Stephen Mandel, Jr.’s Lone Pine Capital is telling clients that policies among the central banks to keep interest rates near zero are “a double-edged sword” for the investment firm, which runs both long-short and long-only funds.
is telling clients that policies among the central banks to keep interest rates near zero are “a double-edged sword” for the investment firm, which runs both long-short and long-only funds. In its first-quarter letter dated April 15 and obtained by Alpha, the Greenwich, Connecticut hedge fund firm cites a number of negative effects and benefits stemming from a low-interest rate environment.
Still, Lone Pine says it continues to identify many “outstanding businesses globally” for investment.
“Valuations are stretched, with earnings and cash-flow multiples toward the upper end of historical averages,” the letter states. “If future cash flows are discounted at today’s interest rates, stock prices are quite reasonable. Discounting those same cash flows at more ‘normal’ interest rates, however, yields a different answer. This is the investment conundrum: Rates will eventually return to normal levels. When they return is the big unknown.”
Among the negatives of the low or zero-interest-rate environment, Lone Pine cites the elimination of interest income on short cash balances. Its shorts are more prone to being acquired, which has pushed up overall valuations throughout the world, “making bargains harder to find.”
However, these negatives are offset by a number of positives.
“Low interest rates, however, have permitted companies able to add significant value to acquisitions to use their balance sheets more aggressively in pursuing those acquisitions,” notes the letter, which is signed by Mandel and three of his colleagues.
Lone Pine identifies a number of companies in its portfolios that have followed this strategy. The firm cites Actavis, Charter Communications, Constellation Software, Energy Transfer, Endo International, Fleetcor, Mohawk Industries, Transdigm, Valeant Pharmaceuticals International and Walgreens Boots Alliance.
The firm also argues that low rates have enabled a number of companies to add debt to boost shareholder returns. The best example among its holdings: Apple.
“In private dialogue with managements and boards at several other companies where we are shareholders, we are urging them to follow suit in taking advantage of these unusual debt markets,” Lone Pine’s letter adds.
As we earlier reported, Lone Cypress, the firm’s long-short fund, rose 4.1 percent in the first quarter.
Lone Cascade was up 4.5 percent, Lone Kauri rose 4.7 percent, while Lone Tamarack climbed 5.1 percent.
The first-quarter letter also highlights several of Lone Pine’s non-U.S. holdings — traditionally an important part of the firm’s funds — where, it says, “changes in either shareholder orientation or ownership are catalysts for enhanced returns.”
Examples include Japan-based Fanuc, which Lone Pine describes as “the world’s leading industrial automation company,” and French media giant Vivendi.
Lone Cypress is currently 60.6 percent net long. Four of its five largest longs at the end of the first quarter were its four largest at year-end: The Priceline Group, MasterCard, Baidu and Valeant.
The new addition to the top holdings is JD.com—the Chinese e-commerce giant—which was not in the top-20 at year-end.
Nike, currently its sixth-largest holding, is a new stock for Lone Pine.
