A Quintet of Stocks Steven Cohen and SAC Capital May Be Forced to Sell
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Things do not appear to be getting any easier for Steven Cohen and SAC Capital. In a recent Fox Business scoop, Charlie Gasparino painted a bleak picture for the impending Feb.15 close of the hedge fund's redemption window. It appears that many investors might be contemplating pulling their money from SAC, amidst a recent warning by the SEC that the fund could face civil charges over an insider trading probe.
SAC Capital is a Connecticut-based hedge fund that was founded in 1992 by Steven Cohen. The diversified hedge fund uses both fundamental and quantitative-based approaches. The hedge fund manages approximately $20 billion in assets (as of the end of the third quarter), of which it is estimated that nearly $7 billion is Cohen's personal capital (see what Steven Cohen's top moves have been).
Gasparino says that the February redemption date is one to keep a close eye on. He notes that high-level executives at SAC have been holding one-on-one meetings with some of its largest shareholders in an effort to relieve concerns. The firm is assuring investors that it will likely pay a large fine but not be indicted. Gasparino still believes that "this is crisis mode," adding that they "think there's a very good likelihood they are going to get massive redemptions."
Titan Advisors has already indicated plans to pull capital from SAC. Although Titan has checked out of Cohen's fund, one of its largest investors, Blackstone Group, plans to keep its near $550 million position.
The real issue is: What do these possible redemptions mean? If SAC investors begin to walk away, the fund might have to sell off some of its major positions to subsidize.
SAC could consider selling off Sirius now that subscriber growth is expected to slow in 2013. The satellite radio company is forecasted to add 15% fewer subscribers this year versus 2012. Recent news also indicates the approval of Liberty Media to take de jure control of Sirius, giving it the power to elect the majority of the board of directors. From a valuation standpoint, Sirius trades above some of its notable competitors at 4.6x sales, compared to Saga Communications and Canadian Satellite Radio, both of which trade at 1.6x sales.
Possible issues surrounding AIG are continued exposure to the subprime market, notably in the residential and commercial mortgage-backed area. AIG managed to settle its bailout with the Treasury in early December, and despite whispers that the company was considering joining former CEO Maurice Greenberg in a lawsuit against the U.S. Government, AIG indicated on Wednesday that it would not be taking part.
Also putting pressure on the insurer in the interim will be losses from Hurricane Sandy. Losses are projected to be upwards of $2 billion (pre-tax) from the so-called "superstorm." The company is expected to fund roughly 50% of the claims with capital from its U.S. property and casualty operations. Interestingly, AIG did see billionaire Ken Griffin up his stake by 100% in 3Q 2012 (check out Ken Griffin's newest picks), and the stock trades at mere PEG of 0.14, so there is some obvious value here.
Apple, meanwhile, is seeing continued competition in its tablet business as a number of other tech companies flood the market with their own devices. NPD estimates that these new low-cost alternatives will drive Apple’s market share from 72% (2011 total) to 51% in 2017. Another one of Apple’s struggling segments appears to be its music player business, in part due to the cannibalistic impacts that the iPhone and iPad have had.
Other competition in the music area is coming from Google, Amazon, Spotify and Pandora, which are infringing on Apple’s iTunes. There also appears to be a decline in sales growth, from 45% in FY2012 to an expected 25% in FY2013, and 15% in FY2014. Although we have reasons for concern, Apple still only trades at a 0.5 PEG and is one of the top ten tech stocks loved by hedge funds.
EBay’s payments segment, PayPal, is expected to be one of the key long-term growth drivers for the company. Now, one obvious point of concern is increasing competition in the mobile and online payment space, including from the likes of Square and Google Wallet. Gross margins have also been in decline from 75% to 70% over the last four years (through full-year 2011) as marketplace margins drag the company down. This has been in large part thanks to a large transition from auction transactions to fixed-price transactions.
Tiffany’s 3Q 2012 results came in with earnings per share at $0.49, well below EPS one year earlier, which totaled $0.70 a share. A hesitant economic backdrop does not help with Tiffany's outlook either; management cut full year 2012 EPS estimates from $3.55-$3.70 to $3.20-$3.40.
The affluent customer base Tiffany tailors to is feeling the pressures of a tight credit market, in which low credit availability and high household debt levels are the main sources of pain. Compared to other high-end accessory company Coach, Tiffany trades at 20x earnings; Coach is at only 16x earnings. Due to a weak outlook and a relatively fair valuation, Cohen might consider dumping some Tiffany shares. Billionaire George Soros did, however, take a new position in Tiffany during 3Q 2012 (check out George Soros' newest picks).
While nothing is certain, possible redemptions by SAC Capital investors may force the fund to explore selling off some of its stocks. Sirius was up 50% in 2012 and might present a good opportunity to take profits. Competition is heating up for both Apple and eBay, while AIG still has execution risks related to its turnaround. Tiffany's fairly average valuation does not stand out to us as a stellar pick moving forward either.
This article is written by Marshall Hargrave and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has a long position in Apple. The Motley Fool recommends American International Group, Apple, and eBay. The Motley Fool owns shares of American International Group, Apple, and Tiffany & Co. and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!