Billionaire Stephen Mandel’s New Stock Pick

Billionaire Stephen Mandel’s Lone Pine Capital disclosed a 5.1% stake in Cooper Companies (COO) on Monday. Lone Pine Capital crossed the 5% threshold on June 8^th. The stock traded between $75 and $82 on the week of June 4^th. Lone Pine didn’t report owning any shares in Cooper Companies at the end of the first quarter. Currently they have 2.4 million shares of the company. The stock’s total transaction volume was a little over 5 million shares during the week of June 4^th. It is very likely that Lone Pine started acquiring COO’s shares prior to June 4^th when the stock was trading around $85.

Columbus Circle Investors is another hedge fund with a large bullish position in the stock. The hedge fund had $139 million invested in the stock at the end of March. Lone Pine’s position in the stock is currently valued at $193 million. Billionaire Jim Simons, healthcare-focused hedge fund Healthcor Management, and billionaire Steven Cohen are among the stock’s other shareholders but their stakes are in the $20-25 million range (see Steve Cohen’s top picks).

This is a relatively medium size position for Stephen Mandel. Lone Pine had $838 million invested in Google (GOOG), $776 million in Priceline (PCLN), and $755 million in Apple (AAPL) at the end of the first quarter. We don’t find Cooper Companies as an extremely compelling investment idea. Cooper Companies is primarily a contact lens company, receiving more than 80% of its revenue from this segment. The company also manufactures and markets surgical instruments used in obstetrics and gynecology. This segment’s contribution is slightly more than 15%. The stock is growing its earnings at around 10% annually and is expected to make slightly more than $5 per share in 2012. Based on estimated 2012 earnings and the company’s guidance, the stock’s PE ratio is 16. The company recently announced second quarter results, making $1.12 per share vs. analysts’ expectation of $1.20.

Contact lens industry is a slow-growth industry. According to Contact Lens Institute (CLI), worldwide sales of contact lenses increased 4% in 2011. The market leaders in this industry are Johnson & Johnson (JNJ) and Novartis (NVS), followed by Cooper Companies. This is a highly competitive industry and COO is a relatively risky bet. We prefer Pfizer (PFE) over COO simply because of its cheap valuation and high dividend yield. Cooper Companies is 60% more expensive than Pfizer in terms of its PE ratio, yet its EPS growth rate is only 5 percentage points higher. Pfizer’s nearly 4% dividend yield is also high enough for conservative long-term investors. Cooper’s dividend yield is next to nothing.

Could Stephen Mandel know something about the stock that we don’t? Insiders in the company haven’t bought any stock during the past 52 weeks and they have been exercising their stock options as recently as April. If there were “rumors” or developments about the sale/takeover of the company, these insiders would have at least postponed the sale of their stocks/options. We don’t think there is any evidence of bullish insider sentiment in the stock (see the insider transactions here), so our recommendation is neutral.