Born in the United Sates, Steven A. Cohen studied at the Wharton School of Business of the University of Pennsylvania. Cohen currently lives in Greenwich, Connecticut, together with his wife and his seven children. After graduating from Wharton, Cohen worked during 1978 at Wall Street as a junior trader within the options arbitrage department of the firm Gruntal & Co., where Cohen eventually managed a portfolio of $75 million, as well as six traders.
During Cohen's first day at Gruntal & Co., he managed to make an $8,000 profit. Cohen would then go on to make for the firm nearly $100,000 per day. He was also managing his own trading group at Gruntal by the year 1984 and then kept on managing it until he founded his own firm, SAC.
In 1992, Cohen established SAC Capital Partners, at Stamford, using $20 million of his own capital. Today, the company, which administers $14 billion in equity, is a hedge fund dealing primarily with equity market strategies. Its subsidiaries include, among others, the Stamford-based CR Intrinsic Investors (Equity), the San Francisco-based Canvas Capital (Tech & Asia), as well as the NYC-based Sigma Capital Management (US Equity & Debt).
Cohen is focused on the fundamentals of firms and their technical analysis when he decides to invest. As Cohen himself has stated, "SAC's initial investment style was 'trading'-oriented. However, we have evolved into a multi-strategy, multi-disciplinary, investment management firm emphasizing rigorous research and risk management practices. SAC's investment strategies include, but are not limited to: Fundamental and Technical Long/Short Equity Portfolios, Global Quantitative Strategies, Fixed Income and Credit, Global Macro Strategies, Convertible Bonds and Emerging Markets."
The firm SAC has published average yearly returns of nearly 30% during the last 20 years. I deem it essential to buy companies selling products or rendering services which are needed or desired, lack a close substitute and are not regulated. I examined Cohen's portfolio and found that he shares these business tenets as well. I will thus detail Cohen's holdings and the reasons why he could have chosen that particular stock.
Newcastle Investment Corp (NCT)
Newcastle Investment Corp is engaged in investing in real estate securities as well as several other real estate-related assets. Newcastle performs its operations to fulfill the requirements to qualify as a real estate investment trust as regards federal income tax purposes.
As regards quarterly results, some of the firm's highlights include:
- It has reported core earnings of $0.39 per diluted share.
- It has posted a GAAP income of $0.35 per diluted share.
- It has declared a common dividend of $0.15 per share during the third quarter of 2011.
- It has raised the over-collateralization in CDO X to $106 million at the quarter's end.
- - It holds $190 million of current unrestricted cash for investment purposes.
During the third quarter of the year 2011, the firm's GAAP book value fell by $0.34 per share. As of September 30 of 2011, the firm's GAAP book value stood at $1.02 per share, in comparison to $1.36 per share as of June 30 of 2011. In the third quarter of the year 2011, the firm managed to create $15 million of cash flow from operations in comparison to $15 million within the second quarter of the year 2011. Moreover, the firm could receive $9 million of unrestricted cash from principal repayments as regards Newcastle's repurchased CDO debt, as well as other CDO securities bought at a weighted average price of 57% to par.
On September 14 of 2011, the Board of Directors decided to declare a quarterly dividend of $0.15 per common share or $16 million as regards the third quarter of the year 2011, which reflected a 50% rise from the prior quarter's dividend at $0.10 per common share. Moreover, the Board of Directors also declared dividends of $0.609375, $0.503125 and $0.523438 per share as regards the 9.75% Series B, the 8.05% Series C and the 8.375% Series D preferred stock, respectively, for a period starting August 1 of 2011 and ending October 31 of 2011. On September 27, 2011, the firm finalized the sale of 25.9 million shares of common stock at $4.55 per share. Net sale proceeds stood at $112.3 million, after having deducted underwriting discounts as well as offering expenses.
The current net profit margin of NCT is 87.53, which is lower than its 2010 margin of 160.17. I do not like it when companies have profit margins that are lower than past ones. In itself, that factor could be a reason to analyze why it happened.
In terms of income and revenue growth, NCT has a 3-year average revenue growth of 81.20. There is no information on the firm's 3-year net income average growth. Its current revenue year over year growth is -29.31, lower than its 2010 revenue growth of 10.65. I do not like it when current revenue growth is lower than the one of the past year. It shows that business is decelerating for a certain reason. The current net income year over year growth is -58.27. There is no information on the firm's 2010 net income year over year growth.
In terms of valuation ratios, NCT is trading at a Price/Book of 5.3x, a Price/Sales of 1.9x and a Price/Cash Flow of 9.4x in comparison to its industry averages of 1.2x Book, 6.3x Sales and 10.7x Cash Flow.
Banco Santander Ads (BSBR)
Banco Santander Brasil is basically the third-largest bank not controlled by the government in Brazil. The firm holds nearly $250 billion in assets, over 2,000 branches and about a 10% deposit-and-loan market share. Its commercial loans make up nearly 70% of its $100 billion loan book, while credits for individuals constitute the rest. Conventional commercial banking gives nearly four-fifths of the firm's core earnings; at the same time, global banking is provides 15%, while insurance and asset management make up the balance.
