Billionaire Lee Ainslie’s Best Ideas for 2016

Billionaire Lee Ainslie‘s Maverick Capital was among the few large equity hedge funds that bucked the trend and performed well last year. According to our analysis of its stock picking performance, the fund not only outperformed the broader market in 2015, but also managed to beat several of its hedge fund peers by a wide margin. We estimate the stock picking performance of a fund by calculating the weighted average returns of its positions in companies worth over $1 billion, based on the size of those positions at the beginning of each quarter. Based on that metric, Maverick Capital’s qualifying long positions returned 6.4% in 2015, while in comparison the long positions of Carl Icahn’s Icahn Capital LP, David Einhorn’s Greenlight Capital, and Seth Klarman’s Baupost Group registered losses of 17.3%, 24.9% and 27.7%, respectively, during the same time. The fund recently submitted its 13F filing for the fourth quarter with the SEC, which revealed that its U.S equity portfolio at the end of 2015 was worth nearly $7 billion and that over half of that was jointly allocated to stocks from the consumer discretionary and information technology sectors. Since the fund performed rather well in 2015, in this post we will be going through five of its best stock ideas for 2016.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas (see the details here).

Santander Consumer USA Holdings Inc (NYSE:SC)

– Shares Owned by Maverick Capital (as of December 31): 14.17 million

– Value of Holding (as of December 31): $223.74 million

Let’s start with vehicle finance company Santander Consumer USA Holdings Inc (NYSE:SC). Despite Maverick Capital increasing its stake in the company by 22% during the fourth quarter, it slid four spots quarter-over-quarter to become the fund’s 12th-largest equity holding at the end of December, due to the nearly equal 22.3% drop in its stock price. Santander Consumer USA Holdings Inc (NYSE:SC) has lost another 35% of its market capitalization already in 2016, with most of those losses coming after it reported its fourth quarter results on January 27. While analysts were projecting the company to report EPS of $0.56 on revenue of $1.70 billion for the quarter, it declared EPS of $0.19 on revenue of $1.26 billion, falling well short of both estimates. Following the earnings release, several analysts reduced their price targets on the stock, including analysts at Jefferies Group, who on February 1 slashed their target price by nearly half, to $15 from $29, despite maintaining a ‘Buy’ rating on the stock. Fir Tree, founded by Jeffrey Tannenbaum, also increased its stake in the company during the fourth quarter, by 95% to over 8.00 million shares.

Adobe Systems Incorporated (NASDAQ:ADBE)

– Shares Owned by Maverick Capital (as of December 31): 2.98 million

– Value of Holding (as of December 31): $280 million

Amid a 12.9% rise in Adobe Systems Incorporated (NASDAQ:ADBE)’s stock during the fourth quarter, Maverick Capital increased its stake in the company by 72%. Shares of Adobe Systems Incorporated (NASDAQ:ADBE) posted consistent gains between 2012 and 2015, rising by nearly 230% over that period. However, the rally seems to have finally run out, as Adobe shares are trading down by 13% year-to-date. While most analysts are still bullish on the stock in spite of its long bull run and recent decline, some are skeptical about the future growth of the company. According to them, most of Adobe Systems Incorporated’s growth in the last few years has come from acquisitions, while its organic growth has been subdued. They also think that the margins of the company are unlikely to improve and point out that it is currently trading at a very expensive valuation of 65.85-times its trailing price-to-earnings multiple. Jeffrey Ubben‘s ValueAct Capital continued to hold over 14 million shares of Adobe Systems Incorporated at the end of December.

ARRIS International plc (NASDAQ:ARRS)

– Shares Owned by Maverick Capital (as of December 31): 11.64 million

– Value of Holding (as of December 31): $355.93 million

After initiating its position in ARRIS International plc (NASDAQ:ARRS) during the third quarter, Maverick Capital increased its stake by another 47% during the fourth quarter. ARRIS Group, Inc. became parent company ARRIS International after the former completed its $2.1 billion acquisition of Pace PLC on January 4. The entertainment and communication technology company has lost 20% of its market capitalization since the transaction was completed. On February 17, ARRIS International plc (NASDAQ:ARRS) reported its fiscal year 2016 fourth quarter results, declaring EPS of $0.62 on revenue of $1.10 billion, topping analysts’ estimate of EPS of $0.47, but falling short of revenue estimates of $1.13 billion. Though the revenue for the quarter came at the low end of the company’s original guidance, its margins and non-GAAP earnings came above its guidance due to R&D tax credits and year-end software license sales.

Pfizer Inc. (NYSE:PFE)

– Shares Owned by Maverick Capital (as of December 31): 11.3 million

– Value of Holding (as of December 31): $364.73 million

As with ARRIS International, Maverick Capital also initiated a stake in Pfizer Inc. (NYSE:PFE) during the third quarter and raised it significantly during the fourth quarter, by 62%. Shares of the pharma giant are down considerably since it announced its plan to acquire Allergan plc Ordinary Shares (NYSE:AGN) for $160 billion last November, including having declined by 8.21% so far this year. On February 8, a day after it reported its fourth quarter results, Pfizer Inc. (NYSE:PFE) announced its plans to reorganize its business after the Allergan merger and also revealed the names and designations of the executives who will be leading the merged entity. On February 17, the company revealed that it has settled a seven-year-old lawsuit against the pricing practices of its Wyeth unit, whose liabilities it inherited following its acquisition of Wyeth in 2009, for $784 million. Cliff Asness‘ AQR Capital Management increased its stake in Pfizer Inc. by 3% to almost 17.45 million shares during the fourth quarter.

Sabre Corp (NASDAQ:SABR)

– Shares Owned by Maverick Capital (as of December 31): 13.06 million

– Value of Holding (as of December 31): $365.2 million

Maverick Capital increased its stake in Sabre Corp (NASDAQ:SABR) by 22% during the fourth quarter, helping it to climb two spots quarter-over-quarter and become the fund’s third-largest equity holding at the end of December. Shares of Sabre Corp (NASDAQ:SABR) saw significant value erosion during the first few weeks of 2016, but have recouped most of those losses after the company reported its fourth quarter results on February 9 and now trade down by only 2.3% year-to-date. It declared EPS of $0.27 on revenue of $758.8 million for the quarter, topping the EPS of $0.22 on revenue of $646.10 million it reported for the same quarter of the previous year. Following the earnings release, analysts at Oppenheimer reiterated their ‘Outperform’ rating on the stock on February 10, but lowered their price target on it to $32 from $34. Clint Carlson‘s Carlson Capital also increased its stake in the company by 22% during the fourth quarter, to 1.14 million shares.

Disclosure: None