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New York-based hedge fund Coatue Management, founded in 1999 by Philippe Laffont, manages $2.8 billion in assets, per its latest SEC 13-F Q4 filing. Laffont, like fellow hedge fund veterans Stephen Mandel at Lone Pine Capital LLC, John Griffin at Blue Ridge Capital Holdings LLC and Chase Coleman at Tiger Global Management, is a Tiger Cub, meaning that he honed his investment skills while working for legendary hedge fund manager Julian Robertson at Tiger Management LLC. At a 16.9% return, it was the among the top 25 performing hedge funds in 2011, well above the 0% return for the S&P 500 index and negative returns for the average hedge fund in 2011. The fund deploys almost all of its assets in the technology, media and telecom (TMT) sectors, and about 80% of its assets are invested in large-caps, another 10% in mid-caps and the remaining 10% is invested in small-cap equities.

We analyzed Coatue's equity holdings in its Q4 13-F to determine its highest conviction bets, selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company. Based on that analysis, the following are its high conviction bullish positions (see Table):

Molycorp Inc. (MCP): MCP is engaged in the mining and processing of rare earth ores at the mountain pass facility near the CA/NV border. The rare earths are critical inputs in existing and emerging applications, including: clean energy technologies, such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including fiber optics, lasers and hard disk drives; numerous defense applications, such as guidance and control systems and global positioning systems; and advanced water treatment technology for use in industrial, military and outdoor recreation applications.

Coatue added $21 million, the second largest buyer of MCP in Q4, to its $12 million prior quarter position. Other major institutional investors with large bullish bets on PCLN in Q4 include Aletheia Research & Management adding 2.3 million shares to its 0.6 million share prior quarter position, and also mega fund Wellington Management adding 0.6 million shares to its 1.4 million share prior quarter position.

MCP shares rallied up 19% on Friday after the company announced its signing of a definitive agreement to acquire Neo Materials for approximately C$1.3 billion, leading to the creation of the most technologically advanced, vertically integrated rare earth companies in the world. The move also lifted shares of fellow rare earth miners, Rare Element Resources (REE), a Canadian company engaged in the acquisition and exploration of gold and rare-earth elements in North America, that was up 20%, and Avalon Rare Metals Inc. (AVL), a Canadian miner engaged in the exploration and development of rare metals and minerals that was up 5%, amid speculation that the deal would lead to further consolidation in the industry.

Even after the steep rally on Friday, MCP trades at a cheap 7 forward P/E and 2.6 P/B, while earnings are projected to rocket up from $1.27 in 2011 to $4.34 in 2013, at an average annual growth rate of 84.9%; in contrast, rivals REE and AVL are both currently generating losses. We are strong believers in MCP, and have earlier expressed our opinion here that the company was outperforming on all levels, looking beyond the headline numbers, after the company released its Q3 earnings report last November. We continue to believe that MCP's valuation is compelling here, especially on a P/E relative to growth or PEG basis, and would be buyers here, especially on a dip back into the high-$20s.

Netapp Inc. (NTAP): NTAP manufactures integrated network storage and data management hardware for corporations and government agencies. Coatue added a new $189 million position, the third largest buyer of NTAP in Q4. Other major institutional investors with large bullish bets on NTAP in Q4 include Atlanta-based investment powerhouse INVESCO doubling its 4.0 million share prior quarter position, and also UBS Global Asset Management Americas adding 4.9 million shares to its 0.9 million share prior quarter position.

NTAP shares that had lost over a third of their value last year, have been strong since the company released an in-line Q4 report in mid-February. Although just in-line, the results were a big improvement over poor results in recent quarters, and helped calm investor fears about slowing growth and market share losses at the data storage company. NTAP shares trade at a current 19.1 P/E and 3.8 P/B compared to averages of 18.0 and 2.2 for its peers in the computer storages devices group.

LinkedIn Corp. (LNKD): LNKD operates an online professional network via its proprietary social networking platform that enables members to create, manage and share their professional identities online, build and engage with their professional network, access shared knowledge and insights, and find business opportunities. Coatue added $26 million in Q4 to its $35 million prior quarter position. Other major institutional investors with large bullish bets on LNKD in Q4 include T Rowe Price adding 5.9 million shares to its 0.1 million share prior quarter position, and also Morgan Stanley adding 2.1 million shares to its 2.2 million share prior quarter position.

LNKD shares are currently consolidating at their highs following a rally after the company reported a bullish Q4 last month, in which they beat analyst revenue and earnings estimates by wide margins. The LNKD story is compelling, and revenues and earnings are currently exploding with strong growth projections in the near term. However, we believe that shares may be a bit ahead of themselves in the short-term, trading at a very high 80-81 forward P/E compared to the 28.2 average for its peers in the Internet services group, while earnings growth is projected at a 75.7% annual rate from 35c in 2011 to $1.08 in 2013. Analysts are bullish on the stock, with eight of the 17 covering the stock rating it a buy/strong buy, eight at hold, and one at underperform. However, the shares are already trading very close to their price targets in the $90 range.

Other high conviction buys by Coatue in Q4 include (see Table):

  • Google Inc. (GOOG), the Internet's premier search engine company, in which it added it added $194 million to s $274 million prior quarter position;
  • Priceline.com Inc. (PCLN), the pioneer of name-your-own price service, a diversified online travel services company that provides airline ticket, hotel room, car rental, vacation package, and cruise services through Priceline.com, in which it added it added $129 million to its $145 million prior quarter position; and
  • Williams Sonoma Inc. (WSM), a specialty retailer of home products, in which it added a new $21 million position.

The following are Coatue's high conviction bearish picks based on their Q4 selling activity (see Table):

  • Green Mountain Coffee Roasters Inc. (GMCR), probably most famous for its patented single-cup coffee and tea brewing systems for offices and homes sold under the Keurig brand name, a distributor of approximately 200 whole bean and ground coffee selections, cocoa, teas and coffees, in which it cut $114 million from its $222 million prior quarter position;
  • Amazon.com Inc. (AMZN), a leading online retailer in North America and internationally, in which it cut $72 million from its $274 million prior quarter position;
  • Chipotle Mexican Grill (CMG), an operator of casual Mexican food restaurants in the U.S., Canada and U.K., in which it cut $53 million from its $182 million prior quarter position;
  • Sina Corp. (SINA), a Chinese internet portal offering media content and services for China and global Chinese communities, in which it cut out completely its prior quarter $50 million position;
  • Finland-based Nokia Corp. Ads (NOK), a worldwide leader in mobile communications. It is a leading supplier of mobile devices, a leading supplier of mobile, fixed and IP networks, and a provider of Internet and digital mapping and navigation services worldwide, in which it cut out completely its prior quarter $23 million position; and
  • Research in Motion Ltd. (RIMM), the Canadian manufacturer of BlackBerry handheld devices for the mobile communications market, in which it cut $11 million from its $21 million prior quarter position.

Table


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Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Source: Top Ranked Tech-Focused Hedge Fund Coatue Management's High Conviction Q4 Picks