Hedge fund manager Jonathon Jacobson is co-founder of the $12 billion Highfields Capital Management fund. By examining 13F forms filed with the SEC we can see that in Q4 Jacobson boosted the fund’s positions in controversial automaker Tesla Inc (NASDAQ:TSLA) and healthcare giant Gilead Sciences, Inc. (NASDAQ:GILD).
Jacobson himself has a traditionally illustrious finance background: he graduated with a B.S. in Economics from the Wharton School which he followed up with an M.B.A. from Harvard Business School. His career led him to a series of impressive roles including senior equity portfolio manager of Harvard Management Co, and vice president of the Equity Arbitrage Group at Shearson Lehman Brothers in New York.
Jacobson, a well-known philanthropist, subsequently began his own venture when he co-founded Highfields Capital Management with Richard Grubman back in 1998. They began the fund with just $1.5 billion in assets, a figure which quickly grew as the firm posted impressive gains over its first decade due to a cleverly-managed fundamental value investment approach.
The firm made headlines at the end of 2013 when Jacobson decided to return up to $2 billion to clients: “While we are quite comfortable with our ability to generate good returns at our current size, we would rather be slightly smaller and generate better ones,” Jacobson wrote in a letter sent to investors, explaining “It has become increasingly difficult to find new compelling investments given today’s low interest rates and how much equity multiples have expanded over the past 12 months.”
Indeed, since its early peaks the Boston-based firm has seen returns decline with the firm subsequently telling investors at the end of 2014 that it was expecting redemptions equaling about 3% of its $12.5 billion in assets (i.e. $370 million) following low single-digit returns, according to Bloomberg.
Will the fund’s latest Q4 moves improve its outlook for 2017? Let’s take a closer look now at two stocks that Jacobson is betting on to improve the fund’s returns:
Highfields ramped up its position in Tesla by as much as 250% to 350,000 shares valued at $74.8 million. Despite the increase, the stock still makes up just a fraction of the portfolio’s total holdings (about 0.6%). While Jacobson may be revealing a bullish approach to Tesla, Wall Street analysts are much more cautious. In the last three months, there has been a fairly even balance between the number of buy, hold and sell ratings published on the stock according to financial accountability engine TipRanks.
The market is holding its breath for the launch of Tesla’s $35,000 Model 3 all-electric luxury sedan with limited production set to begin in July. Tesla CEO Elon Musk recently surprised investors with his assertion that the Model 3 will outsell top luxury brands such as the BMW and Mercedes in the space of just one year. The company is planning an extremely ambitious production acceleration from 1,000 cars a week in July to 4,000 a week in September, moving up to 10,000/ week by the end of next year. This translates into a final goal of about 500,000 cars a year- an unprecedented target both in terms of demand and supply- especially for electrical cars priced at $35,000.
Top Morgan Stanley analyst Adam Jonas believes that the Model 3’s safety performance will be the “real surprise” that drives the Model 3 awareness and could ultimately increase demand. He says the Model 3 should be “significantly” safer than other cars, adding “You don’t put a liquid cooled supercomputer in every car to make it just twice as safe as other cars”. In fact, Musk’s goal is to make the Model 3 10x safer than the average car. Jonas says safety is a crucial demand factor as “nearly every” automaker he talks to says safety is the key determinant of purchases, and it could also convince insurance companies to reprice premiums. Jonas reiterated his buy rating on the stock with a $305 price target (16% upside).
Gilead Sciences, Inc.
The fund initiated a new position in biopharma giant Gilead Sciences with 348,100 shares with a value of close to $25 million. This could be a good move if the stock achieves the kind of gains anticipated by top Barclays analyst Geoff Meacham who reiterated his buy rating on the stock on March 21 with a bullish $90 price target (33% upside).
Meacham is waiting for Gilead to make a crucial strategic acquisition to expand its current offering. Gilead is suffering as demand for its key Hep-C franchise (Harvoni and Sovaldi) declines as patients complete successful treatments and stop buying the drugs. He says most “[…] investors agreed with the need for a larger, more transformational deal, which could be multiple-expanding and pipeline accretive. Importantly, this could provide a real catalyst to put GILD shares back on a growth trajectory that could be more broadly appealing to investors; we suspect this is fully appreciated by the management team and board.”
Out of the 26 analysts polled by TipRanks (in the past 12 months), 14 rate Gilead Sciences a Buy, while 12 rate the stock a Hold. With a return potential of 24%, the stock’s consensus target price stands at $84.11.