Polen Capital is bullish on both Adobe Systems Incorporated (NASDAQ: ADBE) and Align Technology, Inc. (NASDAQ: ALGN). The investment management firm loves the two companies as they were the top performers in the second quarter of 2018, similar to the first quarter. In its Q2 investor letter, Polen Capital discussed Adobe Systems and Align Technology as well as other companies. So, in this article, we’re going to take a look the firm’s comments about these two companies.
Adobe Systems
Adobe continues to see prolific revenue and earnings growth from both its Digital Media and Experience Cloud offerings. The former is Adobe’s decades-old legacy business that is still growing at a blistering pace (nearly 30% recently) as it remains in a near monopoly position in the market for content creation tools. The Experience Cloud helps companies measure the effectiveness of digital content creations. It is unique to have content creation and measurement tools under one roof. Recently, Adobe also announced they will be acquiring Magento for $1.7 billion, bringing a leading e-commerce tools platform to the company. E-commerce was a missing piece that Adobe needed to help companies all the way from content creation, to measurement and commerce.
While still one of our largest holdings, we trimmed our Adobe position in the quarter from 10.0% to 8.5% purely for risk management purposes. We used the proceeds to add to our Microsoft position, bringing its weighting up to 8.5% from just under 7%.
Align Technology
Align had a very strong quarter on the back of very robust growth of its clear aligners with general practitioners and orthodontists, in the United States and abroad, for teenagers and adults. This quarter there was an orthodontic conference where we expected to see the first real competitive products from big companies like Danaher and 3M. As we expected, their first iterations are where Align was 10 years ago. We see little if any risk to Align’s growth from these offerings. In fact, Align is accelerating product development to address many more use cases for its aligners and to bring in patients that might never have considered braces.
We see many years of high growth to come for this uniquely positioned company that is disintermediating an outdated method of tooth movement (cementing braces to teeth).
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Shares of Adobe Systems Incorporated (NASDAQ: ADBE) are up 48.29% since the start of this year. The share price has jumped 11.95% over the past three months and 82.84% over the past 12 months. The stock has a consensus average target price of $289.08 and consensus average recommendation of ‘OVERWEIGHT’, according to analysts polled by FactSet. ADBE was closed at $268.47 on Wednesday. Meanwhile, ADBE is a popular stock among hedge funds tracked by Insider Monkey. As of the end of the second quarter of 2018, there were 67 funds in our database with position in the creative software maker.
Align Technology, Inc. (NASDAQ: ALGN), which manufactures 3D digital scanners and clear aligners used in orthodontics, has been performing well so far this year, with the share price is up 68.35% year-to-date. The stock has moved up 13.21% over the past three months and 112.65% over the past 12 months. ALGN has a consensus average target price of $411.13 and consensus average recommendation of ‘OVERWEIGHT’, according to analysts polled by FactSet. The stock was closed at $389.23 on Wednesday. Unlike Adobe, Align Technology isn’t a very popular stock among hedge funds covered by Insider Monkey. Our database shows that the stock was held by 67 funds as of the end of the second quarter of 2018.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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