Give Me The Cutthroats

Earlier this month, we saw the 13F deadline come and go. In the interest of transparency, the Securities and Exchange Commission (SEC) requires all money managers and hedge funds to reveal what stock they own every quarter. 

By comparing this quarter to last quarter, we can uncover what the best and brightest investors have been doing with their investors’ money. 

Talk is nice, but like in any business – it’s cheap.

Seeing where investors are actually putting their cash though – that’s pure gold.

13F filings give us a chance to engage in some idea piracy and steal ideas from brilliant investors. In a sense, reading the 13Fs gives us access to the greatest investment research department in the history of the world. And the access is completely free.

The trick though is knowing who to steal ideas from at any given time. 

Stealing ideas from Warren Buffett and Carl Icahn back in the 1980s when I started doing this was a great idea. Doing so today… not so much. 

The fact that Warren is selling Merck (MRK) and buying Kroger (KR) does give me something to think about when it comes to macro trends, but I have no interest in stealing those trades.

Icahn buying Occidental Petroleum (OXY) and Xerox (XRX) sounds more like a bad Lifetime movie than trades I want to steal.

I want to invest in a version of old school Carl Icahn. The man who had the reputation of a bare-knuckled brawler from Brooklyn.

Remember the line from the Goodfellas movie years ago? “$%^* You, Pay Me” – that was Carl Icahn in the 1980s and 90s.

Or the pre-crafty boy from Omaha persona of Warren Buffett. I want the old Warren, the one who used his razor-sharp mind to slit the throat of more than one dummy who thought they could get the best of him in a transaction.

Not Just Any 13F…

I want to steal ideas from the investors who still fight like a younger Warren and Carl. 

Mason Morfit at ValueAct Holdings is that kind of investor. 

He took over control of ValueAct when Jefferey Ubben retired in June of 2020 and has continued to engage in the type of shareholder activism that his predecessor did for years. 

As a result, during the first year of his leadership, Mortfit has generated returns of almost 70%.

Just buying and holding the firm’s top ten holdings has crushed the S&P 500 since 2007 by more than 60%.

ValueAct didn’t buy a lot in the second quarter of the year but what they did buy was interesting. 

The fund increased its position in Insight Enterprise (NSIT) by more than 150%. Insight is a global IT company that works with businesses of all sizes, governments, schools, and health care organizations. Insight’s offerings include Digital Innovation, Cloud plus Data Center transformation, and Connected Workforce solutions and services.

While they have not taken any aggressive action toward the company, they do own more than 8% of Insight, so if we don’t see the stock moving higher before too long, do not be surprised to see Mr. Morfit and his team move in for some discussions with the Insight board.

In the quarter, ValueAct also opened a new position in shares of Lumentum Holdings (LITE). Lumentum makes optical components (for transmitting information) and commercial lasers (for things like cutting sheet metal).

ValueAct does not own 5% of the company and has declared no activist intentions yet, but I am pretty sure I see why they opened a position.

I think these are two fantastic businesses that should be growing at a much higher rate… and this holds especially true for Lumentum.

Even as the overall market soars off the COVID lows of 2020, this stock has gone nowhere thanks to ho-hum earnings results. As shown in the chart below, 1Y returns are pretty much flat.

LITE stock

I suggest watching this stock closely over the next few months. If we see prices fall from here, we have the opportunity to bargain shop near or around the same price where ValueAct got in.

Insight Enterprise (NSIT), on the other hand, has fared much better with the overall market. The stock has seen gains north of 60% from one year ago.

NSIT stock

Despite the successful year, I have a feeling we will see even more buying by the activist in this stock.

So, just like Lumentum, any opportunity for us to get in at a lower price should suit us quite well.