Lone Pine Capital Stock Holdings & Investment Analysis

Published on September 11th, 2020 by Aristofanis Papadatos

Lone Pine Capital is an American-based hedge fund headquartered in Greenwich, Connecticut. It was established in 1997 by its president and managing director Stephen Mandel. Lone Pine Capital is well-known for its exceptional returns thanks to the expertise of Stephen Mandel.

You can download an Excel spreadsheet with metrics that matter of Lone Pine Capital’s current 13F equity holdings below:
 

Note:  13F filing performance is different than fund performance.  See how we calculate 13F filing performance here.

This article will discuss Lone Pine Capital’s investment strategy and portfolio holdings.

Table Of Contents

Lone Pine Capital’s Holdings

Lone Pine Capital has achieved impressive annualized returns over the past few years, outperforming the S&P 500 by a wide margin. The outstanding performance has resulted from the management’s competency in identifying and investing in companies in the high-growth tech sector.

The portfolio of the fund almost exclusively includes technology stocks, and thus it has some remarkable characteristics. Only 10 out of the 28 stocks included in the portfolio pay a dividend while the average forward price-to-earnings ratio is extremely high, standing around 90.0 (excluding the non-meaningful earnings multiple of some stocks).

The top 5 holdings of the stock portfolio comprise 34% of its total value. It is thus evident that Lone Pine Capital has high conviction in its major holdings.

Lone Pine Capital’s top 10 holdings comprise 57% of its total portfolio and consist of the following equities:

Facebook (FB):

Lone Pine Capital initiated a stake in Facebook in 2014, at prices between $66 and $79. It doubled its stake in 2018 and raised it by another ~50% in the most recent quarter. The stock has quadrupled since the initial purchase and is now hovering around an all-time high, thus vindicating the conviction of the hedge fund.

Facebook is currently enjoying excellent financials, with $65.7 billion of cash and receivables, and a net cash position of $35.5 billion (5% of the market capitalization of the stock). Facebook is one of the extremely few companies that have no debt. This is a testament to the strength of its business model and its perfect execution. Moreover, even though half of the globe uses at least one of the apps of Facebook on a monthly basis, its user base is still growing at double-digit rates.

Furthermore, as its rival social media company Tik Tok is recently facing scrutiny in the U.S., with talks of the app becoming banned across the nation, Facebook’s monopolistic nature is looking more attractive than ever.

Shopify (SHOP):

Shopify is the largest holding of Lone Pine Capital, comprising 7.8% of the value of its portfolio. The stake was initiated last year, at prices between $195 and $328. Although this is a relatively new stake, the stock has more than tripled since the initiation of the stake, now standing at $934.

Shopify provides a cloud-based commerce platform, which enables merchants to adapt to the e-commerce era. The company obviously benefits from a secular trend, which has decades ahead to run, namely the shift of consumers from brick-and-mortar purchases to online purchases.

The pandemic has caused this long-term trend to accelerate at an enormous pace. As a result, Shopify saw its revenues double in the second quarter over last year. That was the steepest revenue growth recorded in more than five years.

Shopify has grown its monthly recurring revenue at a 46% average annual rate over the last five years. Even better, thanks to the immense growth potential of its business, it is likely to keep growing its revenues and its earnings at a breathtaking pace for several more years.

On the other hand, the market has already priced a great portion of future growth in the stock price. To provide a perspective, the stock is currently trading at 38.5 times its expected earnings in 2025. As a result, the stock will have material downside risk whenever it faces an unforeseen headwind.

Amazon (AMZN):

Amazon is the second-largest holding of the portfolio of Loan Pine Capital, comprising 6.8% of its total value. This stake was initiated about three years ago, at prices between $957 and $1,176. Some investors might be disappointed that Mandel, who is an expert in tech stocks, purchased Amazon so late. However, the tech giant has essentially tripled since the initiation of the stake and thus it has highly rewarded the shareholders of Loan Pine Capital.

Amazon benefits from a strong secular trend, namely the increasing preference of consumers to shop online instead of visiting a store. As conventional stores cannot match the prices of the online giant, the latter has a wide moat, particularly given the economies of scale it enjoys.

Amazon has grown its revenues and its earnings per share nearly 10-fold over the last decade. Even better, the secular shift from brick-and-mortar retail to online sales has accelerated this year thanks to the pandemic. While the pandemic is likely to subside from next year, the consumers who have recently shifted from conventional to online purchases are likely to adopt online shopping for the long run thanks to its advantages. This helps explain the 72% rally of the stock of Amazon this year.

Amazon has net debt of $91.0 billion. As this amount is only 5.5% of the market cap of the stock, it is essentially negligible and confirms the strength of the business model of Amazon.

Booking Holdings (BKNG):

Booking Holdings is a new stake, which was purchased by Lone Pine Capital in the second quarter at prices between $1,231 and $1,841, and comprises 5.0% of its total portfolio. As the stock has shed 10% over the last 12 months, it is a suitable candidate for those who have great confidence in the stock picks of Lone Pine Capital and seek to follow its investing moves.

The online travel, restaurant, and related booking services company incurred a nosedive in March due to the travel restrictions caused by the coronavirus crisis and the tendency of consumers to spend much more time at home. Leisure air traffic is still 50% lower than it was last year while business air traffic is still 88% lower. As a result, Booking is poised to incur an approximate 80% plunge in its earnings this year.

