Axalta Coating Systems Ltd (NYSE:AXTA) has popped by nearly 9% in trading today, after it came to light that famed investor Warren Buffett of Berkshire Hathaway would soon be the owner of some 20.0 million shares purchased directly from The Carlyle Group for $28 apiece. The news clearly indicates confidence in the company and its operations from the most revered investor in the world, which is why shares have spiked on the news.
The Carlyle Group purchased Axalta Coating Systems Ltd (NYSE:AXTA) from E I Du Pont De Nemours And Co (NYSE:DD) in February 2013 for $4.9 billion. At the time, Axalta was a division of DuPont dubbed DuPont Performance Coatings, which DuPont shed as it aimed to focus on some of its higher-margin businesses. Some 20 months later, The Carlyle Group took Axalta public in November 2014 with an offering of 50 million shares at $19.50 apiece. In the five months since then, the stock has grown by nearly 50% and proved to be popular among some of the world’s most prominent investors, including George Soros and Steven Cohen, each of whom took a position in the newly-listed company.
The purchase by Buffett, which amounts to $560 million worth of Axalta Coating Systems Ltd (NYSE:AXTA) shares gives him a nearly 10% ownership position in the $6.6 billion market cap company. While the investment is not a huge one for Buffett, whose equity portfolio was valued at over $109 billion at the end of 2014, it’s another vote of confidence by the Oracle of Omaha in the automotive sector, which he has previously declared as a good long-term area of investment. Buffett already has a $1.43 billion stake in General Motors Company (NYSE:GM), while his holding company Berkshire Hathaway owns both Lubrizol (a maker of lubricants for the automotive industry) and the Van Tuyl Group (a large car dealership since renamed Berkshire Hathaway Automotive).
It’s Buffett’s long-term investment focus that can allow him to shrug off disappointing quarterly results like those his equity portfolio experienced during the first quarter. The weighted average returns during the first quarter of Buffett’s 46 long positions valued at $1 billion or greater as of the end of 2014 were an uncharacteristically poor -2.4%. With Buffett’s top four picks accounting for more than 60% of his equity portfolio, we can find the reasons why by starting there. What we find is that all four of those top picks underperformed the market, with his top pick Wells Fargo & Co (NYSE:WFC)dipping by 0.11% during the quarter, his second pick The Coca-Cola Co (NYSE:KO) sliding by 3.15%, and his fourth pick International Business Machines Corp. (NYSE:IBM) posting a marginal gain of 0.74%, also underperforming the market, as the S&P 500 was up by 0.9% during the quarter.
However it was Buffett’s third-most valuable position, in American Express Company (NYSE:AXP), which did the most damage, crumbling by more than 15% during the quarter. With competition increasing and margins sliding, American Express Company (NYSE:AXP)’s stock has come under heavy pressure since the beginning of 2014 after a strong five-year run exiting the financial crisis in early 2009. Shares have now slid back to their lowest levels since late 2013 as investors grow skeptical of the credit company’s ability to meet its long-term growth targets.
Buffett was battered by American Express Company (NYSE:AXP)’s poor quarter, as he not only held the largest position in terms of shares by a country mile with 151.61 million, but the 12.89% of his portfolio that the position accounted for was also the largest of any of the institutional investors we track. Billionaire Ken Fisher was able to beat the market despite American Express also being one of his top positions, thanks to holding a much larger and more balanced portfolio. As with Buffett, American Express is also Fisher’s third-largest position, though in his case it only accounts for 2.16% of his portfolio.
The weighted returns of those top four positions of Buffett’s was -3.0%, which means the rest of his portfolio performed better, though it also underperformed the market. In fact, among Buffett’s top ten holdings, the only stock that impressed was DaVita HealthCare Partners Inc (NYSE:DVA), which continued to perform well for the investor, gaining more than 7% during the quarter. DaVita Healthcare Partners also stands as the only healthcare stock in Buffett’s portfolio, which may explain why his performance is lagging given that healthcare and particularly biotech stocks are the hottest in the industry right now. Buffett’s 38.57 million share position in DaVita HealthCare Partners Inc (NYSE:DVA) is by far the largest among funds we track, with billionaires Andreas Halvorsen, Stephen Mandel, and D.E Shaw also having some of the largest positions. However it amounted to just 2.67% of Buffett’s portfolio, doing little to offset the losses of those top four positions.
Wealthy investors like Buffett have the majority of their capital invested in large and mega-cap stocks because these companies allow for much larger capital allocation. That’s why, if we take a look at the most popular stocks among hedge funds (we track more than 700 in our database), we won’t find any mid- or small-cap stocks there. However, our backtests of hedge funds’ equity portfolios between 1999 and 2012 revealed that the 50 most popular stocks among hedge funds underperformed the market by 7 basis points per month. However, we found that we can combine the pricing inefficiencies among small-cap picks with hedge funds’ expertise and obtain significant results. This was confirmed through backtesting, and in forward tests since 2012 our strategy that involves imitating the most popular small-cap picks among hedge funds has managed to provide gains of more than 134%, beating the broader market by more than 82 percentage points.
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