Luxor Capital Group Scored Big Last Year; Here’s Where It’s Headed Next

Even though the overall hedge fund industry has been lagging and underperforming passive investors and the broader market in general, some groups within the industry are showing signs of regaining momentum. Quantitative hedge funds have gained popularity a couple of years ago and are still going strong and now equity-focused hedge funds are also showing signs of recovery. As correlations across the stock market became less pronounced, stockpickers are once again enjoying larger returns.

One fund that has turned things around is Luxor Capital Group, an event-driven hedge fund led by Christian Leone. According to Bloomberg, Luxor Capital Group’s main fund gained 3.6% in February and the firm overall saw returns of 7.8% in the first two months of 2018. FT said last year that Luxor was also one of the top performers last year, with double-digits returns in the January-September period. The fund made an impressive comeback, considering that it lost 19% in 2015.

At Insider Monkey, we also calculate a fund’s returns, but only focusing on the stocks that it is invested in, thus determining the performance solely based on the fund’s stock picking. In turn, this helps us identify whether or not we should follow a particular fund as part of our investment strategy. The strategy involves identifying the best-performing hedge funds and focusing on the best stocks that these funds are collectively bullish on. The stocks from our strategy are emailed to the subscribers of our premium newsletters every quarter. Between February 16 and May 16, our Best Performing Hedge Fund Strategy was up by 6.9%, beating the S&P 500 ETF (SPY) by 6.8 percentage points. Since its inception in May 2014, this strategy has returned over 90%, outperforming the SPY by more than 35 percentage points.

Based on our calculations, Luxor’s long positions (we only take into account companies with market caps above $1.0 billion) had a weighted average return of 13.2% in the first quarter of 2018, which puts it in the middle of our best-performing hedge funds list. However, in the 12-month period ended March 31, Luxor’s stock picks returned 51.3%, which places it on the top 10 performers list, which is led by Wildcat Capital Management and Opaleye Management. Luxor’s performance is mainly attributed to the huge growth of its top picks: Altaba Inc (NASDAQ:AABA), MINDBODY Inc (NASDAQ:MB), and IAC/InterActiveCorp (NASDAQ:IAC). The fund’s holdings in these companies amass around a quarter of the total value of its equity portfolio as of the end of March.

Moreover, during the first quarter of 2018, Luxor Capital Group initiated several new positions and substantially boosted its exposure to a couple of its older holdings. With this in mind, on the next page we are going to take a closer look at Luxor’s investments in Ally Financial Inc (NYSE:ALLY), Extended Stay America Inc (NYSE:STAY), Amazon.com, Inc. (NASDAQ:AMZN), Autodesk, Inc. (NASDAQ:ADSK), and Facebook, Inc. (NASDAQ:FB) and will try to determine whether following Luxor into this companies is a good idea.

In Ally Financial Inc (NYSE:ALLY), Luxor Capital has been holding shares since 2016, but during the first three months of 2018 it more than doubled the stake to 4.11 million shares valued at $111.46 million. Ally Financial Inc (NYSE:ALLY) is a digital financial services company with assets of around $170 billion and it stands to benefit immensely from the recent rollback of regulations. One of the items on the new bill is raising the asset threshold above which banks are subjected to tough federal regulations to $250 billion from $50 billion. The raised threshold allows Ally Financial Inc (NYSE:ALLY) to escape the yearly stress tests and scrutiny that mandates them to keep extra cash and it will be able to raise dividends or buy back stock without the go-ahead from the Fed. Ally Financial also received another boost from the government last month, when the House and Congress voted to scrap a policy installed in 2013 by the Consumer Financial Protection Bureau to prevent auto lenders from charging minorities higher rates for auto loans. The new legislation helps auto lenders like Ally Financial Inc (NYSE:ALLY) by allowing it to charge higher fees.

Extended Stay America Inc (NYSE:STAY) represents a new position in the fund’s equity portfolio as it acquired 5.14 million shares worth $107.05 million. The stock of Extended Stay America Inc (NYSE:STAY) has appreciated by 15% since the beginning of the year amid better-than-expected EPS and revenue for the last two reported quarters and portfolio revamping. Last year, the company launched a plan to dispose of some undeperforming properties and sold five properties for $77 million. So far this year, it sold 25 properties with 2,400 rooms to Three Wall Capital for $114 million in February. Under the terms of the agreement, Extended Stay America will continue to manage these properties over a period of 20 years. Three Wall Capital will build 15 additional ESA hotels over the next seven years. In March, Extended Stay America Inc (NYSE:STAY) also sold a hotel in Texas for $44.8 million. Overall, the plan involves selling 150 properties by 2021 and by the end of the year it plans to sell 45 more hotels.

During the first quarter, Luxor boosted its stake in Amazon.com, Inc. (NASDAQ:AMZN) by some 47,200 shares, having amassed around 70,000 shares valued at $101.35 million. Amazon.con, Inc. (NASDAQ:AMZN) continues to build momentum in most areas it operates in. According to Mary Meeker, a partner at Kleiner Perkins Caufield & Byers, who presented her internet trends report for the Code Conference, Amazon.com, Inc. (NASDAQ:AMZN) continues to dominate the US eCommerce space with a market share of 28%. Overall, eCommerce sales advanced by 16% last year, up from a 14% growth in 2016. The tech behemoth is also enjoying strong success in the smart speaker segment, with the Amazon Echo installed base growing to over 30 million in the last three months of 2017 from 20 million a quarter earlier. However, in the first quarter of 2018, Amazon Echo sales were surpassed by Alphabet Inc (NASDAQ:GOOGL)’s Google Home, according to a Canalys report. Google shipped 3.2 million Home and Home Mini devices versus 2.5 million Echo devices shipped by Amazon.com, Inc. (NASDAQ:AMZN).

Autodesk, Inc. (NASDAQ:ADSK) is another new position in Luxor Capital Management’s equity portfolio, with the fund holding almost 571,800 shares worth $71.80 million. At the end of May, Autodesk, Inc. (NASDAQ:ADSK) reported its first-quarter results, which showed revenue grow by 15.3% on the year to $559.90 million. It was the first quarter of double-digit revenue growth since 2015. In addition, the revenue was $2.50 million higher than anticipated, while EPS of $0.06 topped the consensus estimate of $0.03. For the current quarter, Autodesk, Inc. (NASDAQ:ADSK) expects revenue between $595 million and $605 million and EPS between $0.13 and $0.16, versus consensus estimates of $598.50 million and $0.18, respectively.

Last but not least, Facebook, Inc. (NASDAQ:FB) was also added to Luxor’s equity portfolio, with the fund disclosing a $34.36 million position that contains 215,000 shares. Earlier this month, Facebook, Inc. (NASDAQ:FB) has been the subject of a note by KeyBanc analyst Andy Hargreaves, who wrote that by 2020 the primary growth driver for Facebook, Inc. (NASDAQ:FB) will be Instagram. Hargreaves estimates that Instagram will generate 27% of Facebook’s incremental add revenue this year, but this figure will growth to 58% by 2020. He also forecasts that Instagram will have over 1.40 billion monthly active users and revenue of more than $22 billion.

Disclosure: none