Here Are This Top Hedge Fund’s Conviction Technology Picks

John Horseman founded Horseman Capital, a London-based long/short equity hedge fund, about a decade-and-a-half ago. Because of Horseman’s astute stock picking, the fund has grown by several orders of magnitude since it started, as it now has an equity portfolio worth $393 million as of September 30. Although Horseman Capital focuses primarily on financial stocks, it also has sizable stakes in technology companies too. In this article, we take a closer look at Horseman’s recently filed 13F positions in tech stocks NetEase Inc (ADR) (NASDAQ:NTES), Infosys Ltd ADR (NYSE:INFY), Alphabet Inc (NASDAQ:GOOGL), Paypal Holdings Inc (NASDAQ:PYPL), and Check Point Software Technologies Ltd. (NASDAQ:CHKP).

Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).

#5 NetEase Inc (ADR) (NASDAQ:NTES)

Shares held (as of September 30): 2,900
Total Value (as of September 30): $348,000
Percent of Portfolio (as of September 30): 0.09%

Although shares of NetEase Inc (ADR) (NASDAQ:NTES) have been volatile recently as the wild gyrations in the Chinese markets have affected the stock, the equity price of the developer of Westward Journey Online and other MMORPG’s is up by 44.28% year-to-date as management executes and revenues grow. Online gaming is a major growth market in China, as is the mobile game market, and shares of NetEase trade at a reasonable 17.29-times forward earnings. Helping sentiment is NetEase’s September board announcement of a new share repurchase program of up to $500 million. Horseman Capital kept its position in NetEase steady at 2,900 shares throughout the third quarter.

#4 Infosys Ltd ADR (NYSE:INFY)

Shares held (as of September 30): 18,800
Total Value (as of September 30): $359,000
Percent of Portfolio (as of September 30): 0.09%

Although Horseman Capital trimmed its position in Infosys Ltd ADR (NYSE:INFY) by 34% in the third quarter, it still owned 18,800 shares at the end of September. Infosys recently reported solid second quarter earnings, in which the outsourcing giant earned $0.23 per share on revenues of $2.39 billion, beating estimates by $0.01 per share and $50 million, respectively. While the strong dollar had a 5.5% negative impact on sales, the company’s expenses could benefit from the dollar’s rally versus the Rupee given Infosys’ many Indian employees. Cliff Asness‘ AQR Capital Management owned 11.89 million shares of Infosys at the end of June.

#3 Check Point Software Technologies Ltd. (NASDAQ:CHKP)

Shares held (as of September 30): 5,500
Total Value (as of September 30): $436,000
Percent of Portfolio (as of September 30): 0.11%

Horseman Capital increased its position in Check Point Software Technologies Ltd. (NASDAQ:CHKP) by 3,000 shares to 5,500 duirng the third quarter, after the software security company handily beat its second quarter earnings estimates by $0.04 per share and revenue expectations by $2.42 million. Deferred revenue growth was strong while guidance was in-line. The company also spent $245 million on share buybacks. With a forward P/E of 17.88 versus the NASDAQ’s forward P/E of 17.75, shares aren’t cheap, but analysts think there is plenty of growth ahead, with an average next-five-year EPS ratio of 10.78%. Given network security is so important to businesses around the world, growth could surprise on the upside. David Blood and Al Gore‘s Generation Investment Management owned 5.81 million shares of the company at the end of June.

#2 Paypal Holdings Inc (NASDAQ:PYPL)

Shares held (as of September 30): 400,700
Total Value (as of September 30): $12.44 million
Percent of Portfolio (as of September 30): 3.16%

The company Elon Musk co-founded is now fully independent, having spun off from eBay Inc (NASDAQ:EBAY) in July. With the right M&A and investment in R&D, Paypal Holdings Inc (NASDAQ:PYPL) could also be one of the world’s largest financial institutions by market capitalization over the next decade or two, as online finance technologies are only beginning to catch their stride. Analysts are bullish on the payment company’s propsects. One analyst has a ‘Strong Buy’ rating, 24 have a ‘Buy’ rating, five have a ‘Sell’ rating, and nine have a ‘Hold’ rating. Overall, analysts have a consensus price target of $42.38 per share, giving shares an upside potential of 21.13%. Horseman Capital is bullish too, as Paypal was a new position for the fund in the third quarter.

#1 Alphabet Inc (NASDAQ:GOOGL)

Shares held (as of September 30): 26,500
Total Value (as of September 30): $16.92 million
Percent of Portfolio (as of September 30): 4.30%

While its name might be different, Alphabet Inc (NASDAQ:GOOGL) is still the same dominant search company that it was a year ago. Alphabet Inc/Google has the majority market share in the most lucrative ad market of all: online search, and contrary to what bears had hoped, the company’s search/ad business is growing – third quarter paid clicks increased by 23% year-over-year and rose by 6% quarter-over-quarter. Rather than just spending billions on world-changing technologies such as automated cars and artificial intelligence, management is also spending billions on shareholders, with the company having recently announced the authorization of a $5 billion share buyback program. Investors hope the buyback announcement will be the first of many to come.  Given its wide moat and reasonable forward P/E of 20.57, shares of Alphabet Inc are a good bet for long-term holders.

Disclosure: None