A Look At Steven Cohen's Big Positions
Timothy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It can be interesting to look at the larger positions held by the most institutional investors, including those running prominent hedge funds. Steven Cohen founded SAC Capital Advisors in 1992, and since then this group of hedge funds have grown to manage around $14 billion in assets. Controversy has surrounded the funds lately regarding allegations of insider trading, and just last week SAC agreed to pay $602 million in fines to resolve a civil lawsuit. The settlement removes the dark cloud above the firm that caused investors to withdraw $1.7 billion last month.
Regardless of these legal issues, SAC has averaged a 30% gross annual return over the last two decades, making it one of the best performing hedge funds. The funds also have some of the highest fees, charging customers 3% of assets and 50% of the profits each year. The funds hold around 1,900 different positions, which are all listed conveniently on NASDAQ's website. Let's take a look at three of the larger positions.
Schlumberger Limited (NYSE: SLB)
Schlumberger is a supplier of technology and information solutions for the oil and gas industry. The company has been around for over 80 years and has seen impressive revenue growth over the past decade. Since 2003 revenue has grown at an annualized rate of about 13%, and that includes a decline in 2009 due to the financial crisis. EPS came in at $4.10 in 2012, still lower than the pre-recession 2008 EPS figure of $4.45. The current P/E ratio is about 19.3 based on the current share price of $79.
Strong growth seems likely to continue as global demand for oil continues to grow. In addition to oil, there is an expectation that natural gas will see a strong increase in demand as a low-cost energy alternative. In fact, Warren Buffett, who's company owns the major railroad Burlington Northern, has recently stated that the railroad is exploring trains which run on natural gas instead of diesel. If natural gas demand blows up like many think it will, Schlumberger could be a big beneficiary.
The average analyst estimate for 5-year earnings growth is 16.99%, and for 2013 the average estimate sits at $4.74. This puts the forward P/E ratio at 16.67. The current P/E ratio doesn't look unreasonable given the growth prospects, but the stock certainly isn't cheap. SAC owns about 3 million shares and currently have a gain of about 18% on the position, according to Nasdaq, meaning their cost basis is somewhere around $67 per share. That price seems a lot better, with a P/E ratio of 16.3 and a PEG ratio of just about 1. I'd wait to see if the stock falls back below $70 per share before considering this one.
Sirius XM Radio (NASDAQ: SIRI)
Sirius is a provider of satellite radio services, and has about 23 million subscribers. The company has grown revenue at a staggering pace, from just $13 million in 2013 to $3.4 billion in 2012. Free cash flow turned positive in 2009 and has been growing ever since, and EPS (after removing the effect of a giant tax benefit) was about $0.07 per diluted share.
Liberty Media, which now has a stake of over 50% in Sirius, is set to take control of the company's board soon. This drama has played out over many months amid much speculation. Sirius trades for about $3.10 per share and has a diluted share count of 6,950 million, a number that keeps growing. This puts free cash flow per share at $0.10 and the P/FCF ratio at 31. The company also has $2.4 billion in debt, although they have been paying down the debt in recent years.
I just can't imagine this company growing at a rate to justify paying 31 times the cash flow and 44 times the earnings. The average analyst estimate for 5-year earnings growth is 29%, but that seems a bit outrageous to me. How many people are willing to pay for a premium radio service? I just don't think it's as many as some people seem to think. SAC owns 69.7 million shares and have seen a 46.88% loss on their position. I just don't see any real reason to gamble on this company.
eBay (NASDAQ: EBAY)
eBay is a global commerce platform and payments provider. Paypal has grown to be a popular payment processor and revenue for the company has grown at an annualized rate of 23% over the past 10 years. The company had an EPS of $1.99 and a FCF/share of $1.97 in 2012, putting the P/E ratio and the P/FCF ratio both at about 25.
I think that eBay has years of growth ahead of it, but 25 times earnings seems a bit rich to me. I think that, like Schlumberger above, the stock has gotten a bit ahead of itself. SAC owns 4.5 million shares and has a gain of 82.26% on its position, meaning that they paid far less than the current price. At the end of 2011 you could have paid $30 per share, and at that price the stock was a steal. But shares have risen dramatically since then and are probably overvalued now. I'd stay away from eBay at these prices.
The bottom line
Looking at hedge fund holdings can be useful, but its important to be aware of the price paid for the shares. Simply trying to mimic hedge fund holdings after the fact is not a good strategy because you'll often end up overpaying for the positions. Great company's can be terrible investments at the wrong price.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends eBay. The Motley Fool owns shares of eBay. 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!