Steven A. Cohen is a billionaire hedge fund manager and the founder of SAC Capital Advisors. SAC Capital Advisors manage ~$14 billion in assets and is known to charge a whopping 50% performance fees, thanks to its excellent past performance. The firm has posted an enviable 30% average annual return for investors from 1992 to 2010.
I scanned the top 15 buys of SAC Capital from the last quarter for generating investment ideas. After studying those stocks, I came up with a list of four ideas, which looks fundamentally compelling and one which I would definitely avoid - here's the list.
Shares Bought Last Quarter
Sirius XM Radio Inc
Cisco Systems, Inc
Sprint Nextel Corporation
Advanced Micro Devices, Inc
Source: 13F filing
I like Sirius XM radio, Oracle, Cisco and Sprint among the above stocks while I would recommend avoiding Advanced Micro Devices. Here is a look at each of these stocks in detail.
SIRIUS XM Radio Inc: My Take - Buy
Sirius XM Radio Inc. provides satellite radio services in the United States and Canada. The company broadcasts approximately 135 channels, including music, sports, entertainment, comedy, talk, news, traffic and weather channels on a subscription-fee basis through two satellite radio systems.
Sirius offers a differentiated consumer value proposition based on a broad and unique content line-up, seamless integration into cars and ease of use, and ubiquitous network coverage. I believe this will drive continued growth. Sirius' business model is characterized by low capital intensity, high operating leverage and incremental margins, pricing power, and lack of substitute products. All these factors make its business attractive.
Sirius has not seen any increase in churn rates, which remain stable at 1.9%, despite its price hike earlier this year. This pricing power will be an important driver of SIRI's valuation going forward. In addition, there is a lot to watch for in 2012 and beyond, with further contributions from used cars, roll out of the Sirius 2.0, and the launch of internet-based on-demand services.
Oracle Corporation: My Take - Buy
Oracle Corporation is an enterprise software company, which develops, manufactures, markets, distributes and services database and middleware software, applications software and hardware systems, consisting primarily of computer server and storage products. It operates in three segments: Software, hardware systems and services. Oracle's EPS forecast for the current year is 2.65 and next year is 2.92. According to the consensus estimates, its top line is expected to grow 4.90% in the current year and 6.60% next year.
On its analyst day last year, Oracle management mentioned its medium-term target of 20% EPS growth rate. This is way above 9-11% current consensus estimates. Clearly, if Oracle is able to execute and post ~20% growth, it will surprise the market positively and result in a significant upside in the stock. Oracle also laid out the formula for sustaining 20% EPS growth, which appears reasonable. The key points include:
- Growing distribution 15-20% with an increased focus on SAAS and verticals.
- Leveraging the technology portfolio into bigger deals and market share gains.
- Driving new opportunities around Exa, Fusion and other emerging products.
- Expanding operating margins above 50%.
In addition to the good growth prospects, Oracle's strong cash position makes it a good defensive play in current uncertain times and I believe the stock offers a favorable risk reward.
Cisco System, Inc.: My Take - Buy
Cisco Systems designs, manufactures, and sells Internet protocol-based networking and other products related to the communications and information technology industry worldwide and provides services associated with these products and their use. Cisco's products are installed at large enterprises, public institutions, telecommunications companies, commercial businesses and personal residences.
Cisco reported inline to slightly better results last quarter. However, its guidance was below expectations. I believe most of this weakness in the company's guidance is macro-related and the company continues to execute well. With a strong product portfolio, low valuations (~8.58x forward earnings), high cash flow generation (~9% FCF yield), and a solid balance sheet (~$6 net cash per share), I believe the company offers an attractive risk reward.
Going forward, trends in the routing business seem positive as Cisco is gaining market share, while Juniper is struggling with its product timing. Cisco's switches business is also expected to continue doing well with product refreshes in the Catalyst and Nexus lines. Margins are also expected to improve due to pricing power from product refreshes. Overall, I believe Cisco is well positioned for steady 6%-8% growth. With improving margins, product refreshes and a strong execution capability, there is good upside potential for the stock price in the near term.
Sprint Nextel Corporation: My Take - Buy
Sprint's stock price has gained ~35% in the last one month. The company posted strong Q1 results and showed progress toward meeting its 2012 targets for the network modernization (aka Network Vision). Sprint remains in a favorable position to improve its FCF over the next 3-years from the combination of modernizing its network assets and growing its core base of CDMA subscriptions. Also, Sprint is a potentially attractive acquisition target. I believe improving cash position; the prospects to grow core-CDMA revenue even through transition period; and the longer-term prospects to significantly improve its cost structure by migrating to a single-network architecture makes the stock an attractive long candidate.
Advanced Micro Devices, Inc.: My Take - Avoid
I am bearish on AMD because of its low market share and Intel's superior products. AMD faces significant competitive threat from Intel- and ARM-based competitors in the second half of this year with the launch of Windows 8. AMD's ASPs remain at less than half of Intel's level ($54 vs. $123 for Intel) and its competitive position in the server industry continues to remain challenged with Intel's Romley. Although AMD's valuations aren't demanding at ~8x current earnings, the above mentioned headwinds are likely to keep the stock under pressure. I believe Intel is a much better bet than AMD. I have previously written a detailed article on Intel. Please visit the same for my bullish thesis on Intel.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.