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.