The Top Tech Picks from Jonathon Jacobson’s $11 Billion Equity Portfolio

Highfields Capital Management is a Boston, Massachusetts-based, value-oriented long/short equity hedge fund founded by Jonathon Jacobson in 1998. Starting with $1.5 billion in assets under management (AUM), the fund has today grown to over $12 billion in AUM. Highfields Capital Management has been one of the best performing value-focused hedge funds of the last decade, boasting an average annual return of 12.6% between 1998 and 2010, compared to the S&P 500’s average annual return of 3.6% during the same period. The fund recently filed its 13F with the SEC for the reporting period of September 30. According to the filing, Highfields Capital Management’s U.S equity portfolio at the end of September was worth $11.33 billion and its top 10 equity holdings accounted for 51.80% of the value of its portfolio. In a previous article we discussed the fund’s top five stock picks at the end of the third quarter. In this article, we are going to zero in on Highfields Capital Management’s top five tech stock picks going into the fourth quarter.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#5 International Business Machines Corp. (NYSE:IBM)

– Shares Owned by Highfields Capital Management (as of September 30): 792,500

– Value of Holding (as of September 30): $114.9 Million

Tech giant International Business Machines Corp. (NYSE:IBM) has been unable to stem the tide of second-half losses in its stock, resulting in it currently trading down by 13% year-to-date. During the third quarter, when IBM shares declined by 10%, Highfields also reduced its stake in the stock by 12%. However, other hedge funds were more optimistic about the company, as the number of hedge funds covered by Insider Monkey that held a stake in International Business Machines Corp. (NYSE:IBM) increased by four quarter-over-quarter to 63 by the end of September. Recently, International Business Machines Corp.’s SoftLayer bare metal platform emerged as the winner of a test conducted by niche cloud platform provider VoltDB, with the help of an independent research firm to measure the performance and costs of the cloud platforms offered by the top players in the industry. With ownership of over 81 million shares of the company, Warren Buffett‘s Berkshire Hathaway was the largest shareholder of International Business Machines Corp. at the end of September among the funds we track.

#4 Paypal Holdings Inc (NASDAQ:PYPL)

– Shares Owned by Highfields Capital Management (as of September 30): 4.55 Million

– Value of Holding (as of September 30): $141.23 Million

Although Highfields Capital Management technically initiated a stake in Paypal Holdings Inc (NASDAQ:PYPL) during the third quarter, it’s important to highlight that the fund was already a major shareholder of eBay Inc (NASDAQ:EBAY) before the split of the companies was completed at the start of July. Since the split, shares of Paypal Holdings Inc (NASDAQ:PYPL) have largely remained range-bound, but it has nonetheless emerged as one of the most popular stocks among hedge funds, with 87 hedge funds in our database reporting a stake in the company as of the end of September. In its first financial report since becoming a separate trading entity, Paypal Holdings Inc reported EPS of $0.31 on revenue of $2.30 billion for the third quarter, versus analyst expectations of EPS of $0.27 on revenue of $2.27 billion. Legendary activist investor Carl Icahn’s Icahn Capital LP sold its entire stake of 46.3 million shares of eBay Inc (NASDAQ:EBAY) while reporting ownership of an equal number of shares of Paypal Holdings Inc (NASDAQ:PYPL) as of the end of September, showing clearly which half of the formerly combined entity it was most bullish on.

#3 eBay Inc (NASDAQ:EBAY)

– Shares Owned by Highfields Capital Management (as of September 30): 6.55 Million

– Value of Holding (as of September 30): $160 Million

Unlike Icahn, Highfields Capital became more bullish on the core business of eBay Inc (NASDAQ:EBAY) after the PayPal spin-off than it was earlier. Whereas the number of hedge funds covered by us that owned a stake in eBay Inc (NASDAQ:EBAY) fell to 83 from 99 during the third quarter, Highfields increased its stake in the company by 45% during the same period. Like PayPal, shares of eBay Inc (NASDAQ:EBAY) have also remained largely range-bound since the split. Most analysts that cover eBay Inc are apprehensive about the future growth of the company and remain neutral on the stock. On November 19, analysts at Cowen and Company reiterated their ‘Market Perform’ rating and $27 price target on the stock. Andreas Halvorsen’s Viking Global was one of the funds that initiated a stake in eBay Inc during the third quarter; it held nearly 7.26 million shares of the company as of September 30.

#2 Alphabet Inc (NASDAQ:GOOG)

– Shares Owned by Highfields Capital Management (as of September 30): 362,956

– Value of Holding (as of September 30): $220.83 Million

Alphabet Inc (NASDAQ:GOOGL)

– Shares Owned by Highfields Capital Management (as of September 30): 284,300

– Value of Holding (as of September 30): $181.5 Million

While Highfields reduced its stake in Alphabet Inc (NASDAQ:GOOG)’s class C stock by 25,000 shares during the third quarter, it kept its stake in Alphabet Inc (NASDAQ:GOOGL)’s class A stock constant during the same period. Each class of Alphabet Inc’s stock has enjoyed a terrific bull run since the start of the second-half of the year, and currently trade up by more than 44% year-to-date. According to recent reports, Alphabet Inc will soon re-launch Google Glass for enterprise customers, but analysts and tech experts are skeptical whether it will find any takers, especially after the first version of Google Glass failed to take off. The venture capital arm of the company, Google Ventures (GV), is reportedly looking to reduce its exposure to early-stage companies and cut down on seed funding. Ken Griffin‘s Citadel Investment Group increased its stake in the company’s class A shares by 60% to 803,793 shares during the third quarter.

 #1 Microsoft Corporation (NASDAQ:MSFT)

– Shares Owned by Highfields Capital Management (as of September 30): 15.54 Million

– Value of Holding (as of September 30): $688 Million

Finally, the decision of Highfields Capital Management to increase its stake in Microsoft Corporation (NASDAQ:MSFT) by 48% during the third quarter has paid off handsomely. Shares of the tech giant have climbed by over 20% during the fourth quarter, with most of those gains coming after Microsoft reported its fiscal year 2016 first quarter results on October 22. For the quarter, Microsoft Corporation (NASDAQ:MSFT) reported EPS of $0.67 on revenue of $21.66 billion, while analysts had expected it to report EPS of $0.58 on revenue of $21 billion. Highfields was not the only hedge fund that became increasingly bullish on the company during the third quarter. 113 of the more than 700 funds tracked by Insider Monkey reported owning a stake in the company as of the end of September, compared to 107 as of the end of June. Boykin Curry’s Eagle Capital Management also increased its stake in Microsoft Corporation during the third quarter and held over 30 million shares of the company at the end of September.

Disclosure: None