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.
Final
thoughts
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.
Disclosure: none
