Billionaire Ray Dalio’s Top Stock Picks for 2016

2015 was the worst year for the hedge fund industry since the 2008 financial crisis. While the broader market remained largely flat, several hedge funds suffered high double-digit losses during the period, including prominent names like Pershing Square and Greenlight Capital as a number of hedge fund hotels (stocks very popular among hedge funds) had horrendous years. Industry titans like billionaire Ray Dalio of Bridgewater Associates weren’t able to buck the trend either. Our analysis shows that the long positions held by the fund in companies with market capitalizations of at least $1 billion produced a weighted average returns loss of 10.7% during 2015, based on the size of those holdings at the beginning of each quarter. It seems Bridgewater Associates realized during the fourth quarter that it would be ending 2015 on a dismal note and that to bounce back in 2016 it would need to make a number of changes to its portfolio, which its latest filing shows as being the case. According to the filing, Bridgewater’s equity portfolio experienced 100% turnover during the fourth quarter and by the end of that period financial stocks accounted for 78% of the value of the portfolio (this is mostly from investments in ETFs however, and not actual finance stocks). In this article, we will be going through Bridgewater Associates’ top five stock picks going into 2016.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas (see the details here).

#5 VMware, Inc. (NYSE:VMW)

– Shares Owned by Bridgewater Associates (as of December 31): 517,061

– Value of Holding (as of December 31): $29.25 million

Bridgewater Associates  made a nearly ten-fold increase to its stake in VMware, Inc. (NYSE:VMW) during the fourth quarter. Shares of the virtualization infrastructure solutions provider have fallen by over 40% since last October, when Dell Inc. announced that it would be buying EMC Corporation (NYSE:EMC) in a $67 billion deal. Since EMC Corporation (NYSE:EMC) owns 83% of the outstanding shares of VMware, Inc. (NYSE:VMW), Dell Inc. categorically clarified in its announcement that it will let VMware, Inc. remain an independent, publicly-traded company. However, Dell Inc. recently submitted a regulatory filing in which it disclosed to investors that the final price of the EMC Corporation deal could drop by $10 billion due to the massive drop in VMware, Inc.’s stock over the past few months.  According to recent reports, VMware, Inc. is planning to layoff 5% of its 18,000 employees ahead of the Dell/EMC merger. Matt Sirovich and Jeremy Mindich‘s Scopia Capital also increased its stake in VMware, Inc. during the fourth quarter; it held nearly 2.56 million shares of the company as of December 31.

 #4 BCE Inc. (USA) (NYSE:BCE)

– Shares Owned by Bridgewater Associates (as of December 31): 772,300

– Value of Holding (as of December 31): $29.72 million

Amid a 5.7% drop in BCE Inc. (USA)(NYSE:BCE)’s stock during the fourth quarter, Bridgewater Associates increased its stake in the Canadian communications major by 93%. BCE Inc. (USA)(NYSE:BCE) is among the few stocks that’s trading in the green this year, up by 8.78% year-to-date, so the move has paid off so far. Most of the rally the stock has seen this year came in anticipation of the company’s fourth quarter results. On February 4, BCE Inc. reported EPS of $0.72 on revenue of $5.60 billion for the quarter slightly missing analysts’ expectations of EPS of $0.72 on revenue of $5.63 billion. Despite the recent run-up in BCE Inc.’s stock, it still sports an attractive annual dividend yield of 4.74%. On February 6, analysts at RBC Capital reiterated their ‘Outperform’ rating and $58 price target on the stock. Cliff Asness‘ AQR Capital Management reduced its holding in the company by 7% to 1.94 million shares during the fourth quarter.

#3 Microsoft Corporation (NASDAQ:MSFT)

– Shares Owned by Bridgewater Associates (as of December 31): 538,008

– Value of Holding (as of December 31): $29.85 million

Moving on, Bridgewater Associates added 67,000 more shares of Microsoft Corporation (NASDAQ:MSFT) to its equity portfolio during the December quarter. After rallying by over 20% during the fourth quarter, shares of the software giant have declined by 7.91% so far this year. However, they are still trading comfortably above the $50 mark and boast an annual dividend yield nearing 3%. Analysts covering the stock are happy that the company has been actively reducing its exposure to the mobile hardware market and focusing more on the software side. Over the past 14 months, Microsoft Corporation (NASDAQ:MSFT) has made four large acquisitions in the app space, the most recent being SwiftKey, a third-party keyboard app. The stock currently has an average rating of ‘Overweight’ from 35 analysts, with an average price target of $58.95, suggesting upside potential of over 10%. Stephen Mandel‘s Lone Pine Capital also increased its stake in Microsoft Corporation during the fourth quarter, by 7% to 27.26 million shares.

#2 Bed Bath & Beyond Inc. (NASDAQ:BBBY)

– Shares Owned by Bridgewater Associates (as of December 31): 647,054

– Value of Holding (as of December 31): $31.22 million

Shares of Bed Bath & Beyond Inc. (NASDAQ:BBBY) have been on a consistent decline over the past year, losing 42.7% of their value. However, rather than get apprehensive, Bridgewater Associates has been taking full advantage of the opportunity. After increasing its stake in the company by 250% during the third quarter, the fund again increased its stake during the fourth quarter, by 96%. Following the consistent decline, Bed Bath & Beyond Inc. (NASDAQ:BBBY) now trades at a trailing price-to-earnings multiple of 8.82, almost 40% lower than the 15.34 average multiple that the industry trades at. The company is facing increasing competition from e-retailers, resulting in its store traffic declining significantly during the past few quarters, which has led many investors to dump their holdings in the stock. Analysts fear that if Bed Bath & Beyond Inc. isn’t able to do something over the next few quarters, it will find it very hard to regain its lost market share.

#1 Apple Inc. (NASDAQ:AAPL)

– Shares Owned by Bridgewater Associates (as of December 31): 327,452

– Value of Holding (as of December 31): $34.47 million

Bridgewater Associates increased its stake in Apple Inc. (NASDAQ:AAPL) by 19% during the fourth quarter, moving it to the top spot among Dalio’s long stock picks at the end of December. The company has lost almost 25% of its market capitalization in the past year, but technical analysts feel that it will be hard for it to fall further because it has considerable support at the $90 levels. Fundamental analysts seem to share the same views on it as technical analysts, but for a different reason. According to them, if the greater than $200 billion in cash that the company has on its balance sheet is discounted from its market capitalization, Apple Inc. (NASDAQ:AAPL) is currently trading at a forward price-to-earnings multiple of below 7.0, which is absurdly low for any company, especially a tech company.  However, a majority of investors are still wary of buying the stock, their primary reason being the expected decline in the core business of the company. After many quarters of keeping its stake unchanged, activist investor Carl Icahn of Icahn Capital LP reduced his stake in Apple Inc. by 7% to 45.76 million shares during the fourth quarter.

Disclosure: None