Tiger Cub Lee Ainslie Warns About Valuations, Reveals Major Q2 Moves

Maverick Capital is a long/short equity hedge fund founded by billionaire Lee S. Ainslie III in 1993. Known as a ‘Tiger Cub’ because of his past affiliation with Julian Robertson’s Tiger Management Corporation, Mr. Ainslie is a value investor who doesn’t trade bonds, currencies, commodities or options. Mr. Ainslie’s fund has beaten the S&P 500 index on average by about 6-7 percentage points annually, but with 50% less volatility. Maverick Capital mostly compares free cash flow to enterprise value to evaluate an option, but the hedge fund firmly believes in using various metrics to decide the best stock picks and mostly targets the stocks that it thinks will outperform the market by 20% on an annualized basis.

According to Maverick’s recent letter to investors, during the three-month period ended June 30, the fund was up by 2.9%, 2.8% and 1.5% in its LDC, Long Enhance and Long funds respectively. The Long Enhanced fund is up by 0.3% on the year, while the Long, LDC and Levered funds have lost 0.2%, 0.8% and 1.8% respectively. Lee Ainslie also warned investors about sky-high valuations in the letter, opining that the market has entered a cycle of short alpha. In particular, Mr. Ainslie points to the market’s Forward P/E as being higher than it was in 1998/1999, and that its EV/sales ratio is at 2.8-times, 15% higher than its previous all-time peak.

Amid that backdrop, let’s evaluate the most important moves made by Maverick Capital during the second quarter, according to its latest 13F filing, which revealed that it has over $7 billion worth of holdings in its U.S. equity portfolio as of June 30.

By analyzing the equity portfolios of 750+ top investors, we can see what stocks they are collectively bullish on and use this data to compile a portfolio that can outperform the market. We have determined through this process that the best strategy is to follow the 15 most popular small-cap picks among hedge funds, which have delivered an alpha of around 81 basis points per month in our backtests covering the period between 1999 and 2012 (see more details).

Pfizer Inc. (NYSE:PFE)

– Shares Owned by Maverick Capital (as of June 30): 18.43 million

– Value of Maverick Capital’s Holding (as of June 30): $648.80 million

Maverick boosted its holding in Pfizer Inc. (NYSE:PFE) by 123% during the second quarter, ending the period with a total of about 18.43 million shares of the New York-based global pharmaceutical company, which said on Monday that it was going to acquire cancer drug company Medivation Inc (NASDAQ:MDVN) for around $14 billion. In a statement, Pfizer’s CEO Ian Read said that the takeover of Medivation will “immediately” accelerate revenue and earnings potential for the company. Back in April, Pfizer pulled out of its $160 billion planned merger with Ireland-based Allergan plc Ordinary Shares (NYSE:AGN) after the US treasury department made a key change to tax laws to limit the benefits of inversion deals. Pfizer Inc. (NYSE:PFE)’s stock is up by over 7% so far this year. Ken Fisher’s Fisher Asset Management owns 31.72 million shares of Pfizer as of the end of the second quarter.

Philip Morris International Inc. (NYSE:PM)

– Shares Owned by Maverick Capital (as of June 30): 5.85 million

– Value of Maverick Capital’s Holding (as of June 30):  $595.21 million

Maverick Capital added Philip Morris International Inc. (NYSE:PM)’s stock to its portfolio during the second quarter, buying approximately 5.85 million shares of the company worth $595.21 million on June 30. The newly-added position accounts for 8% of the value of the hedge fund’s equity portfolio. Phillip Morris has developed iQOS heat-not-burn technology, claiming that the technique depletes the risks of traditional smoking significantly.  Earlier this month, Philip Morris said its Marlboro e-cigarette has captured 3% of Japanese tobacco sales, while iQOS cigarettes accounted for 2.2% of the tobacco sales in Japan, as of the end of the second quarter. For the full 2016 fiscal year, Philip Morris International Inc. (NYSE:PM) expects diluted earnings per share to be in the range of $4.45-to-$4.55, versus the Street’s estimate of $4.47. The stock has gained over 13% year-to-date.

We’ll continue our discussion of Maverick’s biggest moves of the second quarter on the next page.