2018 ended on a sour note for investors. Global stock markets fell by double digits on growing worries over politics and slowing economic activity. But just when it seemed like things couldn't get much worse, the calendar turned over to a new year, and stocks came roaring back. Since the start of the year, the S&P 500 index is up 13% as of this writing.
Times like right now can be confusing to navigate for individual investors, but take a cue from the big boys and use the dips to go shopping. Here are two assets that were the desire of professional money managers and one that Warren Buffett recently made a move on: SPDR S&P 500 ETF (NYSEMKT: SPY), CVS Health (NYSE: CVS), and Suncor Energy (NYSE: SU).
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If you can't beat it, buy it
Chuck Saletta (SPDR S&P 500 ETF): With very few exceptions, it is incredibly rare for professional money managers to be able to sustainably beat the S&P 500 index over time. Yet they try, at least in part because they can't get paid nearly as much for simply investing other people's money in an index and letting the market earn the returns for them. So when hedge fund managers decide it's time to buy the SPDR S&P 500 ETF -- which tracks the S&P 500 -- then it's time to sit up and pay attention.
According to the folks at WhaleWisdom, hedge funds increased their position in the SPDR S&P 500 ETF by around 22.2 million shares in the last quarter of 2018. That's a whopping 44% increase in their holdings of that index fund in the quarter. During that same time period, that ETF dropped around 14% in value, which made it a tempting target for bargain hunters, particularly near the end of the quarter when it was near its lowest.
It's not exactly clear why hedge funds were snapping up shares in that index. As the name "hedge fund" implies, they may have simply been hedging against short positions, going long the index to protect against a market snap back while they were short during the downturn. Or it could have been that they simply could find no better alternative in the market than buying a broad market index itself.
Either way, when the professionals decide to embrace indexing to the tune of somewhere in the neighborhood $5.5 billion of incremental investments in the space of a quarter, it's time to take notice. If nothing else, it's a great reminder to us mere mortals that indexing is still a great strategy for earning stock market returns with very low costs. And that makes the SPDR S&P 500 ETF worthy of consideration by anyone looking to build wealth over time.
Poised for a rebound?
Daniel Miller (CVS): Many investors enjoy finding value in oversold stocks, but sometimes stocks are trading lower for a reason. CVS Health has shed nearly 30% of its value over the past six months, lowering its consensus forward price-to-earnings ratio to a meager eight times. However, the stock might be worth considering as some of the world's best investors are scooping up shares. The number of hedge fund shareholders who are bullish on CVS picked up during the back half of 2018, and hedge fund ownership of the stock jumped 57% during the fourth quarter thanks to a merger with Aetna. The move pushed the company into the 30 most popular stocks among hedge funds for the fourth quarter.
As previously mentioned, stocks every now and then are cheap for a good reason, and one reason CVS stock price slipped during the first quarter was thanks to pessimistic guidance for the full-year 2019. More specifically, management believes its performance will be challenged as it absorbs the nearly $70 billion Aetna acquisition, assuming it gets final approval. It also took a $2.2 billion goodwill impairment charge during the fourth quarter after challenges impaired its ability to grow the business.
There is also uncertainty surrounding shareholders as the 2020 election cycle could change the national perspective on healthcare and how it's delivered. But if CVS can gain final approval of its Aetna transaction and then generate the synergies and benefits from the merger smoothly, its business should be ready to rebound in 2020 even if this is a transition year. That could be a reason so many hedge funds are jumping on board recently. Also, its 3.6% dividend yield while you wait for uncertainty to dissipate isn't too shabby.
Mopping up the 2018 oil spill
Nicholas Rossolillo (Suncor Energy): During the stock market tumble at the end of 2018, Warren Buffett went shopping, primarily increasing some of his favorite positions in the banking sector. He added a couple new positions, too, including Canadian integrated oil outfit Suncor Energy.
Suncor didn't have a particularly good outing last year. All was going reasonably well, but the concerns over slowing global growth that sent the stock market tumbling lower at year-end also sent sensitive energy prices lower as well. Energy stocks generally tend to follow closely, and the Canadian producer was no exception. With oil in retreat, shares took a beating.
As energy barely shows up in Buffett's holdings at Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), perhaps the dip was simply too good to pass on. Nevertheless, there's a lot to like about Suncor specifically. Even though Canadian oil tanked, the company was still highly profitable. Fourth-quarter operating earnings were $580 million. The management team also hiked its dividend by 17% (making its annualized yield 3.7% as of this writing) and initiated a new $2 billion share repurchase program.
The reason Suncor is able to weather the ups and downs inherent in oil is that it not only produces raw product but also refines and sells finished product. If one segment of business falls, the other often benefits, making for a vertically integrated operation that's far more stable than the commodity it deals in. With shares down nonetheless on the bummer end to 2018, Buffett and company decided to get in on the Canadian energy industry on the cheap.
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Chuck Saletta has no position in any of the stocks mentioned. Daniel Miller has no position in any of the stocks mentioned. Nicholas Rossolillo and his clients own shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.