Tiger cub Steve Mandel of Lone Pine Capital continued experiencing frustration in the second quarter, with their longs again lagging the market averages, according to an investor letter reviewed by ValueWalk.

Steve Mandel Lone Pine Capital

Steven Mandel’s investing strategy

Mandel’s strategy involves favoring either stocks that compound value through organic earnings growth or companies that are “undergoing favorable management and strategic changes not yet realized in their valuations.” Mandel says that while this strategy is not currently in favor, the approach “has characterized our investing since our founding and we believe strongly in its long-term validity.” Mandel specifically points to Tesla Motors Inc(NASDAQ:TSLA) and Zillow Inc(NASDAQ:Z) as “Blue sky” stories -stocks with little earnings, but high valuations.

Year to date Lone Cypress fund is down 2.9 percent, the Lone kauri fund down 3.9 percent and the Lone Cascade down 0.9 percent, performing below the market but positive nonetheless.

“Our errors in 2014 have largely been ones of omission, not commission,” the letter said. The business performance of the fund’s largest long bets “generally” met the fund manager’s expectations, but the problem, they say, is “the market has been rewarding other types of investments.”

The types of stocks that have been leading the market are those benefiting from the easy-money policies of global central banks which largely is absent from Lone Pine portfolios.  Artificially low global interest rates are the investing “elephant in the room” that are pushing investors out the risk curve, arguably creating mispricing of risk (e.g., junk bond spreads), the letter said.  At the same time this makes short-selling difficult (the result of M&A, activists, recapitalization). “How this great central bank experiment in quantitative easing (QE) ends is unknown, but we suspect not well,” the letter said. ”We are poised to take advantage of those companies treading water without swimsuits when this tide eventually goes out.”

Steven Mandel’s hedge fund holdings

Should the economic environment favor different types of stocks, Lone Pine may benefit to a more significant degree. Current examples of “compounders” that the hedge fund holds include Baidu Inc (ADR) (NASDAQ:BIDU), Cognizant Technology Solutions Corp (NASDAQ:CTSH), Mastercard Inc (NYSE:MA), Michael Kors Holdings Ltd (NYSE:KORS), Priceline Group Inc (NASDAQ:PCLN), SBA Communications Corporation (NASDAQ:SBAC) and Tencent Holdings Ltd (HKG:0700) (OTCMKTS:TCEHY), while portfolio investments undergoing changes yet to be fully reflected in their valuation include Adobe Systems Incorporated (NASDAQ:ADBE), Comcast Corporation (NASDAQ:CMCSA) (NASDAQ:CMCSK), The Gap Inc. (NYSE:GPS), Global Logistic Properties Ltd (SGX:MC0) (OTCMKTS:GBTZF), McGraw Hill Financial Inc (NYSE:MHFI) and Microsoft Corporation (NASDAQ:MSFT), the hedge fund reported.

The letter does not specify any specific short positions, but according to Novus Research Lone Pine has over $700 million worth of shorts in Europe as the chart below shows.

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In news from inside the fund, Scott Phillips, a managing director,  and Ben Gettinger, an associate analyst, are leaving the firm.  Phillips will pursue opportunities in portfolio management while Gettinger will be attending Harvard Business School.  Brett Shaheen will be joining the firm as an analyst.

Novus Research, a platform which collects and analyzes data on more than 4,000 hedge fund portfolios, Stan Altshuller, co-founder, points out (see more details here)

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  1. Steve Mandel tends to add value by sizing his positions. His actual weighted portfolio simulated based on public positions outperformed an equal-weighted version by over 100% since 1999.

 

  1. Even though his portfolio value has ballooned, his liquidity profile is still healthy: Most of the portfolio can be liquidated in 60 days assuming he represents only 20% of average daily volume (90day) for each stock he sells.

How the stable liquidity? Only two possible levers to pull in the face of sky-rocketing AUM – increase position count or move up the M-Cap spectrum. We can clearly see that this is not due to increasing number of positions, but rather to moving up the market cap spectrum. The median Market Cap of his book has increased dramatically:

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While the securities count has actually decreased.

 

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But what does that mean? It is a problem for Steve to move up the Mcap spectrum? Let’s dig deeper.

Incredibly his batting average is higher for large- and mega- caps than his smaller capitalization stocks:

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Even more importantly his Win/Loss ratio follows a similar pattern (meaning he makes a lot more on each winner than he loses on each loser in his larger cap names)

The Win / loss ratio is allocation-specific, meaning it uses contribution rather than pure returns. So let’s look at pure ROIC, or returns on his portfolio broken down by Mcap bucket:

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Incredibly, this manager is actually BETTER OFF fishing in the large-cap pond. This is interesting because most managers have higher ROIC on the smaller cap names.

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Now let’s talk sectors. Running a similar analysis on his sector performance  we can see a remerging preference for Consumer Discretionary

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This is great for Steve and his investors as he is clearly good at picking stocks in that industry as evidenced by the high return numbers and favorable batting average and win/loss ratios

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