The “Tiger Cub” behind Archegos Capital’s epic collapse may not have learned the right lessons from his former teacher
Julian Robertson’s unique investment philosophy gave birth to a new generation of hedge fund managers, often called the “tiger cubs.”
Bill Hwang, a student of Julian Robertson and the leader of Archegos Capital Management, made $20 billion before losing it all in just two days.
With the collapse of Archegos Capital Management, investors are wondering if this contagion has spread to the other tiger cubs.
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Bill Hwang and his fund, Archegos Capital Management, have made waves in the financial industry following the news that the fund quickly made $20 billion before losing it all in just two days.
Hwang was known as one of the greatest traders to ever live. Now, his last bet is known as one of the most speculative failures in modern financial history.
In short, Hwang leveraged significantly to up the ante on his ViacomCBS (VIAC) position. When the stock fell, lenders demanded their money and forced margin calls on Archegos.
By forcing Archegos to close its trades, the fund booked this record loss, and was unable to cover its other positions.
This highlights just how risky unregulated markets can be, as Wall Street banks all were forced to take huge losses from their loans.
Bill Hwang was a student of Julian Robertson, the former head of Tiger Management. Some investors are now looking at all of the successors of Julian Robertson, or the “tiger cubs,” for potential risk.
A few months ago, Bloomberg reported that another “tiger cub,” Tiger Global, was the top performing hedge fund in 2020. It managed to generate $10.4 billion for its clients in a year with volatility, uncertainty, and unprecedented market conditions.
While we highlighted Tiger Global back in February, it’s worth seeing how the fund has adapted its portfolio through the end of the year to understand what the top managers are seeing, and if they are making better investment decisions than Archegos.
In March 2000, Julian Robertson made the decision to return all Tiger Management’s investors’ money and shut down the hedge fund.
One of Tiger’s funds, the Jaguar Fund, had dropped 14% in the first 2 months of the year, having lost almost 18% since late 1998. After a $2 billion loss on a bad bet in the Japanese yen in 1998, Tiger had steadily seen investors leaving, and had taken on losses, seeing the firm’s AUM drop from $20 billion in 1998 to $6.5 billion at the time Robertson decided to close the doors.
Robertson and Tiger had been one of the early stars of the hedge fund world. He took $8 million in capital in 1980 and turned it into over $20 billion by the fund’s 1998 peak.
But Robertson was too early to the party of shorting internet stocks. His dogmatic value based philosophy on investing led him to be long old-economy companies in the late 1990s, in the face of a rampant growth-focused bull market.
It meant that when he reached his peak in AUM, it was just when he started losing money. And because of that timing, many have said he actually lost more money for investors than he ever made them in the prior 18 years.
Ironically, March 2000, when Tiger threw in the towel, was the market peak, and Robertson ended up being proven right.
He made plenty of money after 2000, as he remained short the internet bubble with his own money, but his investors never got to participate.
But that’s not the most important thing that came out of Tiger Management. The most important thing was the group of investors that Robertson mentored and sponsored at Tiger growing after its demise.
He had built an all-star team at Tiger. They matured under him, absorbing his deep fundamental research perspective.
Importantly, with his help, they also learned his mistakes in the dot.com bubble, and understood the importance of timing their investments to avoid being right too soon as Robertson had been.
In the aftermath of the dot.com bubble, Robertson sponsored several of his former employees in setting up their own hedge funds.
He would provide them with initial capital for a stake in their fund. He would continue to mentor them. And he would help them create a network of Tiger Cubs, that would share ideas and research, much like they had inside of Tiger Management, to maximize returns.
These great investors include brand names like Samlyn, Maverick, Lone Pine, HealthCor, and Coatue. Hedge funds that are amongst the most respected investors today.
However, most would agree the most successful and largest of the tiger cubs is Chase Coleman and his firm, Tiger Global.
Coleman and Tiger Global follow Robertson’s fundamental research-driven footsteps. Their strategy is not as simple as focusing just on value companies, like Klarman at Baupost, or growth companies, like Driehaus.
Their goal is to find great thematic ideas that are mispriced by the market, which can run the gamut of deep value, value, GARP, and growth names, depending on the market context.
When looking at Tiger Global’s holdings, anyone using as-reported accounting metrics would likely be scratching their heads. Coleman and his firm are focused on the true fundamentals of companies when they are looking for mispriced firms.
Using traditional as-reported accounting metrics, the fundamentals and KPIs for businesses don’t line up with the accounting. It is only once those holdings are looked at with a lens that better represents economic reality, and lines up with the KPIs and real fundamentals, that their investments become apparent.
To show what we mean, we’ve done a high level portfolio audit of Tiger Global’s top holdings, based on their most recent 13-F. This is a very light version of the custom portfolio audit we do for our institutional clients when we analyze their portfolios for torpedos and companies they may want to “lean in” on.
See for yourself below.
Using as-reported accounting, investors would think Coleman and Tiger Global weren’t picking particularly compelling themes, given that the companies exposed to those themes barely had positive return on assets (ROA) on average.
On an as-reported basis, many of these companies are poor performers with returns below 1%, and the average as-reported return on assets (ROA) is immaterial.
In reality, the average company in the portfolio displays an impressive average Uniform ROA at 13% This is well above the current corporate averages of 12%. These are the kind of companies that likely have fundamental and thematic tailwinds.
