Renaissance Technologies has had one of the most successful histories of any hedge fund tracked by Insider Monkey. Because of the fund’s success and its very high fees, founder Jim Simons has built a multi-billion dollar fortune. We track Renaissance’s quarterly 13F filings alongside those of hundreds of other hedge funds and notable investors, using the results to help us develop investment strategies. We have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy) and our own portfolio based on these findings outperformed the S&P 500 by 33 percentage points in the last 11 months. Because we have this database of hedge fund activity, we can compare Renaissance’s most recent 13F (from the end of June) to the previous one to see which stocks the fund has been buying and selling (see a history of the fund's stock picks). Here are three trends we noticed in Renaissance’s recent activity:
Dumping IBM and Google. Renaissance’s investment team cut their stake in International Business Machines Corp. (NYSE:IBM) by about half between April and June, and reduced its holdings of Google Inc (NASDAQ:GOOG) to about 100,000 shares versus over 500,000 shares three months earlier. These companies have been moving in completely different directions in the current tech environment. International Business Machines Corp. (NYSE:IBM)’s revenue fell 3% last quarter compared to the second quarter of 2012, and net income was down 17%. The stock is down 5% in the last year against a rising market as investors are pessimistic about the company’s prospects, and in fact the trailing P/E here is 13. That would be close to value levels if International Business Machines Corp. (NYSE:IBM) could manage to maintain its current level of earnings, though we think Renaissance is right to be skeptical. Google Inc (NASDAQ:GOOG), meanwhile, has been recording double-digit growth rates on both top and bottom lines. It trades at 17 times forward earnings estimates, with the search business continuing to be a gem asset and at least the possibility that the company will be able to generate income growth from the Motorola Mobility division as well.
Apple. The fund used a good deal of the cash they generated from selling their IBM and Google Inc (NASDAQ:GOOG) shares to initiate a position of more than 700,000 shares in Apple Inc. (NASDAQ:AAPL). Apple Inc. (NASDAQ:AAPL) has been doing even worse in the market over the last year than IBM, as margins slip and profits decline as a result. The stock does feature a trailing P/E of only 12, and that figure counts Apple Inc. (NASDAQ:AAPL)’s large cash hoard as part of its market capitalization- meaning markets are already pricing in at least a modest decrease in net income going forward. Apple Inc. (NASDAQ:AAPL) had been the most popular stock among hedge funds in the first quarter of the year, just ahead of Google Inc (NASDAQ:GOOG) (check out the full top ten list).
Cheap calories. Two of Renaissance’s top eight picks, and two positions which it increased significantly during the second quarter of 2013, were McDonald's Corporation (NYSE:MCD) and Hershey Co (NYSE:HSY). McDonald's Corporation (NYSE:MCD) was in fact the fund’s largest holding by market value at 6.4 million shares. Its valuation of 18 times trailing earnings is a discount to many other quick service restaurants, though the company has been delivering much weaker performance than its peers: earnings grew only 4% in the second quarter of 2013 versus a year earlier.
Of course, McDonald's Corporation (NYSE:MCD) is a popular defensive pick with a beta of 0.2 and (at this time) an annual yield of 3.2%. The Bill and Melinda Gates Foundation Trust has been another major shareholder in McDonald’s (find more stocks the trust owns). Hershey Co (NYSE:HSY) also features a beta of 0.2. Its revenue was up 7% in its most recent quarter compared to the same period in the previous year, with earnings up 18%. However, with trailing and forward P/Es of 30 and 24 respectively markets have already priced in high growth for the next few years.