Pershing Square Capital Management, L.P., which is run by the famous investor Bill Ackman and known for taking concentrated bets, recently increased its stake in The Howard Hughes Corp. (HHC). A recent 13D filing revealed that Ackman significantly increased his stake in the stock on December 13.  Howard Hughes is a specialized real estate development company.

Overall, Pershing’s holding in Howard Hughes rose to roughly 6.4 million shares from 1.2 million shares at the end of the third quarter. It means that Pershing now has a 14.8% holding in the company. The filing reveals that the company is allowing Pershing the ability to buy up to 26% of the common stock.

Not an Investor Favorite

The sharp rise in Pershing’s holding in the company seems surprising, given that the stock was not popular among investors during the third quarter. During that quarter, the aggregate 13F shares were unchanged at 36.3 million. Overall, 74 firms increased their holdings, and 31 created new positions. Additionally, 29 firms exited the stock and 91 reduced their holdings.

The stock certainly hasn’t had a stellar 2019, with shares rising by 26.2%. That’s less than the S&P 500’s gains of 28.5%. But still, it hasn’t held Pershing back from significantly increasing its stake in the company. One can only speculate as to why the hedge fund increased its position by so much.

Concentrated Holdings

The holding isn’t even a small one, with the total position worth roughly $740 million. It makes the stock the seventh-largest holding in the hedge fund manager’s portfolio. But here’s the catch, there are only eight stocks in the portfolio.

(WhaleWisdom)

Recent Success

However, it is hard to argue with Ackman’s recent performance. According to data compiled by WhaleWisdom, the fund has seen its holding, and most significant position in Chipolte Mexican Grill, Inc. (CMG), more than double since they first took a stake in the stock in the third quarter of 2016. Meanwhile, its second-largest position, Restaurant Brands International Inc. (QSR), rose by over 66% since the fourth quarter of 2018. Also, the firm’s third-largest holding, Hilton Worldwide Holdings Inc. (HLT), climbed by 54% since the fourth quarter of 2018.

Pershing’s big plunge into Howard Hughes is undoubtedly noteworthy and eye-catching, considering the prospects for future growth seem lumpy at best. Analysts estimate that earnings will fall by 68% next year to $0.58 per share, and then surge to $4.62 per share in 2021. The lumpy earnings outlook would certainly be enough to scare off any ordinary investor, but Bill Ackman is no ordinary investor.

Starbucks Corp. (SBUX) has been one of the better performing stocks of 2019, with shares racing higher by over 37%. It is easily better than the S&P 500’a gain of about 26% over the same period. However, investors do not appear to be optimistic for the future, with sellers outpacing buyers by approximately 2-to-1 during the third quarter.

The significant stock advance in 2019 has also stretched the company’s P/E ratio. Given the prospects for future earnings growth, it doesn’t bode well for the future direction of the stock price either. It could be one reason why investors were eagerly leaving the shares in the third quarter.

Institutions Dump Shares

During the third quarter, the total number of 13F shares held by institutions fell by almost 4% to 818.5 million from approximately 847.7 million in the second quarter. During the quarter, 503 institutions added to their existing positions, while 97 created new ones. Conversely, the number of firms decreasing their positions was at 858, while 64 sold out of the stock. Also, the number of firms holding Starbucks among their top ten holdings in their portfolio fell to 81 in the third quarter, down from 89 in the second quarter.

Slow Growth

One reason why investors may be fleeing from the stock is that future earnings growth is expected to be slow. Currently, analysts project earnings to climb by 7.5% in fiscal 2020 to $3.04 per share. Meanwhile, earnings estimates show growth of 12.7% to $3.43 in fiscal 2021 and by 10.8% to $3.80 per share in 2022.

High Earnings Multiple

The problem is that the stock currently trades for roughly 26 times fiscal 2021 earnings estimates. That price-to-earnings multiple is not cheap when adjusting for future earnings growth. Earnings growth for the next three years is forecast to grow at a compounded annual growth rate of 10.3%. It means that the stock trades with a PEG ratio of about 2.5. That is much higher than a range of 1 to 1.5, which is considered to be a reasonably valued PEG ratio.

The slow earnings growth and high P/E ratio may be one reason why the stock has slumped some since peaking at a price of around $100 in late July. It may also be the driving force behind investors fleeing the stock during the third quarter.

It hasn’t been the most fabulous year for Palo Alto Networks Inc. (PANW), with the stock rising by 20.5% and underperforming the broader S&P 500 by five percentage points. Still, the stock was very active among investors during the third quarter, resulting in the shares landing on the WhaleWisdom Heatmap, and the WhaleWisdom Whale Index 100.

Palo Alto hit a rough patch at the end of November, when it reported fiscal 2020 first quarter results. The company was able to report earnings of $1.05 per share, versus estimates for $1.03 per share. Revenue also came in better than expected at $771.9 million versus estimates of $767.8 million. However, the company guided the fiscal second quarter to $1.12 per share at the mid-point versus forecasts for $1.30, resulting in the shares falling.  Despite the decline, it didn’t stop the CEO, Arora Nikesh, from making a large purchase of the stock.

Moving Up the Heatmap

The stock moved up on the WhaleWisdom Heatmap in the third quarter to 85 from 98. Of the top 150 hedge funds tracked for the Heatmap, 21 held the stock in their portfolio, with 8 increasing their positions and 9 reducing them. Additionally, the stock was a top-10 holding in 4 of the hedge fund portfolios.

