Jim Simons’ Renaissance Technologies is one of the most successful hedge funds in the world. Renaissance Technologies is well-known because of its Medallion fund. Medallion Fund is the best fund that we have come across. Its returns are so spectacular that Simons became one of the richest people in the world. Simons is ranked 30th on the Forbes 400 list of the richest Americans and ranked 74th on the Forbes World Billionaires list with a net worth of $10.6 billion. Unfortunately Medallion Fund doesn’t accept outsiders’ money anymore. Instead investors can invest in Renaissance’s long-term equities fund (RIEF). RIEF was also one of the top performing hedge funds in 2011. It returned around 35%.
Renaissance Technologies recently released its most recent holdings in a 13F filing. We are going to take a closer look at the most bullish bets and decide whether it makes sense to imitate these stock picks.
Apple Inc (AAPL): AAPL is the largest position in the 13F portfolio of Renaissance Technologies at the end of last year. The fund increased its AAPL stakes by 22% over the fourth quarter of 2011. As of December 31st RenTech had $519 million invested in AAPL. AAPL is the most popular stock among hedge funds. More than a third of the hedge funds we track had AAPL positions in their portfolios at the end of the third quarter. Besides Renaissance Technologies, Rob Citrone’s Discovery Capital Management also had over $800 million invested in AAPL. Tiger cubs Stephen Mandel and Chase Coleman were also bullish about AAPL. Their funds both had about $700 million invested in AAPL at the end of the third quarter. We agree with these hedge fund managers. Apple designs and sells great products that are welcomed by consumers. We believe that most of its products, such as iPad, iPhone, and MacBook, will achieve more market penetration globally in the next few years. AAPL is also very attractive when it comes to valuation. It has a forward P/E ratio of 10.68 and its EPS is expected to grow at 19% annually over the next five years. Therefore, its forward P/E ratio for 2014 is about 7.57. Other tech giants have low valuations as well. Google Inc (GOOG) has a 2014 P/E ratio of 8.7, and Hewlett-Packard Company (HPQ)’s P/E ratio for 2014 is 5.8. Investors value utility stocks at 13-14 times their earnings whereas tech stocks that grow at much higher rates are valued at almost half of these multiples. Hedge funds noticed this opportunity, pounced on it and enjoyed strong gains from Apple last year. We believe Apple will continue to be a winner.
Bristol Myers Squibb Co (BMY): Simons’ RenTech also increased its BMY stakes by over 10% in the fourth quarter. As of December 31, 2011, Renaissance Technologies reported to own $226 million worth of BMY, up 14% from the end of September. The company has been actively expanding its product lines and developing new products over the recent years. It also has several promising drugs, such as Eliquis and Yervoy, which are expected to contribute a lot to the company’s sales in the next few years. The main competitors of BMY are AstraZeneca PLC (AZN) and Merck & Co (MRK). BMY’s P/E ratio for 2014 is around 16, compared with 7.3 for AZN and 9.5 for MRK. We think BMY is a little bit overpriced relative to its peers at this moment.
Another healthcare stock that Simons’ RenTech likes is Eli Lilly & Co (LLY), in which Renaissance Technologies had $300 million invested in. The fund boosted its position in LLY by only 2% over the fourth quarter, compared with 14% for BMY. LLY is also relatively less popular among hedge funds compared with BMY. There were 25 hedge funds with LLY positions at the end of September, vs. 34 for BMY. We like LLY as a dividend play. Its 2014 P/E ratio is 12, which means its earnings yield is more than 8%. It has a high dividend yield of 5.05%, which is over 150% higher than the 10-year Treasuries. We think the dividend is safe and income investors should consider LLY as an alternative to long-term Treasuries. Ken Griffin, Ray Dalio, and Steven Cohen are among Eli Lilly investors.
Simons is also bullish about Chipotle Mexican Grill Inc (CMG) and McDonalds Corp (MCD). Both companies operate restaurants throughout the United States as well as in foreign countries. Simons had over $200 million invested in both stocks. He increased his CMG stakes by 5% while reduced his MCD stakes by 27% during the fourth quarter last year. We like MCD better as a long-term play. MCD’s P/E ratio for 2014 is 12.9, versus 22.8 for CMG. Additionally, McDonalds has more exposure to the foreign markets, with a large percentage of its revenues coming from counties other than the United States. Therefore, we think MCD can provide some protection against a decline in the value of the US Dollar.
Overall we like Simons’ top stock picks. Technology stocks are undervalued and it isn’t too late to buy Apple. We also like healthcare stocks. The healthcare spending is growing rapidly, and insurance coverage is projected to increase by 32 million after Obama’s health reform really kicks in. We recommend Eli Lilly as a dividend play for investors seeking at least 5% yield.