The tumble in Facebook and Netflix shares in July presents a test of what has been one of the strongest conviction trades of some of the world’s best-known stock pickers.
Closely watched investors including David Tepper, Dan Loeb and a group of the largest so-called “Tiger Cub” funds made Facebook one of the biggest positions in their portfolios.
Viking Global Investors, a $25bn fund founded by Andreas Halvorsen, held a stake in Facebook worth $1.49bn — the fund’s single biggest position — while David Tepper’s Appaloosa held 10.2 per cent of its long US equity portfolio in Facebook, the fund’s second-largest position worth $992m at the end of the first quarter, according to the latest US regulatory filings.
Both funds added significantly to their positions after the collapse in Facebook’s value following the Cambridge Analytica controversy in March.
While it is not yet public whether these funds have added to or reduced their positions since the first quarter, their concentrated bets came as an increasing number of closely followed bottom-up stock pickers argue that fast-growing tech companies are actually undervalued by the market despite trading at optically high valuation multiples.
Dan Loeb, whose Third Point held Facebook and Netflix as its fifth and seventh largest holdings, commented in his fund’s letter to clients last month that “growth is where the value is”, and that Third Point was “moving from purely an event-driven, value-based universe of stocks to include ‘compounders’ and, increasingly, what are classically considered ‘growth’ stocks”.
However, Facebook shares have lost 22 per cent since warning investors last week of slowing sales and user growth. Meanwhile, Netflix stock has tumbled 17 per cent since the video streaming company disclosed last month that it had added 1m fewer subscribers in the second quarter than forecast.
Despite the weakness in both stocks in July, Facebook shares have climbed almost 50 per cent since the start of last year while Netflix stock has surged 180 per cent in the same period. By comparison, the S&P 500 has climbed 25 per cent.
“We are happy owning these stocks for longer periods at higher multiples and absorbing the inevitable volatility, particularly in this late-cycle environment,” Mr Loeb said in his letter to clients. “We have also discussed with investors the insight that stocks with unprecedented growth rates have defensible valuations when one extends earnings out two to three years.”
Several other prominent Tiger Cub funds, known as such because they trained at Julian Robertson’s Tiger Management hedge fund in the 1990s, have made outsized bets on Facebook, according to their latest filings. These include Lone Pine, which had Facebook as its biggest holding.
Stanley Drucken miller, who rose to prominence as the deputy to George Soros, was rare among his peers in dumping his entire Facebook position over the first quarter, with the stock previously having made up 9.6 per cent of the long US equity portfolio of his Duquesne family office.
Viking Global, Appaloosa, Third Point and Lone Pine all declined to comment.