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Stephen Mandel’s Investment Check-List

Lone Pine’s Stephen Mandel is widely regarded as one of the best bottoms-up fundamental portfolio managers out there. He also has a great reputation for managing his employees well, which is rare in the hedge-fund industry.

One of the keys to Mandel’s success is he gives check-list guidelines for his analysts to follow in what he wants for longs and shorts. Given Lone Pine’s success over the years, I would say the guidelines are working.

For long ideas Mandel wants:

-sold return on capital
-good cash flow
-prudent balance sheet
-competitive barriers (aka moat)
-strong management team

Mandel focuses on the long-term opportunity market size. He wants to see a long runway for growth where a company can reinvest capital at a high rate of return. That’s why he loves retail roll-out stories because if a retailer is successful in one region it is likely to be successful nation-wide.

For short ideas Mandel wants:

-avoid private equity targets (companies with good cash flow etc.)
-competitively challenged (aka no moat)
-fads, 1 product companies
-falling knives (results will be much worse than consensus)

For his price targets on solid growth companies, Mandel’s analysts model earnings 2 years out and are willing to put a 25Xs earnings multiple on that forecast. The game-plan is one year later the company will be valued at 25Xs forward earnings with the stock hitting the analyst’s price target as consensus catches up to Mandel’s analyst earnings estimate.

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