PLG - Trade Like Alan Lowenthal: Q4 2022 Update

Summary

• In today's update, we are reviewing the fourth-quarter performance of our Alan Lowenthal trading strategy and are analyzing his most interesting, and as always, well-timed trades.
• Lowenthal sold both his and his wife's Blackstone shares only days prior to the company announcing restrictions on withdrawals from its private REIT fund.
• This peculiar decision to sell only days ahead of the crash is only a tiny drop in a myriad of extraordinary moves by one of the best traders on Capitol Hill.
• This is not the only exciting move, as the Long Beach Democrat also gave a huge vote of confidence in favor of the Microsoft-Activision deal, initiating a long position in the video game publisher.

We previously discussed how the Long Beach Democrat got into his fair share of trouble for his questionably precise and timely trading activity throughout the years. After investing in Sunrun ( RUN ), a producer of residential solar energy systems, he launched a renowned campaign in support of relief measures for renewable energy firms. Similar actions, such as selling off Boeing ( BA ) stock before a House committee hearing on the 737 Max jet accidents, drew a lot of attention. After all, there is a good reason why we have a trading strategy that actively monitors his every market move.

You can access our original article and thesis through this link . Yet, this quarter, Rep. Lowenthal might have outdone himself with a peculiar decision to sell shares of Blackstone ( BX ) ahead of a crash . The company operates one of the best-known and highest-regarded private REITs but was forced to impose restrictions on withdrawals after struggling to manage cash outflows, consequently getting hammered in the markets. Representative Lowenthal has had an incredibly busy quarter, having up to this point disclosed 30 transactions/trades. His decision to play the Activision Blizzard ( ATVI ) merger arbitrage is also an interesting positive sign for the deal. This is our updated fourth-quarter analysis of his most interesting trades.

Alan Lowenthal Q4 Strategy Update

We have created several trading strategies based on the idea of tracking and mimicking the trading activity of active public officials with close access to sensitive information that could be used to maximize returns. This particular strategy is one of the more popular ones and attempts to mirror the trading activity of Rep. Alan Lowenthal (as well as members of his family) and is being actively rebalanced when fresh trades are disclosed. In the event stock options are bought or sold, the options are replaced with common stock instead. The portfolio is weighted based on the reported size of the disclosed trades.

Representative Lowenthal has been involved in 109 trades so far this year, 61 of which have been sale orders and 48 of which have been purchase orders. Once more, the majority of the reported trades were made in trusts whose names were not tied directly to him or using his spouse's accounts. Verisk Analytics ( VRSK ) is now the largest position, contributing to slightly more than 7% of the portfolio's NAV, followed closely by iShares Russell 2000 Value ETF ( IWN ) and Amazon ( AMZN ), each accounting for around 6% of the NAV.

A $100 million investment would have soared to $197.83 million as of today if one would have placed faith in the Long Beach Democrat's stock-picking skills back in 2018. The peak of the portfolio was in November of last year when the figure climbed up to $256.63 million. Lowenthal's strategy has produced a negative year-to-date return of 19.67%, surpassing the S&P 500 ( SPY ) by a slight margin. As of this day, the Lowenthal strategy produced a 15.86% historical CAGR.

As of the time of the writing of this article, the top ten holdings of the Lowenthal portfolio were: Verisk Analytics, iShares Russell 2000 ETF, Amazon, Waste Connections ( WCN ), NextEra Energy ( NEE ), ProShares Short QQQ ( PSQ ), S&P Global Inc ( SPGI ), Brookfield Infrastructure ( BIPC ), Service Corporation ( SCI ), as well as Eli Lilly and Co ( LLY ).

Lowenthal's latest trading activity

With 30 transactions recorded this quarter, Representative Lowenthal has had a busy and extremely exciting couple of months. It is important to mention that these may not be the last trades for the fourth quarter of 2022, considering that filings might not yet be made public until mid-February. Here are the latest Lowenthal stock picks that are worth considering:

