2 Long Ideas from Billionaire Jim Simons' Top Holdings, 1 to Avoid

By Ashish Sharma - July 3, 2012 | Tickers: AAPL, BMY, DRI, MCD | 0 Comments

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Jim Simons is a billionaire hedge fund manager and founder of Renaissance Technologies Corp. Renaissance uses quantitative analysis, specifically mathematical and statistical methods, to uncover technical indicators with predictive value. This analysis is used to construct proprietary computer models that use publicly available financial data to identify and implement trading decisions. The firm has over $25 billion in assets under management. The following is a list of the top three stocks held by Renaissance according to its latest 13F filing with SEC.

Here’s a look at each of these stocks in detail:

Bristol Myers Squibb Co. (NYSE: BMY) is one of the best positioned companies among US pharmaceutical majors to grow at a high rate if the product pipeline continues to deliver. In particular, BMY’s hepatitis C (HCV) and anti-PD-1 (BMS-936558) assets are two key opportunities to watch closely. Anti-PD-1 is BMY’s immunotherapy, which is due to begin Phase III trials in 2H12/1H13 in various tumor types. Data to date suggests that it could be more efficacious than Yervoy in metastatic melanoma and has high potential in other tumor types such as renal cell carcinoma and non-small cell lung cancer. Yervoy is annualizing at ~$600mn/yr one year after launch, and BMY’s anti-PD-1 is likely do better if approved. HCV is another big opportunity for BMY. Phase II data of BMY’s HCV drug BMS-986094 will be another key catalyst for the stock before year-end.

BMY is currently trading at a forward PE of 19x which is a slight premium over its peers. I believe this is justified given BMY’s strong product pipeline which should enable it to post strong growth in the medium to long term. BMY’s recent acquisition of Amylin is an added positive as it will expand BMY’s presence in global diabetes, and the prevalence of diabetes is increasing rapidly.

Apple Inc. (NASDAQ: AAPL) is a secular growth story in mobile and tablet space. I believe its stock price will continue to rise in the medium to long term as it extracts more profits from traditional PC and mobile phone space. The iPhone 5 launch in September will likely be a catalyst for the stock in the near term. The new iPhone will be available in both 4G LTE and 3G modes. I believe Apple will be able to sustain its leadership position given a combination of revolutionary hardware enhancements and software-driven services (i.e., Passbook, Maps, FaceTime). Other key drivers for Apple include a number of product refreshes including iPad mini, iMac, Mac Pro, and various iPods.

Apple’s low level of penetration in tablets and PCs, emerging markets like China & India, and enterprise customers is likely to help its continued growth over the next several years. Apple has very favorable end markets as compared to other tech companies, yet it is still trading at just 10.93x forward PE. I believe Apple is deeply undervalued at these levels and its risk-reward profile is skewed on the upside at these levels.

McDonald's Corporation (NYSE: MCD) has underperformed the broader markets and its peers year to date. McDonald’s stock price has declined 11.75% in 2012 as compared to the S&P 500’s 8.31% gain. In contrast, other restaurant companies with high exposure to domestic consumers have done well. Global exposure, which was a positive and key growth driver for McDonald's over the past several years, has now become a headwind for the company. Same store sales (SSS) in the company’s APMEA business, which accounted for 18% of the company’s operating profit last year, turned negative in May with both Japan and China posting negative SSS. The company’s European business, which accounted for 38% of the company’s operating income last year, posted just 2.9% SSS growth in May. YTD traffic trends have turned negative in major European markets like France and Germany. In addition to the broader macro volatility, the company is also facing forex resistance from a stronger US dollar, and I believe this will continue to be a problem. 

The company is trading at a forward PE of 14.42x which is not overly expensive, but more so than some of the  names with a greater domestic focus in the restaurant industry. For example, Darden Restaurants (NYSE: DRI) is expected to grow its top line and EPS by 7.50% and 13% respectively from the current fiscal year to the next. This is better than McDonald's, which expects rates of 5.50% and 10%. Still, Darden is trading at a forward PE of just 11.35x. Clearly there is more upside potential in other restaurant names than McDonald's; I would prefer to be on the sidelines and avoid this stock.

To conclude, Apple’s secular growth potential in tablets and smartphones and BMY’s strong pipeline make them good buys. McDonald’s global exposure makes it less appealing than its domestic restaurant peers and hence I would recommend avoiding it on a relative basis.

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