Tiger Cub Stephen Mandel Jr. made a number of significant changes in the fourth quarter to portfolios managed by his Greenwich, Connecticut-based hedge fund firm, Lone Pine Capital, in some cases taking new positions while boosting the size of others.
Several stocks joined the top 20 list of long positions held by the firms Lone Cypress long-short equity hedge fund, which manages roughly $5.7 billion, and Lone Cascade, the firms long-only fund, which now manages roughly $16 billion.
This is important, since the top 20 holdings account for more than 64 percent of the equity of Lone Cypress and more than 62 percent of Lone Cascade, according to the fourth-quarter letters sent to clients of the individual funds.
Last year Lone Cypress gained 8.7 percent, while its two smaller long-short funds Lone Kauri and Lone Tamarack returned 8.9 percent and 8.3 percent, respectively.
Lone Cascade, however, fell 1.2 percent last year.
In any case, Lone Pines portfolio changes reflect the firms larger investment strategy, which it breaks down into six broad views that the firm lays out in its fourth-quarter letters and that are heavily shaping the portfolios of all its funds.
Lone Pine hits on its long-held assertion that “the Internet is the single most important and disruptive economic phenomenon in the world . . . transforming almost every sector of the economy.”
And the firm repeats previous support for the Internet companies that are benefiting from the increase in mobile web use. It singles out, for example, enterprise software companies such as Adobe Systems and Microsoft Corp. “as they move to accretive subscription models.” Lone Pine stresses that Internet-driven investments remain the largest piece of its long portfolio.
By the same token, a second key view has led Lone Pine to short companies adversely affected by the Internet, which Mandel stresses has resulted in “the permanent and ongoing dismantling of longstanding economic models” in the advertising, media, retailing, technology and travel sectors, among others.
Third, Lone Pine has revamped its energy strategy. The firm concedes that it incorrectly believed its small number of investments in Cheniere Energy and Energy Transfer/Williams Cos. (the two companies agreed to merge in September) did not closely track the price of oil.
“While their take-or-pay contracts largely removed the oil or gas price level from the economic equation, fears of customer bankruptcies/abrogation of contracts and lack of access to capital markets weighed on their share prices,” Lone Pine explains in the reports.
Williams remains a top ten holding for Lone Cascade but is not among the top ten longs in Lone Cypress. Lone Pine also says it now has a position in Pioneer Natural Resources Co., an independent oil and gas company, which it says “should perform as the oil price rises and their cost of capital normalizes.” However, the stock did not crack the top 20 of either portfolio.
Lone Pine is also focusing on companies it thinks can create value by drawing on historically low interest rates to improve acquired businesses. The firm singles out convenience store operator Alimentation Couche-Tard; Altice, a Netherlands-based telecom giant; Constellation Software, which provides software and services to public and private-sector companies; discount retailer Dollar Tree; FleetCor Technologies, which provides various kinds of payment cards for businesses; clothing company Hanesbrands; specialty drug company Horizon Pharma; TransDigm Group, a maker of military aerospace components; drug giant Valeant Pharmaceuticals International; and credit card giant Visa.
Dollar Tree is now the fourth-largest holding of Lone Cypress and the sixth-largest position of Lone Cascade. Lone Pine had initiated a smaller stake in the company in the third quarter.
Visa became the 11th-largest position for the long-short fund in the fourth quarter. It is also the fifth-largest holding of the long-only fund, according to their respective letters. Alimentation Couche-Tard is among the top 20 holdings of Lone Cypress, while Valeant is a top 20 holding of the long-only fund.
Lone Pine also continues to embrace the growth of emerging-markets consumers. Many of our investments have a portion of their businesses driven by these consumers, it adds. Investments here include e-commerce site JD.com, a major holding in both funds, and technology holding company Tencent in China, along with three private sector banks in India: Axis Bank, HDFC Bank and Kotak Mahindra Bank.
Finally, the hedge fund firm asserts that the commodities boom over the past decade “is over” since it was largely driven by construction in China. “The resulting overcapacity hangover in businesses linked to this boom will take many years to cure, more than the normal cyclical downturn,” the firm explains. “Our short exposure in this area is driven by the view that the downturn will be longer and deeper than consensus expectations.”
