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5 Stocks to Piggyback SAC Capital - 13565 views
BALTIMORE (Stockpickr) -- Hedge fund manager Steven Cohen has been making the news recently, but not for the typical reasons you’d expect to see a legendary trader make the papers. Earlier this month, the billionaire's reported interest in buying a stake in the New York Mets was getting the media's attention (a focus that now's shifted to David Einhorn of Greenlight Capital, who bought a minority stake in the team).
Cohen's also making headlines for insider trading investigations by the SEC into his hedge fund, SAC Capital.
But that’s not why we’re looking at this hedge fund today.
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SAC Capital boasts one of the best track records in the industry -- a 30% average annual return for the last 18 years, according to data from Bloomberg. Of course, that sort of performance comes at a cost: SAC has one of the priciest fee structures in the hedge fund business.
Either way, you get what you pay for. Described as one of the best traders in the world, Cohen is known for his dedication to the firm. Rumor has it that he sends a team of techies ahead of him when he travels to set up a trading platform that he’ll be able to use while away from the office.
With all of those resources poured into stock picking, let’s take a moment to pick apart some of the most recent buys that SAC Capital reported in its quarterly filings with the SEC.
The firm’s aggregate portfolio changed significantly in the last quarter -- new positions make up a full 27% of the firm’s total reported market value (keep in mind that reported holdings are relegated to certain kinds of positions). With that, let’s take a look at some of the bigger new buys. (Check out Cohen's top 30 holdings here.)
SAC’s biggest new position last quarter came in the form of 1.9 million shares of ACE (ACE), a commercial property-casualty insurance firm incorporated in Switzerland. At current prices, that hefty position in ACE sports a market value of more than $124 million.
ACE caters to some of the world’s largest corporations, providing a way for major firms to protect against potentially catastrophic risks. As a result of its unique positioning in the insurance world, ACE is able to capture a massive chunk of the corporate insurance market, edging out potential rivals who’d like to secure a piece of ACE’s business. Like its peers, however, ACE hasn’t been immune to the challenges the insurance industry has faced in recent years.
Overly risky portfolios meant that ACE realized large losses during the height of the market meltdown in 2008. The company will need to rethink some of its underwriting (and leave some potential profits on the table) if it wants to stay protected from the next bubble burst.
That said, a bounce-back in worldwide investments has left ACE with a still-strong capital position, and a hefty chunk of a very attractive insurance market. Shares are in a definite uptrend right now. Expect that performance to continue into the second half of 2011.
ACE is also a top holding in David Williams' Clumbia Value & Restructuring Fund's portfolio, with a 3.1 million-share position. The stock shows up on recent lists of Stocks With Recent Dividend Increases and Hedge Funds' Biggest Buys and Sells.
Hospital operator HCA Holdings (HCA) is a recent IPO that’s been on many hedge funds’ buy lists since shares started trading in early March of this year. Other holders include Lee Ainslie's Maverick Capital and Einhorn's Greenlight Capital. But one of the largest hedge fund buys in HCA last quarter came from SAC Capital’s 1.42 million shares, a $48 million stake in the stock at current prices.
HCA is the largest private hospital operator in the U.S., and following major efficiency improvements during its tenure as a private equity holding, it’s also one of the best-positioned to withstand the political and economic headwinds that the health care industry is facing right now. Longer-term, an aging population should help to spur increased admissions as patients look for outpatient and inpatient care.
Financially, HCA is in a somewhat tenuous condition. The firm has a massive amount of debt that’s coming mature in the next several years -- it’s unlikely that the firm will be able to meet those obligations through extinguishment. Instead, it will likely have to push back those maturities at potentially less favorable interest rates than we’re seeing now.
Still, with backing from many high-profile investors, the company should have plenty of help finding the financing it needs.
Even though the company’s business is closely tied to the construction industry, the company has managed to maintain its profitability throughout the height of the recession. Now, as the market improves, so too are Hubbell’s chances for meaningful growth.
That’s because this firm has been building out its product portfolio thanks to the bargain-bin prices that equity markets have provided in recent years. That’s left Hubbell with a more attractive set of offerings without the need to resort to massive borrowings in the process. Financially, the company is in strong shape with a long history of dividend payouts and free cash flow generation.
In the last quarter, SAC Capital picked up 620,000 shares of the stock, a $44 million position at current prices.
As the league leader in the office product business, Staples (SPLS), one of the top-yielding specialty retail stocks, is able to command more than $24 billion in annual sales from its 2,000 worldwide stores and truly massive online business. The company is also one of SAC’s biggest new imitations -- the firm picked up 1.42 million shares of Staples’ stock last quarter, a $27.5 million stake.
As the world’s biggest office supply distributor, Staples enjoys a massive scale and customer Rolodex that’s been growing despite recessionary headwinds and stiff competition from peers. Staples has worked hard in recent years to build out its offering of private label products, a measure that should help expand margins and increase customer stickiness. The acquisition of Corporate Express in 2008 is another major element of Staples’ growth strategy. As hiring increases, the firm’s massive exposure to high-volume corporate and institutional clients won’t go unnoticed.
Neither should its online presence. By sales, Staples currently rings in as the world’s second biggest e-tailer, trailing only Amazon.com (AMZN). That’s a very big deal as office suppliers fight for the best way to get customers’ eyes on their products. With a size, cost and brand advantage over competitors, expect the company’s fundamentals to strengthen in this economy -- just don’t expect an escape from grocery-sized margins just yet.
Another big bet on Staples in the first quarter comes from Jim Simons' Renaissance Technologies, which scooped up 5.77 million shares in a newly initiated position.
Heavy equipment maker Caterpillar (CAT) has been one of the more high-profile participants in the massive post-2008 construction slowdown in the U.S. It’s also been a high-profile beneficiary of increased infrastructure and commercial building initiatives in emerging-market economies such as China and India. Even though the construction market continues to be soft at home, don’t discount the growth potential overseas in 2011.
Another concern for Caterpillar has been its financing arm, but limited loan losses have kept exposure to the lending business from crippling Caterpillar’s balance sheet as of yet. With markets decidedly stabilizing finally, that’s unlikely to change in the next couple of years. Strong margin performance and a massive market share of the worldwide heavy equipment business should keep Caterpillarpurring.
SAC Capital picked up more than 156,000 shares of Caterpillar in the last quarter, a $17.4 million position at current share price levels.
Caterpillar shows up on a recent list of Cramer's Sensible Stocks for the Long Term.
To see SAC Capital’s top 30 positions, check out the firm’s portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.