RiverPark recently released its Large Growth Fund Q2’18 Investor Letter, discussing the fund’s second quarter performance as well as presenting its viewpoint on Facebook, Inc. (NASDAQ: FB) and other companies. In this article, we’re going to focus on the fund’s comments about Facebook, which is still a hot social networking stock all of the negative headlines.
Here is what RiverPark said about Facebook in the letter:
Facebook: FB shares rebounded from the 1Q18 data privacy scandal and were our top contributor for the quarter. The stock’s strength was driven by extremely strong 1Q18 results in which revenue increased 49% to $12 billion. Despite all of the negative headlines, monthly and daily average users each increased 13%, and average revenue per user increased 31%. Although the company substantially increased spending on innovation, internal reporting and new initiatives to bolster its data protection in response to recent events, the company still leveraged operating expenses, posting robust operating income growth of 64%.
Facebook’s business model remains among the most impressive in our portfolio with enormous global scale – over 1.4 billion people use Facebook every day – and extraordinary profitability – 84% gross margins, 46% adjusted operating margins and over $5 billion of free cash flow generated in just the first quarter. Future growth opportunities also abound as the company’s core business remains in a strong growth mode, while the company has significant nascent opportunities to monetize its Instagram, Messenger and WhatsApp platforms. While we do not anticipate that the recent media or regulatory scrutiny will have a long-term negative impact on the company’s growth, we will continue to monitor these issues. In the meantime, the relevance of the company’s platform to its users has continued to grow and, in our opinion, the FB management team has done a commendable job in both adapting to the heightened scrutiny and continuing to drive strong fundamental performance. At less than 20x forward earnings, we continue to find FB’s stock to be extremely attractive.
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Facebook shares are down 2.18% since the beginning of this year. Over the past three months, the stock of the social networking giant has fallen 4.46%. Whereas the share price has moved up 6.11% over the past 12 months. FB has a consensus average target price of $205.96 and a consensus average recommendation of BUY, according to analysts polled by FactSet. On Monday, the stock was closed at $177.46.
Meanwhile, Facebook is a very popular stock among hedge funds tracked by Insider Monkey. As of the end of the second quarter of 2018, there were 193 funds in our database holding shares of the social networking company, including Immersion Capital, Taconic Capital, and Cat Rock Capital.
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.
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