Prowling for Battle-Tested Longs

 | Apr 08, 2014 | 11:32 AM EDT
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The hedge fund Coatue lost 9% in March, so I interested to read the firm's subsequent letter to investors -- and, in it, founder Philippe Laffont told investors that he would return to them $2 billion of the fund's $7 billion in assets under management. He said the fund's March performance was bad as what he saw in the 2002-to-2003 and 2008-to-2009 periods -- and that, in light of this, he now preferred to manage a smaller amount of money. Both his long and his short positions lost money, he said. He also noted that he had a substantially high amount of cash on hand, and that he expects it to remain such.

This letter carries a number of implications for market participants, because Laffont is a very successful hedge fund manager with a long track record. If he's nervous, you should be too.

For every Laffont, there are hundreds of other traders and hedge fund managers with similar thoughts and fears about the current market configuration. You can think this most recent market action is merely a stock rotation. But you have to plan as if it's the start of something more. Folks like Laffont are moving as if this is a start of a major de-risking.

For the last three month snow, Henry Blodget of Business Insider has been saying that stocks are overvalued and have the potential to come down by 50%. While we have seen major damage done in the high-flying tech and biotech sectors, this action has yet to cascade over to other sectors. At the same time, bullish sentiment among investors remains above 50%, according to several surveys.

The major indices -- even the Nasdaq -- are only down a few percentage points year to date. Moreover, we haven't yet seen a lot of redemption requests sweeping across different funds.

Maybe the market will bounce from current levels. We are, after all, seeing such action today in several of the worst-hit tech stocks. But, assuming that investors use the bounce to sell into strength, how do you pick winners on the long side in this kind of flat-to-down market?

Well, it goes without saying that you have to pick individual stocks with growth stories that are unfolding right now, and which will likely continue for the next few months.

With that in mind, one of the most resilient charts I've seen lately has been that of First Solar (FSLR). Looking at it year-to-date, you would think there's been no market volatility. First Solar has announced that it's moving into supplying consumers with solar panels, and its stock is up 28% for the year.

Zynga (ZNGA) is another promising name. If it rolls out new mobile games later this year, as most expect, it should see a rise in its monthly active user numbers. That will happen regardless of whether Russian president Vladimir Putin invades another country, or whether the Nasdaq continues to slump. You could, therefore, see Zynga's stock price move upward.

Of course, any time you are picking individual stocks, you face the risk that these individual stories will break down instead of continuing to blossom. So you have to weigh the risk of each one accordingly. Otherwise, if you've got any longs in your portfolio right now, they should really be battle-tested if you're to continue holding them.

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