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Point72 Takes a 5% Stake in Luckin Coffee

Posted on August 12th, 2019

Point72 Asset Management, L.P., which is run by the legendary investor Steven A. Cohen, made a big bet this week in Luckin Coffee Inc. (LK), a China-based coffee chain. A 13G filing revealed that the investment firm took a 5% position in the stock.

The stake that Point72 took in Luckin is significant, and it makes Luckin’s stock the second largest equity holding in the Point72 portfolio, behind only Netflix (NFLX). The market value of the Luckin stake is about $390 million, which is just slightly behind the value of the Netflix stake of $397 million.

(WhaleWisdom)

The Filing

The firm filed the 13G on August 5, revealing that it had acquired almost 16.6 million shares,  giving it a 5% stake in Luckin. The new position makes Point72 the fifth largest shareholder behind firms such as Capital Research Global Investors and GIC Private Ltd.

Luckin Comes Public

Luckin launched an initial public offering on May 17, pricing its shares at $17. Since that time the stock has risen by over 50% to a price of around $25.75 on August 9.  The company is the second largest coffee chain in China, operating almost 2,400 stores.  The company’s chief rival in China is Starbucks Corp. (SBUX), which operates over 3,900 stores on the mainland.

Why Luckin?

Point72’s move into Luckin may be due to the big revenue and earnings growth that analysts are projecting for the company. Analysts are currently forecasting revenue to rise to $3.7 billion by the year 2021 from just $125.3 million in the year 2018. That comes to an astronomical compounded annual growth rate (CAGR) of almost 210%.

Additionally, the company is expected to begin earning a profit by the year 2021. Analysts currently see the company losing $1.49 per share in 2019, but that is expected to rise to a profit of $1.78 per share by the year 2021.

The Stock May Be Cheap

If the growth forecast for Luckin proves to be correct, then Point72 could be getting a steal at the stock’s current valuation. The equity currently trades at roughly 14 times 2021 earnings estimates. Starbucks currently trades at almost double, with a 2021 PE ratio of 27.3. However, Starbucks does not offer investors nearly the same earnings growth. The company is forecast to see its earnings rise to $3.54 per share in 2021 from $2.83 per share in 2019, an increase of about 25%.

Point72’s move into Luckin could be for the long-term, especially if the company can deliver on analysts’ forecasts.

Zillow Group Inc. (Z) will report results on August 7. Analysts are forecasting Zillow to have seen significant revenue growth during its second quarter. Currently, revenue estimates are for $586 million, 80% greater than the same period a year ago. The significant increase in revenue isn’t expected to translate into earnings growth, with the company forecasted to lose $0.22 in the second quarter.

The strong revenue growth may be one reason why investors have been flocking into the stock. The equity has risen by more than 55% in 2019,  which is more than two times greater than the S&P 500’s gain of around 17%. The stock was so popular that it was added to the WhaleWisdom WhaleIndex 100, on May 16.

Added to the WhaleIndex

The stock landed on the WhaleIndex due to a rising number of institutions that held the stock at the end of the first quarter. The total number of 13F shares held increased by 5.1% to 144.2 million. The number of firms increasing their positions was at 103, while 52 created new holdings. There was a total of only 60 firms that reduced their stakes and 22 that sold out of the equity.

Strong History of Topping Estimates

The company has a solid history of beating analysts’ revenue estimates, having done this during six of the last eight quarters. Earnings for the company have also been stable, beating estimates during seven of the past eight quarters.

Offers

The big jump in revenue for the quarter comes as the company ramps up its newest business unit called Zillow Offers. This is Zillow’s home-flipping business, where Zillow buys and sells homes.  Zillow recently started offering this service and charges a service fee to customers to complete the transaction. It has created a massive revenue stream for the company. For example, during the first quarter, Zillow generated around $128.5 million in revenue from the unit, selling 414 homes and buying nearly 900.

The new approach from Zillow to drive top-line revenue growth has attracted investors to the stock, pushing it significantly higher in 2019. However, this has come at a cost, because the company took a loss in the first quarter and is expected to do the same in the second quarter. For now, analysts forecast that Zillow will not earn a profit through the second quarter of 2020.

The quarterly results for Zillow on August 7 will be telling. Should the company deliver strong revenue growth and show investors a path to profitability, then perhaps the stock may have even further to climb. If not, then it seems possible that the stock could see a steep loss.

Advanced Micro Devices’ (AMD) stock has rocketed higher in 2019, rising by over 84% through July 26. The strong performance is more than quadruple the pace of the S&P 500’s gain of just 20%. The stock had been a favorite among institutions and hedge funds in the first quarter of 2019.

Now, the chipmaker is scheduled to report second-quarter results on July 30 after the close of trading. Expectations are low, with consensus analysts’ estimates forecasting earnings to decline by 44% versus a year ago, to $0.08 per share. Meanwhile, revenue is expected to have dropped by 13% to $1.523 billion.

Hedge Funds Up Holdings

During the first quarter, the number of shares held by hedge funds increased by over 28% to total shares held of 36.6 million from 28.58 million.  During that time, there were a  total of 23 funds that created new positions, while ten funds added to their existing positions. However, there was also a total of 18 funds that closed out their holdings while 23 reduced them.  In total, the number of 13F shares held among institutions increased by over 3% to 657 million shares from 636 million shares.