Activision Blizzard

On January 18th, Microsoft ( MSFT ) shocked the video gaming industry by announcing its intention to buy Activision Blizzard in a record-breaking $68.7 billion all-cash dea l. Following the merger, Microsoft would become the publisher of popular titles like Call of Duty and World of Warcraft and the third-largest video game company in the world by revenue. Activision Blizzard wasn't the tech giant's only significant acquisition in the past. In 2020, Microsoft paid $7.5 billion for ZeniMax Media, and in 2014, it paid $2.5 billion for Mojang Studios, in a move to consolidate its strength and attempt to rival the likes of Sony ( SONY ) and Tencent ( OTCPK:TCEHY ). The acquisition itself has been the subject of ongoing discussion since many individuals are skeptical that it will be able to get regulatory approval. Rep. Lowenthal opened his ATVI position in mid-December. It currently makes up 2.81% of the portfolio, which is a huge vote of confidence in the deal going through. While many of its peers are significantly underperforming in the market, ATVI yielded a 13.13% year-to-date return. After the latest pullback, Activision is currently selling for an EV/EBITDA of 13.58x, a P/E of 19.79x, and a P/FCF of 22.60x. The overall consensus is that the stock will likely suffer more than a double-digit decline in case the deal falls apart. Both Seeking Alpha Authors, as well as Wall Street Analysts remain largely bullish about the likelihood of the deal actually going through, having both rated the stock as a "Buy" with an average score of 4.00/5.00 and 4.29/5.00, respectively. Senator Tommy Tuberville, along with Congressmen Rick Allen and Ro Khanna, were also partaking in this merger arbitrage alongside him. The company has also been featured in our Tom Carper and No-PAC Large Cap Core strategies. The stake has been acquired in the $74.56-$76.97 range. Activision Blizzard can currently be bought for $76.70 per share. If there is no significant regulatory pushback, the acquisition is expected to be closed at the tail end of next year.

Service Corporation International ( SCI )

Rep. Lowenthal initially opened his SCI position in late December. He entered the position through multiple transactions between the 22nd and 27th of this month, paying an average of $71.14 per share. The company itself is quite an unconventional business, providing deathcare products and services in the United States and Canadian markets through its Funeral and Cemetery segments. Over 1,471 funeral service locations are operated by the Houston-based company. SCI is also held in high regard by analysts. Seeking Alpha Authors have assigned it a "Buy" rating with an average score of 4.00/5.00. Wall Street Analysts are even more enthusiastic and rate the stock as a "Strong Buy" with an average rating of 4.60/5.00. Service Corporation is another company that held out rather well in the markets this year. It generated a 0.37% year-to-date return, accompanied by a negative 0.63% one-year return, thereby significantly outperforming the market. It is also another company with a relatively steep valuation. SCI is selling for an EV/EBITDA of 12.49x, a P/E of 21.05x, and a P/FCF of 24.95x. The company is the second largest holding within our Natural Resources Committee Strategy, having gained tremendous traction among the members of the committee. Shares of SCI can currently be purchased for $67.07.

Blackstone

The most intriguing trade of the quarter is Rep. Lowenthal's unusual decision to sell his BX stake just days before the crash. The company operates one of the best-known and highest-regarded private REITs, which is estimated to be valued at $69 billion. As a result of surging interest rates and other macroeconomic concerns, public REITs have been hammered in the markets this year, with Vanguard Real Estate ETF ( VNQ ) losing 29.06% of its value year-to-date. Other publicly traded investor darlings such as Prologis (PLD), Realty Income ( O ), and American Tower ( AMT ) are all suffering well beyond double-digit losses for the year as well. B-REIT, on the other end, has not experienced nearly as much of the same volatility, prompting many investors to withdraw their investments. Blackstone was, in a way, a victim of its own success. Facing difficult fund outflows, the company was forced to announce it would limit withdrawals, after which its shares fell off a cliff. However, Rep. Lowenthal sold his stake only days prior to the announcement. Lowenthal reported the same trade for his wife Malumed Lowenthal's account. Our Lowenthal strategy was rebalanced to reflect these changes and excluded Blackstone from its portfolio on the 25th of November. We can only speculate on whether or not Rep. Lowenthal somehow knew about the decision, but this only contributes to a myriad of peculiarly well-timed trading decisions throughout the years. What was a difficult year for the company prior to the crash became even worse after, with BX generating a negative 42.99% year-to-date return. Recent developments caused concerns among Seeking Alpha authors, who downgraded the stock to a "hold" rating. Wall Street analysts remain undeterred, still rating the firm as a "strong buy" with an average score of 3.78/5.00. Blackstone is currently selling at $75.42 per share.

Other notable trades for the quarter include Rep. Alan Lowenthal closing out his TJX Companies ( TJX ), as well as his Ecolab (ECL), Crown Holdings ( CCK ), and Boston Scientific Corp ( BSX ) positions.

Closing arguments

One of the fundamental tenets of modern finance is that the more informed investor will likely be able to generate market alpha. Where else can one find individuals who have insight into reliable information more than Capitol Hill? It is our belief that recent actions surrounding California's 47th congressional district representative are a prime example of the inherent value that can be extracted by breaking down and analyzing the trading activity of our country's political leadership. The peculiar decision to sell his Blackstone stake ahead of the unfortunate announcement is a testament to that thesis. As we have mentioned previously, Congressman Lowenthal indicated he would not seek reelection for his sixth term in office, depriving us of a crucial insider source. Keeping a close eye on the couple dozen of his last disclosed trades is that much more important. Suffice it to say, Alan Lowenthal has asserted his position as one of the best investors on Capitol Hill throughout the course of his 30-year career as a public servant.

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