Billionaire Tiger Cub Robert Citrone of Discovery Capital Management made some waves recently after he predicted a rather sharp market crash. In a letter to investors, Citrone said, “we believe we are in the midst of the market correction we have been expecting. It will likely persist over the next 3-4 months and be the largest correction since the 2008 crisis.” Given that Discovery Capital specializes in macro-trading and managed around $12.4 billion at the beginning of the year, the fund is well-suited for predicting such events.
Thus, we’ve put together a list of Discovery Capital’s top picks, which are Alibaba Group Holding Ltd (NYSE:BABA), Broadcom Ltd (NASDAQ:AVGO), Sprint Corp (NYSE:S), Tempur Sealy International Inc (NYSE:TPX), and Amazon.com, Inc. (NASDAQ:AMZN). We’ll discuss them in this article and see why Citrone might like them even should the market turn bearish.
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 the details here).
#5 Amazon.com, Inc. (NASDAQ:AMZN)
– Shares Held (as of June 30): 228,437
– Total Value of Position (as of June 30): $163.47 million
Given the fund’s prediction of a serious retracement ahead, Discovery understandably cut its stake in Amazon.com, Inc. (NASDAQ:AMZN) by 59% in the second quarter to just over 228,000 shares. Given that Amazon’s earnings yield isn’t as high as that of other tech giants, some traders think its stock is potentially more vulnerable to a market correction. Amazon wouldn’t be able to buy as much stock back using its earnings/cash flow during a correction as a company like Apple Inc. (NASDAQ:AAPL) would. Discovery Capital did hold on to some of its shares in Bezos’ company though, likely for the long-term. Correction or not, Amazon will dominate e-commerce and the cloud for the years to come. Eventually, and if done right, both segments will pay handsome dividends for shareholders.
#4 Tempur Sealy International Inc (NYSE:TPX)
– Shares Held (as of June 30): 3.11 million
– Total Value of Position (as of June 30): $172.15 million
Citrone’s fund bumped up its holding in Tempur Sealy International Inc (NYSE:TPX) by 18% in the second quarter to just over 3.1 million shares, good for a value of $172.15 million on June 30. Although Tempur Sealy is technically a consumer discretionary company (and likely to see demand fall during a recession), investors do have some interesting reasons to remain long, especially in terms of relative value/potential optionality. Peer Mattress Firm Holding Corp (NASDAQ:MFRM) was bought out in early-August at a 115% premium. Analysts have a price target of $84.40 per share on Tempur Sealy, predicting about 10% upside.
Three more stocks that Rob Citrone likes despite his doom-and-gloom thesis are detailed on the next page.