Keeping an eye on what billionaire investors have been buying and selling can be a great way for individual investors to generate ideas. The wealthy, after all, tend to spend ample time researching a business before they buy, so following in their footsteps can sometimes make sense.
With that in mind, we asked a team of Fools to highlight a stock that a famed money manager has been buying. Following is a look at three companies -- Sears Holdings (NASDAQ: SHLD), Apple (NASDAQ: AAPL), and Antero Resources (NYSE: AR) -- that caught their attention. Should you follow the big boys into these three businesses? Read on to find out more and judge for yourself.
Too risky to touch
Despite the company's struggles, famed money manager Bruce Berkowitz of Fairholme Capital Management has amassed a big position in it. His rationale is that the company's stock price doesn't properly credit Sears Holdings' huge base of assets.
Berkowitz is betting that the company's billionaire CEO, Eddie Lampert, will turn Sears Holdings into a successful investment from here by cutting costs,
Still, I continue to see several reasons to stay away. The company has been losing money for years, and the losses are expected to continue. It is also hard for me to believe that this company will ever become profitable again, given the company's waning brands and shifting retail environment. Meanwhile, its balance sheet is loaded with billions in debt, and the company has only $258 million in cash. That situation hints that any gains from asset sales might only be used to delay the inevitable, instead of providing shareholders with gains.
In all, I view Sears as a potential turnaround story that is far too risky to touch. That's why I plan on avoiding this stock like the plague and would suggest that other retail investors do the same.
An $8 billion bet
Berkshire doubled down on that Apple bet in a big way during the fourth quarter. The company's regulatory filing showed that it owned 57.4 million shares at the end of 2016, up from 15.2 million shares at the end of the third quarter. At the current price, Berkshire's Apple stake is worth nearly $8 billion, making it one of the company's largest holdings.
There's a lot to like about Apple. The company has an extremely strong brand, and its iPhone has been viewed as the best smartphone since its inception. Apple produced $45.7 billion of net income in fiscal 2016, down substantially from the previous year but still a staggering sum. The company also has $158 billion in net cash on the balance sheet. With a market capitalization of roughly $715 billion, the valuation is certainly attractive.
There's also a lot not to like about Apple. The company is heavily dependent on the iPhone, and a combination of smartphone market saturation, improving mid-range phone quality, and lengthening upgrade cycles have the potential to wreak havoc on its biggest cash cow. Apple needs to keep coming up with new ideas to spur upgrades each year, and a failure to do so could lead to further earnings declines.
Buffett seems to be betting that Apple's strong brand and quality products will be enough for the company to maintain its exceptional profitability. But I'm not so sure.
This niche natural gas producer has a big value investor on board
Is Antero a good stock for you? If you're looking for a solid natural gas-focused producer, with great low-cost assets, adequate liquidity, and dependable cash flows, it could be worth a closer look. The cash-flow aspect is definitely something that makes Antero appealing, as the producer has 96% of its 2017 production hedged at $3.47 per thousand cubic feet equivalent, far above the current market price of $2.63 for April delivery.
In other words, Antero's hedging activity helps it avoid the biggest risk to oil and gas producers: commodity price volatility. While other producers could end up selling gas for less than it costs them to produce it, Antero knows what its cash flows will be for the full year. That's great for investors.
Antero also has a pretty decent balance sheet, with plenty of access to liquidity, most of its debt at reasonable costs, and no major maturities before 2021.
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