Billionaire Investor Predicting A Huge Market Collapse, Betting On These Stocks

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.

#3 Sprint Corp (NYSE:S)

– Shares Held (as of June 30): 40.28 million
– Total Value of Position (as of June 30): $182.46 million

Like Tempur Sealy, Discovery was also bullish on Sprint Corp (NYSE:S) in the second quarter, as the fund inched up its stake in the company by 6% from March 31 to June 30. Although Sprint is arguably one of the lower-tier telecoms, without the benefit of scale that AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) realize, or the growth that T-Mobile US Inc (NASDAQ:TMUS) is experiencing, many investors believe that Sprint could eventually merge with another player and unlock substantial value for shareholders. In terms of overall hedge fund ownership, 20 funds in our system were bullish on Sprint Corp (NYSE:S) at the end of June, unchanged quarter-over-quarter.

#2 Broadcom Ltd (NASDAQ:AVGO)

– Shares Held (as of June 30): 1.27 million
– Total Value of Position (as of June 30): $196.64 million

As 2016 has been a very good year for semiconductor stocks, Citrone’s fund rung the cash register when it came to its Broadcom Ltd (NASDAQ:AVGO) position, trimming its stake in it by 29% in the second quarter. Given its large size, there are fewer acquisitions that Broadcom can seek out that will make a big difference in terms of its bottom-line. The stock is also not exactly screaming-cheap anymore, with a forward P/E of over 12.5. Although Broadcom’s stock isn’t likely to fall off a cliff during a correction (given the stock’s beta of around 1), Broadcom won’t be immune to ‘risk off’ sentiment either.

#1 Alibaba Group Holding Ltd (NYSE:BABA)

– Shares Held (as of June 30): 3.89 million
– Total Value of Position (as of June 30): $309.35 million

Discovery Capital also cut its stake in Alibaba Group Holding Ltd (NYSE:BABA) in the second quarter, this time by 35% to just under 3.9 million shares. Theoretically, Alibaba shares could behave idiosyncratically and show some relative strength in the event of a market crash because its stock isn’t part of as many indexes as other major tech companies such as Apple. Alibaba’s economic fortunes also depend on China rather than the United States. Nevertheless, in today’s increasingly algorithmic-dominated world, theory and reality rarely match. Like Amazon, Alibaba does have great long-term promise given its dominant position in e-commerce in China, with its still-growing economy. 69 funds that we track had a long position in Alibaba Group Holding Ltd (NYSE:BABA) as of the most recent 13F reporting period, up by two from the previous one.

Disclosure: None