Billionaire Jim Simon’s fourth quarter investor letter showed that his strategy could be showing signs of slipping. The returns for his hedge fund management company Renaissance Technologies (RenTech) were disappointing in 2012. As a result I decided to take a look at what may have led to Simons and RenTech’s lackluster performance and see if I couldn’t learn from his mistakes.
The broad-based under-performance was driven by a number of RenTech’s key funds. The Institutional Diversified Alpha Fund, launched on March 1, reported a 1.28% loss for 2012, while its Renaissance Institutional Futures Fund lost 3.17% versus a gain of 1.84% in 2011. Meanwhile, its Renaissance Institutional Equities Funds, which trades both U.S. and non-U.S. equities listed, was up 8.4% in 2012, but the return still lagged that of the S&P 500, which was up over 13%.
Despite Simons’ off year, many of the companies he lost big on could still be solid investment opportunities. Although Simons is no longer involved in the daily operations of RenTech, he remains non-executive Chairman and a visionary for the firm’s direction (check out Simons’ portfolio). Two of Simons’ bets that caused his firm to lag the broader market are pharma picks Bristol Myers Squibb Co. (NYSE: BMY) and Eli Lilly. Bristol is Simons’ fourth largest 13F holding and Eli is its second as of the third quarter. Bristol was relatively flat for the year, which helped contribute to Simons’ under-performance. Going into 2012, Simons had Bristol as his fourth largest holdings and it remained in the top five for most of the year (per his third quarter 13F).
Bristol Myers, does however pay a solid dividend yield of 3.7%, and could be a growth story going forward. Recent quarterly results showed that earnings came in down 11% on a year over year basis, with earning hampered by a reduction in sales of its drugs coming off of patent protection. Although recent performance has been rocky for the company, Bristol Myers boasts a robust pipeline for the future. One of the company’s most interesting candidates is its type II diabetes play, Forxiga. Further strengthening Bristol Myers’ diabetes market penetration is the acquisition of Amylin in 2012.
Microsoft Corporation (NASDAQ: MSFT) is the well known tech company, and one that Simons had as his second largest 13F holding as of the end of the third quarter, owning 15.8 million shares after upping his stake 88% during 3Q. Then, at the third of the third quarter, Microsoft was his largest holding. However, it was over the second half of 2012, just as Simons was doubling down on Microsoft, that the tech company was down almost 10%.
The compelling investment opportunity embedded in Microsoft is its robust product portfolio. This includes its Windows operating system, which accounts for around 25% of revenues. The other big revenue generators, accounting for around 25% each, is its business division and server segment, giving the company a bit of a diversified portfolio. Microsoft has traded with a price to earnings multiple that has ranged from 8.6 to 18.2 over the last five years, but the stock is only at 8.8 times next year’s earnings. What’s more is that Microsoft is trading below the industry average on an EV/EBITDA multiple basis. The industry EV/EBITDA is north of 8.6, where Microsoft is at around a 35% discount to the industry at a 5.6 multiple.
Intel Corporation (NASDAQ: INTC) is a chip-making giant, and as of the end of the first quarter of 2012 it was Simons’ seventh largest 13F holding. Then in the second quarter, the fund upped its stake over 100%, but Intel had already peaked at $29 in April and through the second half of the year fell by 25%. Simons still owned over 423 million shares at the end of the third quarter. I remain weary of Intel, despite its 4%-plus dividend yield. The company has been pressured due to its over-exposure to the PC market, and revenues from this segment are around 60% of the company’s profits.