Apple, Alphabet Among Welch Capital’s Favorite Tech Stocks for Q3

New York-based long/short equity hedge fund Welch Capital Partners recently submitted its 13F filing with the SEC for the reporting period of June 30, revealing a U.S. equity portfolio containing $277.81 million worth of holdings. The fund was founded in July 1996 by Leighton Welch, who currently serves as its President and Senior Portfolio Manager. Mr. Welch holds both an A.B. and an M.B.A. from Harvard University and prior to starting Welch Capital Partners worked as a portfolio manager at Boykin Curry’s Eagle Capital Management. Welch Capital focuses on fundamental valuation and implements a private equity approach to public equity investing.

According to its latest filing, the fund’s equity portfolio had a quarterly turnover rate of 36.84% during the second quarter and its top-ten holdings at the end of June accounted for almost 42% of the value of its equity portfolio. The filing also revealed that stocks from the healthcare, finance and information technology sectors amassed 25%, 22% and 21% of the value of Welch Capital Partners’ equity portfolio respectively. In this article we’ll take a look at the fund’s top-five tech stock picks heading into the third quarter and will discuss their performance so far this year.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

#5. Oracle Corporation (NYSE:ORCL)

– Shares Owned by Welch Capital Partners (as of June 30): 187,399

– Value of Holding (as of June  30): $7.67 Million

Let’s start with Oracle Corporation (NYSE:ORCL), in which Welch Capital cut its stake by one-fourth during the second quarter. Shares of the enterprise software company have performed well this year, appreciating by almost 12%, but are still trading considerably below their 10-year high from late-2014. Last month, the company announced that it will be acquiring NetSuite Inc (NYSE:N) for $9.3 billion or $109 per share in an all-cash deal. Following the announcement, analysts have been divided on the implications of the deal. While some of them think that Oracle Corporation (NYSE:ORCL) is paying a hefty premium to acquire the company, other analysts feel that the premium is justified considering the strategic importance of the acquisition. Nevertheless, most analysts who track Oracle agree that the stock is undervalued, especially when one takes into account the company’s massive share buyback program and the fact that its cloud computing (SaaS, IaaS and PaaS) revenue will be able to offset its declining software license sales in its fiscal year 2017 ending May 31, 2017. Kerr Neilson‘s Platinum Asset Management lowered its stake in Oracle Corporation by 6% to 3.74 million shares during the first quarter.

#4. Alibaba Group Holding Ltd (NYSE:BABA)

– Shares Owned by Welch Capital Partners (as of June 30): 109,830

– Value of Holding (as of June  30): $8.73 Million

Alibaba Group Holding Ltd (NYSE:BABA) was a new entrant to Welch Capital’s equity portfolio during the second quarter. The Chinese e-commerce behemoth lost almost one-fourth of its market capitalization at the beginning of 2016 amid the broader turmoil in both the U.S. and China equity markets. However, its stock managed to recover most of those losses by March and is currently trading up by 12.35% year-to-date. Helping those gains was a spike on August 11 after the company reported its first quarter of fiscal year 2017 results. While the Street had expected the company to report EPS of $0.63 on revenue of $4.54 billion for the fiscal quarter, Alibaba Group Holding Ltd (NYSE:BABA) reported EPS of $0.74 on revenue of $4.84 billion. Earlier this month, the company announced that it is entering into a partnership with Taiwanese consumer electronics company HTC to advance virtual reality development with cloud computing solutions. On August 12, analysts at Royal Bank Of Canada reiterated their ‘Outperform’ rating on the stock while hiking their price target on it to $110 from $105. Jacob Rothschild‘s RIT Capital Partners reduced its holding in Alibaba by 41% to 190,000 shares during the second quarter.

We have the details on Welch Capital’s three favorite tech stocks on the next page.

#3. Pandora Media Inc (NYSE:P)

– Shares Owned by Welch Capital Partners (as of June 30): 828,530

– Value of Holding (as of June  30): $10.32 Million

Welch Capital reduced its holding in Pandora Media Inc (NYSE:P) marginally during the April-June period, by 7,940 shares. Shares of the music streaming company are currently trading flat for 2016, but significantly lower than the highs they made in early-2014. The company is currently facing tremendous pressure from activist investor Keith Meister‘s Corvex Capital, which recently petitioned to increase its stake in the company to 14.99% from 9.99%, so as to explore strategic options. In May, Corvex sent a letter to Pandora Media Inc (NYSE:P)’s Board asking it to “engage an independent investment bank with a fresh perspective and without any prior history of advising the company to advise on a value maximization process.” Most analysts who track the company aren’t too optimistic about its future prospects including analysts at Mizuho, who on August 4 reiterated their ‘Neutral’ rating and $11 price target on the stock, which represents potential downside of 17.35%.

#2. Apple Inc. (NASDAQ:AAPL)

– Shares Owned by Welch Capital Partners (as of June 30): 115,557

– Value of Holding (as of June  30): $11.05 Million

Apple Inc. (NASDAQ:AAPL) jumped 13 spots in Welch Capital’s equity portfolio during the second quarter to become its eighth-most valuable equity holding at the end of June after the fund increased its stake in the company by 67% during the period. Apple Inc. (NASDAQ:AAPL)’s stock has been hugely volatile this year, trading in the $89-$113 range. Nevertheless, it is currently trading flat year-to-date, owing to the recent gains it has enjoyed following the company’s third quarter of fiscal year 2016 earnings release. On August 12, the company acquired Seattle-based artificial intelligence and machine learning startup Turi for around $200 million. While some analysts think that Apple will be using Turi’s AI platform to improve its personal assistant software Siri, other analysts feel that this is a strategic acquisition that will help Apple to accomplish its long-term goal of becoming a cloud player. On the same day that it announced the acquisition, Bloomberg reported that Apple is planning the first significant overhaul to its line of Macbook Pro laptops in more than four years. Currently, most analysts and investors are eagerly waiting for the next iteration of the company’s main revenue driver, the iPhone, which is expected to be launched next month. Christopher R. Hansen‘s Valiant Capital also upped its stake in the company during the second quarter, by 3% to 999,800 shares.

#1. Alphabet Inc (NASDAQ:GOOGL)

– Shares Owned by Welch Capital Partners (as of June 30): 16,100 Class C Shares

– Value of Holding (as of June  30): $11.14 Million

Alphabet Inc (NASDAQ:GOOGL) continued to remain Welch Capital Partners’ largest tech holding at the end of second quarter, even though the fund inched down its stake in the company by 137 Class C shares during the period. Shares of the technology giant saw a huge rally last month in anticipation of the company’s second quarter results and are currently very close to their lifetime high of $813.88, which they made recently. Interestingly, this rally in the stock hasn’t been hindered by the numerous regulatory issues related to its business practices that the company is facing in several countries. On August 11, authorities in Russia fined the company $6.75 million for abusing its market position with Android. A day after that, reports emerged that antitrust authorities in South Korea are investigating the company on allegations that it violated the country’s anti-competition laws. Earlier this year, authorities in France raided Alphabet’s Paris headquarters as part of a €1.6 billion ($1.79 billion) tax fraud investigation. On August 8, Alphabet announced that it has agreed to acquire cloud-commerce platform Orbitera for an undisclosed sum of money.

Ferdinand Groos‘ Cryder Capital upped its stake in Alphabet Inc (NASDAQ:GOOGL)’s Class A shares by 25% to 13,690 during the second quarter, while also raising its position in the company’s Class C shares by 25% during that time, to 11,509.

Disclosure: None