I'm often asked how I come up with a consistent stream of investment ideas. There is really no single answer to this question.
I have been immersed in the financial markets since my first trade back in 1990. Since that time, my investing library has grown so large that it has overwhelmed my bookshelves and spread into attic storage boxes. I am also a voracious reader of the financial media, reading several magazines and newspapers on a near-daily basis -- not to mention subscribing to real-time news services to stay up on what's happening.
While my investing library has provided the foundation, and the daily financial media torrent turns the knowledge actionable, my favorite fresh idea source is other investors. New ideas can come from anyone, from the most naive beginner to the most sophisticated hedge fund manager and everyone in between. This is the reason I make it a point to talk to every trader and investor I meet about what's working and what's not working in their investing.
Another way to learn from others is by following the big-money players.
There are several large hedge fund managers who have earned my respect, and I watch their every publicly known investment. Fortunately, large money managers are required to file a Form 13F with the Securities and Exchange Commission on a quarterly basis disclosing their equity holdings. By keeping track of these filings, investors can glean profitable ideas as to what stocks these players are buying or selling.
One of the most respected hedge fund managers in the world is Israel Englander, who operates Millennium Management. Millennium has more than $198 billion of gross assets; gross asset value refers to the total value of all assets under management, including leverage. Using this measure, Millennium is by far the largest hedge fund on earth. As a comparison, the next largest funds by gross assets are Bridgewater, with just under $140 billion, and Citadel, with $107 billion as of April.
To put these numbers into perspective, they are larger than the annual GDPs of many countries. It's important to keep in mind, however, that when leverage is not included, Millennium has just under $20 billion in assets.
Calling itself a global multi-strategy opportunistic fund, Millennium was launched in 1989 with just $35 million. The fund has a relatively unusual business model: Englander allocates capital to teams of traders who invest it to the best of their abilities. Traders can remain on the team as long as they're profitable. But as soon as a certain amount is lost, the trader is fired. In this regard, Millennium is often thought of as a trader of traders.
Most interestingly, Englander and his head managers rarely discuss investment themes or strategies with the actual trading teams. He prefers to give them autonomy to follow their own ideas. This team approach guarantees diversification and uncorrelated returns, as each team uses its best ability to outperform. In addition, Millennium does not charge the traditional fixed management fee; rather, it simply passes the actual costs along to the investors. Englander believes that having investors directly involved with the true costs of running the business, rather than paying an arbitrary fixed percentage, is truer to the original entrepreneurial spirit of hedge funds.
Here's what I found when I drilled into Millennium's holdings:
The firm increased its short position in the SPDR S&P 500 ETF (NYSE: SPY) by 576% last quarter. This position now takes up 1.88% of the fund's portfolio. I am not overly alarmed by this move, since more than 15% of the holdings remain long on SPY. However, it is important to note that Millennium decreased its long position in this exchange-traded fund by 52% during the quarter. While I don't think this is signaling a basic macro shift from bullish to bearish just yet, I will be observing the next filing carefully.
Millennium's No. 1 single stock holding is PPL Corp. (NYSE: PPL). The fund owns more than 8 million shares and increased its ownership by 73% last quarter.
PPL is an energy and utility holding company in the U.S. and U.K. The company boasts a market cap of nearly $19 billion and trailing 12-month revenue of just more than $12 billion. The quarterly gross profit margin is more than 61%, and the company currently offers a 4.9% dividend yield.
Clearly, the traditional steady dividend payouts of utility companies are an attraction to Millennium. (Remember, the dividend strategies Amy Calistri shares in her Daily Paycheck advisory are effective no matter the size your portfolio.)
The technical picture shows the company has set up in a clear trading channel. The price has consolidated between $29.50 and $31 on the weekly chart.
This consolidation occurred after a long uptrend starting in April 2011, culminating at $32 in mid-April 2013. Shares have since fallen back into the present weekly channel.
Millennium's second largest holding is Baker Hughes (NYSE: BHI). The fund owns more than 4 million shares and increased its position 30% in the most recent quarter.
Baker Hughes is an oilfield services, products and technology supplier. It boasts a market cap of nearly $24 billion and trailing 12-month revenue of nearly $22 billion. The company offers a small forward dividend yield of 1% on a payout ratio of 25%. The things I like best about this stock currently are the seasonal decline and an Iraqi disruption, which have knocked shares lower. Shares are presently right below the 50-day simple moving average, which opens up an ideal breakout entry point.
Risks to Consider: There are no guarantees when investing. Even the largest hedge funds and money managers lose money and make poor decisions at times. Always use stop-loss orders and diversify properly in your portfolio.
Action to Take --> I like the dividend producing qualities of PPL and see it as a potentially great addition to a long-term portfolio. However, Baker Hughes has set up to be an ideal buy candidate. Buying on a breakout close above $55 with a nine-month price target of $59 and initial stops just below $53 makes solid investment sense.