By Jake Mann
There are three reasons why Stephen Mandel should be on any stock market enthusiast's "legendary investor" shortlist. For starters, the man's hedge fund, Lone Pine Capital, manages roughly $18 billion in assets. This makes Mandel one of the 20 largest fund managers by AUM. Secondly, Stephen Mandel is a Tiger cub, having worked with the legendary Julian Robertson for seven years, and lastly, Lone Pine has had a solid history of beating the S&P 500.
Let's see the most important moves Mandel was making in the second quarter.
Losing Lululemon. Perhaps the most intriguing move Stephen Mandel and Lone Pine Capital made in Q2 was its decision to ditch athletic apparel drama queen Lululemon Athletica inc. (LULU). A top 25 position for the hedge fund at the end of the first quarter, it's possible Mandel and his team thought the stock had already reached its fair value, and then some.
Perhaps more likely, the hedgie simply doesn't like Lululemon without its CEO Christine Day in charge. Day announced on June 10th that she'd be leaving upon the hiring of a successor, and within two days, shares had fallen by more than 20%.
While Lululemon's stock price has since recovered about half of its losses over the last two months, there's no clear growth plan for the company just yet. At 39.4 times earnings and EPS growth valuation multiples nearing overvalued territory, it's tough to go against Mandel and Lone Pine here.
AIG abandonment. The same rational cannot be given for Mandel's decision to sell American International Group (AIG). The insurer was a hedge fund favorite at the end of last year, and many big investors like Seth Klarman and Boaz Weinstein had since joined in on the fun. Yes, it's true that up 36.1% year-to-date, shares aren't as attractive as they've been in recent memory, but a sub-1.0 PEG and a price-to-book multiple below parity indicate there's still potential for more gains.
What's more, AIG announced earlier this month that it would pay its first dividend since 2008, in addition to a $1 billion share buyback plan. Why would Mandel leave these fruits unpicked?
Playing devil's advocate here for a second, it is worth mentioning that the hedge fund manager wasn't exactly ever smitten with AIG; the position never reached higher than 27th in Mandel's equity portfolio since it was established in Q4 2012. In that same light, a growing theory amongst certain segments of the financial blogosphere is that AIG's government bailout irrepressibly destroyed the marketplace's perception of its "true" value.
In other words, Mandel could very well think that a 25% discount to book might always be in the cards for AIG, at least in the intermediate-term, because that's the market's bias against a post-bailout stock. Right or wrong, behavioral psychology isn't a factor to be taken lightly in this particular case.
Buying FleetCor and Facebook. On the bright side, Stephen Mandel and Lone Pine were buying two stocks with a lot of momentum lately: Facebook (FB) and FleetCor Technologies (FLT). The latter has returned 85.3% in 2013, as consistent top and bottom line beats have pushed investors into the fuel card provider. FleetCor receives a flat percentage of fuel sales for its card services, which means that 2013's abnormally stable gas price environment has provided a nice macroeconomic backdrop for the company.
Facebook, meanwhile, continues to flirt with its IPO price of $38 as of mid-August. The key to Facebook's future is twofold, and begins with mobile advertising. Numbers were better than most would have expected in the second quarter, as mobile ads now account for over 40% of Facebook's total ad revenue. This figure was essentially zero a year ago.
Secondly, there has been some talk that Facebook might broaden its user base by lowering its minimum age requirement below 13. The social networking company has launched what it calls a "Guide For Educators" in collaboration with U.K. think tank The Education Foundation.
With privacy education as a key part of this program, younger users can hypothetically be trusted to use Facebook in a safer manner. An increased level of classroom adoption by grade school teachers is also expected to boost interest in lower age groups.
At a forward P/E near 40.0x, Facebook isn't particularly cheap, but the sell-side does expect earnings growth to average just under 30% a year over the next half-decade. If just one of the aforementioned initiatives exceeds expectations, there's upside to this projection, which is something Stephen Mandel is likely banking on.
Coach. Lastly, we couldn't forget about Coach, Inc. (COH). Shares of the luggage retailer have had a rocky 2013, but they're up over 10% in the past six months. For investors looking for luxury, Coach offers very good value at current prices, trading at a forward P/E of 12.4x and a PEG near 1.3. Same-store sales growth worries aside, it's tough to ignore the attractiveness of this stock.