We’re talking about hedge fund sentiment.
At Insider Monkey, our goal is to help you understand how to parse down the vast hedge fund industry into insight you can use. Our empirical research on hedge funds has allowed us to hone our small-cap strategy into a market-beating machine. In its first year ended last month, this strategy returned 47.6%, outpacing the S&P 500 by more than 29 percentage points.
The crowd’s pick: Apple
We track a little over 500 of the best and brightest hedge funds in existence (out of around 8,000 total), and in the Apple-Microsoft debate, the consensus filings are intriguing. According to the final numbers from last quarter, Apple was the third most popular stock among the money managers we track, with 122 hedge funds invested. Ninety-two elite hedge funds were long Microsoft at this time.
Relatively speaking, Google (GOOG) was a much more well-liked tech stock last quarter with a whopping 157 hedgies, but both Microsoft and Apple finished in this measure’s top 10, easily outpacing peers like Nokia (NOK) or Intel (INTC). This overarching form of analysis isn’t the only way to compare the duo, though.
Einhorn’s pick: Apple
Within the aggregate data, there are quite a few interesting cases of noteworthy hedge fund managers choosing between the two based on a variety of factors. David Einhorn, for example, chose to go with Apple while closing out of Microsoft last quarter. His rational was explained in his Q2 2013 shareholder letter, in which Greenlight Capital wrote, “Windows 8 appears to be a flop, and a decade of mismanagement has put Microsoft at risk of becoming a shrinking company.” Apple, meanwhile, is still Einhorn’s No. 1 stock pick, accounting for just over 16% of his $5.3 billion equity portfolio.
Yacktman’s pick: Microsoft
One hedge fund manager who feels precisely the opposite is Donald Yacktman. At the Value Investing Congress on Monday, Yacktman—who’s particularly skilled at finding opportunities in the large cap space—said Apple isn’t as cheap as most think, reasoning that it can’t sustain its high profit margins.
Yacktman remarked his "hat's off to Steve Jobs, he hit 4 home runs in a row," to those in attendance, but in response to a question posed by an audience member on why he holds Microsoft but not Apple stock, his response was interesting. Essentially, Yacktman said that Microsoft's profit margins are protected, i.e. there aren't competing viable operating systems or Office products, while Apple's margins are not. Assuming Samsung's smartphones are close substitutes to Apple's iPhone, Cupertino is theoretically more vulnerable to a shift in consumer preferences and/or a prolonged lack of innovation.
Ubben’s pick: Microsoft
Behind the next proverbial door we’ll take a look at Jeff Ubben of ValueAct Capital, an activist investor who has a longer-term focus than many of his corporate raider peers. Ubben and ValueAct took a huge stake in Microsoft back in April, and the position represents close to $2 billion on the books. In the eyes of most analysts familiar with the matter, it’s widely understood that Ubben’s aim is for Microsoft to concentrate on cultivating its Azure platform to become the top dog of cloud computing.
Ubben was also at the VIC in New York, and his statements on Microsoft echoed those of Yacktman. According to CNNMoney, the crux of his bullish thesis—in addition to the recently approved buyback and dividend boost—is that Microsoft can rely on its enterprise contract staple for the long term. Apple and its peers, on the other hand, “have to run faster every year to keep up,” Ubben said.
At the end of the day, it’s up to each individual investor to make up his or her own mind about the Apple-Microsoft debate. The elite hedge fund crowd is leaning toward Apple, and Einhorn is sticking with his guns now that Tim Cook and management have shown their shareholders the money.
Apple’s apparently cheap valuation can be called into question, though, if you’re in Yacktman’s camp with regard to margin pressures. Or, if you’re like Ubben and are more confident in Microsoft’s cloud opportunity and existing strengths in enterprise computing, it’s reasonable to feel like the company represents a safer investment than Apple. Either way, the world’s richest investors are split on the matter, and this is a debate that doesn’t look like it will be decided any time soon.