Hedge fund manager Frank Sands, founder of the $28.7 billion fund, Sands Capital Management, has cut holdings in Palo Alto Networks Inc (NYSE:PANW), Facebook Inc (NASDAQ:FB) and Amazon.com, Inc. (NASDAQ:AMZN) in the crucial Q4 investing quarter. Sands is ranked #77 out of 202 hedge fund managers tracked by financial accountability engine TipRanks.
The ranking is based on the fact that the tech-focused fund has driven returns of 13.24% over the last 3 years (annualized basis), rising to 21.11% last year. However while the fund’s measured performance of 64.83% has easily eclipsed the performance of the average hedge fund portfolio (51.58%), the S&P 500 is still significantly in the lead with 84.2%.
Sands describes the fund’s investing process in the following way: “For over two decades we have focused exclusively on trying to identify leading growth businesses that meet our six investment criteria.” The criteria are sustainable above-average earnings growth; leadership in promising industry; competitive advantage; clear mission; financial strength; and rational valuation.
Clearly Sands felt that most companies were not living up to these criteria in the fourth quarter as he reduced about two thirds of the stocks in the fund’s portfolio. We look at three of those stocks here:
Palo Alto Networks Inc
In Q4, Sands cut the fund’s position in cybersecurity firewall company Palo Alto by 11.57%. The fund has retained a hefty 3.8 million shares worth $476 million. The shares have increased in value by 22.36% since the last filing date. However, prices have been knocked back slightly by the release of weaker-than-expected fiscal second quarter results on 28 February. Palo reported a profit of 63 cents a share (EPS), on sales of $422.6 million vs the expected EPS of 62 cents and sales of $430 million.
“While fiscal second quarter revenue of $423 million was yet another record for the company, we were disappointed that we came in below top-line expectations due to some execution challenges, which we are moving quickly to address,” CEO Mark McLaughlin said.
The analyst consensus rating on PANW is moderate buy while the average analyst price target of $153 is only a marginal 0.72% from the current share price. Several analysts downgraded PANW following the earnings release, including five-star analyst JP Morgan’s Sterling Auty who downgraded Palo Alto to hold while taking the price target to $140 from $170. Execution challenges typically take three-to-four quarters to run their course, Auty explained to investors in a research note.
Sands reduced the fund’s Facebook exposure substantially. He cut 21% of the holding to 16.9 million shares worth $1.94 billion which are up 17% since the last filing date. Facebook is still the fund’s second biggest holding, at 7% of the portfolio, just behind Visa at 9%.
Facebook owns social messaging app WhatsApp that has over 1.2 billion users across 180 different countries. Now Facebook has announced that WhatsApp users can add temporary statuses with drawings, emojis and captions that disappear after 24 hours. The move is a slap in the face for app SnapChat which has made its name on the back of such statuses and is set to go public with an IPO launch on 1 March.
However, this isn’t the only makeover Facebook has introduced recently- Instagram users can now upload multi-picture and video stories while Facebook Messenger has new voice and video-chat features that has already attracted 400 million users. And in the future, Facebook has exciting plans to introduce commerce-buttons that will enable users to buy make purchases related to social occasions such as food, transport and entertainment.
Analysts are very bullish on the social media giant which has a strong buy analyst consensus rating. In the last three months there have been no sell ratings on the stock and only 2 hold ratings (vs 34 buy ratings). The average analyst price target also suggests a confident 18.5% upside from the current share price of $135.
As we can see above, e-commerce leader Amazon is one of the fund’s biggest holdings at 6% of the portfolio. This is after Sands trimmed the fund’s AMZN position by 8.4% to 2.2 million shares worth $1.72 billion.
While Amazon’s cloud service AWS is a very successful part of Amazon’s business, the company suffered an embarrassing blip on Feb 28 when Amazon Simple Storage (S3) service managed to bring down part of the internet and entire website networks. S3 stores data for cloud-based apps such as Slack and Trello. As AWS is the world’s largest cloud company with over 30% of global cloud infrastructure, a small error can have serious shockwaves. Analyst Gene Munster called it a “temporary black-eye” for Amazon but ultimately, he believes customers are unlikely to switch to cloud competitors because of a one-off event.
“We continue to experience high error rates with S3 in US-EAST-1, which is impacting various AWS services. We… believe we understand root cause, and are working on implementing what we believe will remediate the issue” an AWS spokesperson said. US-East-1 refers to Virginia which is one of the busiest sources of internet traffic in the US.
Amazon has a strong buy analyst consensus rating as 27 out of 28 recommendations on the stock published in the last 3 months are buy ratings. Analyst price targets regularly top the $1,000 mark (see John Blackledge from Cowen & Co for example) although the average analyst price target of $941 suggests an upside of just 11% from the current share price.