3 Of Our Favorite Stocks In Steve Mandel’s Portfolio by Luke Neely, Better Investing Habits
Steve Mandel is a Tiger Cub who founded Lone Pine Capital in 1997. He invests in public equity markets across the globe using a long/short strategy. The firm uses a fundamental, bottom-up process to build each portfolio. He returned ~23% during the past 11 years. He has a higher turnover than most of the investors we follow, however, his results and ability to seek out high-quality investments speaks for itself.
Here are three companies from Steve Mandel‘s portfolio that we find interesting:
Steve Mandel – Visa (V) – FCF Yield of 3.14%, EV/EBIT of 19.90, Dividend Yield of 0.63%, No Debt
Visa is the global leader in credit / debit card transactions. Based on credit/debit cards in circulation, dollar volume, and transaction, Visa has the largest electronic payments platform. 50% of all transaction are debit card related and this number is expected to grow.
Barriers to entry can be tough as competitors need multiple things to compete adequately: brand recognition, stringent fraud systems in place, and merchant/customer acceptance. Visa’s relationship with financial institutions and merchants allows them to extend no credit, which in turn, allows them to assume no credit risk. In addition, Visa’s main revenue model provides built-in inflation protection because its fees are based on the percentage of the total purchase.
Visa has a fortress balance sheet with $6 billion in cash and very little debt. This allows them plenty of opportunity and flexibility to take advantage of strategic acquisitions, organic growth, and repurchasing of shares. It will be very difficult to kill this company.
The company’s shares are up 22% over the past 12 months and trade at $79.31 per share (near all-time highs). Shares are not overly appealing at current levels with a FCF Yield of 3.14%, EV/EBIT of 19.90, and Dividend Yield of 0.63%. Shares appear to be fully valued at current levels offering very little in a margin of safety. Our preference is to wait for lower prices, but investors could do worse in owning this compounder at current levels.
At the very least, this high-quality company with excess FCF flow generation and very little debt should be kept on your watch list.
Steve Mandel – MasterCard (MA) – FCF Yield of 2.91%, EV/EBIT of 21.59, Dividend Yield of 0.64%
Very similar to Visa and these two businesses make it very difficult to pick a clear cut winner in the space. Both are likely to do well.
MasterCard operates the second largest payment network that connects, bank, consumers, and merchants in over 210 countries. They have over 2.2 billion active cards, 51 billion purchase transactions, and $4.5 trillion in gross dollar volume. Operating margins are well over 50% and the company generates excess free cash flow.
There is little doubt that a secular growth opportunity remains from paper to plastic (digital). ~85% of transactions today are done using cash and checks. MasterCard is at the forefront of this movement. We have little doubt that MasterCard will continue to perform well as a leader in the growing payments industry, regardless of the volatile economies worldwide and currency fluctuations. The loss of USAA was not a great sign, but new deals with TD Bank should help with other deals down the line.
MasterCard has a fortress balance sheet with $5.10 billion in cash and very little debt. This allows them plenty of opportunity and flexibility to take advantage of strategic acquisitions, organic growth, and repurchasing of shares in the years to come. It will be very difficult to kill this company.
The company’s shares are up 15% over the past 12 months and trade at $99.94 per share (near all-time highs). Shares do appear attractive at current levels with a FCF Yield of 2.91%, EV/EBIT of 21.59, and Dividend Yield of 0.64%. However, it’s difficult to ignore the high margin, free cash generation power of the business model. We feel the market is accurately reflecting the intrinsic value of the business at current levels with e FCF yield of ~3%. We don’t have much of an edge here at current levels, but we are watching it very closely. If/when the stock falls out of favor on Wall Street, we would be big buyers of the company.
Shares appear to be relatively overvalued using various metrics. However, the long wave of growth for this company is tremendous based off of increased personal consumption and the shift from paper to electronic-based transactions. This is a company to keep on your watch list and wait for the right opportunity. Obviously, we like the company at lower levels (and with less “rosiness” priced into the stock). With that said, we believe investors could do little wrong investing in MasterCard at current levels at a slow and steady pace over time (and hopefully at lower levels).
Steve Mandel – Cheniere Energy (LNG)
Cheniere Energy is the owner / operator of the Sabine Pass LNG terminal in Louisiana, a natural gas liquefaction and export facility four miles from the Gulf Coast. The company hopes to benefit from increased global demand for LNG with demand forecasted to from at a 5.7% CAGR by 2025. The company has already secured federal permits for U.S. natural gas to be exported overseas. They have signed deals to purchase gas for over 20 years. But the company’s looming debt load and additional capital expenditures has become a concern for many investors as shares have dropped 32% in the past year alone.
On August 6, 2015, Icahn disclosed an 8.18% “active” stake in stock and options with his filing of a 13D. Icahn used fairly standard language in the 13D filings, stating “acquired their positions in the Shares in the belief that the Shares were undervalued. The Reporting Persons intend to have discussions with representatives of the Issuer’s management and board of directors relating to the Issuer’s operations, capital expenditures, financings and executive compensation. The Reporting Persons may also seek shareholder board representation if appropriate.”
Using traditional valuation metrics, the company is grossly overvalued (near impossible to value). Let’s make no mistake about it…this is a speculative play as the company is riddled in debt and has never generated net income, let alone free cash flow. But alas, the future of the company does not benefit from the economics or misdeeds of the past.
Regardless, this is a speculative bet on the future of the U.S. as an exporter of natural gas. It’s a very tempting and appealing story given the supply of natural gas in the U.S. and the potential long wave of growth for a company with first-mover and geographic advantages. Regardless, it’s difficult to justify an investment (even with activists and great investors circling the company). Now, with that said, it’s ok to speculate in potential game changers like Cheniere, just make sure it’s a small percentage of your portfolio.
About The Author:
Lukas Neely is a former Hedge Fund Portfolio Manager and author of the Amazon #1 bestselling book (valuation), Value Investing Edge: A Value Investors Journey Through The Unknown. His work has been cited on such sites at TED, Wall Street Journal, Bloomberg, ValueWalk, CBS, GuruFocus, and Seeking Alpha. He is also the co-founder of Vantage Research, the provider high-quality investment idea generation, serving investment funds, portfolio managers, and sophisticated investors. Lukas is also the co-founder of BetterInvestingHabits.org.
If you’d like to learn more about Value Investing Edge: A Value Investor’s Journey Through The Unknown, grab the kindle version here, physical version here.
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