Billionaire Steven Cohen's Top Stock Picks

 |  Includes: AAPL, BA, DG, GILD, WFT
by: Insider Monkey

Steven Cohen is one of the most successful hedge fund managers of the past two decades. He still doesn't have trouble beating the market. SAC's flagship fund returned 8% net of fees in 2011. Hedge funds usually put a larger proportion of their assets in the stocks that they are most bullish about. These positions are likely to outperform the rest of their portfolio. In this article, we will take a closer look at Cohen's five largest bets and check out whether it makes sense to imitate his picks.

The largest position in Cohen's latest 13F portfolio is Apple Inc (NASDAQ:AAPL). During the fourth quarter, Cohen boosted his AAPL stakes by over 300%. His fund had $433 million invested in this position at the end of 2011. That was an excellent move as Apple keeps surprising investors with its outstanding performance in 2012. Apple is also the most popular stock among hedge funds (see the 10 most popular stocks). Rob Citrone, Stephen Mandel, Chase Coleman, David Einhorn, Andreas Halvorsen and Jim Simons were all bullish about AAPL. Their funds invested more than $500 million in AAPL at the end of last year. We like AAPL as well, and we have discussed it in detail and recommended it in our previous article. Since then, AAPL was up 8.35%, versus 1.77% for the S&P 500 index. Investors could have beaten the market by over 6 percentage points if they had followed our advice. At this moment, we still think it is not too late to purchase AAPL. Investors can purchase it at 13X its 2012 expected earnings and enjoy a high earnings growth of around 20% per year in the next couple of years.

The second-largest position is SPDR S&P 500 ETF Trust Put (NYSEARCA:SPY). Cohen invests in this position to hedge against some of the risks of his long positions. The third-largest position is Weatherford International Ltd (NYSE:WFT). It is also the second-largest non-ETF position in Cohen's latest 13F portfolio. Cohen slightly increased his position in WFT by 8% over the fourth quarter last year. As of December 31, 2011, SAC Capital reported owning $176 million worth of WFT shares. Cohen also invested another $99 million in WFT Call options. There were 28 hedge funds with WFT positions in their 13F portfolios at the end of 2011. Ken Griffin was the most bullish hedge fund managers about WFT. His Citadel Investment Group had $191 million invested in this stock at the end of last year.

WFT's North America business enjoyed strong growth over the past year. It generated about 66% of WFT's operating income, up from 51% in 2010 and 16% in 2009. We think the company will continue to benefit from the growing activity levels in U.S. and Canadian heavy oil plays over the year ahead. Over the longer term, we see stronger growth in the international operations of the company. We also like WFT's long-term strategy of expanding geographically into the Latin American countries. We believe the strategy is consistent with the trend in the energy industry.

On the negative side WFT recently reported that it had not remediated the material weakness in internal control over financial reporting related to income taxes. So, investors should not rely on Weatherford's previously issued financial statements. WFT is expected to make about $225 million to $250 million of aggregate net correction of errors and it expected to file restated financial statements for several prior years. We think the elimination of the material weaknesses will have a positive impact on WFT's share performance. WFT is expected to make $0.84 per share in 2012 and $1.39 per share in 2013. Its forward P/E ratio is below 20 and its earnings are expected to grow at above 40% per year over the next couple of years. This is a long-term bet though, so don't expect any quick payoffs.

The other large positions in Cohen's portfolio include Gilead Sciences Inc (NASDAQ:GILD), Boeing Co (NYSE:BA) and Dollar General Corp (NYSE:DG). We like Gilead and Boeing. These two stocks have double-digit expected grow rates as well as appealing valuations levels. BA and GILD are expected to grow at about 12-14% annually and their forward P/E ratios are below 15. DG's forward P/E ratio is slightly higher and its earnings are expected to grow at 20% per year. We think these expectations are optimistic. Dollar General's growth rate will decline as the economy performs better than expected.

Disclosure: I am long SPY.