By Renee O'Farrell
Jim Simons' Renaissance Technologies is one of the best performing funds we track. Its spectacular returns have made Simons, its founder, one of the richest people in the world. The 73-year-old is currently ranked 31st richest person in America with an estimated net worth of about $10.7 billion - and no wonder.
Renaissance Technologies, affectionately known as "RenTech," has had stellar performance. Over the past year, RenTech's institutional equities fund returned about 33%, while the S&P 500 index was only up 0.85% during the same period. So far this year, the top 10 positions in RenTech's 13F portfolio at the end of 2011 have returned a weighted average of 20%, versus 8.76% for SPY.
Table 1: Top 10 positions of RenTech's 13F portfolio
Company Name | Ticker | Value (x1000) | Activity | YTD Return |
APPLE INC | AAPL | 518570 | 22% | 55.17% |
LILLY ELI & CO | LLY | 300059 | 2% | -3.95% |
CHIPOTLE MEXICAN GRILL | CMG | 287856 | 5% | 23.36% |
BRISTOL MYERS SQUIBB | BMY | 226315 | 14% | -6.02% |
MCDONALDS CORP | MCD | 224880 | -27% | -1.97% |
NOVO NORDISK A S | NVO | 218694 | -12% | 27.44% |
LORILLARD INC | LO | 207092 | -38% | 19.44% |
PHILIP MORRIS INTL | PM | 205829 | -58% | 11.90% |
INTEL CORP | INTC | 201236 | -12% | 14.09% |
COMPANHIA DE BEBIDAS DAS AMERS | ABV | 199383 | 9% | 14.84% |
The main contributor to RenTech's massive 20% return is its largest position, Apple Inc (AAPL). The fund had over $500 million invested in the company at the end of last year. The stock has returned a spectacular 55% so far this year, beating the market by over 46 percentage points. Apple's performance last year was also strong, returning about 23%. Fund managers Stephen Mandel, Chase Coleman, David Einhorn, and Andreas Halvorsen have also made a bundle from their stakes in Apple. We have been recommending Apple to our readers for a while now because we like its low valuation levels and strong growth potential.
Chipotle Mexican Grill Inc (CMG) has also generated high returns so far this year. RenTech had $288 million invested in this position at the end of the fourth quarter 2011. Chipotle is up 23.36% since the beginning of 2012. Chipotle is also quite popular among other hedge funds. As of December 31, 2011, there were 26 hedge funds with Chipotle positions in their 13F portfolios, up from 20 hedge funds at the end of September. Louis Navellier, Jeffrey Vinik, and Joe DiMenna were also bullish about Chipotle. We, on the other hand, are not so sure. We actually prefer McDonald's (MCD) to Chipotle.
RenTech also had a significant stake in McDonald's at the end of the fourth quarter 2011. While the company has not performed very well this year, losing about 2% since the beginning of 2012 and underperforming the market by around 10 percentage points, McDonald's has better growth potential, aided largely by a more diversified geographic reach.
We see strong growth potential in McDonald's business in Asia Pacific, Middle East, and Africa, which will offset the slower growth in the United States and Europe. Moreover, we believe the value offerings of McDonald's will enable the company to gain additional market shares during the soft global economy. McDonald's is also more attractive compared with Chipotle when it comes to valuation.
McDonald's is expected to make $5.71 per share in 2012 and $6.32 per share in 2013. Its P/E ratio for 2013 is about 15.5, versus 39.1 for Chipotle. McDonald's 2013 P/E ratio is also lower than the 18.6 for its main competitor Yum Brands Inc (YUM). There were 34 hedge funds reported to own McDonald's at the end of 2011. Besides RenTech, Ric Dillon's Diamond Hill Capital, Boykin Curry's Eagle Capital Management, Louis Navellier's Navellier & Associates, and Cliff Asness' AQR Capital Management all had significant positions in McDonald's at the end of the fourth quarter.
Besides McDonald's, two healthcare stocks in RenTech's portfolio - Eli Lilly & Co (LLY) and Bristol Myers Squibb Co (BMY) - also underperformed the market this year. We do not like Bristol Myers because we think the stock is overvalued at this moment. Its forward P/E ratio of 17 is relatively higher compared with its main competitors. For example, Merck & Co Inc (MRK) has a forward P/E ratio of about 10 and AstraZeneca Plc's (AZN) forward P/E ratio is about 7. With regard to Eli Lilly, we think investors should hold this stock. Its forward P/E ratio is about 12, but its earnings are deteriorating. Analysts expect its earnings to decline at about 8% per year due to the patent expiration on antipsychotic medication Zyprexa and the lower sales of off-patent Gemzar.
The other large positions in RenTech's portfolio - Novo Nordisk (NVO), Lorillard Inc (LO), Philip Morris International Inc (PM), Intel Corp (INTC), and Companhia de Bebidas Das Americas (AMBEV) (ABV) - all outperformed the market by generating double-digit returns so far this year. Two ADRs, Novo Nordisk and AMBEV, are good options for investors who want to seek exposure to foreign markets. Tobacco stocks Lorillard and Philip Morris both pay attractive dividends and are trading at relatively low multiples. Tech giant Intel also looks attractive with its relatively low forward P/E ratio of 11 and a strong growth rate of around 10%. It pays a decent dividend yield of 3%.
Disclosure: I am long PM.
