Analyzing James Simons' Final Renaissance Portfolio

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Includes: AMZN, BDX, CMCSA, ESRX, F, INTC, ORCL, SNY, T
by: John P. Reese

One of the key parts of my investment approach is finding and learning from strategists who have proven long-term track records, something that can be hard to do in an investment world filled with unproven pundits and talking heads. And, when it comes to a long-term track record, few can match the one compiled by James Simons.

Simons, who recently stepped down as chief executive of Renaissance Technologies, the firm he founded nearly 30 years ago, has managed one of the most successful hedge funds in history -- the Medallion fund. The numbers are the stuff of which legends are made: Medallion has averaged returns of about 45% a year (after fees) since its inception in 1988, according to The Wall Street Journal, which adds that Medallion has had just one down quarter in the past 15 years -- 1999's first quarter, when it dipped a mere 0.5%.

Simons was a pioneer in quantitative trading, using complex computer models to guide Medallion's buying and selling decisions, which often involved rapid trading. (He also opened another fund in 2005 that used a longer-term approach. According to the Journal, it has beaten the market, though it hasn't been nearly as successful as Medallion.)

Medallion isn't open to new investors, and, unlike the investing greats upon whom I base my Guru Strategy computer models, Simons hasn't disclosed his investment strategy. In fact, it's quite the opposite -- the Journal describes him as a "secretive mathematician and Cold War code breaker".

But Renaissance's latest SEC filing, for the fourth quarter of 2009, gives an idea of how the firm was positioned when Simons stepped down in January. While its holdings may well have changed significantly given Renaissance's quick-trading style, I thought it would be interesting to look at which of the firm's biggest recent holdings also get high marks from my Guru Strategies. Several, including Ford (NYSE:F), Amazon.com (NASDAQ:AMZN), DirecTV (DTV), Genzyme (GENZ), and Oracle (NASDAQ:ORCL), didn't meet my models' standards, but several others did. Here's a look at some of the best of the bunch.

Express Scripts (NASDAQ:ESRX): Based in St. Louis, this pharmacy benefits manager ($28 billion market cap) handles more than a million prescriptions a day through its retail and home delivery services. As of the end of 2009, Renaissance owned close to $90 million worth of the stock, which may well benefit from the new healthcare bill.

Currently, the approach I base on another top quantitative strategist, James O'Shaughnessy, likes ESRX. One reason is that Express has upped earnings per share in each of the past five years. (In fact, it has done so in every year of the past decade.)

O'Shaughnessy also looked for a key pair of qualities when assessing growth stocks: a high relative strength, which allows you to find stocks that are being embraced by the market, and a low price/sales ratio, which makes sure you're not paying too much for those good growth plays. Express has a solid relative strength of 78 and a strong 1.13 P/S ratio, both of which earn this model's approval.

Comcast Corporation (NASDAQ:CMCSA): This Philadelphia-based firm is the U.S.'s largest provider of cable services, with 23.6 million cable customers, 15.9 million high-speed Internet customers, and 7.6 million digital phone customers. Renaissance owned close to $250 million worth of a couple different classes of Comcast shares as of the end of 2009, and my Peter Lynch approach is currently high on the firm's Nasdaq-listed common stock.

Comcast ($53 billion market cap) is a "fast-grower" -- Lynch's favorite type of investment -- according to this approach, thanks to its impressive 35.5% long-term EPS growth rate. (I use an average of the three-, four-, and five-year EPS figures to determine a long-term rate.) Lynch famously used the P/E/Growth ratio to find bargain-priced growth stocks, and when we divide Comcast's 14.99 price/earnings ratio by that long-term growth rate, we get a P/E/G of 0.42. That falls into this model's best-case category (below 0.5).

Another reason this approach likes Comcast: The firm's 68% debt/equity ratio comes in under the model's 80% upper limit, showing that Comcast appears to be on solid financial footing.

Becton, Dickinson and Company (NYSE:BDX): Renaissance owned more than $100 million worth of shares of this New Jersey-based firm, which makes a variety of drug delivery and medical diagnostic technologies, at the end of last year. Becton ($19 billion market cap) is also a favorite of Warren Buffett, whose Berkshire Hathaway owns a chunk of its shares -- and a favorite of my Buffett-based model, which became keen on the stock shortly before Berkshire picked it up.

My Buffett-inspired model looks for firms that have consistently upped EPS over the past decade, have manageable debt, and have high returns on equity over the long haul. Becton has increased EPS in each year of the past decade, could pay off its $1.5 billion in debt in a little over a year given its $1.2 billion in annual earnings, and has produced an average annual ROE of almost 20% over the past 10 years, all of which earn high marks from this model.

My Lynch model is also high on Becton, which it considers a "stalwart", the kind of big, steady, defensive firm Lynch liked. My model likes Becton's 16.2% long-term growth rate, 0.87 yield-adjusted P/E/G, and solid 32% debt/equity ratio.

Intel Corporation (NASDAQ:INTC): This chip-making giant ($123 billion market cap) has taken in more than $35 billion in sales over the past year. Renaissance owned more than $108 million worth of the California-based firm's shares at the end of 2009, and the stock is now a favorite of my O'Shaughnessy-based value model.

O'Shaughnessy targeted large firms with solid cash flows and strong yields when looking for value plays. Intel's size, $1.71 in cash flow per share (more than twice the market mean of $0.85), and 2.8% yield all fit the bill right now.

Disclosure: I’m long ESRX, BDX, INTC, F, and AMZN.