- Lone Pine Capital’s two funds — Lone Cypress and Lone Cascade — each lost more than 2% in the third quarter thanks to the shift away from momentum, or growth, stocks, the firm said in a letter to its investors.
- The funds are still up double-digits for the year, and Lone Pine said in its letter that it doesn’t expect a temporary market shift to value stocks to be a sign of things to come.
- “Much has been written about the multi-year underperformance of ‘value’ stocks, with an expectation of a reversion to the mean. We believe that structural changes in the economy, driven in part by technology, make this unlikely,” the letter states.
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The market-rattling momentum-stock crash in September did not spare billionaire Stephen Mandel Jr.’s Lone Pine Capital.
The $19 billion hedge fund firm saw its two funds — Lone Cypress and Lone Cascade — drop 2.1% and 2.6%, respectively, for the quarter, paring year-to-date returns down to 16.9% and 19.2%, a letter to investors said. The firm cited the sudden decline in momentum stocks as reason why, but told investors that it does not plan on changing its strategy.
Lone Pine declined to comment.
“We have no intention of rotating capital out of strong multi-year investments because they have recently done well, or because ‘growth’ has outperformed ‘value.’ We continue to invest in the best opportunity set we can find globally, totally independent of what factor bucket they fall in,” the letter states.
The firm, which Mandel founded in 1997 and stepped back from running the portfolio of this year, later on in the letter states that it is bearish overall on value stocks, particularly the idea that they will surge after lagging growth stocks for several years.
“Much has been written about the multi-year underperformance of ‘value’ stocks, with an expectation of a reversion to the mean. We believe that structural changes in the economy, driven in part by technology, make this unlikely,” the letter states.
Businesses in industries like advertising, energy, banks, and retail, among others, that are considered value stocks because of what they trade at compared to their earnings are not going to make the same revenues in the future thanks to technological disruption, Lone Pine states.
“The backward-looking nature of factor investing thus overstates the value of ‘value.’ Past is not prologue,” the letter reads.
The firm was able to buy some companies at a discount because of the momentum drop as well, the letter states, specifically Netflix, a favorite of many hedge-fund managers, and Global Payments.
Other buys in the quarter included United Healthcare and Humana, which have fallen because of talk of a Medicare-for-all system being implemented should a Democratic president take office in 2020.
Lone Pine likes the two healthcare companies specifically because of the chance for Medicare-for-all, according to the letter. The two companies are leaders in Medicare Advantage area, where seniors have a more personalized healthcare plan compared to the classic Medicare options. The letter states that more than half of eligible seniors chose Medicare Advantage over Medicare in the most recent sign-up period, and more than 10% of seniors in swing states like Florida, Michigan, Ohio, and Pennsylvania use it.
“We believe both Humana and United Healthcare have ‘double play’ potential, with earnings continuing to grow at a mid- teens or better rate and the earnings multiple returning to historic levels as single-payer fears subside.”
Lone Pine also announced that it is opening up Lone Cascade to the private markets, starting next year. Lone Cypress has roughly 3% of its assets in the private markets, and “we have found a number of attractive private investments” in direct-to-consumer businesses, payments, and software arenas. Neither fund, the letter states, will be able to invest more than 5% of its assets in the private markets.
Fellow Tiger Cubs like Viking Global, Coatue, and Tiger Global have been increasingly involved in the private markets. A recent letter from Viking stated the firm was hiring more people for its team.