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3 Stocks Hedge Fund Billionaires Are Getting Wrong

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Wall Street has been a volatile place in 2022. From the tech crash to the growth slump, from the hikes in interest rates to surging inflation, investors have been left questioning what to do now.

If your portfolio is in the red, it’s natural to want to look to those “smarter” than you. There is always a corner of the market making money and there are plenty of high-profile investors making their bets on where that next big money-maker will be.

So, should you look to someone like Howard Marks of Oaktree Capital, Ray Dalio of Bridgewater and even Warren Buffett of Berkshire Hathaway for queues and clues to how to invest your hard-earned money?

You certainly can. Institutional investment managers with more than $100 million under management are required to file quarterly 13F reports. These reports reveal exactly which securities are being bought and sold. It is a roadmap that shows what billionaires and other big-money players are buying.

In theory, anybody can now trade alongside giants without knowing any of the right people . . . or paying massive hedge fund fees.

But the stock picking instincts that create billionaire fortunes don’t work all the time. A lot of their “best” ideas go nowhere but down.

The difference between them and you is they have deep-deep pockets that allow them to fail now and then and not miss a beat. Also, they are often held to a standard of beating an index. Your portfolio likely has loftier goals—retirement, security, providing for the next generation in your family.

This is all important to know, but today I’d like to share three stocks that the hedge funds are favoring and that I don’t see working out for them or individual investors.

1. The Cloud Company With No Roots in Reality

Start at the top of the food chain with Warren Buffett, who bought 6 million shares of cloud-based data storage company Snowflake Inc. (NASDAQ: SNOW) at the $120 IPO price in 2020.

The stock soared when Wall Street heard about its high-profile backer . . . but then it crashed, leaving loyal Berkshire Hathaway clients two years older and just about back where they started.

The Sage of Omaha committed an error the rest of us can’t afford. He stuck with his strategy even though the situation had changed.

Buffett’s “buy and hold forever” mantra only works when his picks are going up and even then, he has to fight his own impulses in order to lock in a dime of profit.

He could have cashed out close to $400 when the stock took off on the IPO. He could have done the same a year later when the stock made a quick and unsustainable run higher. And he could have made his own shareholders over a billion in profits. Instead, two years later, he’s barely keeping the position above water.

And then there are the opportunity costs of having $700 million tied up in a stock that could take years to rally back to its giddy COVID-era peak.

The company continues to struggle with profitability with current earnings estimates showing a $0.02 loss for the quarter. Growth estimates are all over the map and the company has posted several significant earnings surprises—more a sign that analysts can’t figure this stock out either.

Unless you’re already a billionaire, there’s no room in your portfolio for dead money. Every dollar needs to work. Now. When you’re alive to enjoy the results.

2. The Bankrupt Rental Company

Howard Marks is an iconic vulture investor, building a $2 billion personal fortune by combing the market for valuable assets at deeply distressed prices. He can work miracles, but he may have taken a wrong turn buying 14 million shares of Hertz Global Holdings Inc. (NYSE: HTZ).

Hertz definitely called the vultures when it filed for bankruptcy months after the COVID lockdowns pushed millions of potential car renters off the road.

Companies can use bankruptcy to restructure, relieve debt burdens and emerge stronger.

Unfortunately, the experience didn’t exactly create a better version of HTZ. If anything, the fleet is now two years older and the automotive supply chain remains twisted, forcing the company’s recovery into a much slower lane.

Revenue is still 20% below 2019 levels and while last quarter was profitable, the numbers are still moving in the wrong direction.

Current earnings growth is set to decline 53% year-over-year, putting annual growth at -19.8% and next year’s earnings at -32%.

It’s important not to be distracted by any big headlines the company may make. HTZ management made a big show out of ordering 100,000 lithium cars from Tesla Inc. (NASDAQ: TSLA). The entire industry is making that move and Elon Musk himself was surprised to hear about the “deal.”

Furthermore, HTZ is opening up that electric fleet to Uber Technologies Inc. (NASDAQ: UBER) drivers. UBER and other rideshare companies are competitors to HTZ. The car-sharing networks were created to steal rides from conventional rental companies, so all HTZ is doing here is enabling a ruthless competitor and clouding its own prospects.

In looking at the details, this is a deal to nowhere that may help the company make headlines in the green space, but doesn’t leap frog the company out of its current rut.

Oh, and HTZ is going to sponsor a Porsche racecar in the 2023 FIA World Endurance Championship. The thought is that the logo on the car brings attention to the brand. Race fans across the world will see the HTZ name. This is a less direct plan to keep the company out of bankruptcy gain.

How is this bargain stock working out for Howard? Oaktree started building its HTZ stake just above $20 and paid all the way up to $35. A lot of those shares are deep underwater now with shares trading around $18.

What’s the moral here? Cheap doesn’t always mean good. Paying too much for a truly distressed business model too often turns into throwing good money down a bottomless hole.

3. The Fallen Crypto Darling

The difference between good investments and bad ones can be about timing. Roughly 10 years ago NVIDIA (NASDAQ: NVDA) was a stunning buy at $3 . It would’ve been great 5 years ago at $35 or $40. But in more recent years, the opportunity in this company looks far more questionable.

If you aren’t familiar, NVDA makes graphics processing units that have tons of applications. They are used in processing lots of information needed for gaming, work stations and even the infotainment display in your car.

Shares of NVDA got a real boost when it was revealed that this graphic processing technology could be used in mining for Bitcoin. Investors were eager to pile into any stock with a Bitcoin angle.

That mania pushed the stock to just under $330 per share. And after all that speculation appreciation, it is head scratching as to why the legendary Ray Dalio recently started nibbling on NVDA at $270. Mere months after opening that position, he’s down close to 35% and his recovery options are limited.

After all, even here at a “lowly” $175, NVDA is priced at a lofty 45X trailing 12 months earnings. That multiple worked when the pandemic was raging and the Fed was pouring trillions into the market, but it’s nosebleed territory today.

Back of the envelope estimates suggest that Dalio paid up to 50X earnings for his shares. That’s the equivalent of paying $460 for Microsoft Corp. (NASDAQ: MSFT) or $300 for Apple Inc. (NASDAQ: AAPL).

Granted, NVDA is growing. But you can still pay too much for sizzle and find the steak disappointing when it arrives.

At best, it looks like NVDA can boost its bottom line 20% in the coming year, which is double what the S&P 500 can probably do. Is double the growth rate worth triple the multiple?

Not in a world where the Fed is moving faster.

NVDA’s true value is better reflected by the minuscule dividend management put in place years ago and has yet to significantly raise. Keeping the dividend this low is a red flag. And this is one position that the smart money just doesn’t seem to have right.

I sincerely hope that you’ve found this information helpful and actionable. Knowing and avoiding the potential pitfalls in this market is critical to growing and protecting your portfolio.

But, it’s also important to know where the opportunities are.

That’s why I’m proud to share my latest research…