Thornburg Betting On Rising Interest Rates, Grows Bearish On Tesla, Likes Netflix

Thornburg Investment Management is a U.S-based investment manager that has an asset base of around $55 billion across a range of different funds. In terms of its equity portfolio, the firm primarily invests in growth and value stocks across all capitalizations. Its Thornburg Value Fund has outperformed the broader S&P index by about 1 percentage point annually since its inception in 1995, returning 9.54% per year on average.

In its recent newsletter for the third-quarter, the investment manager discussed the current market climate, saying that the key factor driving the stock markets today are interest rates. Low interest rates have led to an overvaluation of securities with stable cash flows and high dividend yields, leading to the creation of an “expensive defensives” category. The fund is avoiding this category, which tends to be high on P/E and low on growth. In this article we’ll take a look at five stocks the fund discussed in its letter.

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HP Inc (NYSE:HPQ) was one of the top performers for the Fund in the third quarter, with Thornburg having allocated 2.1% of its equity portfolio’s assets to its position in HP Inc (NYSE:HPQ). Thornburg likes HP because it is a leader in some of the major IT segments such as printing and PC, where it continues to gain market share. The company is shareholder-friendly, as it has committed to return 75% of the cash it generates to shareholders in the form of share buybacks and dividends. It also has a high FCF yield, at 12%. The stock has done well this year, returning around 24%. Analysts covering the stock aren’t as bullish as the fund, as just eight analysts have rated it as a ‘Buy’, while 14 analysts have it pegged as a ‘Hold’. The number of hedge funds in our system with a long position in HP Inc (NYSE:HPQ) remained at 40 as of June 30, same as on March 31.

While HP has been a good performer for the fund during the third quarter, its other IT holding, Cognizant Technology Solutions Corp. (NASDAQ:CTSH), was the worst performer. Cognizant Technology Solutions Corp. (NASDAQ:CTSH)’s legacy outsourcing business has started to slow down, though its digital business is starting to show good traction. Shares of the company fell sharply in September after it announced the resignation of its second-in-command as well as an investigation that was in violation of the Foreign Corrupt Practices Act. Despite its current travails, 22 of the 34 analysts covering the stock have rated it as a ‘Buy’. 40 hedge funds from within our database held shares of Cognizant Technology Solutions Corp. (NASDAQ:CTSH) worth $922 million on June 30, representing 2.7% of the company’s float.

We’ll check out three more stocks discussed in Thornburg’s latest investor letter on the next page.

The value of hedge funds’ holdings in Solaredge Technologies Inc. (NASDAQ:SEDG) appreciated by 13.2% to $162.7 million in the June quarter, though the number of hedge funds in our database with a position in the stock decreased to 12 from 14. Solaredge Technologies Inc. (NASDAQ:SEDG) is another Thornburg holding whose stock price declined during the third quarter. SolarEdge is one of the market leaders in the solar panel microelectronics segment and has gained market share in the area. However, the solar industry has faced a rough time during the second-half of 2016 due to a crash in solar panel prices because of a fall in Chinese demand. This has led to poor performance for most solar stocks and SolarEdge has also fallen in value, despite increasing its margins in a tough environment. The U.S. residential solar market, from which Solaredge Technologies Inc. (NASDAQ:SEDG) gets most of its revenue, has also slowed down in 2016 due to the extension of the solar investment tax credit (ITC). While this bodes well for the future growth of the industry, the demand in the short-term has slowed down. SolarEdge is currently trading near its 52-week-low of $13 and has a market capitalization of around $540 million.

The fund exited its position in Tesla Motors Inc (NASDAQ:TSLA) to put its cash into what it saw as a better opportunity: Netflix. Thornburg thinks that Tesla Motors Inc (NASDAQ:TSLA)’s management is biting off more than it can chew, with the announcement of the SolarCity Corp (NASDAQ:SCTY) acquisition as well as its ambitious long-term plan to develop electric buses. The fund thinks that while Tesla Motors Inc (NASDAQ:TSLA)’s ambitious plans are exciting, the probability of failure has increased. Tesla plans to expand its EV offerings to all segments of transport, such as trucks. It also plans to compete with the likes of Uber in developing a fleet of fully autonomous, self-driving vehicles. Elon Musk recently announced that Tesla will soon be offering solar generating roof tiles after its SolarCity acquisition, along with electric vehicles. Approximately 5% of the company’s total outstanding stock as of June 2016 was held by 36 of the hedge funds that we track.

Netflix Inc (NASDAQ:NFLX) was a new purchase for the fund in the third quarter. Netflix is by far the global leader in providing digital movie and TV serials through online streaming. Thornburg thinks that this creates a nice virtual cycle, as more content gets more subscribers that get more content. Netflix Inc (NASDAQ:NFLX) is currently trading near its 52-week-high after delivering very good quarterly results, with the addition of more than 3.5 million subscribers, which easily beat the market’s expectations. Hedge funds were bearish on Netflix during the second quarter, as among the funds we track, the value of their holdings in it decreased by 44% to $3.73 billion as of June 30. A net total of ten hedge funds exited their long positions in Netflix Inc (NASDAQ:NFLX) during the quarter, bringing the number down to 54.

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