Billionaire Ken Griffin is back. After losing billions during the financial crisis, Citadel Advisors kept at it and earlier this year the fund cleared its high water mark, allowing Griffin and his team to earn carried interest again. We have reviewed Citadel’s 13F filing for the second quarter and here are some themes we noticed compared to previous filings:
Consumer staples. Two of the largest equity positions in Citadel’s portfolio according to the 13F filing were Pepsico (NYSE:PEP) and Kimberly-Clark (NYSE:KMB); both of these were increased dramatically from the first quarter of the year. Both of these companies are defensive consumer staples stocks paying high dividends: Pepsi’s yield is 3% while toiletries company Kimberly-Clark (owner of brands such as Kleenex, Scott, and Huggies) has a dividend yield of 3.6%.The two companies are also disconnected with the broader market on a statistical basis with betas of 0.3 and 0.1 respectively. We read the 4.1 million share position in Pepsi and 3.3 million shares in Kimberly-Clark as investments in a weakening market where the best buys are cheap consumer goods. Griffin doesn’t seem to be very optimistic about the state of the U.S. economy given these buys. Relational Investors had initiated a large position in Pepsico in the first quarter of the year, but Kimberly-Clark wasn’t much of a hedge fund favorite. We think that at a forward P/E of 15 it makes for a particularly good defensive stock.
Discount retail. Citadel finished the quarter with large positions in TJX Companies (NYSE:TJX) and Wal-Mart (NYSE:WMT). The Wal-Mart position was grown from a very low level while the stake in TJX- owner of concepts such as T.J. Maxx and Marshall’s- was more than tripled. Similarly to the companies’ products, these stocks are priced for value. Wal-Mart trades at 16 times trailing earnings and 13 times forward earnings, paying a 2.1% dividend yield; TJX trades at 20 times trailing earnings, but partly because of its smaller size it should be easy for it to achieve strong growth rates like the 21% earnings growth it reported in its most recent quarter compared to the same period a year ago. In both of these cases, the discount factor powers the stock to a low correlation with broader market movements: each has a beta of 0.4. Similarly to the consumer staples point, an expanded position in one of these retailers may have been company-specific or purely value-driven, but the fact that both stocks now rank among Citadel’s top holdings suggests a stratagem at work.
Out of flashy consumer brands. Apple (NASDAQ:AAPL) is still the top holding according the 13F, but the approximately 670,000 shares are significantly down from the 2.3 million which Citadel owned at the beginning of the quarter. Much of Apple’s recent success has come from the pricing power that its brand allows, and the company will have to rely on its core customer base as well as its recent converts as it fends off lower-priced challengers to its smartphone and tablet products. The fund also reduced its stake in Nike from 2 million shares to just under 200,000. Nike also trades at a fairly reasonable trailing P/E of 20 but part of the reason for this multiple is its strong brand name which allows it to sell to consumers at higher prices. We can’t help but notice Griffin backing out of both of these names, and when combined with Citadel’s increased positions in consumer staples and discount retail we think we see a “bearish on the consumer” theme in play at the fund.
So should investors read an end-of-the-world scenario into Griffin’s activity? No, and Apple for example is still reasonably priced enough that we’d advise against reducing a position in the stock as dramatically as Citadel has. However, we’d take the broader perspective of the fund being bearish and use that to justify investments in value stocks- of the ones mentioned here we do like Wal-Mart and Kimberly-Clark for their combination of value, low correlation with the market, and reliable dividends. We are sure that investors can find appropriately cheap stocks in other areas of the market as well.