Netflix (NFLX), Facebook (FB) & More: Here’s Why You Should Follow SRS Investment Management

Karthik Ramakrishna Sarma founded SRS Investment Management in 2007. Mr. Sarma is considered a Tiger Grand Cub, because prior to launching his own fund, he was an analyst and managing director at Chase Coleman‘s Tiger Global Management for five years. SRS was launched with $125 million in seed capital and currently has over $7.0 billion in regulatory assets under management. SRS focuses mostly on technology and usually holds a concentrated equity portfolio with a couple of big positions that amass the largest share of the portfolio. SRS’s technology bets have played out pretty well for the fund, as it managed to post double-digit returns in four of the past five years.

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SRS Investment Management is one of our best-performing hedge funds. We assess a fund’s performance by calculating the weighted-average returns of its holdings in companies with a market cap above $1.0 billion disclosed in quarterly 13F filings. This allows us to measure the performance relying solely on the fund’s public information that it discloses with the Securities and Exchange Commission. In this way, SRS Investment Management’s stock picks returned almost 25% during the first quarter and over the 12-month period ended March 31, they posted gains of 51.7%. This makes SRS the third best-performing hedge fund in the third quarter (you can take a look at the list of 40 best performing hedge funds by accessing this list).

During the first quarter, SRS Investment Management initiated three new positions, one of which is in Facebook Inc (NASDAQ:FB), which is one of the top stocks hedge funds are crazy about. In addition, Mr. Sarma’s fund boosted its exposure to two other companies: Broadcom Inc (NASDAQ:AVGO) and Walt Disney Co (NYSE:DIS), which we will discuss in more detail on the next page. In we will take a look at its top picks that helped it generate strong returns over the past year, one of which is SRS Investment Management’s activist target.

Let’s start with Walt Disney Co (NYSE:DIS), in which SRS Investment Management had initiated a stake during the fourth quarter of 2017 and in the following three months increased the stake by 55% to 2.64 million shares worth $265.41 million. Walt Disney Co (NYSE:DIS) has made headlines recently as its movie Avengers: Infinity War was an absolute success, first hitting $250 million in the opening weekend in the US, an absolute record in the history of cinema, then getting to $1.0 billion in just 11 days after its release. In addition, Walt Disney Co (NYSE:DIS) is working on the acquisition of some of 21st Century Fox (NASDAQ:FOXA)‘s assets, including film and TV studio, some cable networks, the stakes in Hulu and British broadcaster Sky plc, and other assets. Even though, Walt Disney Co (NYSE:DIS) and 21st Century Fox (NASDAQ:FOXA) entered into a deal valued at $52.4 billion (in stock) in December, it might still have to fight off Comcast Corporation (NASDAQ:CMCSA), which had made its own offer before Disney, but which has been rejected by 21st Century Fox on antitrust concerns. Comcast Corporation (NASDAQ:CMCSA) is also working on buying Sky, in which 21st Century Fox (NASDAQ:FOXA) has a 39% stake and has trying to buy the rest. Comcast has recently received the British regulators’ approval to go ahead with its offer for Sky, which complicates the deal between Walt Disney Co (NYSE:DIS) and 21st Century Fox (NASDAQ:FOXA). SRS Investment Management also holds a stake in 21st Century Fox (NASDAQ:FOXA).

Overall, the intense battles in the consumer entertainment space shows how old and well-established companies like Walt Disney Co (NYSE:DIS) and Comcast Corporation (NASDAQ:CMCSA) are trying to get more brands under their roofs and are realigning their strategies amid challenges in form of cord-cutting and lower cinema attendance due to increase in popularity of streaming services like Netflix and Amazon Prime Video.

In Broadcom Inc (NASDAQ:AVGO), SRS Investment Management boosted its position by 87% to 1.24 million shares worth $291.66 million during the first quarter, also after having initiated the stake a quarter earlier. Broadcom Inc (NASDAQ:AVGO) captured the attention of investors at the end of last year, when it tried to buy Qualcomm, Inc. (NASDAQ:QCOM), but in March the deal was halted by President Trump over national security concerns. Even though the deal was cancelled, Broadcom Inc (NASDAQ:AVGO) might still be eyeing a big acquisition. Moreover, amid Broadcom Inc (NASDAQ:AVGO)’s attempt to buy Qualcomm, Inc. (NASDAQ:QCOM), Intel Corporation (NASDAQ:INTC) was rumored to be interested in making a bid for Broadcom Inc (NASDAQ:AVGO) in order to prevent the merger and to expand into the mobile chips segment, where it still has more room to grow (as opposed to PC and data centers, where it dominates the market). Even though the Broadcom – Qualcomm deal was cancelled, Intel Corporation (NASDAQ:INTC) might still consider going after Broadcom Inc (NASDAQ:AVGO).

