Billionaire Steve Cohen's Big Buys: 3 Potential Longs, 2 to Avoid

By Ashish Sharma - May 21, 2012 | Tickers: AMD, CSCO, ORCL, SIRI, S | 0 Comments

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Steven A. Cohen is a billionaire hedge fund manager and the founder of SAC Capital Advisors, a Stamford, Conn.-based hedge fund managing ~$14 billion in assets. The firm has posted an enviable 30% average annual return for investors from 1992 to 2010. Thanks to its excellent past performance SAC Capital is able to charge a whopping 50% performance fee, which is highest in the industry. SAC Capital recently disclosed its last quarter position in its 13F filing with SEC. Here’s a list of some of its top purchases from the last quarter.

I like Sirius XM radio, Oracle and Cisco among the above stocks. Sirius is an interesting EPS growth story and is trading at a valuation of just 17.14x forward PE after the recent correction, making it an attractive buy. Oracle and Cisco are both quality companies available at less than 10x forward PE. However, I don’t like Sprint and Advanced Micro Devices and would recommend avoiding them. Here is a look at each of these stocks in detail.

Sirius XM Radio (NASDAQ: SIRI) reported impressive 404,000 net subscriber additions last quarter and now has 22.3 million total subscribers. Its ARPU increased to $11.77 from $11.52 last year while its churn rate decreased to 1.9% from 2% last year despite a January price increase.

Going forward, I expect this growth to continue as auto sales recovery in the US progresses. In addition to new car sales, the used car market also represents a significant growth opportunity for Sirius. The company has agreements with more than 4,000 used car dealers, including Carmax and Autonation, in which Sirius offers a three-month free trial of its services to the used car buyers. On the one hand, this helps dealers by making the cars more attractive to buyers; on the other, it helps Sirius increase its subscriber base if the car buyer continues to use the service after trial period.

Sirius continues to progress on all the key metrics that matter, like subscriber growth, conversion of trial subscribers to self-pay, ARPU increases, EBITDA and FCF growth, and improving financial leverage. I believe Sirius can easily grow its top line by ~10% over the next few years. This should enable it to post outsized EPS growth given its ~70% incremental margins. After the recent market correction, the stock is trading at 17.14x forward PE and I find its risk reward profile attractive.

Oracle Corporation (NASDAQ: ORCL) is currently trading at 9.74x FY13 EPS, which is ~40% discount to the large cap software group. Sell side analysts are currently expecting ~9-11% EPS growth rate for the company for the next few years. However, I believe the company can do significantly better.

In the near term, I see two specific product catalysts: Fusion & Exalytics. I expect Fusion adoption to accelerate in the second half of this year after it reaches critical mass of reference customers. Similarly Exalytics, which went for general availability in February, is expected to ramp up in the back half of this year. From a longer-term perspective, I see secular catalysts in the form of Big Data and demand for analytics.

Another thing that makes me positive on Oracle’s growth going forward is its aggressive sales capacity addition. Oracle has increased it sales capacity by more than 30% over the last year. In addition, Oracle has realigned its sales force by hiring more specialized sales people and optimizing its channels. These additional feet on the ground, combined with the company’s other sales initiatives and new product gaining traction, can help spur growth and positively surprise the Street.

In addition to top-line growth, I anticipate the company’s margins to expand. Although the company has already reached its pre-Sun acquisition operating margins (~46%), I feel there is further upside possible as the company sees operating leverage from increasing revenues. Last year on its analyst day, the company said that its intention is to increase operating margins to over 50%. If the company is able to achieve this target a lot of sell side estimates would prove conservative.

I expect reaccelerating revenues from its new products' traction and increased sales force will act as major catalysts for the stock. In addition, the company’s 80% recurring revenues and $30 billion of cash will provide the downside support for the stock in case the broader macros worsen.

Cisco Systems (NASDAQ: CSCO) reported inline revenues last quarter and its EPS was better than consensus by 1 cent. However, what spooked some of the investors was Cisco’s guidance for revenues/EPS, which was 3%/3 cents below expectations. I believe most of this weakness in the company’s guidance is macro-related and the company continues to execute well. The stock has corrected over 10% since earnings and I believe at current valuations it is already pricing in weak macros. With a strong product portfolio, low valuations (~8.58x forward earnings), high cash flow generation (~9% FCF yield), and a solid balance sheet (~$6 net cash per share), I believe the company offers an attractive risk reward.

Advanced Micro Devices (NYSE: AMD) and Sprint Nextel (NYSE: S) are two companies in the above list thatI would avoid. Although both reported better than expected earnings last quarter, I am concerned about their future prospects. For AMD, I am worried about growing competitive threat from Intel and ARM based competitors in 2H12 with the launch of Windows 8. I also don’t see AMD gaining share in CPUs as its 32nm Trinity lacks the performance specifications to go up against Intel’s 22 nm IVY Bridge.

For Sprint, I believe the company’s operational improvement will take time. Although, Sprint reported better than expected last quarter results, its key drivers including subscriber addition and service revenue growth were still negative. I am also concerned about the competitive and margin impact of the eventual LTE iPhone. In addition, Network Vision costs are ramping up and I am not sure about the timing and prospects of Sprint realizing any tangible benefits from it.

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