In this article, we reviewed returns from billionaire Stephen Mandel’s top ten stock picks to determine whether Lone Pine’s strategy of embracing the tech revolution is working. Click to skip ahead and see Billionaire Stephen Mandel’s Top 5 Stock Picks.
Julian Robertson’s protege Stephen Mandel’s hedge fund Lone Pine Capital has generated annualized returns of 19.5% since inception. Mandel’s fund has extended gains in 2020 despite poor performance in the first quarter. Lone Pine Capital’s strategy of investing in e-commerce and internet stocks helped in rebounding in the second quarter and extending that momentum into the second half of the year.
Lone Pine employs a long-short strategy and the fund uses both value and growth strategies when picking stocks. The firm doesn’t hold the position for a long time. The average time held for the top ten positions stands around 4.00 quarters while the time held for the top 20 positions averages 4.20 quarters.
Mandel announced to quit the role of managing investments for his Lone Pine Capital in 2019, but he remains as managing director. The billionaire Stephen Mandel has one of the strongest track records when it comes to stock picking.
Stephen Mandel of Lone Pine Capital
Mandel’s Lone Pine Capital seeks to diversify investments across several industries. However, the 13F portfolio shows the hedge fund has not been chasing old fashioned companies and banking giants. The fund has been investing heavily in companies that are offering technological innovations and following digital trends. The technology sector accounted for 46% of the overall 13F portfolio at the end of the September quarter, up 18% from the previous quarter. In 2019 we published an article based on Lone Pine’s 2019 Q2 investor letter. Here is an excerpt from that letter that explains Lone Pine’s investment approach:
“The combination of historically low interest rates — $13 trillion of global government debt, over 20% of the total outstanding, yields less than-zero— and historically high levels of technological disruption, has created a stock market with a number. of ‘distinct segments that have widely varying valuations. Any judgment about the overall level of the stock market misses the nuance of these underlying extremes,” said Lone Pine Capital’s 2019 Q2 investor letter.
The letter explains that Lone Pine goes long the shares of the companies that are disrupting “large swaths of the economy” and goes short the shares of companies that are disrupted. Lone Pine also invests in compounders which are “established businesses with known growth algorithms and long runways for expansion (examples include credit card networks, data analytics companies, internet platforms, and vertical software leaders)”. Lone Pine reckons that most of compounders are also disruptors.”
Mandel was right about betting on tech stocks early. The technology sector has topped the rest of the ten S&P 500 sectors in 2020, with the contribution of almost 90% to the S&P 500’s returns in 2020. The technology sector index grew around 35% in 2020. Communication and consumer discretionary sectors are the second and third best performers of last year while healthcare ranked fourth in the best performing sectors.
Lone Pine’s portfolio is also heavily concentrated on the communication services sector, which represents 18% of the overall portfolio. Mandel’s Lone Pine portfolio also includes stocks from financial services, healthcare, and consumer cyclical sectors.
While Stephen Mandel’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start examining the top ten stock positions that helped billionaire Stephen Mandel’s Lone Pine Capital to beat the broader market index in 2020.
10. Humana Inc (NYSE:HUM)
Although the healthcare stock Humana Inc (NYSE: HUM) underperformed compared to the broader market index in the last three months, Stephen Mandel’s hedge fund has benefited from Humana’s stake in 2020. Humana’s share price rallied 19% in the last twelve months, up from SPY’s growth of above 16%.
Lone Pine Capital first initiated a stake in Humana during the third quarter of 2018. Despite selling a 10% stake in the September quarter of 2020, Humana accounted for 3.88% of the overall 13F portfolio.
Other Hedge funds are also optimistic about Humana but positions declined slightly. It was in 61 hedge funds’ portfolios at the end of the third quarter of 2020, down from the previous all-time of 75.
VLTAVA Fund, a global equity investment fund launched by Daniel Gladis in 2004, highlighted few stocks including Humana in an investor’s letter. Here is what VLTAVA Fund stated:
“Humana is benefitting from a lower number of visits to physicians, which means lower insurance pay-outs for health care. This trend will most probably return gradually to normal by the end of the year.”
