Ken Heebner's 1st Quarter 2009 Moves - CGM Focus (CGMFX): Financials and Retailers

Ken Heebner of CGM Funds is one of few mutual fund managers we keep a close eye on; he is a very aggressive fund manager [May 6, 2008: Ken Heebner's Trading for CGM Focus Tripled in 2008] and through last summer had an incredible winning streak going - then he was placed on the cover of Fortune [May 28: Ken Heebner - America's Hottest Investor] and for you Sports Illustrated fans - you know what happens next. Since he is aggressive, has the ability to short, and has been a lot more right than wrong over the years, I like to keep watching even as he has recently struggled. Year to date in 2009 he is still down nearly 10%...


I went back and looked at his major moves for Fourth Quarter 2008 (Oct - Dec 2008) and ironically his huge move into insurance stocks was "right", but "early". [Feb 18: Ken Heebner's Fourth Quarter 2008 Moves]

These were his 10 biggest additions to CGM Funds during Q4 2008 (as of Dec 31, 2008)

Biggest Additions in the Quarter:

1. Metlife (MET) - Insurance
   
2. Hartford Financial (HIG) - Insurance
3. Apolle Group (APOL) - Adult "re-education"
4. Baxter International (BAX) - Healthcare
5. Aflac (AFL) - Insurance
6. Gilead Sciences (GILD) - Biotech/healthcare
7. Research in Motion (RIMM) - Technology
8. Newmont Mining (NEM) - Precious metals
9. Prudential (PRU) - Insurance
10. Berkshire Hathaway (BRK-A) - Insurance and others

Now at the time I thought this was premature as the insurance companies had some massive problems but I was still under the mistaken world view of free markets existing in the U.S.... I am still slowly adjusting to the new world order where the federal government backstops everything and lo and behold [Mar 12: The Next Big Bailout Choice - Insurers] in the past few weeks we've seen the government decide insurers can't go bust either. Remember our pockets are bottomless, and our trees that grow money are fruitful.

Anyhow, I was under the assumption that Heebner would of benefited from this move to draw a fire circle around the insurers but now that we have the 1st quarter data, it appears he sold out of most of his stake in the sector ahead of March 31, 2009. And across the board, these stocks were lower (much lower) in many cases on March 31st (even with a furious 3 week rally at the time) than anytime in 2008. For example...

So we can see above, the same situation many of us face - perhaps being correct on a thesis but if your timing is off you can still lose, and lose big. Based on TV interviews I don't think he sold out in January 2009 from the insurance space so somewhere in February or March would be when he let go much of the inventory. Obviously waiting for April or May would of been far superior but in hindsight we're all geniuses.

His top holding as of Q4 2008 with a 10% stake in CGM Focus (CGMFX) was Abbott Laboratories (ABT) with a 10% stake - I don't follow this company so I am not sure what the catalyst is here... this company didn't help much during Q1 either with a huge swoon towards the end of February.

Walmart (WMT) was another major position going into the new year at 8.5% and again - as people fled into riskier assets, Walmart actually suffered after being a star in 2008.

I could be wrong here, but I don't remember CGMFX ever being this concentrated in so many positions at the top... Heebner literally had 35% of his holdings in his top 4 stocks as of Dec 31st.

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So that explains some of the under performance - let's now look at what he did during Q1 2009 ending March 31st. But remember with his style - this is now 6 weeks later and this entire portfolio could be different ;)

Once more let's look at the biggest additions in the quarter, by order of weight

1. Morgan Stanely (MS) [added to current position]
2. Amazon.com (AMZN) [new]
3. Best Buy (BBY) [new]
4. Goldman Sachs (GS) [added]
5. Petrobras (PBR) [new]
6. CVS Caremark (CVS) [added]
7. Teva Pharam (TEVA) [added]
8. JP Morgan (JPM) [added]
9. PNC Financial (PNC) [new]
10. Kohl's (KSS) [new]

These changes show a big push into financials and retail - Heenber went heavy into financials in Q3 2008, prematurely [Nov 14, 2008: Ken Heebner Moves into Financials Big Time] Now again, you have the government behind you and he added or started stakes in specific leaders - either the 2 remaining independent big time investment banks - Morgan Stanely (MS) and Goldman Sachs (GS), or best of breed "do it all" bank JP Morgan (JPM) along with PNC Financial (PNC) which is now the 5th largest US based commercial bank right after the "big 4". So this is a directional bet but he is buying the top of the food chain - surprisingly Wells Fargo (WFC) is not in the list; this has been a name he has been in the past, and a Warren Buffet favorite. If you are not too familiar with how we've "saved" the system; after dealing with "too big to fail" we've decided as a solution we need to make the banks even "too bigger to fail" - and the top 4 banks now dominate the assets in America [Apr 20, 2009: BB&T (BBT) - A Better Gauge on How Banks Will Try to "Outearn" Their Losses]

...essentially we have created 4 monsters, with the smallest, Wells Fargo at $1.3 Trillion in assets, being over 4 times the size of the next largest US based financial institution - PNC Financial (PNC) at under $300 Billion, which is itself a combination of 2 super regionals, National City and PNC.

So we can argue about the sense of it all til we are blue in the fact but the US government has enpowered the largest 4, and made them even more systematically important - that's how oligarchy works. And then in the investment banking system Goldman Sachs (GS) wins again as most of its major competition has been wiped out or weakened immensely. If I didn't have qualms with what they are doing hand in hand with "the important people", I'd be buying this 4th branch of government myself...

His other main theme is retail which is the prototypical early cycle recovery play - can't argue too much with the purchases as Best Buy (BBY) only really has Walmart as a major competitor in the electronics space, with Circuit City now defunct - and Kohls (KSS) is the good middle class value play in the apparel space. Amazon.com (AMZN) has been a great performer both operationally and as a stock - the issue here has always been valuation but it is almost never cheap. Petrobras (PBR) is the one commodity stock of his major purchases - frankly with the way Ken talked about this company in 2008 I was shocked to see him sell it off... as a note he had sold both PBR and KSS out of the portfolio the quarter before.

While not so focused on what he has sold out of, since he could already be back in these positions these were some sales of note...

Some Major Names Completely out of: (many insurers as we mentioned above)

1. Prudential (PRU) [this was 4th largest position at 7.5% stake in CGMFX as of Dec 31st]
2. Research in Motion (RIMM) [this was a 5% stake as of Dec 31st]
3. McDonalds (MCD) [this was a 5.7% stake as of Dec 31st]
4. Aflac (AFL) [this was a 5.7% stake as of Dec 31st]
5. Hartford Group (HIG) [this was a 5.9% stake as of Dec 31st]
   
6. Berkshire Hathaway (BRKa) [this was a 3% stake Dec 31st]

Smaller names he completley exited as of March 31st that we've touched on in the blog - Fidelity National Financial (FNF), First American (FAF), EZ Corp (EZPW), ProLogis (PLD), Lowes (LOW), Dollar Tree (DLTR), General Electric (GE), Intuitive Surgical (ISRG), Ford (F), Express Scripts (ESRX), Medco Health (MHS)

Some Major Nations with Material Cut Backs, in Order of Magnitude:

1. Abbott Labratories (ABT) [was largest position as of Dec 31st]
   
2. Baxter (BAX) [was 8th largest position as of Dec 31st]
3. Walmart (WMT) [was 3rd largest]
4. MetLife (MET) [was 2nd largest]
   

* please note the above commentary relates to CGM Funds in total, not just CGM Focus fund

[Sep 10: Ken Heebner to Launch Hedge Fund]