Monday, Jan 6th 2020

Hedge fund alpha from Titan stocks


"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.'" - Stephen Mandel Jr., founder of Lone Pine Capital

In the 2010s, the stock that generated the most alpha for hedge funds was Apple. Other Titan stocks like Charter, Amazon, Facebook , Netflix, Microsoft, and Google were among the top 10. (Source: Novus)

Top Alpha Stocks of 2010s

These days, the stock market moves making the most money for hedge funds are ones that don't require years of experience deciphering balance sheets or a business school degree. It's the stocks of simply high-quality growth companies on the right side of technological disruption.

Is value investing dead?##

You may have read headlines about the demise of "value investing" in recent years. Businesses in industries like retail and energy have underperformed growth sectors (like technology) massively. They are considered value stocks because of what they trade at compared to their historical earnings.

For example, you may pay a $10 stock price to get $1 of annual earnings in a value stock (10x P/E), versus paying $30 to get $1 from a growth stock (30x P/E). Some investors only invest in statistically cheap stocks (value) regardless of quality, while others prefer to pay up for high-quality, faster growing companies (growth).

Value stocks are trading at their lowest valuations in decades. Some believe they will soon make a comeback, but many hedge funds disagree. The founder of legendary hedge fund Lone Pine Capital put it succinctly:

"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."

Value vs. Momentum

The key takeaway here is that hedge fund alpha is being driven by stocks that look expensive on the surface but have the fundamentally best business models. These are the technological disrupters like Facebook, Amazon, etc. -- and they don't expect that to change anytime soon.

Hedge funds like Lone Pine believe the cheap companies are, well, cheap for a reason: they're slow to adapt to technological changes, and as long as that happens, they'll keep getting cheaper. It's a structural shift that your Titan portfolio is well-positioned for, given the funds we analyze and the stocks we invest you in are quality- and growth-oriented.

Be prepared for a correction##

We wouldn't be surprised to see traditionally cheap "value" stocks make a comeback, especially if "growth" stocks see a correction and trigger a rotation. Hedge funds have been riding the momentum trades in tech and telecommunications for years now. A quick unwinding of trades by quants could clam the sector like we saw in September 2019.

Even if we see another momentum correction, we're confident about the structural advantages of your companies over the long run.

Corrections are generally a good buying opportunity. Some of the best hedge funds, including Coatue and Lone Pine, lost big in September due to the drop in momentum stocks, but they took advantage and bought more of stocks like Netflix at the time. So far, it's paid off.

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