Strong Sector

The company has reported mixed results in recent quarters, with both revenue and earnings topping estimates in just two of the previous four quarters. However, this quarter’s earnings have been notably strong across the semiconductor sectors with many companies reporting results that came in ahead of analysts’ expectations. Additionally, they have also been reporting better than expected outlooks. Companies such as Intel Corp. (INTC), Teradyne Inc. (TER), and Micron Technology Inc. (MU) are just a few of the more recent companies.

Expectations Are Building

The better than expected results and outlook across the sector have resulted in expectations building for AMD to deliver strong results as its quarterly report approaches.  Since the beginning of July, the equity has increased by 12%, which is better than the sector as measured by the VanEck Vectors Semiconductor ETF’s (SMH) increase of only 9%, and much stronger than the S&P 500’s gain of almost 3%.

Based on previous trends observed in 13F filings, it wouldn’t be surprising to see hedge funds piling into the stock again before AMD’s next round of results.  Now the same investors will need to hold their breaths, wait for the numbers, and hope they get strong results.

 

Facebook will report second-quarter results on July 24. Analysts estimate that the company will earn $1.86 per share, an increase of 7% versus last year, while revenue is expected to climb by almost 25% to $16.5 billion.  The company has a history of topping those earnings estimates, which could be one reason why some very well known hedge funds are holding the stock.

According to data compiled by Whale Wisdom, four very well-known hedge funds own the social media giant. The four funds are Tiger Global Management, LLC., Hound Partners, LLC., Coatue Management, LLC, Appaloosa Management LP, with each having between 5% to 10% of their portfolio invested in the stock as of the end of the first quarter.

A Strong Comeback

The stock has recovered from its steep sell-off in 2018 after data breaches and privacy concerns made investors wary, resulting in the stock’s sharp decline. Additionally, the company had to invest a tremendous amount into strengthening its security, which has been a drag on the company’s margins and reduced earnings growth. That margin compression is one reason why analysts are looking for strong revenue growth this quarter, but weak earnings growth.

History of Big Beats

However, the company has a history of topping analysts’ earnings estimates. The company has beaten its earnings estimates in each of the last nine quarters, and in some cases by a wide margin. It makes the odds high that the company will repeat that success in the second quarter of 2019.

(YCharts)

Conviction

The four funds hold a large concentration of the stock, with the equity ranked as either the third or fourth-largest holding in their portfolio.  The market value of the total holding among the four funds is about $2.6 billion at the end of the first quarter.

What is interesting is that despite the conviction that these four well-known hedge funds have, the rest of the industry was taking profits. During the first quarter, the total number of 13F shares held fell by almost 5% to $136.5 million from $143.5 million. In total, 41 funds created new positions, while 22 exited the stock. Additionally, 99 added, while 112 reduced their holdings.

With second-quarter results for Facebook around the corner, it will be interesting to see if the company will continue its streak of topping investors’ earnings expectations, or if they will fall short. With some of the most well-known hedge funds taking significant stakes in the social media company, it makes it hard to bet against a Facebook disappointment.

Microsoft Corp. (MSFT) has been one of the hottest stocks in the market during 2019, rising by more than 36%. That is 16 percentage points higher than the S&P 500 return of 20%. The strong stock returns have been driven by the company’s healthy cloud and software as a service product and are likely one reason why investors have been flocking into the stock.

WhaleWisdom compiled data across 49 of the most well-known and followed Hedge Funds. Of those, WhaleWisdom found that 16% or 8 funds owned the stock at the end of the first quarter.

The Smartest Funds

Some of the most well-known and smartest hedge funds have piled into Microsoft’s stock, and in some cases own significant amounts of it. For example, TCI Fund Management Ltd. has over 13% of its portfolio invested in Microsoft, while Tiger Global Management, Joho Capital LLC, and Hound Partners LLC have allocated about 8% of their respective portfolios. These investments are followed by Viking Global Investors, Coatue Management LLC, and Maverick Capital, with each investing between 5% to 6% of their portfolio in the company.

(WhaleWisdom)

The Rest Were Wrongly Dumping

Interestingly, overall hedge funds were selling their shares of Microsoft, with the total number of 13F shares falling by almost 5% to 343 million from 360 million. During the last quarter, 23 funds created new positions, while 111 funds added to existing holdings. Meanwhile, 28 funds closed out their holdings and 148 reduced their positions.

Fiscal Fourth Quarter Results

The company is scheduled to report quarterly results on July 18. Analysts are forecasting fiscal fourth quarter revenue to rise by 9% to $32.8 billion, while earnings are expected to have climbed by 7% to $1.21 per share. Meanwhile, analysts are expecting the company to guide first quarter revenue to $32.06 billion, and earnings to $1.19 per share.

More important may be what the company says about the growth of its cloud computing business units, which have had a blistering growth rate in the past. For example, in the fiscal third quarter, Intelligent Cloud revenue increased by 22%. Microsoft’s cloud business has become one of the chief rivals of Amazon.com Inc.’s (AMZN) Web Services business unit.

Cheap Compared to Peers

Microsoft is currently trading at 22.7 times fiscal 2021 earnings estimates of $5.87 per share, which comes at a reasonable valuation when compared to many of its technology peers. For example, the average PE ratio of the top 25 holdings in the Technology Select Sector SPDR ETF (XLK) is about 22.5 times one-year forward earnings estimates. However, stocks such as Intuit Inc. (INTU) and Adobe Inc. (ADBE) trade at over 30 times earnings estimates.

When looking at Microsoft on a peer analysis basis, it’s no wonder why some of the most well-known hedge funds have been piling into and holding shares of Microsoft in the most recent quarter, and despite Microsoft’s sharp rise, the stock may still be cheap with the potential for further upside.