I believe that Cohen invested in the firm because Grupo Santander , which is Spain's biggest bank, is still the majority stakeholder of Santander Brasil, which I consider a definite advantage. The Brazilian subsidiary benefits from the Spanish group's experience in expansions and integrations. A perfect example is reflected by its massive integration with Banco Real, bought from ABN AMRO during 2008. Even though it is not yet completed, such integration has managed to come a long way, with considerable improvements in efficiency. Furthermore, the firm's wide reach, mostly in Latin America, oftentimes ends up making Santander Brasil the company of choice when Brazilian firms seek a bank to aid them in developing operations beyond their home country. I believe that this places Santander Brasil in a great position to win market share.
Another factor behind Cohen's choice could be that both insurance and credit penetration have remained rather low in Brazil, and most, if not all, banks are seeking to court aggressively the nation's growing middle class. I reckon that Santander Brasil is considerably well-positioned to profit from such growth, since the firm is underleveraged, with its equity base nearly equaling 20% of its assets (about twice that of Bradesco and Itau Unibanco). I believe that it has enough funding to deploy through the construction of more branches and the expansion of its loan book without starting to resort to heavy future equity increases.
The current net profit margin of BSBR is 22.73, which is higher than its 2010 margin of 17.20. I usually seek companies that have raised their profit margins in comparison to other years. Thus, I find it is vital to know why that happened. Its current return on equity is 10.39. It is lower than the 20% standard I look for in companies I invest in. It is higher than its 2010 average return on equity of 9.38.
In terms of income and revenue growth, BSBR has a 3-year average revenue growth of 47.87 and a 3-year net income average growth of 58.74. Its current revenue year over year growth is 3.64, lower than its 2010 revenue growth of 91.91. I do not like it when current revenue growth is lower than the one in the past year. Usually, what it shows is that business is decelerating for some reason or another. The current net income year over year growth is 34.03, lower than its 2010 average of 131.57. I do not like it when current net income growth is lower than the one in the past year. In general terms, I look for companies that raise both profits and revenues.
In terms of valuation ratios, BSBR is trading at a Price/Book of 0.9x, a Price/Sales of 1.1x and a Price/Cash Flow of -1.3x in comparison to its industry averages of 2.0x Book, 2.6x Sales and 4.5x Cash Flow.
Among Brazil's biggest banks, Santander Brasil proves to be the best-capitalized one, with its equity constituting nearly 20% of its assets (following its IPO in late 2009). I think that such a level is appropriate both to absorb the bank's expected loan losses as well as to offer capital for future expansion.
ITT Corporation (ITT)
ITT Corporation , whose 2010 sales and revenues amount to $11 billion, is one of the worldwide multi-industry leaders in high-technology manufacturing and engineering. The firm is engaged in designing, manufacturing and selling a broad range of engineered products and providing relevant services. The firm, based in New York City, employs nearly 40,000 people globally. As regards reporting purposes, the firm is organized into three segments: Defense & Information Solutions (nearly 53.6% of revenues in the full 2010), Fluid Technology (33.4%) as well as Motion and Flow Control (13.1%).
I reckon that Cohen was attracted by the fact that the ITT Corporation has been playing a significant role in essential markets like global defense and security, water and fluids management, as well as motion and flow control. In its Fluid Technology and Motion & Flow Control businesses, the firm owns industry-leading brands. It is rather well diversified, serving attractive end markets and having a rather wide geographic footprint.
A second reason supporting Cohen's pick is that the firm keeps investing in attractive growth areas like air traffic management, defense adjacency, product innovation, expansion in emerging markets, diversity strategies as well as analytical instrumentation. I am especially bullish as regards the segment of water equipment (mostly pumps), which ought to profit from replacing and upgrading aging networks in developed markets as well as the building of infrastructure in emerging markets. I am also especially bullish as regards the firm's defense business, which has the bulk of its sales arising from network-centric and electronic warfare.
The current net profit margin of ITT is -6.14, which is lower than its 2010 margin of 7.26. I do not like it when companies achieve lower profit margins than the past. Among others, it could prove to be a reason to analyze why that took place. Its current return on equity is -5.00. It is lower than the 20% standard I look for in companies I invest in. It is also lower than its 2010 average return on equity of 19.04.
In terms of income and revenue growth, ITT has a 3-year average revenue growth of -43.41. There is no information on the firm's 3-year net income average growth. Its current revenue year over year growth is 11.06, higher than its 2010 revenue growth of -82.12. The reality that revenue rose from last year evidences that the firm is performing well. There is no information on the firm's net income year over year growth.
In terms of valuation ratios, ITT is trading at a Price/Book of 3.1x, a Price/Sales of 1.0x and a Price/Cash Flow of 12.0x in comparison to its industry averages of 2.6x Book, 1.4x Sales and 10.3x Cash Flow. It is indispensable to analyze the company's current valuation and check how it is trading in relation to its peer group.