In the meantime, Broadcom Inc (NASDAQ:AVGO) seems to be doing great on its own. Its first-quarter report showed EPS, revenue and gross margins well above estimates and showed steady revenue growth across all segments. In addition, last month Broadcom said its board had authorized a new $12-billion buyback program. The companny also presented its guidance that includes revenue of around $5.0 billion for the fiscal second quarter, which is close to the consensus of $5.01 billion and $5.05 billion for the fiscal third quarter, which is lower than the expected $5.235 billion.

SRS Investment Management added Facebook Inc (NASDAQ:FB) to its equity portfolio during the fourth quarter of 2016 and then saw the stock gain over 51% during 2017. The position was closed during the last three months of the last year, but re-added during the first quarter, with the fund acquiring 3.13 million shares worth $500.54 million, as the stock lost ground amid the data scandal. However, Facebook Inc (NASDAQ:FB) managed to recoup the losses, helped by a strong first-quarter report and optimism expressed by a string of analysts that boosted their price targets. In the first quarter, Facebook Inc (NASDAQ:FB) saw its ad revenue jump by 50% to $11.80 billion, while daily and monthly active users figures went up by 13% on the year to 1.45 billion and $2.20 billion, respectively. Facebook Inc (NASDAQ:FB)’s issues related to data privacy are far from over, with Mark Zuckerberg today testifying before the European Parliament and there’s the possibility of tougher regulations, but many agree that it’s unlikely that the company will suffer any long-lasting damage from the controversy.

Avis Budget Group Inc. (NASDAQ:CAR) represents SRS Investment Management’s second largest position and its only activist target. At the end of March, Mr. Sarma’s fund held 12 million shares of Avis Budget Group valued at $562.08 million. SRS has held shares of Avis Budget Group Inc. (NASDAQ:CAR) in 2010 and went activist in January 2016, entering into a cooperation agreement with the company that included a larger board and the appointment of SRS’s nominee to the board. In February 2018, SRS, which holds 12% of Avis Budget Group Inc. (NASDAQ:CAR)’s outstanding stock and has exposure to another 16% through notional shares, nominated five directors for election at the annual meeting. In April, Avis Budget Group Inc. (NASDAQ:CAR) and SRS Investment Management signed a new cooperation agreement, under the terms of which Avis appointed SRS’s president Jagdeep Pahwa and independent candidate Carl Sparks to the board and SRS will support all company nominees at the 2018 meeting. In addition, Avis Budget Group Inc. (NASDAQ:CAR) terminated its Shareholder Rights Plan it had adopted earlier this year.

Earlier this month, Avis Budget Group Inc. (NASDAQ:CAR)’s took a hit on the back of soft full-year EPS guidance of $2.90 to $3.75, versus the consensus estimate of $3.37. However, the company posted first-quarter revenue and profits ahead of expectations, but investors were probably betting that Avis would increase its full-year guidance instead of reduce it.

Last but not least, Netflix, Inc. (NASDAQ:NFLX) remained SRS Investment Management’s top holding at the end of March, even though the fund cut its stake by 893,170 shares to 7.18 million shares worth $2.12 billion during the first quarter. In this way, the position represents almost 42% of SRS Investment Management’s equity portfolio. Over the last year, Netflix, Inc. (NASDAQ:NFLX)’s stock more than doubled as the company continues to expand, add new subscribers and focus on original content. During the first quarter, Netflix, Inc. (NASDAQ:NFLX) added 1.96 million subscribers in the US and 5.46 million internationally, smashing its own guidance and analyst expectations. In this way, the company had around 125 millio subscribers at the end of March. Netflix, Inc. (NASDAQ:NFLX) also expects to release 86 original movies this year, versus 61 in 2017 and has set a budget of $8.0 billion for programming this year. Just yesterday Netflix disclosed that it had signed a multi-annual deal with Barack and Michelle Obama to make movies and shows for the company. The financial terms of the deal were not announced and there isn’t any information regarding the content that the Obamas will produce, but it’s expected to be outside the US politics.

Disclosure: none