Once the distortions from as-reported accounting are removed, we can realize that Alibaba (BABA) doesn’t have an 5% ROA, it is actually at 119%. Alibaba is a cash generating machine that has earned its $635 billion valuation.
Similarly, TransDigm’s (TDG) ROA is really 53%, not 7%. While as-reported metrics are unimpressive, Uniform Accounting shows the company’s real robust operations.
JD.com (JD) is another great example of as-reported metrics mis-representing the company’s profitability.
JD’s ROA isn’t at 2%, it is actually at 8%. Tiger Global appears to understand that market returns for the company aren’t below the cost-of-capital, but are in fact extraordinary.
The list goes on from there, for names ranging from Spotify (SPOT) and ServiceNow (NOW), to Microsoft (MSFT), Workday (WDAY), and RingCentral (RNG).
If Tiger Global were focused on as-reported metrics, it would never pick most of these companies because they look like anything like the thematically-powered companies with fundamental tailwinds that are the fund group’s mandate.
But to find companies that can deliver alpha beyond the market, just finding companies where as-reported metrics mis-represent a company’s real profitability is insufficient.
To really generate alpha, any investor also needs to identify where the market is significantly undervaluing the company’s potential.
Coleman and Tiger Global are also investing in companies that the market has low expectations for. Were the firm to beat these expectations, upside follows.
This chart shows three interesting data points:
- The 2-year Uniform EPS growth represents what Uniform earnings growth is forecast to be over the next two years. The EPS number used is the value of when we take consensus Wall Street estimates and we convert them to the Uniform Accounting framework.
- The market expected Uniform EPS growth is what the market thinks Uniform earnings growth is going to be for the next two years. Here, we show by how much the company needs to grow Uniform earnings in the next 2 years to justify the current stock price of the company. If you’ve been reading our daily analyses and reports for a while, you’ll be familiar with the term embedded expectations. This is the market’s embedded expectations for Uniform earnings growth.
- The Uniform EPS growth spread is the spread between how much the company’s Uniform earnings could grow if the Uniform earnings estimates are right, and what the market expects Uniform earnings growth to be.
Tiger Global is not just finding high quality companies with significant thematic-driven growth opportunities though, it is finding mispriced companies.
The average company in the US is forecast to have 5% annual Uniform Accounting earnings growth over the next 2 years. Tiger Global’s holdings are forecast by analysts to outpace that, with the median company forecast to have 42% a year earnings growth the next 2 years.
On average, the market is pricing these companies to shrink earnings by 63% a year. While these companies are growing robustly, they are intrinsically undervalued, as the market is mispricing their growth by 105% on average.
These are the kinds of companies that are likely to see their stocks rally when the market realizes how wrong it is. Without Uniform numbers, the GAAP numbers would leave everyone confused. And the risk of returns collapsing is low, considering how high quality these companies are.
One example of a company in the Tiger Global portfolio that has growth potential that the market is mispricing is Carvana (CVNA), Carvana’s analyst forecasts have 17% Uniform earnings shrinkage built in, but the market is pricing the company to have earnings shrink by 227% each year for the next two years.
Another company with similar dislocations is Peloton (PTON). The market is expectating 103% growth in earnings. However, the company is actually forecast for Uniform EPS to grow by 194% a year.
Yet another is JD.com (JD), which is priced for a 38% growth in Uniform earnings, when the company is forecast to grow earnings by 65% a year.
ServiceNow (NOW) is forecast to see Uniform earnings grow by 15% a year going forward. However, the market is pricing the company for 56% annual earnings growth.
This doesn’t look like an intrinsically undervalued company. If anything, the market looks significantly too bullish.
That being said, there are a few companies we’d recommend Tiger Global look at again before holding. Either the rest of the market has not caught up with the themes Tiger Global is watching yet, or Tiger has misjudged these companies’ growth.
But many of Tiger Global’s holdings clearly look like the type of thematically fueled companies with growth tailwinds and upside potential. It wouldn’t be clear under GAAP, but unsurprisingly Uniform Accounting sees the same signals that Tiger Global appears to. Without UAFRS, investors would miss Tiger Global’s strength compared to the failed tiger cub Archegos.
SUMMARY and JD.com, Inc.’s Tearsheet
As Tiger Global’s largest individual stock holding, we’re highlighting JD.com, Inc.’s tearsheet today.
As our Uniform Accounting tearsheet for JD.com, Inc highlights, JD’s Uniform P/E trades at 50.9x, which is above the corporate average valuation of 23.7x and its own historical valuation of 45.4x.
High P/Es require high EPS growth to sustain them. In the case of JD, the company has recently shown a 41% Uniform EPS shrinkage.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, JD’s Wall Street analyst-driven forecasts are 92% EPS growth in 2021 and 41% EPS growth in 2022.
Based on current stock market valuations, we can back into the required earnings growth rate that would justify $77.25 per share. These are often referred to as market embedded expectations.
The company can have Uniform earnings grow by 38% each year over the next three years and still justify current price levels. What Wall Street analysts expect for JD’s earnings is above what the current stock market valuation requires in 2021 and 2022.
Furthermore, the company’s earning power is 1x the corporate average. Also, cash flows and cash on hand are consistently well above total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a low credit and dividend risk.
To conclude, JD’s Uniform earnings growth is above its peer averages, while their valuations are traded well above its average peers.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research