Hedge fund manager Ken Heebner established Capital Growth Management LP (CGM) in 1990 and since then he has been at the helm running the $2.29 billion-dollar portfolio out of his Boston office. He is a legend in the investing world and is famous for making bold moves of concentrated bets against market sentiments. Recently Heebner has been on fire and was just named top performer in a Wall Street Journal contest of best stock-fund managers. Indeed, we can see that his CGM focus fund returned a very impressive 45.6% over the previous 12 months.
Given his recent success, it is worth us taking a closer look at his just-released trades from the third quarter. From 13F forms filed with the SEC we can now see the fund’s trades for the quarter ending September 30. Some of his most intriguing moves include reducing positions in Western Digital Corporation (NASDAQ: WDC); Lam Research Corporation (NASDAQ:LRCX); and Micron Technology, Inc. (NASDAQ:MU) three tech companies involved in data storage equipment and services.
These tech stocks have out performed the standard market benchmarks as investments in data equipment and services have increased across all sectors of the economy as companies prepare themselves for the new technological age based on information computerization. The growth in demand for data hardware and services does not however preclude the prospect of over capacity in the industry.
The strategy Heebner is playing here is in line with his strategic reputation of making bold moves against the market. Considering his success of late it is worth considering his unpopular moves. He himself said “I’ve made the most money when my strategy was something few people agreed with.” Or as the Oracle of Omaha puts it “Be fearful when others are greedy and greedy when others are fearful.” The stock market and in particular tech stock have been going up markedly. If there is something we can take away from the recent moves by Heebner, is that it may be worth giving proportional weight to the bearish arguments regarding these tech stocks, despite popular analyst opinion.
Let’s take a closer look at these three stocks now:
Western Digital (WDC)
Western Digital has been around for nearly half a century and is one of the leaders of computer storage systems. Today it is one of the largest computer hard disk manufactures in the world. In the past year the company has seen impressive growth with its year to date share price increasing 45% from $60.93 to $88.44. In the last quarter CGM reduced their holdings of this stock by -59.86% to $24.62 million, suggesting that Heebner believes the stock is near its peak. This is despite the fact that the current analyst consensus rating on TipRanks is moderate buy.
For example, five-star Benchmark analyst Mark Miller has a buy rating on the stock and a bullish $130 price target (47% upside). He says: “Because of the expected continued double-digit growth in storage demand through 2020 and strong cash flow generation, we believe the shares deserve a higher multiple of 10.5x, consistent with other storage firms.”
Lam Research (LRCX)
Lam Research is a leading supplier to the global semiconductor industry. Its products are used in nearly every leading-edge integrated circuit made today. LRCX has been a strong performer over the past year up 112.4% beating the NASDAQ Composite benchmark year to date growth of 27% and the S&P 500 benchmark growth of 19.4% by a great margin. LRCX stock has increased from $98.51 to $209.23 over this period. CGM reduced their holdings of Lam by -30.39% to $46.63 million in the last quarter reflecting a sentiment that is contrarian to analyst sentiment.
Again, this move comes in contrast to the analyst consensus rating on TipRanks of Strong Buy with 10 buy ratings and only 1 hold rating in the last three months. The one hold rating comes from Citigroup’s Atif Malik who actually has a very strong track record on LRCX stock. He downgraded the stock back in August saying he is becoming more selective in the semiconductor capital equipment space.
Micron has been a world leader in innovative memory solutions for over 35 years supplying memory and storage systems for a broad range of applications. Indeed MU is another strong performer in the Tech Sector. It’s stock price year-to-date is up by an astronomical 137% from $19.21 to $45.60 a share. Last quarter CGM cut their holdings of Micron by -6.22% to $83 million, capitalizing on the growth of the stock. Note however that MU is still the fund’s seventh biggest holding.
From a Street perspective, MU is considered a strong buy with analyst’s optimism reaching an average price target of $76 a share (12% upside from the current share price). “With our expectations for a soft landing for memory supply/demand in 2H of F2018, we believe MU should continue to trade near the low-end of its historical ranges of 5x to 10x” commented top Loop Capital analyst Betsy Van Hees recently. Although she has a buy rating on the stock, she reduced her price target from $48 to $47 on October 13 following MU’s equity offering of 29.3MM shares.