As far as valuation is concerned, the firm's current trailing 12-month earnings multiple stands at 9.6x, in comparison with the 14.7x average of its peer group and 16.2x for S&P 500. During the last five years, the company's shares have been trading in the range from 9.2x until 22.1x trailing 12-month earnings. The firm's stock has been trading at a discount to its peer group based on a number of forward earnings estimates.
The firm's financial health seems strong and will easily back the firm's management's plans to raise revenue by an additional 2-3% per year from company acquisitions with $15 million-$50 million of yearly revenue. Acquisitions of this size are rather less competitive to bid on, may usually be acquired at rather lower multiples and are easier to set to digest and extract value from. Nonetheless, after-tax cash costs from asbestos will most likely grow constantly from about $15 million per year during the next five years to about $30 million during the next five years, but will have a rather uncertain impact thereafter in terms of cash.
The most important aspects of the higher cash outflows will be: (1) the gaps in insurance coverage, which will reflect the insolvency of a number of insurers as well as prior insurance settlements, and (2) a number of policies belonging to some its insurers that will most likely be exhausted during the following 10 years. Indeed, I expect that insurance recovery in the tenth year will reach only 25%, well north of the current 50%.
Research In Motion Limited (RIMM)
Based in Waterloo, Ontario (Canada), Research In Motion Ltd., is engaged in designing, manufacturing and selling wireless solutions to mobile communications markets. By developing and integrating software, hardware as well as services, the firm offers solutions for a seamless access to most time-sensitive information, like e-mail, telephone, messaging, and Internet, as well as Intranet-based programs. The firm's offerings also allow third-party developers as well as manufacturers to improve products and services by means of proprietary wireless connections. The company's product portfolio includes, among others, the BlackBerry wireless e-mail devices as well as embedded radio modems and tools for software development.
I am positive that Cohen researched the fact that, through the provision of a reliable, convenient and secure way of opening e-mail in real time, the company has managed to differentiate the BlackBerry from other products in the communications markets. Even today, BlackBerry still enjoys a very strong brand value within the wireless PDA market, as it is leveraging the great popularity of the push e-mail system. The firm has a total number of 2,033 patents, which manages to cover a wide area of mobile security towards push e-mail system for most high-end smart-phones. During the early 2011, the firm was part of a consortium of numerous mobile telephone developers regarding the 4G LTE-linked patents of the bankrupt Nortel Networks.
A further element contemplated by Cohen's analysis is that, although it has faced considerable erosion of its market share during the three most recent years, the firm remains a profit-making company, which means that it is hoarding cash for whatever it is selling, while many other smart-phone producers like Motorola Mobility as well as Nokia are losing money. The firm started a headcount reduction to enhance its cost structure and has begun benefiting from such restructuring. Moreover, its Board of Directors has authorized a share repurchasing program of up to 5% of the firm's outstanding common shares. All of these measures might enhance the firm's bottom line going forward.
The current net profit margin of RIMM is 17.13, which is higher than its 2010 margin of 16.43. I am positive about firms that have amplified their profit margins when compared to previous years. As such, I deem it relevant to understand the cause behind such result. Its current return on equity is 41.24. It is higher than the 20% standard I look for in companies I invest in. It is also higher than its 2010 average return on equity of 36.46.
In terms of income and revenue growth, RIMM has a 3-year average revenue growth of 48.88 and a 3-year net income average growth of 37.97. Its current revenue year over year growth is 33.13, lower than its 2010 revenue growth of 35.14. I dislike companies with a current revenue growth lower than the past year. It commonly demonstrates that that business is beginning to slow down. The current net income year over year growth is 38.83, higher than its 2010 average of 29.82. I like it when net income growth is higher than the past.
In terms of valuation ratios, RIMM is trading at a Price/Book of 0.7x, a Price/Sales of 0.4x and a Price/Cash Flow of 2.6x in comparison to its industry averages of 2.2x Book, 1.6x Sales and 11.8x Cash Flow. It is fundamental to examine the company's current valuation and check how it is trading in relation to its peer group.
With regards to valuation, the firm is now trading at 2.9x of the fiscal 2012 earnings estimate, which is at an enormous discount to S&P 500 average and to the industry average. Regarding the fiscal 2013 earnings estimate, the firm's stock has been trading at 3.8x, once again an enormous discount to S&P 500 average and to the industry average. I deem that this valuation discount is to be attributed to the firm's rather poor quarter-over-quarter performance, as well as its incapacity to introduce a product of real innovation. This smart-phone addressable market opportunity, not to mention BlackBerry's solid brand position, are still the most important factors in terms of creating future return for stockholders.
Nonetheless, the firm has recently lacked some credibility as regards the new smart-phones by reason of a very challenging market. Going forward, such issues will only keep intensifying, while the firm delays the launching of its new products. Even so, the firm's low-level of current valuation may restrain a further fall in its stock price.
The firm's balance sheet remains strong: $1.5 billion in cash and investments with no debt.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIMM over the next 72 hours.
