The Smart Money Just Made Some Big Calls!

Key Concepts

• 13F Filings: Quarterly reports that U.S. Securities and Exchange Commission (SEC) requires institutional investment managers with at least $100 million in assets under management to file. These filings disclose their holdings in U.S. securities.
• Put Option: A contract that gives the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price (the strike price) within a specified time. It's a bet that the price of the underlying security will fall.
• Strike Price: The price at which the holder of an option can buy or sell the underlying asset.
• In the Money: For a put option, this means the strike price is higher than the current market price of the underlying asset.
• Capital Light: A business model that requires minimal capital investment to operate and scale.
• Franchise Model: A business arrangement where a franchisor grants a franchisee the right to use its trademark and business system in exchange for fees and royalties.
• Same Store Sales Growth: A metric used in the retail and restaurant industries to measure the increase in revenue from stores that have been open for at least one year.
• Moat: A sustainable competitive advantage that protects a company's long-term profits and market share from competitors.
• PE Ratio (Price-to-Earnings Ratio): A valuation metric that compares a company's current share price to its earnings per share. It indicates how much investors are willing to pay for each dollar of earnings.
• Dividend Yield: The ratio of a company's annual dividend per share to its current share price, expressed as a percentage.

13F Filings: Big Moves in the Latest Quarter

This summary details significant investment activities revealed in the latest 13F filings, which provide insights into the strategies of major investors following the end of Q3. Contrary to expectations of a quiet quarter due to the S&P 500's continued rise, these filings show substantial shifts in portfolios.

Michael Burry's Bets Against the AI Bubble and Fund Closure

Main Topics and Key Points:

• Betting Against AI Stocks: Michael Burry, through his fund Scion, has taken significant put option positions against Nvidia and Palantir, signaling a bearish outlook on these companies, particularly in the context of what he perceives as an "AI bubble."
• Palantir Put Options: Scion purchased 500 put option contracts on Palantir with a strike price of $50, expiring in 2027. The total cost for these options was $9.2 million. The strategy relies on Palantir's share price falling below $50 by the expiration date for the options to be profitable. Even a moderate decline in Palantir's stock price (currently around $170) would significantly increase the value of these options due to the extended time to maturity.
• Nvidia Put Options: Burry also acquired put options on 10,000 shares of Nvidia, represented by 100 contracts with a strike price of $110, also expiring in December 2027. Similar to Palantir, the play is for Nvidia's stock price (currently around $190) to decrease, making the options more valuable.
• Fund Liquidation: In a dramatic development, Michael Burry has announced the closure and liquidation of his fund, Scion. He cited a disconnect between his valuation of securities and market prices.
• Notable Statement: Burry stated in a leaked letter to investors, "With a heavy heart I will liquidate the funds and return capital. My estimation of value in securities is not now and has not been for some time in sync with the markets."
• Reasoning for Closure: Burry alluded to market irrationality, quoting, "Sometimes we see bubbles. Sometimes there is something to do about it. Sometimes the only winning move is not to play." This suggests he finds the current market environment too speculative to engage in meaningfully.

Warren Buffett's Portfolio Adjustments

Main Topics and Key Points:

• Significant Investment in Google: Berkshire Hathaway made a substantial investment of $4.3 billion in Google Class A shares. This new position ranks as the 10th largest in Berkshire's portfolio.
• Rationale for Google Investment: Despite arguments that Google's moat is threatened by AI advancements like ChatGPT and a P/E ratio around 30, Buffett's investment is seen as a strategic move. The presenter speculates that Buffett views Google as a "cash producing machine" with an exceptionally strong balance sheet, making it a preferable place to park cash compared to short-term U.S. Treasuries, even at its current valuation.
• Continued Selling of Apple: Warren Buffett has continued to reduce Berkshire's stake in Apple, selling another 15% of the holding in the last quarter. Apple now represents 22% of the Berkshire portfolio.
• Reasoning for Apple Sell-down: This ongoing reduction is interpreted as a reflection of Apple's current valuation. Buffett originally bought Apple in 2016 at a P/E of around 16, and the P/E has since expanded to approximately 35. The presenter suggests Buffett is taking profits while still maintaining a long-term conviction in the company.

