By Jake Mann
Hedge funds, on the whole, don't receive much respect from the average retail investor. With over 8,000 active funds at the close of last year, it's tempting to shrug off this group as oversaturated, outdated or both. Still, through our research, we've actually found that by tracking the best picks of the best hedge funds, it has been possible to beat the market quite handily. Our small-cap strategy generated an outperformance of 18% a year for more than a decade in our back tests, and since we started sharing these picks with the public, we've beaten the market by another 18% in just five months' time (learn more about this strategy here).
With that in mind, it's also important to take a fund-by-fund look at the hedge fund industry's upper tier. Jim Simons and his firm, Renaissance Technologies, fit the definition of the smart money perfectly. As we've mentioned in our profile of Simons, the hedgie's "Medallion Fund is the best hedge fund that Insider Monkey has come across," enabling it to charge a mammoth 5/44 fee structure.
According to his fourth-quarter 13F filing with the SEC, Simons was making a few major moves in preparation for 2013, and some of them were against the consensus of his peers. Here's a list of his full equity portfolio, but let's take a detailed look at his three largest holdings, starting with No. 1.
Bristol-Myers Squibb (BMY) sits at the top spot on this list, and the biopharma giant has been in Simons's top five for five consecutive quarters. In Q4, the hedge fund manager upped his stake by 6%, and the value of his position was worth more than $430 million at the end of this period. On the whole, Bristol-Myers Squibb wasn't the most popular pharma company amongst Simons's peers-it came in just eighth in its industry with bullish bets from 8% of the funds we track. By comparison, Pfizer (PFE) had interest from over twice as many hedge funds, so Simons's play is a bit intriguing.
A key benefit of Bristol-Myers Squibb is its dividend yield of 3.8% - fifth highest in the entire major drug manufacturing industry. Prizer, on the other hand, sports a slightly lower dividend yield of 3.6%. Equally as important, at least for growth-oriented investors, EPS expansion is expected to hit 18.5% next year, which is 13 percentage points higher than analysts' longer range forecast. The Street expects Pfizer's year-ahead earnings growth to reach just 3.5%. For investors searching for intermediate-term growth and a high level of dividend income, it may not be a bad play to "monkey" Simons here.
Intel (INTC), meanwhile, sits at the No. 2 spot in Simons's equity portfolio; the size of this position has doubled since the first quarter of last year. Generally speaking, tech stocks comprise about 20-25% of this hedgie's total 13F filing in any given quarter, but it's interesting to note just how he traded Intel in comparison to one other tech giant in Q4.
In this latest three-month period, Simons cut his Microsoft (MSFT) stake by a whopping 50%, dropping the stock from No. 1 overall to 13th. This move, in combination with a modest boost in his Intel stake, indicates that once again, he was moving against his peers' consensus. Of the funds we track, more than one-fifth of the population is bullish on Microsoft; Intel's support is half this level.
While the Street's EPS growth estimates for next year are slightly in favor of Microsoft-10.5% to Intel's 8.2%-the latter's longer term outlook is more promising, and it trades a particularly attractive discount. Intel's PEG is a meager 0.8 while Microsoft's is much higher at 1.8, and Simons's favored bet also trades at close to a 40% discount to Microsoft's book valuation.
Of all the billionaire-run funds, the only other manager besides Simons to cut Microsoft while upping Intel was D.E. Shaw. Ken Griffin's Citadel, meanwhile, was one of the funds doing just the opposite, more in line with the smart money's overall preference for Microsoft. Interestingly, year-to-date, Intel has lost 1.9% to Microsoft's 2.5% gain, but it's too early to judge these moves just yet.
Eli Lilly & Co (LLY), lastly, rounds out Simons and Renaissance Technologies' top three. The size of the hedge fund's position in this biotechnology company has grown by a little over threefold since we began tracking it in the fourth quarter of 2010, and over this time, shares have gained nearly 50% in value. The stock is already up 9% since the start of this year, and Wall Street's upper-range price target represents a 20% upside from current levels. The average analyst expects a much lower upside of about 2%, but it's safe to say that Simons looks to be a bit more bullish than most investors.
Aggregately speaking, Eli Lilly saw hedge fund outflows of almost 25% last quarter, though Simons cut his position by less than half this mark. It's difficult to discern the exact meaning behind this selling, as it could simply be profit taking at its finest, and Eli Lilly does still trade at a double-digit discount (in percentage terms) to its industry's average price-to-earnings valuation. A dividend yield above 3.6% is an added benefit, and Simons's conviction - he's held this stock in his top five for seven straight quarters - should be considered as a positive sign.