Billionaire Stephen Mandel of Lone Pine Capital was active last quarter, selling off his entire stake of the tech giant Apple Inc. ( AAPL ), while also making big bets in the discount retail sector.
Mandel manages some $17 billion, with a personal wealth of one-tenth that. Mandel and Lone Pine employ a "bottom-up" approach to investing, having returned an annualized 23% from 2000 through 2010, and beaten the S&P 500 index by more than 20 percentage points per year on average. He made a number of other moves last quarter, let's check out a few top changes to his portfolio.
Throwing Away an Apple
In its most notable fourth-quarter selloff, Mandel's firm divested its entire stake in Apple Inc. At the end of the third quarter, Apple Inc. was Mandel and Lone Pine's ninth-largest holding. The selloff comes as concerns over Apple's growth mount. The company managed to grow sales by 45% in 2012, but it's only expected to grow its top line by 14% in 2013.
Apple sounds cheap at only 10 times earnings, but in reality, it's right in line with the average P/E for the other major tech companies, such as Dell, Microsoft, and Intel.
One of Mandel's big additions was Facebook ( FB ), which is now his firm's 22nd largest holding. The social network appears to have some serious growth opportunities, and investors are taking notice, with the stock rallying 20% over the last six months. Facebook reported EPS of $0.17 in the fourth quarter of 2012, which was up 13% from the same quarter last year, and up 41% from the previous quarter.
What's most impressive about the growth is that advertising revenue rose 43% year over year, and now represents 84% of total revenue. Even with a rapidly growing user base, the company managed to increase average revenue per user by 11% last quarter.
Advertising remains one of Facebook's biggest opportunities. ZenithOptimedia forecasts that online ad spending will overtake newspaper ads in 2013, and eventually overtake both newspaper and magazine ad spending by 2015. Moreover, this will equate to about 25% of total ad spending being spend on the internet by 2015.
I'll Buy That for a Dollar
Two of Mandel's big increases came in the discount retail industry.
Mandel and Lone Pine increased their stake in Dollar General ( DG ) by 61%, and the company now makes up the fifth spot in their portfolio. Dollar General is the leading U.S. discount retailer, with some 10,000 stores in 40 states.
The company expects to see net sales up 9% in fiscal year 2014 (ending January), which will be driven not only by higher store traffic, but also by higher transaction sizes. Dollar General expects to expand its product offering to alcohol and tobacco products in 2014. This should help counter margin pressures arising from the retailer's recent offering of faster-selling consumable products.
Mandel also notably increased Lone Pine's investment in Dollar Tree ( DLTR ), with a 203% increase in shares owned since the previous quarter. The stock now ranks 11th in Lone Pine's portfolio.
Although the company does not have as robust a store count as Dollar General, Dollar Tree does have stores in Canada, with a total of 4,500 spread across that country and the U.S. The company has plenty of room to grow, and plans to capitalize by growing square footage by 7% in fiscal 2014 (which ends next January). Based on its industry-best growth and return on investment, I think Dollar Tree is the best-of-the-industry pick.
A Bigger Stake in Broadband
One of Mandel's biggest increases was Charter Communications ( CHTR ) , representing a 1,368% increase from fourth quarter shares. It now occupies the 19th spot in Lone Pine's portfolio. Charter is still a leading broadband communications company and the fourth-largest cable operator in the U.S. It's worth noting that the cable company is a low-volatility play, with a beta of only 0.7.
Charter's revenues are expected to be up 4% and 5% in 2013 and 2014, respectively, thanks to additions to its high-speed residential data services. The company expects to add some 325,000 to 350,000 subscribers per year over the interim.
Analysts also expect the company's EPS to start recovering. Its 2012 EPS came in at a $3.05 loss, but 2013 is forecasted at a negative $1.43, and 2014 is a positive $1.20.
Don't be Fooled
Mandel fell out of love with Apple Inc. entirely, but he appears to have found value in Facebook. I would tend to agree that the uncertainty surrounding Apple warrants a "wait and see" approach. Meanwhile, the prospects and improving financials at Facebook might make for a compelling investment. I still believe that both of Mandel's discount retail picks will perform well despite a rebounding economy, and I think the competition related to Charter's business might continue pressuring the company in the near future.
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