Steve Mandel (Trades, Portfolio), founder of Lone Pine Capital, utilizes a long-short equity strategy to create long-term capital growth. During the second quarter, the fund manager bought Shire PLC (SHPG, Financial), reduced three existing positions and eliminated three stakes.
The Lone Pine Capital manager purchased 2,529,148 shares of Shire at an average price of $180.56 and sold all 10,591,296 shares of Baxalta Inc. (BXLT, Financial) at an average price of $42.24. In the aggregate, Mandel increased his portfolio by 0.02% with these transactions.
Shire completed its acquisition of Baxalta, as mentioned in Shire’s current report filing with the Securities and Exchange Commission, on June 3. With this merger, the management of Shire expects increased revenue growth and returns on capital in the short term. Additionally, the specialty biopharmaceutical company provides a top platform for the cure of rare diseases.
Even though the company has modest financial strength, Shire currently has a profitability rank of 8, implying high growth potential. The company’s operating margin outperforms 86% of global biotech companies and has generally expanded in the past five years. Additionally, the biotechnology company has high net margins and returns on equity.
Twenty-three gurus, including Mandel, eliminated their Baxalta positions likely due to the merger. Among all gurus who invested in Shire, Mandel purchased the largest number of shares.
Mandel eliminates two other positions
Mandel sold his 22,079,215-share stake in JD.com Inc. (JD, Financial) at an average price of $24.15 per share. With this transaction, the Lone Pine fund manager trimmed his portfolio 2.91% and realized an estimated 2% loss since the fourth quarter of 2014.
The Chinese online sales site has a profitability rank of just 3 with negative margins and returns on equity. This suggests that JD.com struggled to make profits during the past few years and is likely to go bankrupt. Additionally, JD has a poor Piotroski F-score, and its equity-to-asset ratio underperforms 83% of global Internet content and information companies. The decreasing equity-to-asset ratio suggests that JD has increased its long-term debt in the past two years.
As the company’s financial outlook weakens, several gurus eliminated their positions in JD.com. Jeremy Grantham (Trades, Portfolio), for whom Mandel worked before establishing Lone Pine Capital, sold all remaining shares of JD after slashing 79.44% of his stake in the first quarter.
The Lone Pine fund manager also eliminated his stake in Allergan PLC (AGN, Financial), selling all 1,789,239 shares at an average price of $230.56 per share. The transaction reduced the portfolio by 2.39% and resulted in a 19% estimated loss since the first quarter.
On April 6 Allergan terminated its merger with Pfizer Inc. (PFE, Financial) due to an “adverse tax law change” by the Department of the Treasury as mentioned in Pfizer’s SEC 8-K filing. The drug manufacturing company has a financial strength rank of 4 with an Altman Z-score in distress zones and a return on invested capital of -1.28%. The company’s operating margin currently underperforms 81% of global drug manufacturing companies, which further implies a weak business operation.
With his transaction, Eric Mindich (Trades, Portfolio) reduced his portfolio by 6.14%, the highest portfolio impact among all gurus who sold their stakes in Allergan. Jana Partners (Trades, Portfolio) knocked off 2.27% of their portfolio, and David Einhorn (Trades, Portfolio) trimmed about 2%.
Lone Pine manager reduces positions in software and online media companies
Mandel pared 32.88% of his stake in Microsoft Corp. (MSFT, Financial) and 17.24% of his Amazon.com Inc. (AMZN, Financial) position. The stocks' prices averaged $51.96 and $676.45 per share.
Based on its 15-year financials and warning signs, Microsoft has a weakened business operation. The application software company was likely a value trap during the first quarter of 2016. Additionally, Microsoft is currently overvalued based on its Peter Lynch chart and various valuation methods.
The application software company has a stock price near a 10-year high and a price-to-sales (P/S) ratio near a five-year high. Based on its median P/S value, Microsoft has a fair value price of $42.86. As the company is moderately overvalued, Stanley Druckenmiller (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) both eliminated their stakes in Microsoft. Druckenmiller pared 2.13% of his portfolio with this transaction.
Despite having high financial strength and a profitability rank of 8, online retail company Amazon experienced contracting operating and net margins throughout the past 10 years. The company’s operating margin is currently near the median of all global specialty retail companies, and Amazon’s net margin underperforms 54% of such companies.
Mandel slashed 74.45% of his position in Alphabet Inc. (GOOGL, Financial), selling 480,851 shares at an average price of $734.01. As mentioned in a previous article, Google is trading near a 10-year high, and its asset growth rate is higher than its revenue growth rate. This suggests that the online media company has an inefficient and unstable business operation.
Louis Moore Bacon (Trades, Portfolio) eliminated his stake in Google, knocking off 5.12% of his portfolio.
See also
You can read about the historical trends of Altman Z-scores for six major companies here. Additionally, to find the guru trades within a specific sector, click on “Sector Picks” and choose the desired sector.
Disclosure: The author has no position in any of the stocks discussed in this article.
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