While the first-half of 2016 was dismal for the hedge fund industry overall, it was particularly disastrous for Larry Chen and Terry Zhang’s Asia-focused long/short equity hedge fund Tairen Capital. Analysis done by Insider Monkey on Tairen Capital’s U.S. equity holdings in companies worth over $1 billion at the end of March shows that those stocks delivered a weighted average loss of 35.2% during the second quarter. Though some of those losses can be attributed to the poor performance of Chinese equities during that period, one can’t put the blame solely on the turmoil in the Chinese stock markets for the staggering loss that Tairen’s long positions delivered, as the Shanghai Composite Index lost only 2.7% in the second quarter.
Large drawdowns are not uncommon for hedge funds. In the past, we have seen some notable hedge funds post large losses and then bounce back from those lows in a short period of time. However, to recover from a drawdown of over 30% requires a Herculean effort, as a fund would have to post gains in excess of over 50% just to recover all the losses that it has suffered. Looking at Tairen’s latest 13F filing, it seems that the team running the fund is well aware of this and made some major changes to its portfolio during the second quarter as a result. According to the filing, Tairen Capital’s U.S. equity portfolio experienced a very high quarterly turnover rate of 77.17% during the second quarter and became considerably top-heavy, with its top-10 holdings accounting for almost 85% of its portfolio’s value. In this article, we’ll take a look at the five major bullish moves made by Tairen Capital during the second quarter and will discuss how those stocks have been performing of late.
At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).
#5 Yelp Inc (NYSE:YELP)
– Shares Owned by Tairen Capital (as of June 30): 306,100
– Value of Holding (as of June 30): $9.29 Million
Let’s start with Yelp Inc (NYSE:YELP), which was a new entrant to Tairen Capital’s equity portfolio during the second quarter. Yelp’s stock is currently trading up by over 37% year-to-date, owing partially to the better-than-expected second quarter results that the company reported last month. However, the stock is still down by over 50% from the highs it made at the beginning of 2014. While analysts had expected the company to report a loss of $0.07 per share on revenue of $169.82 million for the second quarter, Yelp declared EPS of $0.01 on revenue of $173.40 million. Despite the positive numbers and the recent rally that the stock has seen, some analysts still have a negative outlook on it, as they think its valuation suggests that the company is highly profitable and will remain so in the future. During the second quarter, the number of hedge funds covered by Insider Monkey long Yelp increased by 12 to 45, while the aggregate value of their holdings in the company jumped by $348 million to $953.73 million. Another hedge fund that initiated a stake in Yelp Inc (NYSE:YELP) during the second quarter was Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali’s Alta Park Capital, which purchased 104,000 shares of the company.
#4 NVIDIA Corporation (NASDAQ:NVDA)
– Shares Owned by Tairen Capital (as of June 30): 235,200
– Value of Holding (as of June 30): $11.06 Million
NVIDIA Corporation (NASDAQ:NVDA) made its debut in Tairen Capital’s equity portfolio during the second quarter and was the fund’s 13th-most valuable holding at the end of June. Tairen Capital was not the only hedge fund that became bullish on the company during that period, as the number of hedge funds tracked by us that reported owning a stake in the company rose by seven to 50, while the aggregate value of their holdings in it soared by more than 50% to 41.46 billion. Shares of the visual computing company have performed remarkably well this year, rising by 87%. On September 1, while speaking at the annual Baidu World conference, NVIDIA Corporation (NASDAQ:NVDA)’s CEO revealed that the company will be partnering with the Chinese search giant to build a self-driving car platform whose algorithm-based operating system would include the ability to perceive and react to different types of road environments as well as cloud-based HD maps. Most analysts who track NVIDIA are bullish on it, including analysts at Summit Redstone, who initiated coverage on the stock with a ‘Buy’ rating and a $68 price target on August 31.
We’ll analyze Tairen Capital’s three favorite U.S.-traded equities on the next page.
#3 Yum! Brands, Inc. (NYSE:YUM)
– Shares Owned by Tairen Capital (as of June 30): 207,139
– Value of Holding (as of June 30): $17.17 Million
Tairen Capital initiated a stake in Yum! Brands, Inc. (NYSE:YUM) during the second quarter, though the overall popularity of the company among the hedge funds in our database took a beating during the period, as its ownership among them declined by five to 46 and the aggregate value of their holdings in it shrank by $180 million to $4.52 billion. Yum! Brands, Inc. (NYSE:YUM)’s stock witnessed a severe correction after it made its lifetime high of $95.90 last year. However, it has made back most of those losses in the last few months and is again trading above the $90 mark. The company is currently engaged in spinning off its beleaguered China unit, Yum China, which is expected to be completed by the end of next month. For its fiscal year 2016 third quarter, analysts are expecting the company to report EPS of $1.10 on revenue of $3.49 billion, compared to EPS of $1.00 and revenue of $3.43 billion that it had reported for the same quarter of last year. Jamie Mendola‘s Pacific Grove Capital boosted its stake in Yum! Brands by 91% during the second quarter, to 208,401 shares.
#2 Amazon.com, Inc. (NASDAQ:AMZN)
– Shares Owned by Tairen Capital (as of June 30): 28,700
– Value of Holding (as of June 30): $20.54 Million
Like the three stocks we have already discussed, Amazon.com, Inc. (NASDAQ:AMZN) was also a new entrant into Tairen Capital’s equity portfolio during the second quarter. The e-commerce behemoth lost a significant chunk of its market cap at the beginning of 2016, but managed to bounce back fairly quickly and is currently trading up by 13% year-to-date. Though the company failed to make a mark in the Chinese e-commerce market despite launching its operations in the country more than a decade ago, it has managed to become the dominant player in the Indian e-commerce market within four years of launching its operations in the country. On August 21, analysts at KeyCorp reiterated their ‘Overweight’ rating and $847 price target on Amazon’s stock, which represents potential upside of 8.8%. Amazon.com, Inc. (NASDAQ:AMZN) was the second-most popular stock at the end of June among the hedge funds covered by Insider Monkey, 145 of whom reported holdng a stake in the company. Though billionaire Andreas Halvorsen’s Viking Global reduced its stake in Amazon by 5% to 3.27 million shares during the second quarter, it continued to remain the largest shareholder of Amazon at the end of June among those funds.
#1 Alibaba Group Holding Ltd (NYSE:BABA)
– Shares Owned by Tairen Capital (as of June 30): 1.38 Million
– Value of Holding (as of June 30): $110.10 Million
Alibaba Group Holding Ltd (NYSE:BABA) is the only stock covered in this article in which Tairen Capital didn’t initiate a stake during the second quarter. However, the 13-fold increase that the fund made to its stake in the company during that time pushed Alibaba to the top spot in its equity portfolio at the end of June. Shares of the Chinese e-commerce giant recently broke above the $100 mark after trading below it for more than one-and-a-half years and are currently trading up by almost 26% in 2016. Most of the gains that the stock has seen this year came last month after the company reported much better than expected numbers for its fiscal year 2017 first quarter. Analysts had expected it to report EPS of $0.63 on revenue of $4.57 billion, but Alibaba Group Holding Ltd (NYSE:BABA) instead declared EPS of $0.74 on revenue of $4.84 billion. During the April-to-June period, the number of hedge funds in our system long Alibaba inched up by two to 69. Billionaire Ken Fisher‘s Fisher Asset Management reduced its stake in the company by 5% to 3.22 million shares during the second quarter.