George Soros’s Hedge Fund Bullish On J.C. Penney Company, Inc. (JCP) & Herbalife Ltd. (HLF), Selling Airlines

Billionaire George Soros is best known for its profitable macro investments, particularly in currency instruments, but his hedge fund Soros Fund Management engages in equity investments as well. We track the fund’s quarterly 13F filings alongside those of hundreds of other hedge funds and notable investors as part of our work developing investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). Of course it’s also useful to see what individual funds were up to in the previous quarter. We have gone through Soros’s 13F for the end of June and here are some trends we noticed compared to previous filings (see which stocks Soros Fund Management has owned over time):

Buying Ackman’s longs (and shorts). Two of Soros’s biggest buys between April and June, and now two of his top five stock holdings, were J.C. Penney Company, Inc. (NYSE:JCP) and Herbalife Ltd. (NYSE:HLF). Of course, these two stocks have been among billionaire Bill Ackman of Pershing Square’s highest profile positions (find Ackman’s favorite stocks). Ackman argued in December that Herbalife Ltd. (NYSE:HLF) was an illegal pyramid scheme, and he has been long J.C. Penney Company, Inc. (NYSE:JCP) for some time (recently he has been urging the Board to speed up its search for a new CEO). Ackman’s short thesis in Herbalife has been looking shaky: the stock has approximately doubled year to date (though it only recently crossed above what has been reported as the “cost basis” for his short), and both sales and net income have been up. The trailing P/E is 14, and thus far the U.S. government has not shown any indication that it is seriously considering shutting down Herbalife Ltd. (NYSE:HLF)’s domestic operations.

hedge fund researchJ.C. Penney Company, Inc. (NYSE:JCP) has also been tough for Ackman this year, down over 30% so far in 2013. Revenue fell 16% in its most recent quarter compared to the same period in the previous fiscal year, and the consensus from Wall Street analysts is that the department store will be unprofitable at least through the fiscal year ending in January 2015. 29% of the float is held short. Soros, Ackman, and now Richard Perry’s Perry Capital represent three large hedge fund positions banking on a turnaround of J.C. Penney Company, Inc. (NYSE:JCP), but we continue to be skeptical of the company’s prospects in the current environment.

Selling airlines. Soros’s equities team sold out of its position in US Airways Group, Inc. (NYSE:LCC) last quarter, and sold a large share of its stake in Delta Air Lines, Inc. (NYSE:DAL) as well; they had over $130 million invested in each company at the end of Q1. US Airways Group, Inc. (NYSE:LCC)’s proposed merger with American had been thought as bullish for the industry as it would increase industry consolidation and therefore pricing power. However, government regulators have seized on management’s predictions of higher prices as a reason to object to the deal on consumer protection grounds. Even after this news and a corresponding drop in their stock prices, Delta Air Lines, Inc. (NYSE:DAL) and US Airways are up quite a bit in the last year; Delta has more than doubled. Each is valued at less than 8 times forward earnings estimates, and even with the standard concerns over the airline industry we think that they- and other legacy airlines- are worth considering as potential value plays.

Selling Pioneer. The fund dumped more than half of what had previously been its largest single-stock position, Pioneer Natural Resources (NYSE:PXD). Pioneer Natural Resources (NYSE:PXD) is a $24 billion market cap oil and gas exploration and production company operating across the onshore U.S. In the second quarter of 2013, revenue rose close to 30% versus a year earlier and operating income was also up even after adding back an impairment charge in the prior year period. However, at trailing and forward P/Es of 48 and 27, respectively, the market price already incorporates a good deal of future earnings growth.

As a result value investors would likely avoid Pioneer based on its valuation. We’re sure that many market players are too wary of the industry’s history of bankruptcies to invest in airlines, and certainly the federal action against the American-US Airways deal is not good news, but it might be worth at least waiting for further results from these companies to see how they did in Q3. Herbalife Ltd. (NYSE:HLF) is a battleground stock, which again should serve as a negative for many investors, though we would be interested in a closer look at the company given its earnings multiples and decent financials.

Disclosure: I own no shares of any stocks mentioned in this article.