by Guan Wang
Even the biggest money management firms are not immune to allegations of insider trading. Just last year, Steven Cohen's SAC Capital Advisors was investigated by the SEC for insider trading by one of its employees. Luckily, the negative news did not prevent SAC Capital from delivering decent performance last year. Its flagship fund returned 8% net of fees last year, a year during which the whole hedge fund industry struggled.
So far this year, Cohen has continued his strong performance. Since the beginning of 2012, the largest 10 positions in SAC Capital's 13F portfolio generated a weighted-average return of 19.07%, versus 9.89% for the S&P 500 index in the same period.
Table 1: Top 10 positions in SAC's 13F portfolio as of December 31, 2011
GILEAD SCIENCES INC
DOLLAR GENERAL CORP
ILLINOIS TOOL WORKS INC
E N S C O PLC
The largest position in Cohen's 13F portfolio at the end of last year was Apple Inc (AAPL). It is also the best performing stock on the list above, returning 38.34% so far this year, and one of our favorites. We like that investors can purchase Apple at just 16 times its 2011 earnings and enjoy earnings growth of about 20% annually. Cohen significantly boosted his stake in Apple by over 300% during the fourth quarter, raising his fund's position in the company to be worth $433 million at the end of 2011.
SAC Capital isn't the only hedge fund to be bullish on Apple -- over one-third of the 350+ hedge funds we track disclosed owning Apple in their 13F portfolios, including Stephen Mandel's Lone Pine Capital, Chase Coleman's Tiger Global Management, David Einhorn's Greenlight Capital, Andreas Halvorsen's Viking Global and Jim Simons' Renaissance Technologies (check out Jim Simons' top picks).
Gilead Sciences Inc (GILD) is the second best-performing stock listed above. It has returned 27.93% since the beginning of this year, beating the market by 18 percentage points. During the fourth quarter last year, Cohen boosted his fund's stake in Gilead significantly to $160 million at the end of December.
Gilead is the most popular biotechnology stock amongst the hedge funds we track. As of December 31, 2011, there were 41 hedge funds with Gilead positions in their 13F portfolios. Jacob Gottlieb's Visium Asset Management also had over $160 million invested in Gilead at the end of the fourth quarter 2011. Jim Simons and Dan Loeb are bullish about Gilead as well.
In a previous article, published on March 26, we discussed Gilead in detail and concluded that the stock is a good long-term investment. Gilead closed trading that day at $47.22 per share. Gilead's closing price on April 24 was $52.36 per share. The stock returned 10.89% since March 26, while the S&P 500 index was down -3.04% during the same period. If investors had followed our recommendation, they could have outperformed the market by nearly 14 percentage points in one month.
Going forward, we are still bullish about Gilead. The company is expected to make $3.67 per share this year and $4.10 per share next year, making its forward P/E ratio 12.77, versus 18.99 for Biogen Idec Inc (BIIB) and 15.52 for Celgene (CELG). Another main competitor, Amgen Inc (AMGN), has a lower 2013 P/E ratio of 10.71, but its earnings growth expectation of 8.61% is also much lower than the 13.79% estimated for Gilead. We think the modest price premium is fair and worth paying.
Illinois Tool Works Inc (ITW) also returned over 20% since the beginning of 2012. Sure the company has enjoyed a strong return year-to-date, but where this stock really shines is its dividend. Illinois Tool Works has a decent dividend yield of 2.54%, but more impressively the company has been increasing its dividend payouts for nearly 50 consecutive years. Given its low payout ratio of 33% and the fact that its earnings are expected to grow at 12% per year, Illinois Tool Works definitely has strong potential to further raise its dividends. It also indicates that the company has the ability to maintain or increase its dividend payments, even if its earnings fail to meet the double-digit growth expectation.
Additionally, we like the company's diversified customer base. It operates in nearly 60 business units in 57 different countries. Last year, roughly 60% of its revenues were generated from foreign countries. We expect Illinois Tool Works will increasingly benefit from the strong growth in countries such as Brazil, China, and India. Besides Cohen, Ric Dillon and John W. Rogers are also bullish about Illinois Tool Works.
Overall, we like Cohen's stock picks. Seven of his top 10 positions outperformed the market so far this year. We are optimistic about Cohen's performance in the future and we strongly recommend that investors focus on his top stock picks.