Matrix Capital Increases Exposure to Tech Sector; Here Are Its Top 5 Tech Picks

After generating stellar returns in 2015 by increasing its exposure to information technology sector, Matrix Capital Management is again relying heavily on information technology stocks to outperform its peers this year. The latest 13F filing submitted by the Massachusetts-based hedge fund revealed that stocks from the information technology sector amassed over 52% of the value of its US equity portfolio at the end of March 2016, up from 41% at the end of 2015. The filing also revealed that Matrix Capital Management’s US equity portfolio, which was worth $2.05 billion as of March 31, was remarkably top-heavy going into the second quarter as its top 10 equity holdings alone accounted for over 90% of its portfolio value at that time. Founded in 1991 by famous venture capitalist Paul Ferri and Julian Robertson protégé David Goel, Matrix Capital Management was one of the best-performing funds in 2015 among the hedge funds tracked by Insider Monkey with its long positions in companies worth over $1 billion generating a weighted average return of 17.4% during the year. Considering the fund’s  performance and its bullishness on the tech sector, in this post, we will be discussing the top-five tech stocks it was betting on heading into the second quarter.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Knowles Corp (NYSE:KN)

– Shares Owned by Matrix Capital Management (as of March 31): 3.53 million

– Value of Holding (as of March 31): $46.52 million

Matrix Capital Management increased its stake in specialty audio component supplier Knowles Corp (NYSE:KN) by 81% during the first quarter, making the company its fifth largest tech holding at the end of that period. Knowles Corp (NYSE:KN) became an independent, publicly-traded company in February 2014 after it was spun off from Dover Corp (NYSE:DOV). While shares of Knowles Corp (NYSE:KN) held on to the levels they started trading at for about six months after its separation from Dover Corp, they have been on a perpetual decline since September 2014 and currently trade down 6.5% year-to-date. In February this year, the company revealed that its planning to sell its speaker/receiver component business to focus on higher margin products. Three months following that announcement, on May 20, it announced that it has entered into an agreement to sell that unit to Asian investment firm Loyal Valley Innovation Capital for an undisclosed sum. Ric Dillon‘s Diamond Hill Capital also increased its stake in Knowles Corp during the first quarter, by 16% to 698,452 shares.

#4 LinkedIn Corp (NYSE:LNKD)

– Shares Owned by Matrix Capital Management (as of March 31): 712,500

– Value of Holding (as of March 31): $81.47 million

Even though it lost half of its market capitalization during the first quarter, LinkedIn Corp (NYSE:LNKD) managed to jump two spots quarter-over-quarter during that period and became Matrix Capital Management’s ninth-largest equity holding at the end of March because the fund boosted its stake in the company by 72% during the first quarter. In late-April, the company came out with its fiscal 2016 first quarter numbers, which were better than analysts’ estimates. However, that wasn’t of much help in providing a boost to its stock, which currently trades down by 45% year-to-date. The company recently became embroiled in a controversy after a hacker attempted to sell stolen login credentials of 117 million LinkedIn users, which were stolen in a 2012 hack attack, on Dark Web marketplace ‘TheRealDeal’. While LinkedIn Corp (NYSE:LNKD) managed to get the posting removed from TheRealDeal and also announced that it had taken measures to safeguard its users, some industry experts think that this incident will cause serious damage to the company’s credibility in the long run. Karthik Sarma‘s SRS Investment Management initiated a stake in during the first quarter by purchasing 2.34 million shares of the company.

 #3 Tableau Software Inc (NYSE:DATA)

– Shares Owned by Matrix Capital Management (as of March 31): 5.4 million

– Value of Holding (as of March 31): $247.7 million

Tableau Software Inc (NYSE:DATA) experienced the same fate as LinkedIn Corp during the first quarter with its stock plummeting after it reported worse-than-expected numbers for its fiscal 2015 fourth quarter and provided dismal guidance for fiscal 2016. Matrix Capital Management did the same thing to its stake in Tableau Software Inc (NYSE:DATA) during the first quarter that it did with its stake in LinkedIn Corp – boosted it by 72%. Tableau Software’s stock again took a big hit recently after the company reported its first-quarter results, which has increased its year-to-date loss to 48%. Though the first quarter numbers that the company reported were above the Street’s projections and it also upped its guidance for fiscal 2016, Tableau’s stock was still pounded following its earnings release largely because of the slowdown in growth of its licensing business, which grew by 14% year-over-year, compared to a 31% year-over-year growth reported a year earlier and a 57% year-over-year growth in the third quarter of fiscal 2015. Hedge funds that reduced their stakes in the company during the first quarter included Chase Coleman‘s Tiger Global Management LLC, which brought its holding down by 28% to 6.89 million shares.

#2 Workday Inc (NYSE:WDAY)

– Shares Owned by Matrix Capital Management (as of March 31): 5.11 million

– Value of Holding (as of March 31): $392.68 million

Moving on, Matrix Capital Management upped its stake in Workday Inc (NYSE:WDAY) by 29% during the first quarter. Shares of the enterprise cloud applications company suffered a huge decline at the beginning of 2016 after being range bound for over an year. However, they have recouped some of those losses in the last three months and are currently trading down 6.25% year-to-date. In the last couple of weeks, several analysts have downgraded Workday Inc (NYSE:WDAY)’s stock citing the change in accounting rules and the expensive valuation at which the stock trades at currently. Among others, analysts at Brean Capital were also a part of this downgrading spree. On May 9, they lowered their rating on the stock to ‘Sell’ from ‘Hold’ and also reduced their price target on it to $55 from $70.97, which represents a potential downside of 37% from the stock’s current trading price. Eashwar Krishnan‘s Tybourne Capital Management boosted its stake in the company by 140% to 2.95 million shares during the first quarter and was the largest shareholder of Workday Inc among funds tracked by us, at the end of that period.

#1 Netflix, Inc. (NASDAQ:NFLX)

– Shares Owned by Matrix Capital Management (as of March 31): 4 million

– Value of Holding (as of March 31): $410 million

Netflix, Inc. (NASDAQ:NFLX) is the only company in this list in which Matrix Capital Management didn’t increase its stake during the first quarter. However, despite that, it continued to remain the fund’s top stock pick at the end of that period. The multi-year bull run in Netflix, Inc. (NASDAQ:NFLX)’s stock seems to have come to an end this year with some analysts becoming skeptical of the company’s valuation and arguing that the excessive rise in the cost of content will drive down its margins going forward. Those two reasons coupled with the lower than subscribers growth that the company reported for the first quarter recently spooked  investors so much that they sold their stock in droves following the results. As a consequence of that, Netflix’s stock has plummeted in the past few weeks and currently trades down by 21% year-to-date. However, most leading analysts on the Street continue to remain bullish on the company. On May 18, analysts at RBC Capital reiterated their ‘Buy’ rating and $140 price target on the stock. Daniel Benton‘s Andor Capital Management halved its stake in the company to 200,000 shares during the first quarter.

Disclosure: None