MorningWord 5/16/14: Hedge Fund Honchos

by Dan May 16, 2014 9:27 am • Commentary

This past week saw its share of headlines from hedge fund honchos regarding investment themes at both an industry conference in Las Vegas and the release of Q1 13F filings yesterday showing new and altered single stock positions (as of 45 days ago).  While it can be useful to get a sense for money flows, the data is not particularly reliable.  Retail investors should be careful trying to ride coattails, as there is no indication of entry point, possible hedges against, and the overall thesis.

Every once in a while though, there are some fairly easy takeaways, such as “Warren Buffett’s Berkshire Hathaway takes stake in………” In last night’s BRK/B filing it was revealed that the Oracle’s latest pick to click is Verizon (VZ), taking a half a billion dollar stake, which for him is small peanuts, making him the 37th largest shareholder in the telco provider (John Paulson and Dan Loeb also took stakes in the quarter).

Back in mid February, we entered a bullish trade on VZ (New Trade $VZ: Can You Buy Me Now?) and exited it in early April (here) at similar levels to where it is trading this morning. The thesis at the time was fairly simple for viewing the shares favorably:

in this macro environment where threats to global growth are largely perceived to come from the emerging world, VZ is deemed to be defensive given its 100% revenue exposure to the U.S, and its dividend yield of about 4.5%.

That was mid February, a week after U.S. equities bottomed from their worst decline in more than a year (peak to trough) with most of the discontent emanating from emerging markets.  In the last couple weeks, VZ shares bounced off of massive technical support at $46, a level that we had been spying to possibly buy-write the stock again:

VZ 2yr chart from Bloomberg
VZ 2yr chart from Bloomberg

The stock’s recent gains correspond with the U.S. Treasury yields hitting 7 month lows, making VZ’s 4.5% dividend yield look mightily attractive against the backdrop of what could be a challenging year for equity returns.

Implied vol on VZ options is nearing 2 year lows, so for those who are not interested in clipping the coupon, but think that Buffett and a few other hedge fund whales interest in the telco will cause other investors to chase, then directional bets with long premium could make a lot of sense.

VZ 2yr chart of 30 day at the money IV from Bloomberg
VZ 2yr chart of 30 day at the money IV from Bloomberg

Overall, we have preferred the telcos for conservative but appealing long side positions relative to most other “defensive” stocks.  For example, the euphoria in utilities and consumer staples over the past couple of months seems misplaced to us given that both sectors are significantly overvalued compared to their median valuation of the past two decades.  VZ and T, on the other hand, have better growth opportunities in our view given the secular trend of increased data usage, and are also much more reasonably valued.  Warren’s blessing might be the short-term spark to push VZ to green on the year, with the $49 level the spot to watch.