Warren Buffett, Smart Money Love This Duo
By now you probably know the story. Hedge fund activity is worth paying attention to if you know where to look. By tracking a little over 500 of the best money managers in existence today, we at Insider Monkey focus on the elite due to the market-beating potential of their stock picks (see the data behind this strategy).
On any given weekday, there can be 25 to 50 high-value hedge fund trades, so we’re parsing down the important ones for you, for the second week of October. Due to the fact that it’s easier to piggyback buying than selling activity (there are many reasons why an investor would choose to sell), we’ll focus on the bullish activity of the past few days. Here are two such hedge fund buys to keep an eye on.
This was the least surprising move in the past few days, but is still worth discussing. On Tuesday afternoon, Warren Buffett and Berkshire Hathaway Inc. (NYSE:BRK.B) publicly disclosed their passive stake in Goldman Sachs Group, Inc. (NYSE:GS). The position represents 2.8% of Goldman’s outstanding stock, worth about $1.99 billion at current prices. The reason this wasn’t a shock to the market was because the move was pre-announced in late September as a result of Buffett’s decision to exercise warrants bought in 2008.
In the height of the financial crisis, Buffett and Berkshire played a critical role in saving the investment banking and brokerage firm, by offering a lifeline worth $5 billion. As repayment for his rescue, Buffett could have purchased 43.5 million shares of Goldman stock at $115 a piece, but this deal was reworked in March. He also received $5 billion in preferred stock and $500 million a year in dividends (between September 2008 and March 2011).
The revised terms of Buffett’s bailout indicated that he would receive a calculated amount of Goldman Sachs shares, worth 43.5 million times the stock’s average closing price for 10 trading days through the end of September. According to Reuters, Buffett decided to go this route because it “would not require [Berkshire] to commit any capital to exercise the warrants.” It should also not be forgotten that in 2011, Buffett sold back the $5 billion in preferred stock, so assuming two full years of dividend payments, his total profit was at least $3 billion.
Going forward, Buffett is now the sixth largest shareholder in Goldman Sachs stock, behind the likes of Citigroup Inc. (NYSE:C) and State Street Corporation (NYSE:STT), among others. Like his other large bank investment in Wells Fargo & Co (NYSE:WFC), Goldman offers a valuation that’s not out of reach with its peers, in addition to a modest dividend yield of 1.3%.
The bank has upped quarterly dividends in three straight years and only pays out around 11% of its earnings at the moment, so the income picture is bullish, particularly for an investor like Buffett. Earlier this year, the billionaire said that he and Berkshire “intend to hold a significant investment in Goldman Sachs,” implying that it will be for the long-term, adding that he did his “first transaction [with the firm] more than 50 years ago.” So perhaps there’s some sentimental value here as well, but like he’s done with Wells Fargo in 2013, it’s quite possible Buffett may boost his stake in Goldman over the next few quarters. We’ll be watching closely.
Another trade to watch this week concerns BlueMountain Capital’s purchase of more Eastman Kodak Company (OTCMKTS:EKDKQ) shares. Andrew Feldstein and Stephen Siderow manage the mid-sized hedge fund (see their bios here), which focuses on value investments. In a 13D filed on Tuesday, BlueMountain disclosed it had increased its stake in Kodak to 20.2% of the company, versus the 19.2% of the company it owned at the beginning of September.
It was around this time that Kodak surfaced from Chapter 11 after a Manhattan court accepted its reorganization plan in late August. The company’s creditors also approved Kodak’s plan to focus entirely on its corporate imaging business earlier in the month. Post-bankruptcy, the new plan lowers debt by a little over $4 billion by paying secured creditors completely, paying unsecured creditors about 5% of total existing debt, and not paying previous shareholders.
It’s clear that BlueMountain is here for the value. David Kurtz of Lazard Freres & Co. pointed out a couple months ago that the new Kodak should have an enterprise value between $785 million and $1.38 billion, and according to this Seeking Alpha author, the company is expected to generate sales of about $2.7 billion a year.
These estimates indicate that for every dollar of annual sales, around 40 cents of enterprise value is generated; this ratio is about 50% cheaper than peers Xerox Corporation (NYSE:XRX) and Canon Inc. (ADR) (NYSE:CAJ), on average. With over one-fifth of Kodak’s outstanding shares under ownership, Andrew Feldstein and Stephen Siderow have the potential to realize a big payday over the next few years from this investment.