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The King of Quant David Shaw Makes Key Portfolio Shifts on Tesla Inc (TSLA) and Amazon.com, Inc. (AMZN)

By Harriet Lefton 

David E. Shaw, nicknamed the “King of Quant” by Forbes Magazine has made some big moves on Tesla Inc (NASDAQ:TSLA) and Amazon.com, Inc (NASDAQ:AMZN) in Q1, according to 13F forms filed with the SEC. Shaw is the founder of the highly successful DE Shaw & Co fund which has a portfolio value of almost $57 billion and is a pioneer in the field of quantitative investing. Let’s first take a quick look at the fund and Shaw himself before examining his latest portfolio moves.

Shaw, a former computer science professor founded the fund in 1988. According to Forbes, Shaw earnt a whopping $400 million in 2016 alone making him one of the 25 highest-earning hedge fund managers and traders of 2016. This is not necessarily surprising given the fund’s strong performance- LCH Investments’ annual survey of the top 20 fund managers has placed Shaw in 3rd place in respect of the fund’s net $25 billion gain. In fact, the list reveals that system-based investing approaches like quant trading bring funds serious returns as 4 of the top 20 hedge funds are highly reliant on algorithmic trading.

We can see that Shaw has a very prestigious background even from a young age: he received a PhD from Stanford University and was part of Columbia’s University’s Computer Science Department until 1986 (to where he subsequently returned as a Senior Research Fellow). His career outside of academia began with computational finance at Morgan Stanley before beginning started D.E. Shaw & Co., L.P. However, founding the found has not limited his other interest: in 2002 he began building a scientific team and transferred day-to-day management of the fund to an executive team of four trusted colleagues alongside 35 other managing directors. This has enabled Shaw to devote his time to his role as chief scientist of D. E. Shaw Research, LLC, where he heads an interdisciplinary research group and conducts hands-on research into computational biochemistry.

As to the fund itself, it says its success comes down to “attempting to do what other companies might consider impossible, or never imagine at all.”  This is because it puts significant emphasis on the idea that “a single transformative idea that ultimately works—for a new business, a new trading model, or an improved back office process—is worth a dozen ideas that lead nowhere.” The fund, which has offices in North America, Europe and Asia and says it praises “analytical rigor”, adherence to the highest ethical and legal standards, and makes big philanthropic efforts. Notably, the staff come from a wide range of disciplines, with a focus on PhD graduates, authors, and prize-winning scholars.

Now let’s see how the fund played two key stocks in Q1:

Tesla Inc

Shaw initiated a position in controversial electrical automaker Tesla with the purchase of almost 50,000 shares valued at close to $14 million. This gives Tesla approx. 0.02% of the fund’s total portfolio value.

The market is very divided on the outlook for Tesla, hence its hold analyst consensus rating on TipRanks based on ratings published over the last three months. We can also see that the average analyst price target is currently a 24% downside from the current share price.

However mutual fund owner Joshua K. Spencer of the T. Rowe Price Global Technology Fund – one of the top mutual funds in the last five years- is not feeling so bullish. After buying big on Tesla at $175 he has now sold his entire Tesla holding with prices now hitting $370. Spencer said he was not concerned about Tesla’s acquisition of SolarCity in November last year because it “was less than 10% of the market value” but that the low prices this created gave him the perfect opportunity to snap up shares. However he is now concerned that “extreme winners” may lose some of their gains. In other words, Spencer is not bearish on Tesla per se but is cautious about what happens to prices when sentiment elevates quickly- and prefers stable companies with an established base of loya customers.

And he is not alone. Morgan Stanley’s Adam Jonas recently reiterated his hold rating on the stock with a $305 price target. He questions the market’s underlying assumption that Tesla is almost untouchable- and believes the stock could fall in the face of tough competition from larger tech rivals- most notably Apple which recently confirmed that it was looking to expand into the auto tech market.

Amazon.com, Inc

While Shaw turned on Tesla, he turned off e-commerce giant Amazon. Is this a move he will now regret in the face of its just-announced $13.7 billion Whole Food Markets (WFM) acquisition? Who knows. But what is known is that in Q1 he slashed his Amazon holding by 65% to 193,000 shares worth $171.2 million- about 0.3% of the total portfolio.

Amazon stock has now spiked to an all-time high of $1,017 as the market buzzes over the news of the Whole Foods acquisition, a deal which turns Amazon into a prime player in the high-end grocery market. In contrast, the share price of Whole Food Market competitors such as Wal-Mart and Kroger tanked on Monday as the threat of enhanced competition from WFM made investors tremble. Benchmark Co. Analyst Daniel Kurnos is predicting that the acquisition will bring increased operational efficiency to Whole Foods, particularly in stocking and staffing and improved grocery warehousing and has suggested cost synergies “could ultimately fall into the $2 billion range.”

In contrast to Shaw, the market is very bullish on Amazon. The stock has a strong buy analyst consensus rating on TipRanks with 29 buy ratings and only 3 hold ratings published on the stock in the last three months. Meanwhile the average analyst price target of $1,112 translates into potential upside from the current share price of over 11%.