SRS Investment Management, LLC was founded in 2007 by a group of partners, including Edwin M. Stanton, Nicholas J. Rhodes, Danial K. Carr, and Richard D. Baier, who are all still with the company today, explains Nikolaos Sismanis, a specialist in analyzing hedge fund holdings and a contributor to Sure Dividend.
The firm is employee-owned with Karthik Sarma currently having the majority ownership. Mr. Sarma’s current title is Managing Partner of SRS Investment Management. The firm operates six private funds. He now oversees $7.7 billion in total Assets under Management (AUM) of which around $6 billion is invested in public equities.
Investors following the company’s 13F filings over the last three years (from mid-February 2018 through mid-February 2021) would have generated excellent annualized total returns of 33.8%. For comparison, the S&P 500 ETF (SPY) made annualized total returns of 12.5% over the same period.
SRS’s Investment strategy is to achieve high rates of return by investing in securities likely to generate long-term capital appreciation. The firm hopes to accomplish this by buying low, investing conservatively, and generating value through fundamental investment enhancements where possible.
The firm focuses on a bottom-up strategy, which means looking at each company fundamentally — making sure that earnings are growing at a substantial rate. Based on the respective performance of a company, the fund will increase or decrease its exposure to risk-adjust its portfolio.
The strategy has allowed the firm to grow its AUM incredibly fast, despite its relatively concentrated portfolio, which has never included more than 30 individual stocks. SRS’s portfolio comprises 26 individual holdings, the 10 largest of which account for 86.4% of the total weight.
The fund’s largest holding is Zillow Group (Z), accounting for 22% of its total holdings. While some real estate sub-sectors like malls and retail locations struggled during the pandemic, the demand for residential properties has remained robust.
As a result, revenues for Zillow Group, which operates a leading marketplace for residential real estate, ended 2020 at all-time high levels, generating $3.34 billion. The fund trimmed around 9% of its position during the quarter likely to book some profits.
It’s worth noting that while Zillow has been growing quite rapidly, the company has not managed to produce a profitable year. However, being a high-margin service, Zillow should eventually turn its bottom line positive.
In the meantime, its cash position of around $3.9 billion should easily sustain its short-term losses, as the company keeps reinvesting back into the business.
The fund’s second-largest holding is Netflix, Inc. (NFLX), at a position weighting 18.9%, despite management trimming the position by around 11%, selling around 318,000 shares during the past quarter.
Netflix has been the fund’s top holding for several quarters, with SRS apparently loving its long-term growth story. So far, they have been right, as Netflix’s stock is currently trading near all-time highs, beyond $500/share.
The company has achieved consecutive quarter-over-quarter revenue growth since 2012, with its global subscriber base continuously expanding.
As a result, Netflix has been able to leverage its economies of scale and has increasingly been reporting more solid profitability levels. In FY2016, the company booked $186 million in net income. In just four years, that figure grew to $2.76 billion.
With COVID-19’s new daily cases remaining strong, companies operating in the staying-at-home economy like Netflix are likely to continue flourishing. Coupled with its ever-expanding net income margins, Netflix is likely to remain investable, even near all-time highs.
Avis Budget Group (CAR) and Planet Fitness (PLNT) collectively account for around 20% of the fund’s holdings, in what we may call its high conviction distressed investment opportunities. These are companies in different sectors that have been adversely affected due to the pandemic.
The fund also holds significant positions in stocks such as Booking Holdings (BKNG) and MGM Resorts (MGM). As a result, it seems that it has selected what it believes to be the highest quality companies in sectors such as gaming, traveling, and gyms in hopes of a post-COVID resumption to normalcy.
These are some risky investments. For example, Avis was on the brink of bancruptcy just several months ago. The company has taken massive amounts of debt to stay solvent, which should hurt its long-term profitability prospects.
Nonetheless, because SRS has managed to scoop-up shares on the cheap, these investments could pay off, if they can reverse the current negative sentiment. SRS increased its positions in Avis and Planet Fitness by 2% and 20%, respectively.
The social media company Twitter (TWTR) accounts for just over 8% of SRS’s holdings, and its fourth-largest holding. Twitter’s investment case is more volatile and less clear than Facebook’s (in which the fund is also long), as the company has struggled to monetize its user base, let alone deliver some profits. Still, SRS held its position stable, continuing to believe in Twitter’s long-term future prospects.
