TAL Education Group (ADR) (TAL), Momo Inc (ADR) (MOMO): China Bets Pay Off With 36.7% Q1 Gains For This Fund

Considering that you are reading this article on a website that focuses on hedge fund investments, it’s likely that you are aware of the so-called ‘tough times’ that hedge funds have endured for the past few years. It’s no secret that the hedge fund industry has been in the doldrums for some time, with 2016 being the third year in a row in which it suffered net redemptions. Moreover, the closing down of some established hedge funds and the lowering of fees by some marquee names in the business, which was unimaginable until a few years ago, has also been covered extensively by the financial media over the past several months. However, did you know that amid all this dramatization of the fall of the hedge fund business, there have been some funds that have been quietly doing their work and generating astonishing returns? Funds like Larry Chen and Terry Zhang’s Tairen Capital, whose investments in U.S-listed companies with a market cap of over $1 billion delivered a weighted average return of 36.75% in the first-quarter.

Tairen Capital is not an anomaly. There are several other funds covered in our database, like Wildcat Capital Management and Casdin Capital, whose stock picks have generated phenomenal returns over the past year, having gained 65.33% and 71.72% respectively. But the big names in the financial publishing business hardly mention them. Instead, they put all of their energy into covering the hedge funds that have shut shop or highlighting the mistakes made by a few hedge funds like Bill Ackman’s Pershing Square, something that has already been covered to death by numerous publications.

Don’t get us wrong, we are not undermining the work or research done by the big players in the financial media. It’s their research that sometimes saves us all from charlatans or the next big Ponzi scheme. However, they also have a habit of focusing too much on the failures and drawdowns in the hedge fund industry, especially the ones suffered by the big players. Hedge funds are a highly competitive space and we believe that like any other business where competition is involved, there will always be players who will do better than the group and those who will do worse than the group (and eventually cease to exist). The key for a common investor is to keep an eye on the winners and their stock picks, while at the same time not being subjected to exorbitant fees or commissions.

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That’s what we do at Insider Monkey and our flagship strategy has returned 44.2% since February 2016 vs. a 29.6% gain for the S&P 500 index ETF (SPY). Our most recent stock picks, which were disclosed to our subscribers in the middle of February, beat the market by 5 percentage points in the three months since, and we are going to disclose our new stock picks tomorrow. Our system is easy for investors to implement, with just a small batch of trades to be executed once per quarter. We are also offering a 14-day money-back guarantee as well as a large discount on our premium newsletters, so you can check out our latest picks risk-free and see if Insider Monkey’s small-cap strategy is right for your portfolio.

Now then, let’s go back to Tairen Capital and explore in detail three stocks held by the fund that have helped it generate stellar returns this year.

Momo Inc (ADR) (NASDAQ:MOMO)

From having 13F exposure of only 5.65% to Momo Inc (ADR) (NASDAQ:MOMO) at the end of December, the position jumped to account for almost 30% of the fund’s portfolio at the end of March. This massive increase in exposure was driven partially by the fund buying an additional 2.42 million shares of the company during the first-quarter and partially by the 85.36% rally in the stock during that time. Momo Inc (ADR) (NASDAQ:MOMO)’s stock has continued its massive bull run in this quarter as well and is currently trading up by 125% year-to-date.

Being in the social networking business, Momo’s stock was expected to do well when the company issued its ADRs back in 2014. However, the stock remained range-bound for many months after getting listed in the U.S. That was largely because Momo was only a dating app initially, which restricted its growth. It was only when the company started adding more features in 2015 like groups, member forums etc. that its user base started growing. Over time, Momo has become one of the dominant players in the instant messaging business in China and is currently the market leader in live-streaming, which accounts for the major chunk of the company’s revenue today. Momo has been reporting much better than expected financial numbers for the past three quarters and most analysts believe that this trend will continue. Earlier this month, analysts at BOCOM International Holdings initiated coverage on the stock with a ‘Buy’ rating and $46 price target.

We’ll discuss two other stocks held by Tairen Capital on the next page.

New Oriental Education & Tech Grp (ADR) (NYSE:EDU)

Tairen Capital lowered its stake in New Oriental Education & Tech Grp (ADR) (NYSE:EDU) by 19% during the first-quarter. Despite this, the fund’s exposure to the company in its 13F portfolio rose to 25.08% from 22.64%, owing largely to a 40% increase in New Oriental Education & Tech Grp (ADR) (NYSE:EDU)’s stock during the first three months of 2017. Like Momo, New Oriental has also continued its bull run in the current quarter and is now trading up by 67.84% for the year.

At the end of last year, Reuters ran a story on New Oriental in which it revealed that eight former employees of the company have accused it of engaging in college application fraud. Following this revelation, shares of New Oriental plunged heavily. However, the company was quick to issue a statement saying that the unit within the company which had been accused of this fraud, New Oriental Vision Overseas Consultancy (NOVO), accounted for only 8% of Momo’s revenue in its fiscal year 2016 and that it would execute on procedures designed to deter and penalize inappropriate employee conduct. For its most recent quarter, the company reported EPS of $0.43, beating analysts’ consensus estimate by $0.02, on revenue of $437.85 million, which was $18.14 million higher than what analysts had expected. The major driver of these better-than-expected numbers was New Oriental’s Educational programs and services division, whose revenue rose by 26% year-over-year.

Being one of the fastest moving stocks this year, New Oriental Education & Tech Grp has been garnering a lot of interest from investors. If you will like to stay ahead of the curve, you can subscribe to real-time email updates on the company by dropping your address in the box below.

TAL Education Group (ADR) (NYSE:TAL)

TAL Education Group (ADR) (NYSE:TAL) is another China-based education company that accounted for a large share of Tairen Capital’s equity portfolio at the end of March. It’s also another stock that has done exceedingly well this year. Although the fund booked some profit from its TAL Education Group (ADR) (NYSE:TAL) position during the first-quarter by selling 7% of its holdings, its exposure to the company in its 13F portfolio rose to 20.22% from 14.91% during that time. TAL’s stock has been on a consistent uptrend since 2013 and is up by a whopping 1,070% over the last five years. This year alone the stock has returned 76.31% so far.

The unprecedented growth in the demand for K-12 extracurricular training in China has worked wonders for TAL in the past five years and analysts expect this trend to continue in the coming years. Although there are several new EduTech start-ups in the country and the K-12 training space has become increasingly competitive, TAL has some unique advantages which should ensure that it remains one of the leaders in the industry for a long time. Some of these include its standardized model for hiring and training teachers, which helps in reducing costs, established learning centers in prominent locations in most big cities, and better online and offline infrastructure than its peers. Most analysts who currently track TAL are bullish on the company. The stock sports an average rating of ‘Buy’ and an average price target of $130.79 from 15 leading analysts on Wall Street who track it, more than 5% above the stock’s current price.

Disclosure: None