Jim Simons’ Favorite Pharma Duo
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As one of the most successful hedge fund managers of the past 50 years, Jim Simons has truly built an investment-driven empire. Simons’ Renaissance Technologies has a number of successful funds, most notably the Medallion Fund. Since 1989, the $5 billion fund has generated an average annual return of 35% after fees. Considering that typical performance fees have ranged from 20% to 44%, that is quite a feat. Known for his use of algorithmic high frequency trading (here’s a neat video), Simons invests in a variety of stocks, including those in the tech, consumer cyclical, and pharmaceutical sectors. Interestingly, two of the manager’s top stock picks are members of “Big Pharma”; they are detailed below.
Bristol Myers Squibb (NYSE: BMY)
In the past quarter, Simons’ 13F filings show that he increased his holdings of Bristol Myers Squibb by more than 100%, as he now holds more than $400 million in BMY. Shares of BMY have returned 13.2% over the past year, though a recent hiccup in the development of a hepatitis C (liver) drug has caused a modest selloff. With fears of a new epidemic arising in the U.S.’s baby boomer population, Bristol Myers Squibb had high hopes for this drug, which it purchased for $2.5 billion earlier this year.
In addition to this bearish news, BMY also reported that its second quarter profits were down nearly 30% year-over-year, as it was forced to endure patent expirations for Avapro, Avalide, and most notably, Plavix. As was expected, the company reduced its year-end EPS guidance from $1.90-$2.00 to $1.78-$1.88. On an adjusted basis, the Street is still expecting earnings of $1.93 a share, down 15.5% from last year’s EPS of $2.28. By the end of 2013, this forecast falls a bit further, to $1.90.
Now, from a valuation standpoint, the stock is trading at a Price-to-Earnings ratio (15.0X) below the industry average (16.3) and competitors like Johnson & Johnson (NYSE: JNJ) at 21.6X, and Pfizer (NYSE: PFE) at 20.4X, but shrinking earnings warrant this discount. In fact, when Price-to-Book (3.3X) and Price-to-Sales (2.6X) ratios are taken into account, shares of BMY actually look overvalued in relation to its competitors. WealthLift’s Sentiment Index rates Bristol Myers Squibb as a hold, as the community’s users look to be skittish from the company’s less than stellar earnings outlook.
Eli Lilly and Company (NYSE: LLY)
In comparison to Bristol Myers Squibb, Simons owns slightly fewer shares of Eli Lilly, worth an estimated total of $382.9 million. This stock has generally proven to be a solid investment for the hedge fund manager, as it has returned 21.2% in the past year, outpacing the likes of BMY (13.2%) and JNJ (7.4%). While LLY does have a few of its most profitable drugs, including Cymbalta and Humalog, coming off of patent by the end of next year, there is still a potential game changer in the company’s pipeline. Solanezumab, a neuroprotector for patients with Alzheimer’s, is currently in Phase III trials. Projected as a $5 billion windfall, the market for Alzheimer’s is expected to triple in size over the next decade, and Eli Lilly can be a major beneficiary of this growth.
By the end of 2013, analysts are expecting the company to reach an EPS of $3.74; up 10.8% from the $3.38 forecasts are predicting this year. Intriguingly, shares of LLY are currently trading at a Price-to-Earnings ratio (11.8X) below industry peers and its own 10-year historical average (16.8X). Over the past decade, Eli Lilly’s earnings have traditionally traded at a 1% discount to those of the S&P 500; they are trading at a 19% discount this year. Despite strong growth in its operating and free cash flows, the company is similarly undervalued when using the Price-to-Cash Flow ratio (7.7X), which is below the industry average (10.6X), BMY (11.2X), JNJ (12.1X), and PFE (11.0X).
Assuming that the company can hit the Street’s year-end earnings targets, fairly valued shares of LLY can eclipse $51 by next summer, which would mark a near 20% appreciation from current price levels. It would be wise to stay updated on the fate of Solanezumab; WealthLift INSIDER will keep you in the loop.
Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article.The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. 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.If you have questions about this post or the Fool’s blog network, click here for information.