9. Amazon.com, Inc. (NASDAQ: AMZN)
Stephen Mandel’s hedge fund has sold 26% of Amazon.com’s (NASDAQ: AMZN) position in the September quarter to capitalize on the stunning share price rally. While shares of Amazon underperformed during the final quarter of this year, its stock price rose 65% in the past twelve months.
Lone Pine Capital held 337,308 shares of Amazon at the end of the September quarter, accounting for 4.58% of the overall portfolio.
Amazon is one of the favorite stock picks of hedge funds. It is ranked #1 stock among the 30 most popular stocks among hedge funds. AMZN was in 245 hedge funds’ portfolios at the end of the third quarter of 2020 down slightly from the all-time high of 251.
L1 Capital International Fund, which returned 5.1% for the third quarter, highlighted bullish aspects of Amazon in an investor’s letter. Here is what L1 Capital International Fund stated:
“Several investments in the technology sector were trimmed on valuation grounds with the proceeds used to increase our investment in Amazon. Amazon’s successful flywheel business model and Amazon Web Services are well known. However, we believe the current share price under‑appreciates:
– The consistency and longevity of Amazon’s growth potential in its key businesses;
– The importance of additional revenue streams such as advertising which are high margin and growing rapidly; and
– The strengthening barriers to competition and competitive advantages arising from Amazon’s stepped‑up investment in logistics and other infrastructure.”
8. Netflix, Inc. (NASDAQ: NFLX)
Shares of Netflix (NASDAQ: NFLX) underperformed in the final quarter of 2020, but billionaire Stephen Mandel’s hedge fund profited from its position in 2020. Shares of Netflix jumped 61% in 2020.
The hedge fund has raised its existing position by 40% during the September quarter. It is the eighth largest stock holding of the Lone Pine Capital portfolio, accounting for 4.85% of the portfolio.
Ensemble Capital, which returned 22.66% for the second quarter, commented on a few stocks including Netflix in an investor’s letter. Here is what Ensemble Capital stated:
“Netflix, Inc. (8.5% weight in portfolio): We’ve discussed our Netflix thesis in the past, but now we are going to highlight the competitive and financial strengths that Netflix has demonstrated since we last discussed the business a couple of years ago, especially in light of the expected competition that has finally arrived from traditional media companies launching their own streaming services, such as Disney. In addition, the emergence of the COVID-19 pandemic around the world has led to accelerating benefits for digital entertainment and global production.”
7. Global Payments Inc. (NYSE: GPN)
Stephen Mandel’s hedge fund looks bullish over the future fundamentals of Global Payments Inc. (NYSE: GPN) as the fund has raised its position by 33% in the September quarter. Share of Global Payments rallied more than 9% in the last three months, but its stock price gains of 5.69% in the last twelve months underperformed compared to the S&P 500 growth of over 16%.
Global Payments was in 57 hedge funds’ portfolios at the end of September, down from the all-time high of 68. Artisan Mid Cap Fund has highlighted a few stocks including Global Payments in an investor’s letter. Here is what Artisan Mid Cap Fund stated:
“Shares of Global Payments have been pressured amid clear indications that COVID-19 restrictions are having a disruptive impact across many of their businesses. Throughout our long holding period, we have been impressed by management’s progress in building a fast-growing, diversified, more recurring business at the intersection of many strong trends in payments and software. We believe these characteristics position it quite well to weather almost any type of recession. But in the current (unprecedented) environment, many of its customers are closed or severely restricted, and its diversification across geographies such as the US, United Kingdom and Spain isn’t of much benefit either. While we believe short-term earnings will fall far short of initial expectations, we have confidence in management’s nimble response to challenges historically, its healthy balance sheet, and our thesis that once the economy begins to reopen, Global Payments’ positive profit cycle will resume. As such we have maintained our position.”
6. PayPal Holdings, Inc. (NASDAQ: PYPL)
Lone Pine Capital has sold 18% of its PayPal (NASDAQ: PYPL) position during the third quarter to capitalize on significant share price gains.
Shares of PayPal soared 20% in the last three months and it is up 110% in the last twelve months. Billionaire Stephen Mandel’s hedge fund held 6,000,915 shares of PayPal at the end of the third quarter, accounting for 5.10% of the portfolio. It is the sixth-largest stock holding of Lone Pine’s 13F portfolio.
Click to continue reading and see Billionaire Mandel’s Top 5 Stock Holdings.
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