Gavin Rochussen is the newly-appointed CEO for the Polar Capital hedge fund. And now, thanks to the release of 13F forms filed with the SEC, we can see where he chose to trade in the third quarter. Interestingly, Rochussen boosted two key payment stocks that have been recording strong performances recently: Square Inc (NYSE:SQ) and PayPal Holdings Inc (NASDAQ:PYPL).
Rochussen himself was recruited following the fund’s abysmal performance 2016. Profits plunged 22% on £763 million of net outflows during a ‘challenging’ six months period until the end of September. Pre-tax profit slid from £11.7 million to £9.7 million year-on-year with the former CEO referring to the double whammy of Brexit and the appointment of President Trump. The firm’s Japan and North American funds suffered the most, offsetting positive performances from the Biotechnology, Global Insurance, Global Alpha and European Income strategies.
Before joining the fund, Rochussen was head of JO Hambro Capital Management between 2008 and 2016. In this time its assets under management (AUM) soared from £1.5 billion to £23.9 billion. According to Polar Capital, Rochussen will receive £3 million worth of shares under its long-term incentive plan (LTIP). He has also committed to buying shares in the company for his own account or via a nominee. Meanwhile, the fund’s now-former CEO, Tim Woolley, has taken up a non-executive position on the board.
As for the fund’s investment strategy, Polar Capital says it tries to focus on investment performance over and above the gathering of assets. Specifically, Polar hopes to differentiate itself by pinpointing superior ‘fundamentally driven investment products that deliver differentiated risk adjusted returns over the long term.’ It says the combination with this and high levels of customer service can help the fund stand out in a crowded market place.
Now, bearing this in mind, let’s take a closer look at these two key third-quarter trades:
In the third quarter, Rochussen loaded up on Square with the purchase of 126,462 shares- boosting the fund’s holding of Square by 16%. The fund now has a total holding in the stock worth $27,384,000.
Following an outstanding year that has seen share prices soar by a whopping 260%, analysts are beginning to wonder whether these new levels are sustainable. For top Cantor analyst Joseph Foresi (and no doubt Rochussen) the answer is a clear yes. He has become even more bullish on the stock following its strong results for the third quarter. “Revenue growth accelerates as global payment volumes continue strong momentum,” writes Foresi. Revenue came in at $585 million, easily beating the consensus estimate of $572 million. Similarly, adjusted EPS of $0.07 came out above the consensus forecasts of $0.05. Looking into the future, the company issued upbeat revenue guidance for the full year of $963 to $966 million, marking an impressive leap of over 40% from last year’s results.
Bearing this in mind, Foresi reiterated his buy rating on SQ stock while boosting his price target all the way from $31 to $41 (1.43% upside). He sums up his bullish take on the stock thus: “Gross Payment Volumes growth continued to see out-sized growth in the period. We expect rapid growth to continue and further margin expansion going forward, driving stock performance.” Note that Foresi has a success rate on the stock of 100% and an average return of 29.2%.
However, in a surprise bearish move, BTIG analyst Mark Palmer downgraded Square shares yesterday from hold to sell. This is the stock’s sole sell rating on the last three months. His sell rating comes with an equally bearish price target of $30 (-28.5% downside from the current share price). The rating caused share prices to tumble nervously by nearly 11%. Palmer’s explanation speaks to investor’s worst fears: “While we have been impressed by the growth that SQ has generated during the past few quarters in terms of both adjusted revenue and gross payment volume (GPV), we believe substantial growth is already baked into its share price and that it is difficult to justify its valuation.”
Indeed Palmer believes that as Square works to attract increasingly bigger midmarket sellers, it will face rising competition from FDC’s Clover and Clover Go as well as others such as Vantiv. And while he accepts that Square has an attractive offering, especially bearing in mind its combination of hardware, software and managed payments, these do not afford the company an economic moat as the market hopes says Palmer. Interestingly, Palmer also has an impressive track record on SQ stock with an 83% success rate and 22.9% average return.
Overall, Square has a cautiously optimistic Moderate Buy analyst consensus rating from the Street. This breaks down into 13 buy, 11 hold and 1 sell rating in the last three months. Meanwhile, the average analyst price target of $37.36 translates into big downside from the current share price of -8.92%.
As well as Square, Rochussen also snapped up well-known payment firm PayPal. He ramped up the fund’s holding of this stock by 11% with the purchase of 69,474 shares. This gives the fund a sizeable PYPL position worth $48,120,000.
PayPal recently signed a deal with financial services company Synchrony Financial. Under the agreement, announced on November 16, Synchrony will acquire PayPal’s $6.8 billion U.S. consumer credit receivables portfolio. On the closing of the deal, set for the third quarter of 2018, PayPal should receive about $6 billion in cash. The two companies will also extend their existing consumer credit card relationship for another decade, while Synchrony will become the exclusive issuer of PayPal’s online consumer financing program.
Following the announcement, share prices dropped slightly although they have since recovered. Canaccord analyst Michael Graham explains that there will be a dilutive impact for PayPal due to the new profit-sharing agreement with Synchrony for the consumer credit business. However the firm also points out that management still expects to achieve its previous target of 20% operating income growth in 2018 given the accelerating growth of its core business. Plus the deal will free up cash- both in terms of the $6 billion received and an additional $1 billion annually from the consumer credit business. PayPal intends to reinvest this money into its core business, returning capital to shareholders, and pursuing strategic M&A opportunities.
Following the move, BTIG’s Mark Palmer reiterated his buy rating on PayPal with a $81 price target (4.25% upside potential). He expects the company to continue growing rapidly and says “we believe the most significant benefit to PYPL from the agreement may be the expansion of its earnings multiple as a result of the removal of credit-related volatility risk from the company’s risk profile.’
On TipRanks has a bullish Strong Buy analyst consensus rating. In the last three months, the stock has received 24 buy ratings plus 7 hold ratings. These analysts have an average price target on the stock of $79.52. Given that the stock is trading at $77.84, this suggests relatively minor upside potential from the current share price of 2.34%.