Bill Gates' Fund Reduces Microsoft Stake

Main Topics and Key Points:

• Significant Microsoft Sell-down: Bill Gates' charitable foundation has significantly reduced its largest holding, Microsoft. In Q2, Microsoft constituted 27% of the fund's portfolio. Following the Q3 13F filings, the foundation sold 17 million Microsoft shares, bringing the position down to 13% of the portfolio, valued at approximately $4.7 billion.
• Potential Reasons for Reduction:
  • AI Infrastructure Spending: Increasing AI infrastructure expenditures by Microsoft, which reported a record capital expenditure of nearly $35 billion in the quarter and warned of further increases, is a concern for investors regarding the rising costs of the AI boom.
  • OpenAI Concerns: Microsoft's key partner, OpenAI, is facing scrutiny over its financial arrangements. OpenAI CEO Sam Altman's commitment to purchase over $1.4 trillion in computing power over the next few years with limited funding details raises questions, and Microsoft, as a 27% owner of OpenAI, is indirectly affected.
  • Stock Appreciation: The presenter suggests a simpler reason: Microsoft's stock has experienced significant growth, rising over 40% from $350 in April to around $500 currently. This rapid appreciation has led to a P/E ratio of 36, implying high investor expectations for future growth.
• Valuation and Expectations: At a P/E of 36, investors are expecting substantial growth from Microsoft to justify its valuation. The presenter notes that if these expectations are not met, companies focused on AI, like Microsoft, could face sharp re-ratings from Wall Street, echoing Michael Burry's concerns.

Seth Klarman's Increased Position in Restaurant Brands International

Main Topics and Key Points:

• Doubling Down on RBI: Seth Klarman, a prominent value investor, has doubled his position in Restaurant Brands International (RBI). This holding now exceeds 10% of the Baupost Group's portfolio and is valued at over $500 million.
• Restaurant Brands International Overview: RBI is the parent company of major fast-food brands including Burger King, Tim Hortons, Popeyes, and Firehouse Subs. The company operates on a franchise model, generating revenue through franchise fees and a percentage of ongoing store revenue. It is a $22 billion business.
• Reasons for Investor Appeal:
  • Growth: RBI is experiencing decent growth, with operating income increasing and same-store sales growth at 4% in the most recent quarter.
  • Moat and Franchise Model: The company possesses a strong moat due to its well-recognized brands. The franchise model makes it "capital light," enabling scalability, and leads to more predictable cash flow as revenue is primarily derived from fees, regardless of store-level performance.
• Buffett-Style Business: The presenter likens RBI to a "Buffett-style business," noting that it was previously held in Buffett's portfolio until 2020.
• Valuation and Dividend: At a P/E ratio of 24, RBI is not considered a bargain but offers a blend of earnings growth and a steady income stream through its approximately 3.5% dividend yield.

Other Notable Moves

• Leeu: No significant activity reported.
• Bill Ackman: Reduced his Google position by 10%.
• Guy Spear: Made one move, a 60% reduction in Micron.
• Monish Pabrai: Initiated a new position in Transocean, a company that owns and operates offshore oil and gas drilling rigs. The presenter notes Pabrai's continued focus on the energy sector (oil, gas, and coal).

Conclusion

The Q3 13F filings reveal a dynamic investment landscape. Michael Burry's bearish bets on AI and subsequent fund closure highlight concerns about market irrationality. Warren Buffett's significant investment in Google and continued reduction in Apple reflect his strategic allocation of capital. Bill Gates' fund's substantial sell-down of Microsoft suggests potential concerns about rising AI costs and the company's valuation. Meanwhile, Seth Klarman's doubling down on Restaurant Brands International underscores the appeal of well-established brands with a capital-light, franchise-based business model. These moves provide valuable insights into the current thinking of some of the world's most influential investors.