The 13F filings of Stephen Mandel, who manages Lone Pine Capital, reveal that his large-cap stock picks (those with market caps between above $20 billion) returned, on average, 0.51% per month between 1999 and 2012. This is better than the 0.32% monthly total return for the S&P 500 during the same time period. If we adjust for risk by utilizing Carhart’s four factor model, however, his large cap stocks generated a more modest 13 basis points of alpha. More recently, between 2008 and 2012, Mandel’s large-cap stock picks look less impressive, generating average monthly alpha of only four basis points. In general, our research indicates that hedge funds, like other investors, cannot generate enough outperformance to justify their high fees when it comes to larger cap stocks. Our research also shows that hedge fund managers are generally good investors when it comes to small cap stocks. We believe investors can generate better returns if they avoid hedge funds’ large and mid-cap picks and focus on their smaller-cap stocks. Through a similar approach, Insider Monkey’s small-cap hedge fund strategy returned 88% since the end of August 2012 and outperformed the market by nearly 50 percentage points (see the details here). Now, we will take a closer look at Mandel’s top five large cap picks.
Cognizant Technology Solutions Corporation (NASDAQ:CTSH) is Mandel’s top large cap stock holding, with his 10.7 million shares valued at approximately $1.1 billion. Although he trimmed his stake in the provider of IT consulting and business process services by 10% during the fourth quarter of 2013, he maintains a sizable stake. In fact, Mandel is the largest shareholder among the hedge funds we track; other managers invested in the stock include Andreas Halvorsen of Viking Global, Alan Fournier of Pennant Capital Management and John Armitage of Egerton Capital Limited.
Second on Mandel’s list is Priceline.com Inc. (NASDAQ:PCLN), with his 884,756 shares worth roughly $1.0 billion. Again, Mandel cut his stake somewhat during the fourth quarter, but the online travel agency remains a large portion of his portfolio, accounting for more than 4% of his total equity holdings. Ken Griffin of Citadel Investment Group, Chase Coleman of Tiger Global Management and David Shaw of D.E. Shaw are other hedge fund managers that are bullish on the stock.
Baidu Inc. (NASDAQ:BIDU) is number three on Lone Pine’s large cap list, with its 5.4 million shares worth about $960 million. During the fourth quarter, the fund’s stake increased by 2% in the Chinese Internet service provider, which makes up over 4% of its equity positions. Other hedge funds that are long the stock include Philippe Laffont’s Coatue Management, William Von Mueffling’s Cantillon Capital Management and Kerr Nelison’s Platinum Asset Management.
Microsoft Corp. (NASDAQ:MSFT) is fourth on the list, with Mandel’s 25.5 million shares valued at approximately $955 million. He initiated a long position in the software giant during the fourth quarter, joining other hedge fund managers that own the stock, such as Jeffrey Ubben of ValueAct Capital, Donald Yacktman of Yacktman Asset Management and Boykin Curry of Eagle Capital Management.
Last on the top five list of large cap holdings is Valeant Pharmaceuticals International Inc. (NYSE:VRX), in which Mandel owns 7.8 million shares worth approximately $910 million. Valeant is a $41.2 billion market cap drug company that specializes in eye health, dermatology, and neurology. Other shareholders include Jeffrey Ubben of ValueAct Capital, Andreas Halvorsen of Viking Global and Glenn Greenberg of Brave Warrior Capital.