Billionaire Steve Cohen’s SAC Owns 5% of Arris Group

SAC Capital Advisors, a large hedge fund managed by billionaire Steve Cohen and his team, has reported a position of 5.7 million shares in Arris Group, Inc. (NASDAQ:ARRS), a $1.9 billion market cap communications equipment designer and manufacturer. This is up from the 2.6 million shares that SAC reported owning at the end of September 2012, and the fund now owns 5% of the total shares outstanding (see more of Cohen’s stock picks).

13D and 13G filings such as this one are not as comprehensive as quarterly 13F filings, and reporting requirements mean that they are generally only filed for small-cap and mid-cap stocks, but we think that it’s actually more important to know what hedge funds and other notable investors think of these companies. Because they receive less attention from mutual funds and the financial media, hedge fund teams are more likely to uncover a mispriced stock when they analyze a small-cap or mid-cap company. In fact, the most popular small cap stocks among hedge funds which we reported in our August 2012 newsletter produced an excess return of 18 percentage points between September and January (read more about our hedge fund strategies).

Steven CohenLast quarter Arris’s revenue grew by 22% from its levels a year earlier, and operating income was up 70% if we add back an impairment charge to Q4 2011 which had left the company unprofitable in that quarter. While these growth rates would slow as Arris Group, Inc. starts to grow from a larger base, we would say that the company looks quite healthy for now. The trailing earnings multiple is 36, with Wall Street analyst consensus for $1.20 in earnings per share this year (for a current-year P/E of only 14) and for forward numbers which have the stock trading at 11 times 2014 estimates. If the company can hit those targets and still have significant growth potential than it could turn out to be a good value.

David Dreman’s Dreman Value Management had cut its own stake in Arris Group, Inc. by 17% during the third quarter of 2012 but still closed September with 2.5 million shares in its portfolio (find Dreman’s favorite stocks). First Pacific Advisors, which is co-managed by Robert Rodriguez and Stephen Romick, was the largest holder of the stock in our database of 13F filers at that time with 4.9 million shares (check out more stocks First Pacific owned). Valinor Management was another major shareholder, reporting ownership of 4.2 million shares at the end of Q3.

We would compare Arris to Cisco Systems, Inc. (NASDAQ:CSCO), Motorola Solutions Inc (NYSE:MSI), Juniper Networks, Inc. (NYSE:JNPR), and Alcatel Lucent SA (NYSE:ALU). Alcatel Lucent is down 24% in the last year, and the struggling company trades at 55 times this year’s expected earnings. We would avoid it. The forward P/Es for the other three companies are between 10 and 16, placing Arris towards the lower end of the range. Cisco is the cheapest in those terms, and the large company’s trailing earnings multiple is low as well at 14. With the company reporting substantial earnings growth in its most recent quarter compared to the same period in the previous fiscal year, we think it has good value prospects. Motorola and Juniper’s patterns of earnings multiples suggest that the Street expects strong growth over the next year, though we are less sure (particularly in Juniper’s case, going by relatively flat performance on both top and bottom lines over the last year).

It seems at least possible that Arris is a good value, and while we wouldn’t recommend it outright without learning more about the company we think that SAC may have found a good suggestion for investors to do further research. Certainly the valuation is acceptable as long as it is on track to meet analyst forecasts, and the company has been growing nicely. We would encourage investors to look at Cisco as well, since that company could be a better deal.

Disclosure: I own no shares of any stocks mentioned in this article.