Julian Robertson is quite the legend in the hedge fund space. Robertson stopped managing money for clients a decade ago, but is still widely followed in the media and his comments attract a lot of attention. Robertson returned 31.7% per year after fees between 1980 and 1998, beating the S&P 500’s 12.7% annual return by a huge margin. Robertson has bred many hedge fund managers, dubbed Tiger cubs that have studied under Robertson before venturing off to start their own funds, some of which were seeded by Robertson himself.
Robertson’s fund, now managed by a diversified investment team, appears to be making the move from big name investment banks to gold. Tiger Management downsized its Goldman Sachs Group, Inc. (NYSE:GS) position by 80% and JPMorgan Chase & Co. (NYSE:JPM) position by over 15%. The fund’s steep sell-off of Goldman shares could be attributed to the uncertainty of Goldman’s business model going forward. The ultimate impact from the Volcker rule remains to be seen.
Goldman revenues are expected to grow 12% in 2012, after a 26% decline in 2011, where the swings in market conditions generally have a big impact on Goldman revenues, making them hard to forecast. We see Goldman as currently trading in line with its historical P/E at 12x, and its return on equity remains strained at only 9% over the trailing twelve months, reaffirming out questionable outlook.
JPMorgan has been considered one of the best-in-breed of the major banks and is up only 20% year to date, well below many of its peers. JPMorgan also appears to be trading very cheap at 9x earnings, especially compared to Bank of America’s 25x and Citi’s 15x. We take solace in the fact that Robertson’s fund only dumped 15%, and perhaps it sees the low rate environment being more profitable for gold versus banks – hence it is positioning its portfolio accordingly. Possible near-term headwinds that could justify the bank’s discount to peers is the meager expected increase in revenues for 2012 of 0.5%, while net interest income is expected to be down 7%. Check out whether JPMorgan is still a buy.
Robertson’s fund also appears to have become a gold bull. With the announcement of QE3 a couple of months ago, where the Fed plans to keep near zero through mid-2015, we also see gold as an solid investment during this time of uncertain global economic growth. Tiger Management increased its position in Barrick Gold Corporation (NYSE:ABX) during 3Q by 45%. Barrick gold is one of our five stocks to buy as gold prices continue to move higher.
Barrick is not the only way that Robertson’s fund is playing gold, though, it increased their stake in two key gold ETFs, Market Vectors Junior Gold Miners by 50% from 2Q and Market Vectors Gold Miners by 35%. Barrick is the world’s largest gold company by production and reserves. We see this gold company as one of the cheapest in the industry from a valuation standpoint, trading at 9x earnings, compared to other major gold producers Kinross Gold at 17x and Goldcorp 20x. The 2012 outlook for Barrick is positive with both production and revenue expected to be up 7% from 2012. The long-term growth will be driven by higher gold prices and lower-cost mine operations.
Although Tiger Management grew hesitant of investment banks, it did find reason to invest in the mortgage servicing business, with an increase of 67% in his Ocwen Financial Corporation (NYSY:OCN) 2Q position. At first glance Ocwen has a high P/E of 37x earnings, versus New York Community Bancorp and People’s United Financial at 11x and 17x, respectively, but we believe Ocwen’s best-in-industry five year expected earnings growth of 23% warrants such a premium P/E.
Ocwen has made several acquisitions over the past year, looking to buy up bank assets to beef up on loan servicing. This includes teaming with Walter Investment Corp to make a $3 billion bid for Rescap’s mortgage servicing business. The winning bid by Ocwen announced last month will be another key driver for Ocwen’s long term growth. Last month Robertson called out Ocwen in a CNBC interview as a stock to watch.
One of Tiger Management’s newest picks was a big investment for the firm, making up over 3.8% of its 3Q 13F holdings. Robertson’s fund bought over $18 million worth of Charter Communications, Inc. (NASDAQ:CHTR) during 3Q. Charter’s revenue growth is respected to only be modest in 2012 and 2013 at 3% each year. Charter’s 3Q earnings were generally in line with estimates as the cable service company continues its turnaround. Capital expenditures have been on the rise as Charter spends more on labor and infrastructure, but these should assist in higher long term growth rates with Charter’s eventual ability to offer broadband and video bundled services to more market segments.
We agree with Tiger Management that there is a lot of uncertainty with Goldman’s business model, and would like a bit more clarity before investing. We are intrigued by JPMorgan’s current valuation and would be interested in taking a closer look. We also agree with Robertson’s gold pick and bullish outlook. Ocwen is a key player in a niche market that has been securing key assets that will help the company perform well in the future. Charter remains a bit too speculative for us with an incalculable P/E and intense competition from the streaming market and online platforms, such as Netflix, Amazon and Hulu. Be sure to check out all of Tiger Management’s picks here.