Institutions Were Adding Overall

Overall the number of 13F shares held by all institutions increased by less than 1%. Seventy-two firms were creating a new position in the stock, while 264 increased their holding. However, 238 firms reduced their holdings, while 86 sold all of their shares held.

CEO Buying

However, despite the conviction among institutions, the company did provide disappointing guidance for the next quarter. It led to the stock declining by over 12% on November 26. More interesting though, is that the company’s CEO bought a significant stake in the equity, according to a Form-4 filing on December 2. The filing revealed that the CEO bought 25,000 shares of stock at an average price of $221.54 on November 27, raising his total stake in the company to 479,429 shares. The purchase came to a notional value of $5.5 million, raising the CEO’s entire stake in the company to over $100 million.

While the company’s disappointing results sank the stock at the end of November, it would seem that the shares are catching a vote of confidence from some brilliant hedge funds, and most notably, the CEO. It could very well suggest that Palo Alto’s long-term outlook may prove to be very bright.

Broadcom Inc. (AVGO) has had an active 2019 with the shares surging by over 24%, keeping pace with the S&P 500, which has gained by over 25%. The stock is currently sitting near its all-time highs and could be heading higher as it continues to transform away from being a solely low margin semiconductor business into one with higher-margin software applications.

The strong performance has resulted in the stock’s addition to the WhaleWisdom WhaleIndex 100 on November 15. Additionally, the shares have been on the WhaleWisdom Heatmap for two quarters in a row. The heatmap evaluates the portfolios of the top 150 hedge funds using the Whalescore calculation.

Investors Are Staying Optimistic

Broadcom’s ranking on the Heatmap fell to 98 in the third quarter from 45 in the second quarter. The reason for the decline in the ranking is likely because the number of top hedge funds in the third quarter increasing their holdings were 11, versus nine that were decreasing their positions. However, 19 funds held the stock in their portfolio, while 2 had the shares as top-10 holding, a strong showing.

Overall, the aggregate number of 13F shares fell by approximately 2.5% in the third quarter to roughly 329 million shares. During the most recent quarter, 515 institutions added to their positions, while  444 decreased their holdings. In total, 95 firms established new stakes and 90 closed their positions out.

(WhaleWisdom)

Earnings Are Coming

The company is expected to report fiscal fourth quarter 2019 results on December 12. The results tend to be widely followed by investors, as those results tend to give investors an intra-quarter peek into how other semiconductor businesses may be performing. It is not expected to be a strong quarter for the company, with earnings estimated to have declined by more than 8% to $5.36 per share, while revenue is forecast to have climbed by 6% to almost $5.8 billion.

Valuation Is Reasonable

Still, the company trades with a reasonable valuation at just 12 times 2021 earnings estimates of $26.02. That isn’t bad for a company with forecasts to see earnings rebound in 2020 by 10% to $21.28 per share, and by an additional 10% in 2021 to $26.02.

Despite the stock’s significant advance in 2019, the shares are still trading at the low to mid-range of its PE ratio. Since 2015, the PE ratio has traded in a range of 10 to 15. It could be one reason why investors are betting so heavily on Broadcom’s stock, and why the stock may continue to rise over the longer-term.

Fiserv Inc. (FISV) has undoubtedly had a healthy 2019, with the stock rising by a stunning 54%, more than double the S&P 500’s gain of over 24%.  The transaction processing and bill payment company had investors rushing into its stock in the third quarter, based on data compiled by WhaleWisdom. The strong showing has resulted in the stock landing on the WhaleWisdom Heatmap.

Additionally, the stock was among the most actively bought shares during the quarter, among stocks with 1,000 institutional filers or more. The company is expected to see strong earnings and revenue growth over the next two years while trading with an attractive valuation — it may be the reason why investors are rushing into the stock.

Moving Up On the Heatmap

The stock landed at number 2 on the WhaleWisdom Heatmap for the third quarter, which was up from number 24 in the second quarter. The Heatmap uses the top 150 hedge funds as measured by the WhaleScore calculator to determine a stock’s placement.  Out of the 150 funds, 25 held the equity in their portfolio, with 21 increasing their positions and only 4 decreasing their positions.

Nearly 2 Buyers for Every Seller

Additionally, among stocks with more than 1000 fliers, Fiserv saw nearly double the number of institutions increasing their positions, for every one institution reducing their holdings in the equity. In total, there were 486 institutions that were buying shares of Fiserve in the second quarter versus just 266 that were decreasing their positions.  Overall, the total number of 13F shares held among institutions increased by more than 50% to around 625 million from 414 million in the second quarter.

Strong Growth Awaits

The impressive performance and investor interest appear to be rooted in a company that is poised for strong growth. Analysts currently estimate that earnings will grow by 22.5% in 2020 and by 17.5% in 2021. Meanwhile, revenue growth is also expected to be strong next year, rising by 22%, and by 6% in 2021.

The stock trades for just 23.2 times 2020 earnings estimates of $4.87 per share. Given the stock’s average earnings growth of 20% for the next two years,  the stock trades with a PEG ratio of about 1.16. It suggests that the stock is cheap when adjusting for earnings growth. Also, the stock trades with a valuation that is cheaper than other payment companies such as Visa Inc, Mastercard Inc, and Square Inc.

Investors’ big move into Fiserv in the third quarter appears to be driven by a healthy growth outlook and a valuation that is compelling, both versus its peers and for growth. If the fundamental trends remain strong, investors could stand to see some significant gains.