Billionaire Stephen Mandel’s Top Long-Term Picks

Steve Mandel’s Lone Pine Capital, whose mission is to invest in innovation, is one of the largest funds in the hedge fund universe. As of September 30, the fund had an equity portfolio worth over $24.5 billion, giving Mandel plenty of resources to do due diligence and market-beating research. Over the years, Lone Pine managed to outpace many of its rivals, averaging returns of around 20% a year since the fund’s inception. In this article, we take a closer look at some of Mandel’s top long term picks that have been in his equity portfolio for at least three years, including Priceline Group Inc (NASDAQ:PCLN), TransDigm Group Incorporated (NYSE:TDG), Equinix Inc (NASDAQ:EQIX), Visa Inc (NYSE:V), and Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA).

Moreover, we will see if Mandel’s peers in the hedge fund universe share the same views about these picks. Why do we pay attention to hedge fund sentiment? 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 has 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 TransDigm Group Incorporated (NYSE:TDG)

Shares held (as of September 30): 2.22 million
Total Value (as of September 30): $470.58 million
Percent of Portfolio (as of September 30): 1.92%

TransDigm Group Incorporated (NYSE:TDG) reported an excellent fourth quarter, with EPS of $2.83 on revenue of $809.79 million. Earnings exceeded estimates by $0.27 per share while sales beat expectations by $4.37 million. Fiscal 2016 outlook is solid, with management expecting adjusted earnings per share of $10.33-$10.57 on revenue of $3.07-$3.12 billion. Sales could be larger than guidance next year, as TransDigm recently announced it will acquire fellow aircraft component maker Breeze-Eastern for around $206 million. Among the other hedge fund investors in TransDigm are Lee Ainslie’s Maverick Capital and Andreas Halvorsen’s Viking Global.

#4 Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)

Shares held (as of September 30): 3.28 million
Total Value (as of September 30): $535.2 million
Percent of Portfolio (as of September 30): 2.18%

It has been a good year for Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) shareholders, as the stock is up by 44.67% year-to-date. The company has beaten analyst profit and revenue expectations every quarter this year, with Ulta most recently reporting third-quarter EPS of $1.11 on revenue of $910.7 million, exceeding bottom line estimates by $0.06 per share and top line expectations by $30.7 million. Comparable-store sales jumped by 12.8%, as the strong U.S. economy and low crude prices unleash consumer spending. John Griffin‘s Blue Ridge Capital was long 1.01 million shares of Ulta at the end of September.

#3 Visa Inc (NYSE:V)

Shares held (as of September 30): 9.77 million
Total Value (as of September 30): $680.54 million
Percent of Portfolio (as of September 30): 2.77%

Visa Inc (NYSE:V) recently raised $16 billion to finance the company’s $23.3 billion acquisition of Visa Europe Ltd in a deal that will help Visa unify its brand and contribute to its earnings. Both equity and bond investors are optimistic after the capital raise and Visa shares are up 17% year-to-date, while the company’s 30-year bonds trade for only 1.32 percentage points higher than similarly-dated Treasury bonds. Warren Buffett’s Berkshire Hathaway has a holding of 9.89 million shares of Visa as of the end of the third quarter.

#2 Equinix Inc (NASDAQ:EQIX)

Shares held (as of September 30): 2.65 million
Total Value (as of September 30): $724.72 million
Percent of Portfolio (as of September 30): 2.95%

With almost two-thirds of internet traffic data center-related and more people using the internet than ever before, data center demand has skyrocketed. Given that Equinix Inc (NASDAQ:EQIX) is a REIT that provides data center services to connect and protect information assets of corporations all around the world, it’s not surprising that Equinix shares have also been red-hot. Shares of the stock have gained 36% year-to-date and could have some additional upside, as the analysts at SunTrust have a ‘Buy’ rating and $345 price target.

#1 Priceline Group Inc (NASDAQ:PCLN)

Shares held (as of September 30): 992,252
Total Value (as of September 30): $1.23 billion
Percent of Portfolio (as of September 30): 5.00%

China is a very important segment for Priceline Group Inc (NASDAQ:PCLN). The provider of online travel and travel-related reservation and search services recently invested $500 million in Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), giving Priceline an option to own almost 15% of the company. As the Chinese economy recovers and its middle class gains purchasing power, Priceline’s acquisition could pay off in spades. Hedge fund sentiment towards Priceline is bullish, as 86 funds from our database were long the stock at the end of the third quarter, up from 71 funds a quarter earlier.

Disclosure: none