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.

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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.

Waste Connections Inc (USA) (NYSE:WCN)

– Shares Owned by Maverick Capital (as of June 30): 5.55 million

– Value of Maverick Capital’s Holding (as of June 30): $399.95 million

Maverick Capital acquired about 4.69 million shares of Waste Connections Inc (USA) (NYSE:WCN) during the three-month period ended June 30, ending the quarter with $399.95 million worth of the company’s stock. The Canada-based waste collection and disposal company earned $0.66 per share on $727.6 million in revenue during the second quarter, much better than analysts’ estimates of $0.52 in EPS on $712.34 million in revenue. On June 1, Waste Connections announced the completion of its merger with Progressive Waste Solutions. Waste Connections Inc (USA) (NYSE:WCN)’s stock has gained over 60% in market value since the start of 2016. 28 hedge funds in our system were shareholders of Waste Connections on June 30, owning 7.60% of its shares in aggregate.

American Express Company (NYSE:AXP)

– Shares Owned by Maverick Capital (as of June 30): 4.64 million

– Value of Maverick Capital’s Holding (as of June 30): $282.34 million

Maverick Capital amassed 4.63 million shares of American Express Company (NYSE:AXP) during the second quarter, adding them to a position that had contained just a few thousand shares on March 31 and ending the second quarter with a $282.34 million position in the New York-based financial services company. Last month, American Express reported second quarter EPS of $2.10 on $8.2 billion in revenue, versus the consensus estimates of $1.95 in EPS and $8.4 billion in revenue. The company’s return on average equity came in at 26.4%, down from 28.1% reported in the same quarter of last year. American Express Company (NYSE:AXP)’s stock is down by about 6% year-to-date. Gary Claar‘s Claar Advisors added a new American Express position to its portfolio during the second quarter, consisting of 235,000 shares.

Cisco Systems, Inc. (NASDAQ:CSCO)

– Shares Owned by Maverick Capital (as of June 30): 3.06 million

– Value of Maverick Capital’s Holding (as of June 30): $151.93 million

Cisco Systems, Inc. (NASDAQ:CSCO) was also added to Maverick Capital’s portfolio during the second quarter. The hedge fund acquired 3.06 million shares of the technology giant, whose stock is up by over 12% this year. Last week, Cisco reported its fiscal year 2016 fourth quarter earnings, which came in at $0.63 in EPS on $12.6 billion of revenue. For the first quarter of its fiscal year 2017, Cisco Systems, Inc. (NASDAQ:CSCO) expects to earn $0.58-to-$0.60 per share, versus the consensus estimate of $0.60. Following the upbeat earnings, Jefferies reaffirmed its ‘Buy’ recommendation for Cisco and boosted its price target on the stock to $35 from $30.75.

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