Adage Capital’s Biggest Q2 Moves As It Adjusts to “Factor-Based Investing”

Adage Capital Management is a Boston-based hedge fund, founded by Phil Gross and Robert Atchinson in 2001. According to its latest 13F filing with the SEC, Adage Capital manages a U.S public equity portfolio worth over $36 billion. However, during the 12 months ended June 30 (the fund’s fiscal year), the fund underperformed the market, gaining just 1.1%, versus the S&P 500 Index’s overall gain of 4%. That was the first time in its 15-year history that Adage Capital underperformed the market during one of its fiscal years.

In its quarterly letter to investors for the second quarter, Adage Capital identified factor-based investing as a prime reason for its rare market-lagging results. The fund is facing difficulties in trading large positions due to the wedge between the price of equities and their fundamental values, which is created as a result of factor investing. Macroeconomic factors now have more influence on stock prices, the fund suggests, and investment paradigms like ‘smart beta’ and factor-based ETF’s are creating a “challenging environment” for the fund to operate in. However, Adage Capital said that it is in a strong position to benefit from pricing disparity created by ETF’s since value will eventually be driven by the actual worth of stocks.

In this article, we’ll take a closer look at Adage’s biggest moves during the second quarter to see how it’s adjusting to the paradigm shift afflicting large hedge funds in the modern investing landscape.

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Amazon.com, Inc. (NASDAQ:AMZN)

– Shares Owned by Adage Capital Management (as of June 30): 660,383

– Value of Adage Capital Management’s Holding (as of June 30): $472.58 million

Adage Capital Management increased its stake in Amazon.com, Inc. (NASDAQ:AMZN) by 18% during the second quarter, ending the period with 660,383 shares of the e-commerce giant, worth about $472.58 million. Earlier this month, MKM Partners reiterated its ‘Buy’ rating for Amazon, and upped its price target on the stock to $995 from $850, citing the company’s stellar performance in the second quarter. Amazon earned $1.78 per share for the quarter on $30.4 billion in revenue, clobbering the average analyst estimate of $1.11 in EPS on $29.55 billion in revenue. The stock is up by over 13% so far this year. Andreas Halvorsen’s Viking Global owns more than 3.27 million shares of Amazon.com, Inc. (NASDAQ:AMZN) as of the end of the second quarter.

Honeywell International Inc. (NYSE:HON)

– Shares Owned by Adage Capital Management (as of June 30): 2.82 million

– Value of Adage Capital Management’s Holding (as of June 30): $328.66 million

Adage Capital Management acquired 638,677 shares of civil and military avionics manufacturer Honeywell International during the June quarter, increasing its stake in the company by some 29%. Honeywell International Inc. (NYSE:HON) shares are up by around 12% year-to-date. Earlier this week, the Wall Street Journal reported that Honeywell is close to acquiring JDA Software Group for around $3 billion, including debt. However, Blackstone Group LP (NYSE:BX) is reportedly willing to provide a financing plan to JDA that could allow it to avoid being acquired. Honeywell is swiftly transitioning away from its traditional jet engines business towards software. Mario Gabelli’s GAMCO Investors is one of the biggest stakeholders in Honeywell International Inc. (NYSE:HON) in our system, having amassed over 1.90 million shares of the company as of the end of June.

On the next page we’ll take a look at some other important salers and purchases executed by Adage Capital in the second quarter.

Schlumberger Limited. (NYSE:SLB)

– Shares Owned by Adage Capital Management (as of June 30): 2.16 million

– Value of Adage Capital Management’s Holding (as of June 30): $170.64 million

Schlumberger Limited. (NYSE:SLB) was a big new addition to Adage Capital Management’s equity portfolio during the quarter. The fund acquired around 2.16 million new shares of the oil and gas exploration giant through that company’s acquisition of Cameron International Corporation (NYSE:CAM) during the second quarter, of which Adage Capital owned 4.49 million shares of on March 31. Back in April, Schlumberger closed its acquisition of Cameron International, the terms of which entitled Cameron stockholders to receive 0.716 shares of Schlumberger common stock and $14.44 in cash, in exchange for each Cameron share. Based on the size of its Cameron holding, that means Adage Capital would’ve received 3.21 million shares of Schlumberger, which means the fund either sold some shares of Cameron before the deal was closed, or sold 1.05 million shares of Schlumberger after it was closed (or a combination of both).

Schlumberger Limited. (NYSE:SLB) topped second quarter estimates with $0.23 in EPS and $7.16 billion in revenue. Financial services firm Jefferies reiterated a ‘Hold’ rating for Schlumberger shares but increased its price target on them to $88.00 from $85.00, following the earnings report. Schlumberger’s stock has gained over 20% since the start of 2016. Ken Fisher’s Fisher Asset Management owned 4.21 million shares of the company as of the end of the second quarter.

Adage Capital Sells Off Sabre Corp (NASDAQ:SABR)

Adage Capital sold out of its stake of 1.89 million shares of Sabre Corp (NASDAQ:SABR) during the second quarter. Shares of the company are flat since the end of the second quarter after rising steadily through July, but slumping hard on August 2 after the release of the company’s second quarter results. Quarterly year-over-year growth was solid, with revenue rising by 20% to $845 million, adjusted EBITDA jumping by 19% to $271 million, and adjusted EPS leaping by 37% to $0.37. The technology solutions provider for the travel industry debuted four new or upgraded solutions during the quarter, including Commercial Analytics and Revenue Optimizer. It’s unclear why shares tumbled so heavily following the earnings results, as EPS slightly topped estimates, while revenue slightly missed. Sabre Corp (NASDAQ:SABR)’s results also led to some selling in the shares of travel stocks such as Priceline Group Inc (NASDAQ:PCLN).

Target Corporation (NYSE:TGT) Removed From Adage’s Portfolio

Adage Capital unloaded 100% of its stake in Target, selling 919,148 shares of the company in the April-to-June period. The stake had accounted for about 0.21% of the value of the hedge fund’s diversified equity portfolio. Target Corporation (NYSE:TGT) shares are under heavy pressure after the company trimmed its full-year guidance, citing a “difficult” retail environment. The Minnesota-based discount retailer earned $1.23 per share on $16.2 billion in revenue for the second quarter, better than analysts’ forecasts of $1.12 per share on $16.18 billion in revenue. However, for the full-year, the company lowered its EPS guidance to $4.80-to-$5.20, a step down from the prior guidance of $5.20-to-$5.40, and beneath the consensus of $5.13 at the mid-point of the new range.

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