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Thornburg Betting On Rising Interest Rates, Grows Bearish On Tesla, Likes Netflix

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Thornburg Investment Management is a U.S-based investment manager that has an asset base of around $55 billion across a range of different funds. In terms of its equity portfolio, the firm primarily invests in growth and value stocks across all capitalizations. Its Thornburg Value Fund has outperformed the broader S&P index by about 1 percentage point annually since its inception in 1995, returning 9.54% per year on average.

In its recent newsletter for the third-quarter, the investment manager discussed the current market climate, saying that the key factor driving the stock markets today are interest rates. Low interest rates have led to an overvaluation of securities with stable cash flows and high dividend yields, leading to the creation of an “expensive defensives” category. The fund is avoiding this category, which tends to be high on P/E and low on growth. In this article we’ll take a look at five stocks the fund discussed in its letter.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see more details).

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HP Inc (NYSE:HPQ) was one of the top performers for the Fund in the third quarter, with Thornburg having allocated 2.1% of its equity portfolio’s assets to its position in HP Inc (NYSE:HPQ). Thornburg likes HP because it is a leader in some of the major IT segments such as printing and PC, where it continues to gain market share. The company is shareholder-friendly, as it has committed to return 75% of the cash it generates to shareholders in the form of share buybacks and dividends. It also has a high FCF yield, at 12%. The stock has done well this year, returning around 24%. Analysts covering the stock aren’t as bullish as the fund, as just eight analysts have rated it as a ‘Buy’, while 14 analysts have it pegged as a ‘Hold’. The number of hedge funds in our system with a long position in HP Inc (NYSE:HPQ) remained at 40 as of June 30, same as on March 31.

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While HP has been a good performer for the fund during the third quarter, its other IT holding, Cognizant Technology Solutions Corp. (NASDAQ:CTSH), was the worst performer. Cognizant Technology Solutions Corp. (NASDAQ:CTSH)’s legacy outsourcing business has started to slow down, though its digital business is starting to show good traction. Shares of the company fell sharply in September after it announced the resignation of its second-in-command as well as an investigation that was in violation of the Foreign Corrupt Practices Act. Despite its current travails, 22 of the 34 analysts covering the stock have rated it as a ‘Buy’. 40 hedge funds from within our database held shares of Cognizant Technology Solutions Corp. (NASDAQ:CTSH) worth $922 million on June 30, representing 2.7% of the company’s float.

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We’ll check out three more stocks discussed in Thornburg’s latest investor letter on the next page.

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