Ralph Lauren, Gap, and More: Billionaire Stephen Mandel’s Favorite Retail Stocks

Stephen Mandel founded Lone Pine Capital in 1997 after leaving legendary investor Julian Robertson’s Tiger Management. This makes Mandel one of the “Tiger Cub” hedge fund managers, and because his performance over the last 15 years has generally been good he has become a billionaire. When we reviewed the fund’s recent 13F (see the list of Mandel’s stock picks) we noticed a number of retail stocks in Lone Pine’s portfolio. Specifically, five of the twenty largest positions- each over $350 million at that time- were retailers. Here are Lone Pine’s five largest retail holdings by market value according to the 13F:

Lone Pine owned 4.3 million shares of Ralph Lauren Corp (NYSE:RL) at the end of the quarter. The stock is a bit expensive in value terms, trading at 21 times trailing earnings, and in its most recent quarter revenue and earnings were both down from a year earlier. Fellow Tiger Cub John Griffin’s Blue Ridge Capital increased its own stake in Ralph Lauren by 75% between July and September (check out Griffin’s favorite stocks). Analyst expectations are that earnings will improve in 2013, bringing the forward P/E multiple to 16, but we still think that we would avoid the stock.

Another retailer among Lone Pine’s top ten picks was The Gap Inc. (NYSE:GPS), with the fund still owning over 16 million shares despite being a seller during the quarter. Gap’s stock has had a great year, up 71% from this point in 2011, but because net income has also skyrocketed the earnings look fairly good: Gap carries trailing and forward P/Es of 15 and 12, respectively. We are a bit concerned that revenue growth has lagged- which suggests that earnings growth might not be sustainable- but the company only needs modestly higher numbers to justify its valuation. ESL Investments, managed by billionaire Eddie Lampert, also sold shares but Gap was still its third largest holding at over 19 million shares (find more of Lampert’s favorite stocks).