There are only so many investors who can say they grew a fund from tens of millions to tens of billions — and Israel Englander is among them. The billionaire hedge fund CEO launched Millennium Management with Ronald Shear in 1989 with $35 million in seed capital. Today, that initial investment has grown into one of the largest hedge funds in the world with over $70 billion in assets under management.
Englander is among the best of the best, so investors are always curious about Millennium’s investments. Today, Millennium is a “pod shop,” meaning many portfolio managers and their small teams use Millennium’s capital to invest with their own strategies. So not every investment is being made directly or even with the approval of Englander. However, as the CEO, Englander still has control over the company and strong influence over hiring and risk tolerance.
In the third quarter, Millennium sold nearly two-thirds of its stake in Domino’s Pizza (DPZ -1.25%) and piled into a company that Wall Street analysts believe has significant upside. Let’s take a look.
Ditching Domino’s
In Q3, Millennium sold 64% of its shares in Domino’s and also increased its position in put and call options on the stock. The company owns more puts, which pay out when a stock declines beyond a certain level. It’s interesting to see Millennium sell Domino’s because billionaire Warren Buffett’s holding company Berkshire Hathaway purchased shares of Domino’s in Q3. It was one of two stocks the large conglomerate purchased in the quarter.
Domino’s hasn’t performed well, with the stock only up about 12% this year. The broader benchmark S&P 500 is up more than 27%. Much of Domino’s gains also came after Berkshire disclosed its purchase. Domino’s is the largest pizza company in the world, but franchise restaurant businesses have struggled this year due to higher costs, intense competition, and high labor turnover in a historically strong labor market.
Domino’s trades over 28 times next year’s earnings, so the valuation isn’t exactly cheap, although it’s cheaper than earlier this year. Domino’s surprised investors and analysts earlier this year when it revealed that international store openings were coming in weaker than expected. The company has a moat, given its huge network of stores and long-standing brand, and it can certainly bounce back. However, some investors may not be willing to wait. The company’s dividend yield is nothing special, so investors may want to ride the bull market elsewhere. Remember, most portfolio managers typically invest for 12- to 18-month returns.
Investing in a burgeoning market in the sky
One of Millennium’s new positions in the quarter was the electric air taxi company Archer Aviation (ACHR 8.09%). The fund purchased more than 3.2 million shares and is now the 11th largest shareowner, including market makers that don’t take economic positions.
Archer has developed a cult following as one of two U.S. companies hoping to launch commercial air taxi rides. Its Midnight Aircraft can do back-to-back 20- to 50-mile flights for four passengers and a pilot. This would provide a sustainable travel solution, and significantly alleviate traffic and travel times in large cities.
Archer has also achieved important regulatory milestones such as obtaining final airworthiness criteria from the Federal Aviation Administration (FAA). The company also completed 400 test flights earlier this year and thinks it could launch some initial flights as soon as next year. Archer has also been setting up planned routes in various cities and forming partnerships with the airlines.
Analysts are bullish on the stock. According to TipRanks, the average price target among four analysts is $9.30, implying roughly 30% upside from the stock price as of this writing. The most bullish analyst has a price target of $12.50, suggesting roughly 75% upside from current levels. Archer has a tremendous opportunity with the global electric vertical take-off and landing (eVTOL) market projected to grow by roughly $12.3 billion between 2024 and 2028, according to Technavio. The company is one of two that has hit key regulatory milestones. If it’s successful with commercial flights, I’m sure estimates on market growth will fly higher.
However, investors should understand that they are effectively investing in a late-stage start-up here, and the company is pre-revenue. I like the risk-reward proposition at current levels. However, shares have been volatile, so investors should understand that this is still a risky investment, especially if the stock closes in or surpasses analyst estimates.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Domino’s Pizza. The Motley Fool has a disclosure policy.
