Dr David E Shaw has created a reputation as a fearsome quant trader and an award-winning scientist. He is the founder of the extremely profitable D.E. Shaw hedge fund- one of the world’s first quant funds- back in 1988. And luckily for investors we can track the $43 billion fund’s latest moves via forms filed with the SEC. In the last quarter Shaw demonstrated a noticeably bullish attitude on the outlook of China’s fast-growing e-commerce industry with key moves in Alibaba Group Holding Ltd (NYSE:BABA) and Baozun Inc (NASDAQ:BZUN).
However, it is worth noting that Shaw is no longer actively involved in the fund’s day-to-day trading activities. Perhaps he is already satisfied with the whopping $400 million he earnt in 2016. Nonetheless the fund makes clear that Shaw still participates in certain higher-level strategic decisions affecting the investment management business. Plus, the fund continues to utilize his insights in its trading strategy. Now this quant guru has returned to his roots and dedicates the majority of his time to scientific research.
Indeed, he is the chief scientist of D. E. Shaw Research, LLC where he leads an interdisciplinary research group in the field of computational biochemistry. He is also a fellow at Colombia University and Professor at Colombia medical school. On top of this, Shaw was honored with a double appointment to the President’s Council of Advisors on Science and Technology- first by President Clinton in 1994, and then again by President Obama in 2009.
As for the fund itself, D.E. Shaw is well known for its use of sophisticated mathematical models and algorithmic trading. “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” says the fund. It continues “We’ve learned that when an extraordinary team sets extraordinarily ambitious goals, astonishing breakthroughs can be expected.” And the firm has ensured that this is the case with over 60 of its investment professionals holding Ph.D.’s.
Now let’s dive in and take a closer look at these 2 key stock trades from Q3:
In Q3, Shaw demonstrated a very bullish sentiment on the Chinese e-commerce king Alibaba. He snapped up 1,013,514 BABA shares worth a whopping $181,712,610. This 213% increase boosted the fund’s total BABA holding to 1,488,814 shares.
Year-to-date BABA has already exploded by 96%. But top Tigress Financial analyst Ivan Feinseth is confident that this is just the beginning. He says: “Business Performance continues to accelerate as BABA leverages its core e-commerce platform and develops initiatives in new retail and other future growth opportunities.” On the e-commerce side, the analyst draws attention to the “Chinese robust telecommunication infrastructure [that] continues to enable BABA to dominate the fast-growing Chinese e-commerce market.” Indeed, a prime example of this is BABA’s record-breaking performance on China’s online shopping bonanza Singles Day. In just 24 hours, BABA earned over $25 billion in revenue, marking an incredible 40% rise from the previous year.
However, BABA should also benefit from its promising New Retail strategy says Feinseth. Like Amazon in the US, BABA is working on bridging the gap between online and offline retail. To do this BABA is using data analytics and artificial intelligence to help predict shopper’s buying decisions. At the same time, the company is putting its money where its mouth is (so to speak). In late November the news broke that BABA was planning to invest almost $3 billion for a 36% stake in China “hypermart” operator Sun Art Retail. And the company already operates 20 digital-first supermarkets called Hema where consumers shop using a mobile phone app. “We don’t view this as purely physical retail, but rather as an opportunity to transform from physical to digital,” Alibaba CEO Daniel Zhang told Fortune. “We still need physical stores, but we want to redefine the experience.”
Ultimately Feinseth concludes that strong growth lies ahead: “We believe BABA can continue to grow revenue and penetrate new markets, both in China and internationally. We believe BABA can continue to invest to drive increasing return on capital, along with growing economic profit and greater shareholder value creation. We believe further upside exists from current levels.” Note that this is a top analyst to track according to TipRanks. Indeed over 181 stock ratings he boasts an impressive 71% success rate and 16.7% average return.
Overall, we can also see that BABA has one of the best outlooks from the Street. In the last three months the stock has scored no less than 17 consecutive buy ratings from analysts. These analysts believe (on average) that the stock spike by a further 19% to hit $210.
Shaw’s bullish attitude extended to another Chinese stock, Baozun Inc. Baozun is the largest brand E-commerce business partner in China. During the third quarter, Shaw picked up 41,287 shares in BZUN worth $1,322,422. After this 326% increase the fund’s total holding now stands at 53,952 shares.
This company has been described as the ‘Shopify’ of China. It focuses on bringing offline retailers online through providing all the serviced needed to set up an online business including digital storefronts, marketing, customer, fulfillment, and IT services. Interestingly the company also helps bring major US brands to Chinese consumers including Nike and Calvin Klein, and also works with online marketplaces including Alibaba and JD.com. Indeed, BABA owns about a fifth of BZUN shares.
However, after posting strong share gains from just $12 in December 2016 to $40 in September this year, shares have been experiencing considerable volatility. Prices dropped again to $27 on December 4, and are now slightly up again at almost $32. Most of this volatility appears to be down to the company’s mixed third-quarter earnings results. Even though results beat the consensus estimate on both the top and bottom line, very bullish investors were still disappointed. Baozun reported revenue of $134 million per share (up 18.8% year-over-year) and adjusted earnings of about $0.09. This was approximately $0.01 higher than the consensus analyst estimate.
Baozun CEO Mr. Qui refused to be disheartened, saying: “We are pleased to report another outstanding quarter where we continued to strengthen our long-term competitive advantages, drove strong growth from our existing online stores and optimized efficiency with innovative new tools.” He says Baozun will continue to invest in technology to strengthen its competitive position. Crucially, Qui also revealed that he expects Baozun’s services revenue in its fourth quarter to increase 55% year over year. Indeed, we can see that this is the same rate (55%) experienced by the company for services revenue in the third quarter as well.