, it is above the long-term average.
Of those stocks that do appear objectively cheap, many are mega-cap technology, energy and drug stocks that have looked – and stayed – inexpensive for years. Meantime, the relative handful of companies with a truly compelling growth story has been bid by the “growth cult” to towering valuations. These include the likes of LinkedIn Corp. (LNKD), Netflix Inc. (NFLX), Tesla Motors Inc. (TSLA), Salesforce.com (CRM) and Amazon.com (AMZN).
This dynamic means that many investors lack the confidence that returns will simply accrue to them, so they go searching impatiently for catalysts. Unsure the fruit of profits will fall anytime soon, they shake the tree.
Hedge-fund manager ego and competitiveness. Now that it’s become accepted for private investment managers to go on TV or take to Twitter to publicize their favorite stocks, access to an audience has enabled a small group of brand-name investors to capture a scarce source of “alpha” – or excess returns. The hedge-fund world has become crowded in recent years, and the ability to tell one’s investors that they can leverage a public profile to enhance returns is a potential competitive advantage.
A nod to transparency. Hedge fund managers have long spread the word of their favorite positions in small gatherings, via their brokers and by passing story ideas to financial reporters. It’s impossible to pin down, but the aggressive anti-insider trading investigations that have led to charges against the mega-fund SAC Capital have heightened sensitivity to the potential hazards inherent in the old game of sharing tips.
The personal spat between Ackman and Soros Fund Management (along with Icahn) over Herbalife has even put an unfavorable light on the common practice of professional investors holding “idea dinners.” Ackman has sought to have regulators look into whether, at one such dinner, a Soros official effectively organized a coordinated group to drive up the price of Herbalife shares. Outright collusion for the purpose of manipulating stocks would be a breach of securities law. Stating one’s investment thesis publicly, then, can serve as a cleansing gesture of openness.
The common view among ordinary investors that the market is rigged in favor of the clued-in big boys probably leads folks to pay more attention to what the Billionaire Boys Club is doing.
While suspicion of a two-tiered market of privileged “smart money” against everyone else has always existed, the two nasty bear markets since 2000, analyst conflicts, trading scandals and a crisis-and-bailout cycle have magnified this view. So in the absence of a belief in fair access to information, investors are more likely simply to mimic the moves of those presumed to be running on an inside track.
The market response to Icahn’s Apple buy is quite telling in this regard. Apple’s market value exceeds $450 billion. Icahn owns one-third of 1% and could never accumulate a big enough stake to truly muscle around management. Yet simply his observation of what is obvious to many – that Apple is a great company with an inexpensive stock – drove many followers to drive the stock up 7%, and counting, in three days.
- Private Equity & Hedge Funds
- Carl Icahn
- Bill Ackman