Adage Capital Partners’ Favorite Tech Stocks

The underperformance of the hedge fund industry over the past few quarters has of late led several investors to question and criticize the excessive fees (2% and 20%) charged by hedge funds. At numerous institutional investor conferences this year, some of the titans of the industry have admitted that the fees charged by funds, especially those who have consistently failed to generate any alpha, needs to come down. While most leading hedge fund managers share that view regarding fees, they have so far failed to walk the talk by reducing the fees charged by their own funds. Amid this anomaly in the industry, one prominent hedge fund that stands out is Phill Gross and Robert Atchinson‘s Adage Capital Management, which based on the value of assets it manages is currently the world’s largest stock hedge fund.

Unlike most hedge funds Adage Capital Management charges performance fees only after it crosses a hurdle during a year, the hurdle being the returns generated by S&P 500 during that year. Moreover, it also refunds up to half of that performance fees it collects for a year if it fails to beat the S&P 500 in the subsequent year. While this free structure has made the long only hedge fund quite popular among institutional investors over time, the fund hasn’t taken any new money from investors for the past many years.  According to Adage Capital Management’s latest 13F filing, its US equity portfolio at the end of March was worth $36.87 billion. The filing also revealed that  among sectors, the fund was most heavily invested in technology while entering the second quarter with stocks from that sector accounting for 17% of the value of its equity portfolio at the end of first quarter. Considering the fund’s preference, in this post, we are going to take a look at Adage Capital Management’s top five tech stock picks and discuss their performance in 2016 so far.

We track prominent investors and hedge funds 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 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Amazon.com, Inc. (NASDAQ:AMZN)

– Shares Owned by Adage Capital Management (as of March 31): 556,083

– Value of Holding (as of March 31): $330.11 million

The 12% fall in its stock during the first quarter coupled with Adage Capital Management reducing its stake in the company by 6% during the same period led Amazon.com, Inc. (NASDAQ:AMZN) to lose eight spots quarter-over-quarter in the fund’s equity portfolio and become its thirteenth largest equity holding at the end of December. Though the stock performed poorly in Q1, it has managed to recoup all of those gains in the current quarter and currently trades up 2% year-to-date largely due to the rally it has seen since Amazon.com, Inc. (NASDAQ:AMZN) reported its first quarter numbers, beating the estimates by a huge margin. The company has been in the news after Republican nominee Billionaire Donald Trump accused it of a ‘huge antitrust problem’ and alleged that it has used the Washington Post, which is owned by Jeff Bezos, as a ‘tax shelter’. However, none of this has impacted Amazon.com’s stock and analysts continue to remain optimistic about the company’s future prospects. On May 18, analysts at KeyBanc reiterated their ‘Overweight’ rating and $800 price target on the stock. Hedge funds that upped their stake in the company during the first quarter included Alex Snow‘s Lansdowne Partners, which brought its holding up by 19% to 2.2 million shares.

#4 Alphabet Inc (NASDAQ:GOOG)

– Shares Owned by Adage Capital Management (as of March 31): 482,502

– Value of Holding (as of March 31): $359.44 million

Alphabet Inc (NASDAQ:GOOGL)

– Shares Owned by Adage Capital Management (as of March 31): 437,309

– Value of Holding (as of March 31): $333.62 million

Adage Capital Management lowered its holding in both class A and class C shares of Alphabet Inc during the first quarter. While it reduced its stake in Alphabet Inc (NASDAQ:GOOG) by 1%, it reduced its stake in Alphabet Inc (NASDAQ:GOOGL) by 6% during that period. Shares of the search giant recently took a big hit after the company reported its first quarter numbers. Owing largely to that slump, Alphabet Inc (NASDAQ:GOOG) is currently trading down 7.95% year-to-date and Alphabet Inc (NASDAQ:GOOGL) is currently trading down by 8.68% year-to-date. At its recently concluded annual I/O conference, Alphabet unveiled several new products including a conversational assistant called ‘Google Assistant’ and a messaging app called ‘Allo’. However, the highlight of the show was the streaming Android Instant Apps technology, which analysts believe can be a major winner for the company going forward as it allows users to search for and use apps while remaining confined to the Chrome mobile browser. Because it does so, Google can now show apps in search results and as hence increase its mobile advertising revenue. Harris Associates reported holding 1.98 million class C shares of Alphabet in its last 13F filing.

#3 Facebook Inc (NASDAQ:FB)

– Shares Owned by Adage Capital Management (as of March 31): 3.55 million

– Value of Holding (as of March 31): $405.4 million

Moving on, Adage Capital Management upped its stake in Facebook Inc (NASDAQ:FB) by 10% during the first quarter. Shares of the social media giant have kept their uptrend intact this year, rising by 10.48% so far in 2016. While most analysts continue to remain bullish on the company, in the past few months some analysts have become skeptical about the consistent rally in its stock. They believe that at current levels the stock is significantly overvalued based on both parameters – a) traditional valuation metrics and b) relative to its peers. Moreover, they also argue that Facebook Inc (NASDAQ:FB) has posted record financial numbers consistently in the past few quarters only because its user base continues to grow and not because the company has been able to monetize its user base efficiently. On May 16, the company announced that apart from ads for its own platform, it will also start selling video ads for other companies for a cut of the revenues. James Parsons‘ Junto Capital Management made a fourfold increase to its stake in Facebook during the first quarter to 716,800 shares.

#2 Microsoft Corporation (NASDAQ:MSFT)

– Shares Owned by Adage Capital Management (as of March 31): 11.67 million

– Value of Holding (as of March 31): $644.53 million

Though Adage Capital Management reduced its stake in Microsoft Corporation (NASDAQ:MSFT) by 6% during the first quarter, the company continued to remain the fund’s second-largest equity holding at the end of that period. Like Alphabet Inc’s stock, shares of Microsoft Corporation (NASDAQ:MSFT) also took a big hit post the company announcing its first quarter numbers. However, so far they have managed to not convincingly fall below their very important technical support near the $50 mark, even though they are facing negative momentum and are currently trading down 10% year-to-date. While analysts agree that at current levels the stock might look overvalued, they also reason that due to the growth being displayed by its cloud business, Azure, Microsoft Corporation can quickly grow into its current valuation. On May 18, the software giant sold the feature business it inherited from its acquisition of Nokia to FIH Mobile (a subsidiary of Foxconn) and HMD Global for only $350 million. Harris Associates also initiated a stake in Microsoft Corporation during the first quarter; it purchased nearly 17.88 million shares of the company.

#1 Apple Inc. (NASDAQ:AAPL)

– Shares Owned by Adage Capital Management (as of March 31): 8.46 million

– Value of Holding (as of March 31): $922.06 million

Finally, aided by Adage Capital Management increasing its stake in it by 5%, Apple Inc. (NASDAQ:AAPL) continued to hold on to its ‘numero uno’ spot in the fund’s equity portfolio at the end of the first quarter. Adage was not the only large hedge fund that increased its stake in Apple amid a downturn in the stock during the first quarter. Several other hedge funds did the same thing including billionaire David Einhorn‘s Greenlight Capital, which brought its holding in the company up by 31% to 8.21 million shares. However, the calculations of all of these hedge funds seems to have gone awfully wrong as Apple Inc. (NASDAQ:AAPL)’s stock has plummeted heavily in this quarter and are currently trading down over 11.27% year-to-date. Despite this slump, most analysts continue to remain bullish on the stock. The 47 leading analysts and research firms that track the stock currently have an average rating of ‘Buy’ and an average price target of $123.50 on it, which represents a potential upside of 30% from the stock’s current trading price.

Disclosure: None