- $19 billion hedge fund manager Lone Pine Capital categorizes companies as young disruptors, disrupted, or "compounders" when deciding whether to go long or short.
- Young disruptors include recently IPO-ed companies that require a "high degree of creativity" to value them, Lone Pine Capital said in an investor letter seen by Business Insider.
- "Compounders" — companies that Lone Pine considers undervalued — include World Wrestling Entertainment, Nintendo, and Tiffany & Co.
- Lone Cypress and Lone Cascade, the firm’s long-short fund and long-only fund, are both up around 24% for the year. The letter, dated July 15, also said fund-of-funds Lone Juniper closed July 10.
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What do Nintendo, World Wrestling Entertainment, and Tiffany & Co have in common?
$19 billion Lone Pine Capital, a legendary stock-picking hedge fund, owns shares in all of them and sees "long runways" for their growth, according to a recent investor letter seen by Business Insider.
Lone Pine Capital has divided the market into three segments: young disruptors such as Beyond Meat; disrupted firms like banks, ad agencies and legacy technology companies; and "compounders" — like WWE and Tiffany.
The firm is long the compounders, short the companies it considers already disrupted, and both long and short young disruptors, according to the letter, and it thinks judgement about the overall market misses the "nuance of underlying extremes."
Founded by Stephen Mandel in the late 1990s, Lone Pine Capital is one of the few hedge fund firms that does not focus on a specific industry or theme. Mandel — one of several "tiger cubs" who worked at Tiger Management before going on to run high-profile funds — stepped back from day-to-day portfolio management in January.
Through the end of the second quarter, both the firm’s long-short fund, Cypress, and long-only fund, Cascade, are up roughly 24% for the year, according to the letter, versus roughly 7% for the overall market. Lone Pine Capital declined to comment.
The letter, signed by Mandel and managing directors Mala Gaonkar, David Craver, and Kelly Granat, said young disruptors almost always lose money, "sometimes lots of it," and that "expectations embedded in their share prices are high."
Companies the firm considers young disruptors include Wayfair, Sea, Chewy, Beyond Meat, Canopy Growth, and more. The letter said Lone Pine Capital is both long and short several such companies, though it did not list any specific investments.
The disrupted companies meanwhile are facing challenges to their long-established models, and the firm is short many of those companies, the letter said.
"Being right about the pace of decline is critical to shorting success here," the letter said.
Companies that fall under "compounders" have a proven business model now, but might have originally been a disruptor. "Examples include credit card networks, data analytics companies, Internet platforms, and vertical software leaders," the letter states.
The firm is particularly interested in companies it believes fall in this category because "the power of the business platforms is often underestimated," despite being well-known and established. The letter named companies like Activision, Axis Bank, Melrose Industries, Nintendo, Shiseido, Tiffany, Union Pacific, and WWE.
Lone Pine Capital owns shares in all of those "compounders," and said each should improve profitability in the coming years through "overdue management actions" on costs, distribution, and products.
The letter also said that the firm closed the fund-of-funds known as Lone Juniper on July 10 after 19 years, and the person in charge of it, Frank Knapp, will take on a risk and analytics role on one of its other funds.
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