Axon 2.0 has been a big success.
In a December client letter, former star Goldman Sachs trader Dinakar Singh attributed his hedge fund Axon Capital’s best-ever results to its 2019 reboot with co-CIO Kori Estrada and partner Alex Blank.
“While we could never have predicted the events of this year, the business and market philosophy around which we have completely re-imagined, rebuilt and relaunched our team and portfolio could not have been better suited for the extraordinary challenges of this year,” Singh and Estrada wrote in the letter, obtained earlier by Institutional Investor.
Indeed, the fund surged more than 30 percent in the fourth quarter, finishing the year up 74 percent, according to a person familiar with the results.
“We have dramatically re-thought and improved our risk management, and been able to navigate extraordinarily challenging markets successfully,” they added in the letter. “In almost every sense, our firm is essentially a brand-new firm, given the changes in our portfolio structure, our leadership and our risk management.”
Singh co-founded TPG-Axon Capital Management in 2005 with private equity firm TPG. He ran as much as $13 billion in 2007. But after a string of losing years, assets shrunk to less than $2 billion.
In 2019 the firm rebranded as simply Axon and promoted Estrada.
In the December letter Singh proudly pointed out Axon outperformed the market in the two best months of the year, April and November, as well as in the two worst months of the year, February and March. What’s more, it “had substantial positive return” in two sharply negative months for the market, February and October.
II earlier attributed part of Axon’s strong gains this year to the October 7 merger announcement between Stable Road Acquisition Corp., a special purpose acquisition company, and Momentus, which describes itself as a commercial space company offering in-space transportation and infrastructure services.
In the letter, the Axon managers said recent drivers included U.S health care insurers Centene, Trinet, and Humana, which had all surged since mid-year. “They had languished due to anxiety about elections,” Singh and Estrada wrote.
They also recently benefited from investments in several Indian banks: HDFC Bank, ICICI, and IndusInd Bank. The letter said their recent earnings have in part inspired investors to focus on India in general.
The hedge fund also benefited from several Japanese stocks: Olympus, Hitachi and Asahi. The Axon team said in the letter that parts of Asia “offer one of the remaining pockets where one can find solid growth at a great value, as opposed to having to pick from ridiculously overpriced growth stocks or choose ‘value stocks’ but arguably defined as junk at a low price.”
In technology, Axon benefited from two “value” plays such as Google and Facebook and a few select financial technology companies while avoiding what the managers called “zingy” thematic, momentum-driven tech names such as Zoom.
The managers also said during the year they increased or initiated positions in three stocks they believe provide “exceptional value” when the pandemic is over.
They stressed that leisure hotels and resorts “are arguably the best positioned to recovery fully, and perhaps even enjoy years of boom.”
“Without doubt, there will be lasting impact on business travel and behavior of companies and workers,” Singh and Estrada added. “However, people will still want to travel on vacations, and given the surge in savings and household net worth, we may see an unprecedented surge in vacation travel once people are able to do so.”
Their favorites include Playa Resorts, which it called “perhaps the only purely leisure-focused hotel stock in global markets.” They asserted that the illiquid stock “could easily triple from current levels” based on its estimation of future cash flow and reasonable valuation.
Axon also initiated investments in Madison Square Garden, which owns the famous arena and New York Knicks and Rangers sports teams, and Compass Group, a British contract foodservice company, earlier this year. Both companies suffered greatly from the shutdown but are poised to recovery fully when things reopen, the managers asserted.
The hedge fund also initiated a “sizeable investment” in financial services giant American Express, with Singh and Estrada calling it “the best positioned company to benefit from the recovery in spending on travel and services.”
“We think investors should largely look through near term noise about lockdowns and virus surge,” they wrote. “Simply put, the vaccine prospects are better than anyone could have expected, and logic really suggests that this time next year, COVID will be simply eliminated as a meaningful concern.”
Over the longer term, however, Singh and Estrada conceded they are “extremely worried” about equity valuations and the general outlook for equity markets. “Eventually, though, growth will slow, and rates will eventually have to rise, and that will likely yield a massive long-term hangover the likes of which we have not seen since the 1970’s,” they warned.
