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The bearish case for the stock market is picking up. Major billionaire investors have been sounding the alarm for months, yet the market continues to test all-time highs.
There’s a disconnect between what average investors are seeing and what some billionaire hedge fund managers are perceiving with the current market. Carl Icahn, for one, has been making overly bearish bets since last year by loading up on put options against the S&P 500 index.
George Soros, who’s famous for breaking the Bank of England, has recently come out of retirement to make some very big bearish bets against the market. Stan Druckenmiller, who actually cut his teeth working for Soros, is stocking up on gold, which is generally considered a “flight to safety” trade. Recall that Druckenmiller started getting vocal about gold last year.
Generally, you want to buy at the height of the pessimism cycle. However, what’s unique about the current pessimism among billionaires is that it’s not yet widely accepted.
The stock market is not only near all-time highs but also very rich from a valuation standpoint. The S&P 500 is trading at 24 times earnings – well above the historical average of 16 times. Paul Singer, who runs the activist hedge fund Elliott Management, has said flat out that the stock market is overinflated.
However, betting on gold miners isn’t always the answer. Recall Warren Buffett’s mentality on gold: “The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you.”
Plus, investing heavily in S&P 500 put options isn’t economical for the long-term investor. Rather, the prudent move is to invest in stocks that can survive turbulent times.
With that in mind, here are the top three stocks that bearish billionaires are actually long.
Soros Goes Big on Data
If you dig through George Soros’ fund, you’ll find exactly what you’d expect: lots of bets on gold miners and a large bet against the S&P 500. But one of the few non-gold stocks he’s been buying is Equinix (NASDAQ: EQIX).
Soros Fund Management took a new stake in Equinix during the fourth quarter of 2015, and then doubled its position last quarter. Equinix is a data center operator, which is a business that tends to remain in demand regardless of the economic backdrop. With a $25 billion market cap, it’s one of the industry leaders.
Druckenmiller Tries His Luck Overseas
Stanley Druckenmiller shut his hedge fund down to the public in 2010 after a stellar career. But he still runs his Duquesne Capital as a family office. And perhaps the most interesting play from Druckenmiller of late is his bet on the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which was a new holding for his fund last quarter. The EEM fund is paying a 2.4% dividend yield based on its distributions over the last year.
EEM is a top three position for Druckenmiller. His current strategy highlights how most bearish billionaires feel – i.e., the U.S. markets are in trouble, but there are opportunities overseas. The top two holdings of the EEM fund are Tencent Holdings (OTC: TCTZF) and Taiwan Semiconductor Manufacturing Co. (NYSE: TSM). The ETF collectively trades at less than 11 times earnings, which is less than half the iShares Core S&P 500 ETF (NYSEArca: IVV).
Icahn Takes Out Some Insurance
Carl Icahn has American International Group (NYSE: AIG) as his largest equity holding. This is a position that he added to in the first quarter of 2016, after taking an initial stake during the latter half of 2015. He’s been pushing the insurer to split itself up, but has since gotten a seat on the company’s board of directors. He and fellow hedge fund manager John Paulson are now working with management to cut costs and explore other ways to boost shareholder value.
AIG has come a long way since its near collapse in 2008. The focus going forward is to find a way to simplify the business even more. Lest we forget, AIG is paying out a 2.4% dividend yield. And at just 70% of book value, it’s still trading at a steep discount to its peers.
Betting on gold and buying put options on the S&P 500 are strategies that are best left to those that are more nimble and that have more capital to gamble. For the average retail stock investor, the aforementioned long bets by bearish billionaires are worth a closer look in this market.
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Is the economy keeping you up at night? Do you worry there’s another crash just around the corner? If so, you can stop worrying right now. All it takes is a few minutes.