5 Big Bets Made By This Long/Short Equity Hedge Fund
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JAT Capital was founded by John Thaler in 2007 after leaving the private equity firm Shumway. Thaler graduated from the University of Chicago with a BA in economics and worked five years for the private equity firm Shumway, focusing on technology, media and telecom - he now runs a strategy with a focus on these industries. His firm, JAT Capital, is a long/short equity hedge fund based in New York City. In reviewing the firm's most recent 13F - which is a filing with the SEC that reveals the majority of a hedge fund's publicly owned securities - we have identified JAT's top five stocks:
Liberty Media (NASDAQ: STRZA) is JAT's top stock pick as of 3Q 2012, accounting for over 7.9% of the firm's total 13F portfolio. The media company was a new addition to JAT's portfolio and is up over 50% during the last 12 months. With plans to spin off Starz Entertainment, Liberty should be able to better focus its operations, where the Starz spin-off will now allow Liberty to focus on Sirius and Barnes & Noble. Liberty invested some $200 million in Barnes & Noble for preferred stock that can be converted into 12 million shares.
Although the book retail business has been in decline, Barnes & Noble's e-reader has been showing solid growth and is 2nd in the e-book market behind the Kindle. Liberty Media is still in its pursuit to acquire more than 50% of Sirius, where its Sirius investment should benefit from the satellite radio company's niche and dominant position in the auto industry, where demand for autos is expected to be up in 2013.
From a valuation standpoint, Liberty is very much on the cheap side when compared to media giants Comcast and Time Warner - both trading at 18x earnings - compared to Liberty's 8x. Billionaire Warren Buffett is the top fund owner of Liberty among those we follow with over 5 million shares (check out Warren Buffett's top picks).
Expedia (NASDAQ: EXPE) is JAT's second largest 13F holding, making up nearly 7.4% of the firm's 13F portfolio. Expedia is up 100% over the last twelve months and continues to be one of the top online travel companies. After spinning off TripAdvisor in 2011, Expedia has been spending more on marketing and advertising, but despite the higher spending, the online travel site still has a robust balance sheet with $2.3 billion in cash and only $1.3 billion in debt. The internet company also operates the Hotels.com site. Expedia is one of the leaders in the travel industry trading in line with in the industry at 25x earnings - compared to major peers Priceline (25x) and Ctrip (28x).
Sprint Nextel (NYSE: S), after becoming a new addition to JAT's portfolio, makes up the firm's 3rd largest and 5.8% of its 13F portfolio. Revenues are expected to see modest growth of 1 to 3% in 2013 and 2014, with longer-term growth to be driven by an accelerated build-out of its 4G network. Sprint has seen some big changes over the past couple months, including the $21 billion investment by Softbank and now the planned acquisition of the remaining shares of Clearwire.
Part of the Softbank investment, around $8 billion, will go toward further spectrum acquisitions. Recent news also suggests that Sprint might be breaking into the pay-as-you go industry, which is just one of its initiatives.
Even after the 80% run up in the stock over the last six months, Sprint still trades at a fraction - $18 billion market cap - compared to major peers AT&T ($200 billion) and Verizon ($125 billion). Although the top two wireless companies AT&T and Verizon pay robust dividend yields - in excess of 4.6% - Sprint is much cheaper from a valuation standpoint. Sprint trades with a P/S of 0.5x compared to AT&T (1.5x) and Verizon (1x). Billionaire David Einhorn of Greenlight Capital did sell off 60% of his Sprint shares last quarter (see David Einhorn's latest picks).
Equinix (NASDAQ: EQIX) is a computer services company connecting businesses and customers through data centers. JAT has Equinix as its fourth largest 13F holding and it is worth 5.7% of the firm's 13F portfolio. To help meet the growing demand for data center usage, Equinix has been expanding globally. The data center company trades at a high P/E at 92x, but compared to Rackspace Hosting (106x), it is right in line. With a 27% long-term expected earnings growth rate, the company is not necessarily a screaming value pick, but does present decent growth prospects. These prospects include its key service that allows customers to increase the efficiency of their IT infrastructure. John Paulson upped his stake over 100% last quarter (check out John Paulson's top picks).
Facebook (NASDAQ: FB), the massive social network, was JAT's 5th largest 13F holding following a 300% increase in shares during 3Q 2012. The social network is down 25% since its summer-2012 IPO, but still trades at a P/E above 250x. Facebook hopes to continue building on its advertising platform and has a solid balance sheet with over $10 billion in cash and no debt. Assuming Facebook can capitalize on mobile monetization it should have no problem meeting its 30% 5-year expected EPS growth rate. In early 2012, Facebook saw the so-called "crossover point" - where more users accessed the social network via mobile versus computer.
To recap: We believe that JAT has made some interesting bets on satellite radio and the book business via its Liberty investment. Other big bets include an expected rebound in the travel industry - with Expedia - and a new bet on Sprint.
This article is written by Marshall Hargrave and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.
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