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Invest Like a Quant: 5 New Trades From Renaissance Technologies - views
BALTIMORE (Stockpickr) -- Want to invest like the smartest hedge fund in the world? Ignore value and balance sheets and let your computer do the hard work for you.
No, that's not a joke.
Founded by mathematics professor Jim Simons in 1982, Renaissance Technologies boasts one of the best track records in investment history. In the 1990s, the flagship Medallion fund earned record-breaking cumulative returns of 2,478%. And more recently, the firm's 2009 performance gave it the top ranking for large fund performance.
RenTec is a quant shop, which means that the firm uses computer models to figure out which stocks it should add to its massive $38 billion equity portfolio. Rather than looking for value stories, the firm's models hone in on trends in price action and statistical relationships between securities. That quantitative bent requires a serious brain trust, and Renaissance has it.
Of the firm's 150 people, around half hold PhDs in scientific fields -- physicists and statisticians aren't exactly the demographics you'd find at most Wall Street firms. But that focus on hiring the smartest unconventional thinkers has helped fuel some of the biggest gains in the industry.
By looking at RenTec's 13F filing with the SEC, we can get a partial peek at some of the big relationships that the firm is putting to work for its institutional and internal investors -- without paying the 5% management fee and 44% profit participation that the firm charges its clients.
With that, here's a glimpse at five of the new names that Renaissance Technologies added to its portfolio in the second quarter.
The biggest buy by far in the second quarter was Apple (AAPL). Renaissance picked up 714,490 shares of the technology giant, building a $283 million stake in the firm at current price levels. RenTec isn't the only big institutional name that's been picking up shares of Apple lately. Last week, Carl Icahn announced that he'd taken on a massive billion-dollar stake in the Cupertino, California-based company.
Icahn and Renaissance bought for very different reasons, but the end result is the same: they're both bullish on Apple this summer.
Apple sports a bargain valuation right now thanks to a major decline from the highs that the firm set last fall. Apple sports a price-to-earnings ratio of just 12 -- a modest multiple that reflects investors' belief that the firm can't continue the breakneck growth it's achieved in recent years. But back Apple's mammoth cash position out of the equation, and Apple's P/E drops flat to 7.
There's a lot of attention on Apple's media event scheduled for Sept. 10. The potential for two new iPhone models as well as more speculative offers such as an Apple television and watch could provide a major catalyst for upside in Apple's sales. Meanwhile, the firm's Macintosh computer sales continue to crush the rest of the industry in terms of profitability and market share growth.
With shares above $500 for the first time since January, the second half looks strong for this $458 billion tech stock.
Big bank Citigroup (C) is another name that Renaissance newly initiated in the most recent quarter. Simons and company added 3.7 million shares of Citi to thier portfolio, building a position worth $177 million. Citi is one of the biggest banks in the world, with 1.9 trillion in assets and more than a quarter of a million employees. And it's one of the biggest beneficiaries from the equity rally that's propelled the S&P 500 more than 16% higher this year.
Like its peers, Citi has made a big about-face in recent years, changing its focus back to conventional banking. As a result, Citi's shareholders are seeing profitability again. Scale matters in the banking business -- that's why Citigroup's $1.87 trillion in assets are worth paying attention to. Despite its size, hefty exposure to emerging markets means that the firm has the ability to tap undersaturated loan markets with burgeoning middle class populations. While those growth opportunities don't come without risks, the relatively vanilla nature of the rest of the financial sector makes it look a whole lot more attractive.
But that doesn't mean that Citi's shares are attractive. Granted, they're not toxic, but then again, an abundance of regulatory restrictions and the possibility for more skeletons in Citi's closet makes it look less appealing. If you're looking for exposure to banking stocks, think regional names instead.
2013 is panning out to be a strong year for ConAgra Foods (CAG). Shares of the $15 billion food processor have rallied more than 19% since the calendar flipped over to January, besting the S&P's impressive run by a small margin. ConAgra is one of the largest major food companies in the world, with a broad stable of retail brands that includes Chef Boyardee, Healthy Choice and Banquet as well as a commercial business that supplies restaurants and food service clients.
ConAgra's household name brands aren't the only ones you'll find on grocery shelves. Thanks to the acquisition of Ralcorp at the beginning of the year, ConAgra greatly expanded its presence as a private label food manufacturer, a business that's in high demand as grocery firms try to boost their margins by introducing store brands. While the Ralcorp acquisition does risk some cannibalization, CAG should make up for it from cost savings and exposure to channels where the firm's conventional brands don't compete.
The decision to move away from commodity processing is a good one for ConAgra; it helps to insulate the firm from commodity risks that it's already exposed to as a food processor, and it also increases the portion of sales that it's able to convert into profits. Even if CAG isn't the most exciting name on the list, investors could do a lot worse after the transformational year this stock is having. Renaissance Technologies picked up a 2.89 million share position in the stock this past quarter.
ConocoPhillips (COP) is another stock that's been undergoing a transformation. That's because the $81 billion oil and gas company spun off its downstream operations into Phillips 66 (PSX) last May, a move that made ConocoPhillips a pure play oil and gas producer with proven reserves sitting at 8.4 billion barrels of oil equivalent and a much more attractive balance sheet.
Around half of ConocoPhillips' reserves come from natural gas. That's an attractive mix, especially given how the firm's supermajor peers have been falling all over themselves to boost exposure to nagtas by acquiring big producers in recent years. With oil prices holding onto the high end of their historic range, natgas prices are starting to see some buoyancy as consumers substitute one fuel for the other. By shedding its downstream assets, COP is able to focus on the most profitable side of the energy sector right now.
Renaissance Technologies picked up a 1.39 million share position in the firm in the most recent quarter, adding more than $84 million worth of exposure in COP to the firm's portfolio.
Being a virtual monopoly has its advantages just ask Comcast (CMCSA). Comcast benefits by being the only game in town over much of its coverage area, a benefit of owning the costly cable infrastructure that connects 53 million households and makes Comcast the largest cable utility in the U.S. Around half of those 53 million homes are paying TV, internet, or phone subscribers.
That "network effect" is one of Comcast's biggest advantages in 2013. Even as new rivals offer competing services over other mediums, Comcast's modern network has the benefit of the hefty bandwidth and expandability that cable provides. From an operations standpoint, the firm's acquisition of 51% of NBC Universal has a similar effect of ratcheting margins wider. Since it's now able to greatly reduce its licensing costs for content it owns, it can earn a bigger profit for its efforts. Top-line growth opportunities exist as Comcast consolidates its customer base with "triple play" deals that package complementary services together and hammer down customer acquisition costs.
Being a monopoly has some downsides. For one, the firm is subject to more regulatory scrutiny than most. For another, Comcast has a horrific customer service reputation and a large number of customers who would likely leave given a decent substitute. That's a pretty good reason to be wary of CMCSA as new tech enables more competition from other utilities.
But Renaissance is a fan of Comcast nonetheless. The hedge fund bought a 1.39 million share position in the cable utility this past quarter. That's good for an $81 million chunk of RenTec's portfolio.
To see the rest of Renaissance Technologies' plays, check out the Renaissance Technologies Portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author was long AAPL.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji
Follow Jonas on Twitter @JonasElmerraji