Coho Capital Partners just released their annual investor letter for 2016, and the fund made 6.3% for the year versus the S&P 500’s rise of 12%. Long term, Coho Capital has beaten the market, averaging 20.2% CAGR versus the S&P’s CAGR of 14.7% during the same time frame.
As a hedge fund, Coho Capital invests in inevitable, wide-moated businesses. We share Coho’s comments concerning five of its favorite investments, Alibaba Group Holding Ltd (NYSE:BABA), Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOG), Visa Inc (NYSE:V), and S&P Global Inc (NYSE:SPGI), below:
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When it comes to Alibaba Group Holding Ltd (NYSE:BABA), Coho Capital writes that Alibaba ‘has a lot of things we desire in a business: network effects, switching costs, scalability, and latent pricing power’. Coho notes that Alibaba has immense users — 493 million active monthly users across its three main platforms — and that the company is growing rapidly — revenue grew 54% year-over-year in the most recent quarter. Coho feels that Alibaba’s cloud division, Alicloud, and its partly owned finance unit, Ant Financial, are particularly promising. Alicloud is already at a $1 billion run rate and is growing fast. Meanwhile Alipay is China’s preferred online payment method. Coho Capital adds, “despite its dominant position and compelling growth opportunities, Alibaba does not have a demanding valuation. We think Alibaba’s core business should trade at least 25x forward earnings given its inherent operating leverage and projected annual sales growth of over 28% over the next few years. This results in a stock price of $114. If we add $15 per share for Alibaba’s investments and stake in Ant Financial, we arrive at a stock price of $129”. Of the 742 elite funds we track, 86 funds owned $5.9 billion of Alibaba Group Holding Ltd (NYSE:BABA) and accounted for 2.70% of the float on December 31, versus 104 funds and $8.27 billion respectively on September 30.
As it pertains to Facebook Inc (NASDAQ:FB), Coho notes that the company has ‘1.8 billion users with 1.2 billion of those users, or a sixth of humanity, using the service daily’. Due to its addicting nature and strong network effects (the greater the users, the more utility for Facebook surfers), the fund thinks that Facebook ‘is still early in its monetization opportunity with inherent operating leverage and multiple pathways to drive profits through software enhancements and enhanced data utilization’. Given that the global market for advertising is $700 billion and Facebook’s revenue is just 4% of that, the social network could have substantial room to grow. 146 top funds had a bullish position in Facebook Inc (NASDAQ:FB) as of the most recent 13-F reporting period.
On the next page, we find out what Coho Capital had to say about Alphabet Inc, Visa Inc, and S&P Global Inc.