Billionaire Steve Cohen’s SAC Capital Advisors has an excellent record of returns from combining fundamental analysis with quantitative investment models. Over the past 20 years, the fund’s average annual return is almost 30% and it has an estimated $14 billion in AUM. Here are some trends that we have noticed in his second quarter 13F filing compared to the end of the first quarter:
Consumer technology. At a time when many funds are taking profits in their investments in Apple (NASDAQ:AAPL) SAC Capital had owned about 60,000 shares of the company at the end of March but closed the second quarter with about 320,000 shares in the portfolio. In addition, Cohen and his team increased the fund’s stake in Amazon (NASDAQ:AMZN) to 1 million shares. These positions are now among the ten largest holdings reported on the 13F. Apple is arguably a good value investment- it trades at 15 times trailing earnings, despite a clear pattern of strong earnings growth over the past few years, and pays a 1.7% dividend yield- but that’s clearly not what SAC Capital is thinking in regards to Amazon. Amazon trades at nearly 100 times forward earnings estimates and the 5-year PEG ratio is 9. Our guess is that SAC Capital is predicting that the tablet business is going to be rapid-growing and highly profitable, and that the iPad and Kindle offerings from these companies will prove superior at their respective price points to competition from companies such as Microsoft and Google.
Micron.SAC Capital more than tripled its position in Micron Technology (NASDAQ:MU), a $6.7 billion market cap manufacturer of data storage and memory products ranging from main system memory for computers and servers to flash memory. The company is unprofitable on a trailing basis but sell-side analysts expect strong growth to bring it into profitability. However, revenue growth has been weak recently with very little change from a year ago. We can see it benefitting from demand for tablet devices, but increased consumer purchases of tablets should to some degree cannibalize purchases of laptops and desktops. Even taking Wall Street projections at face value, the forward P.E multiple is 37. SAC probably knows what it’s doing, and we can understand why that might be enough for some investors, but we’d advise being more patient before going long the stock.
Johnson & Johnson. Cohen and his team substantially increased investment in Johnson & Johnson (NYSE:JNJ) to about 2.5 million shares. The large healthcare company pays a 3.6% dividend yield and trades at 22 times trailing earnings, with Wall Street earnings expectations implying a forward P/E of 12. Our guess is that SAC Capital is making a company-specific investment here. The multiple is too high on a trailing basis to consider Johnson & Johnson a value stock compared to other megacaps. We also didn’t like the fact that Warren Buffett sold a large portion of his holdings in JNJ during the second quarter.
Sticking with oil. The top two positions according to the 13F were Ensco (NYSE:ESV), an operator of offshore drilling equipment, and Murphy Oil (NYSE:MUR), which is a vertically integrated oil company with activities ranging from exploration & production to refining and gasoline sales. SAC Capital actually added to both of these positions, bringing its stake to 6 million and 4.8 million shares respectively. This is, we’d say, how the fund is choosing to invest in companies benefitting from higher oil prices. Offshore drilling in particular is coming to depend on high oil prices as cheaper onshore production ramps up in North America. However, both companies seem well priced with forward P/E multiples of 10 or lower and dividend yields between 2% and 3%. Perhaps even if oil prices hold steady the companies will be able to meet earnings expectations and push up the stock prices.
We can see getting long SAC Capital’s oil names if an investor isn’t worried about a drop in oil prices, as Ensco and Murphy are probably priced about right or even too low for prices being where they are currently. The other three themes we’ve identified require faith in Cohen to follow- Amazon isn’t cheap (though Apple could be seen as a value stock), we’re skeptical of sell-side growth projections for Johnson & Johnson, and Micron Technology’s business seems stagnant. Any copying of SAC Capital’s investments in those companies should probably be kept to a minimum.