Billionaire fund manager Izzy Englander is pulling out all the stops to revive the fortunes of his $34.4 billion Millennium Management fund. In the second quarter he made two key (and very successful) plays on Alibaba Group Holding Ltd (NYSE:BABA) and fast-growing Lam Research Corporation (NASDAQ:LRCX). The firm’s main fund experienced its worst year since 2008 last year, according to Bloomberg. For Millennium Management this may still mean a gain of 3.3%- but its far off its usual breakaway double-digit returns of the prior three years.
But it’s not just the fund’s performance that has been making headlines. Eyebrows raised after the abrupt and unexpected departure of the Englander’s top dog and potential successor Michael Gelband in January. The rumor is that, after eight years, Gelband wanted a stake of the firm- something Englander wasn’t prepared to give. However, it is unlikely that a wildly successful man like Izzy Englander will be daunted by this departure for too long.
The son of Polish immigrants, Englander has built the fund up from nothing to a huge fund with over 2,000 employees and international operations. As for strategy, the fund uses a multi-manager approach which means “opportunistically engaging in a broad array of trading and investing strategies across a wide group of diversified managers.” Perhaps unsurprisingly, it says its goal is to have more winning days than losing day, even if this means making only small gains on winning days.
And- despite it being one of the more expensive hedge funds- investors continue to flood Millennium with funds, even as other hedge funds face demands for lower fees amid poor performance metrics. The fund famously passes on all the full extent of its business costs to customers – which can mean fees of over 5%. So far this strategy appears to be working for billionaire Englander, who began his career as a floor broker on the American Stock Exchange before founding the fund in 1989. Now he plans to keep working until he is 80- but he will still need to select a leader to take over the fund once this day comes.
With this in mind, let’s delve into two of the fund’s most intriguing trades of the second quarter:
Alibaba Group Research Holding Ltd
In the second quarter, Englander didn’t hold back with his trades on this Chinese e-commerce giant. He ramped up the fund’s BABA holding by 114%, buying 87,929 shares. The fund now holds a total BABA holding of 165,231 shares valued at $23,281,000.
No doubt Englander is keeping his eye out for Alibaba’s earnings report on November 2. As we approach this critical date, expectations are very high for Alibaba. The stock has a consensus earnings per share (EPS) estimate of $0.84, a big improvement from last year’s EPS of $0.63. Top Baird analyst Colin Sebastian is very positive on the stock’s fundamental growth picture, but warns that margins may well be constricted in the second half of the year. This is down to the trio of increased platform spending, investments in media/digital content, and the $807 million stake in Cainiao logistics.
Indeed, Alibaba plans to drop more than $15 billion in R&D over the next three years on developing artificial intelligence and machine learning technology. Ultimately, Sebastian believes these advanced technologies will pay off by giving BABA “a sustainable competitive advantage” against smaller rivals. The fact that it has such a strong core retail performance enables BABA to fund such expensive, but nonetheless worthwhile, initiatives.
Sebastian says, “At Alibaba’s June investor day, management provided F2018 (March) revenue growth guidance of 45-49%, and we are encouraged by the company’s success in integrating recent acquisitions (including Youku and Lazada) to supplement strong core retail growth trends. In addition, the company reiterated its long-term goal to roughly double GMV by F2020 to 1Tn USD (up from 547B USD in F2017).”
As a result, Sebastian decided to reiterate his buy rating on BABA on October 17 with a $190 price target. This translates into upside potential for BABA of just over 8%. And if you are unconvinced by his analysis, note that Sebastian is one of the Top 25 analysts on TipRanks, with an 88% success rate and 45% average return on BABA stock specifically.
Overall, BABA has a very bullish ‘Strong Buy’ outlook from the Street. TipRanks reveals that in the last three months, the stock has received only buy ratings from 16 different analysts. These analysts have an average price target on the stock of $199.40- which suggests Alibaba still has big upside potential of almost 14%.
Lam Research Corp
This booming semiconductor manufacturer received the thumbs up from Englander last quarter. He snapped up 423,370 shares- increasing the fund’s LRCX holding by 53%. Now the fund has a sizeable LAM Research position of 801,401 shares valued at $102,868,000.
And it is looking like a wise move- the company has just reported a beat-and-raise fiscal first quarter. Lam Research reported adjusted EPS of $3.46, up an incredible 91% from the same period the previous year, with sales of $2.48 billion, up 52%, for the quarter ending September 24. Both easily exceeded the consensus estimates going into the print of $3.28 EPS on revenue of $2.47 billion.
On the back of such a strong performance, Lam released more bullish estimates for the current quarter. The company is now modelling adjusted EPS of $3.65 on sales of $2.55 billion. And following the results, five-star B. Riley analyst Craig Ellis reiterated his buy rating on the stock with a very strong $220 price target. Ellis explains that he is impressed with geographic shipment mix diversification plus strong operating and financial execution.
Meanwhile LRCX CEO Martin Anstice had this to say about the company’s growing success: “Lam delivered another record quarter for revenue and non-GAAP income in September and our positive momentum continues, with calendar year shipments on track to grow nearly double the rate of 2017 industry growth.” Most encouragingly, he believes that this capital equipment spending is sustainable due a data-driven economy and a diverse range of demand drivers in the semiconductor market.
If we step back and look at the bigger picture, we can see that overall the stock has a ‘Strong Buy’ analyst consensus rating. In the last three months, the stock has received 11 buy ratings and just 1 hold rating. With an average analyst price target of $217, analysts are projecting upside potential of 6.6% from the current share price.