On the other hand, the pandemic is likely to subside from next year thanks to the development of a vaccine. Numerous studies are in progress right now, with a vaccine expected early next year. As a result, Booking is likely to return to its pre-COVID profitability within the next two years. This helps explain why the stock has retrieved nearly all its losses in the last few months. We believe that it is a question of time before Booking returns to its multi-year earnings growth trajectory and its stock posts new all-time highs.

Microsoft (MSFT):

Microsoft is the fifth-largest holding of Lone Pine Capital, comprising 6.2% of the value of its portfolio. The stake was initiated in 2017 at prices between $65 and $72 and the stock has essentially tripled since then.

The diversified portfolio of tech products and services of Microsoft has been ruling the sector’s digital infrastructure. The company’s CEO Satya Nadella has been marvelously transforming the company into a cloud powerhouse. As a result, while the company was considered mature until a few years ago, it has managed to accelerate its growth and post all-time high earnings in the last two years.

On the one hand, it is impressive that a stock with a market capitalization of $1.6 trillion, the second-largest in the stock market, still has strong growth momentum. On the other hand, we are concerned over the remarkably high price-to-earnings ratio (32.0) of this large-cap stock.

PayPal (PYPL):

PayPal is the third-largest holding of Lone Pine Capital, comprising 6.7% of the value of its portfolio. The stake was initiated less than a year ago, in late 2019, at prices between $97 and $110, but the stock has nearly doubled within this short period.

PayPal is in a reliable long-term growth trajectory thanks to the secular growth of digital payments. The company processed a record of $222 billion of digital payments in the second quarter. In addition, it has ample room for sustained long-term growth thanks to the increasing preference of consumers to execute payments with their mobile phone. As there are 5.3 billion mobile accounts in the world, the growth potential is immense.

PayPal has been negatively affected by the pandemic, which has caused a collapse in the number of travelers around the world and thus in the payments of this segment. However, this headwind will not prevent the company from growing its earnings per share by about 20% this year. Even better, we expect PayPal to keep posting new all-time high earnings for years thanks to the secular growth of digital payments.

Adobe (ADBE):

Lone Pine Capital initiated a stake in Adobe in 2014, at prices between $60 and $73. Since then, the stock has rallied approximately 7-fold so it has outperformed the market by a wide margin. On the other hand, Lone Pine Capital has reduced its stake in Adobe by about two-thirds in the last two years. It is thus evident that the hedge fund considers the stock almost fully valued around its current price.

Adobe offers tools and solutions that enable companies to go through digital transformation and thus enhance their sales in the highly competitive business landscape that prevails nowadays. As Adobe offers a vast range of products, it enjoys a dominant position in its business, with a wide moat versus its competitors.

The main segments of the company have a total addressable market of $128 billion. This means that Adobe has promising growth potential ahead. On the other hand, as its stock has rallied 6-fold over the last five years, it is now trading at an excessive forward price-to-earnings ratio of 49.0. In other words, the market has already priced the growth of many years in the stock and thus the latter will have material downside risk whenever it faces an unforeseen headwind.

Humana (HUM):

Lone Pine Capital initiated a stake in Humana about a year ago and has significantly raised its stake in each of the last two quarters.

Humana is a health insurance giant that has offered exceptional returns in recent years but surprisingly it has passed under the radar of most investors, primarily due to its lackluster business model. The company has the second-largest market share (18%) in Medicare Advantage market, which is growing at a fast clip.

The stock incurs sharp declines whenever the market focuses on the uncertainty over the healthcare landscape due to political disputes. However, Humana has kept growing its earnings per share year after year and is likely to remain in its solid growth trajectory for many more years. We expect Humana to grow its bottom line at a double-digit rate in the upcoming years and thus we view its forward price-to-earnings ratio of 20.9 as attractive.

United Health (UNH):

Lone Pine Capital initiated a stake in United Health three years ago, at prices between $164 and $200. The stock is currently trading at $305.

United Health benefits from the same trend as Humana, namely the growing market of Medicare Advantage. It has grown its earnings every single year in the last decade and thus it has more than quadrupled its earnings per share over this period. Thanks to the favorable trends in its business, it is likely to keep growing its bottom line at a double-digit rate in the upcoming years. We thus view its forward price-to-earnings ratio of 18.4 as exceptionally attractive and expect the stock to continue to highly reward its shareholders.

Transdigm Group (TDG):

Lone Pine Capital initiated a stake in Transdigm in 2017, at prices between $256 and $285. The stock has nearly doubled since then.

Transdigm is the only industrial manufacturer included in the portfolio of Lone Pine Capital. The company produces numerous aircraft components in the U.S. and internationally.

As Lone Pine Capital is focused on technology stocks, it is evident that the reason behind its stake in Transdigm is the secular growth that the company enjoys thanks to the ever-growing number of aircraft needed worldwide. This trend has been interrupted this year due to the pandemic and thus the company will incur a dip in its earnings. However, the pandemic is likely to subside and the business of Transdigm is likely to begin to recover from next year.

Final Thoughts

Lone Pine Capital invests only in companies with huge growth potential and a wide moat in their business. As a result, the tremendous earnings growth of these stocks has more than offset their initial rich valuation. On the other hand, investors looking to tap into Lone Pine Capital’s holdings should be wary of the fund’s lack of diversification and the tech sector’s sky-high valuations.