By: Jake Mann
Hedge funds' 13F filings continue to flutter in for the second quarter, and one firm that isn't getting a lot of press for its stock picks is SAC Capital, managed by the infamous Steven Cohen (see his full profile).
SAC was indicted last month on four counts of criminal securities fraud and one count of wire fraud. Although the Wall Street Journal reports that the firm can continue to stay open, it's also estimated that by the end of 2013, SAC's funds will be almost exclusively Cohen's fortune.
With that being said, it's still worth looking at the moves Cohen and his team made in the second quarter of 2013 (original 13F here) to get a better understanding of how it may position its portfolio moving forward. Let's take a look at some of the most notable trades made by SAC Capital.
Cut EQT significantly. According to Q1 data - see Cohen's past equity portfolios - EQT Corp (EQT) was the hedge fund manager's largest stock position. Shares of the diversified oil and gas company totaled 4.26 million at the end of the first quarter, worth a little over $288 million.
In the following three-month period, it's evident that Cohen became sour on EQT, as the position now equals less than one-fourth of its former size, and was worth just $74.9 million at the end of the second quarter. EQT's share count totaled 944,000 and change, and it now sits outside of SAC Capital's top 50.
The logical question, then, is what happened to alter Cohen's mindset? This was a position, remember, that he originally established in the second quarter of 2011, and in the time since the beginning of that period, shares have risen 70.8%.
Obviously, we'll never be able to get into Steven Cohen's head for this trade. Heck, we won't even be able to talk to one of the PM's who may have given him the idea to cut EQT, but the most likely reasoning may simply come down to the valuation. At current prices, shares of EQT sport unsavory multiples across the board, from a price-to-earnings ratio of 47.4x to a price-to-cash valuation above 50. On a sales basis, EQT is the most expensive stock in the entire gas utilities industry, with a P/S of 6.5x.
The point is, despite three consecutive earnings beats, the markets might have run too far with this oil and gas E&P. More specifically, it's very likely that Cohen and SAC have found better ways to invest in the energy sector, as we'll see below.
Sold Panera. But before we can get to that, it's also worth mentioning that SAC Capital sold its entire stake in Panera Bread (PNRA). At the end of the previous quarter, Panera was a top-65 position, accounting for $82.9 million of the firm's $20 billion equity portfolio.
In the second quarter filing, SAC's equity portfolio sported a market value of a little above $18 billion, so it's quite possible that a shrinking capital base led to the cut. Whatever the reason, it's clear that Cohen and his team didn't think Panera was fit to stay in a streamlined version of SAC Capital. Why would this be the case?
Well for starters, this is a stock that has lost 7% over the past three months. Two straight earnings misses-and cuts to its longer-term sales outlook-have investors feeling frothy. After all, this is a stock that has been compared to Chipotle (CMG) many times for its susceptibility to EPS shortfalls, because it generally trades at elevated multiples.
Recent declines have pushed Panera's P/E back down below 30.0x, but shares still sport a price-to-book valuation above 5.0x, and a PEG bordering on overvalued territory. With no dividend to speak of, there's not much to like about Panera if it can't keep up with the growth that's expected of it. With its latest earnings report, the sell-side now expects Panera's annual EPS growth rate over the next half-decade to fall near 17% after averaging almost 27% a year over the past five years.
Bullish on this energy trio. As mentioned above, there were a few stocks that Cohen and SAC Capital were moving money into last quarter, and three of the largest moves were in a trio of energy companies.
Cohen upped his stake in Schlumberger (SLB) by 140%, adding almost 1.7 million shares. The total value of his stake in the oil and gas E&S company now rests at $208.1 million, good for the hedge fund's third largest stock holding. Cohen also added to his positions in EOG Resources (EOG) and Continental Resources (CLR) by 81% and 866%, respectively.
What these three energy companies have in common is simple: they are all undervalued relative to their specific industries, and now sit within Cohen and SAC Capital's top 10 largest positions.
In Schlumberger, investors get shares of an oilfield services company that has surpassed Wall Street's earnings estimates in two consecutive quarters, driven by balanced growth both in domestic offshore drilling projects and abroad. What's more, shares of Schlumberger still trade at a 16% discount to their industry's average, despite the fact that shares have risen almost 19% year-to-date.
Wall Street expects Schlumberger, which currently trades in the low $80s, to flirt with $100 per share in the short-term, and it's evident that Cohen shares at least some level of this general bullishness.
In a similar light, EOG Resources and Continental Resources are expected to have double-digit upside by most sell-side analysts, and both trade at discounts to the oil and gas E&P industry on an earnings basis.
EOG is the costliest of the two, sporting a P/E of 42.0x and a P/B multiple near 3.0x, but recent momentum (+19% appreciation over the last 60 days) is hard to ignore.
Continental Resources, on the other hand, actually offers some of the best growth prospects in the energy sector at a very reasonable price. Shares sport a PEG of 0.65 and a forward P/E below 13.0x.
From an operational standpoint, the company's procedures in the Bakken have simply cost less than were originally expected, largely due to pad drilling techniques.
Without boring you in the technical details, the key thing to know about Continental Resources is that its overall production was up 40% year-over-year in each of its previous two quarterly reports, and proven reserves ballooned by almost 20% last quarter. According to the conference call transcript, production growth is largely set to remain near the 40% mark in the next few quarters, and on the cost side, average well costs are expected to fall at or below $8 million for the rest of 2013.
This compares favorably with Continental's 2012 average well cost of $9.2 million, and the $11.3 million figure that outside-operated wells have averaged.
In the case of investors searching for earnings expansion, you can't beat the combination of a shrinking cost base and heavy growth. This is likely what Cohen sees in Continental Resources.