By Matt Doiron
Millennium Management, run by billionaire Israel Englander, is a multi-strategy fund which allocates capital to a variety of investment teams who work on their own strategies. Millennium was among the most successful hedge funds in 2011, returning more than 8% vs. an average decline of 5% for equity hedge funds. Here are some themes that we have noticed from studying the fund's most recent 13F filing compared to previous quarters:
Oil & gas. Energy was a common theme at Millennium in the second quarter, bringing in additions such as E&P players EOG Resources (EOG) and Southwestern Energy (SWN), oilfield services company Schlumberger (SLB), and diversified Marathon Oil. The fund did reduce its position in pipeline company Williams (WMB), indicating that it is getting particularly aggressive in exploration and production of oil and gas, especially given the boom in onshore drilling in U.S. shale plays. EOG and Southwestern both trade at forward P/Es of 21, and so are growth investments which depend on production projections to pan out. Schlumberger, as more of a services company, is lower priced and trades at 18 times trailing earnings and 14 times forward estimates. We think that it provides good exposure to onshore production at a better earnings multiple.
Selling out of gold. Millennium invests in the highly followed precious metal through the Gold ETF (GLD). At the end of March the fund owned about 940,000 shares of the ETF and reduced this number to about 390,000- around half- by the end of June. The fund is highly committed to oil and natural gas, as had been mentioned, so perhaps its investment managers are reducing gold holdings in order to limit commodities exposure. It also indicates that Millennium is not investing in oil out of a particular desire to hedge against inflation, as gold would likely be a better investment were that the case.
Exelon. Millennium increased its position in Exelon (EXC) from about 280,000 shares last quarter to 2.3 million. According to the 13F, it is now the fund's second largest position. Exelon is a utility which primarily produces electricity but also provides natural gas to some of its customers. As is typical for a utility, it pays a high dividend yield of 5.5% and, with a beta of 0.5, has little exposure to the broader market. Exelon trades at 13 times trailing earnings and was also a favorite of Renaissance Technologies in the first quarter.
Teva. $35 billion market cap drug manufacturer Teva Pharmaceuticals (TEVA) also saw increased investment from Millennium as the fund increased its position by nearly a factor of 10. Over the course of the second quarter, the 220,000 shares of Teva in the portfolio increased to 2.1 million. As a large, diversified drug manufacturer, it is difficult to see any particular treatment or class of drugs that Millennium is being bullish on here, but we would note that by some valuation metrics Teva could be considered a value stock: its trailing P/E is 11 and, according to analyst estimates, its forward P/E is only 7. In its most recent quarter, revenue increased 19% and earnings increased 50% compared to the same period in 2011. Our guess is that this is primarily a value play, which also carries the benefit of diversifying away from the energy picks at the top of the portfolio. Billionaire David Shaw's hedge fund doubled its put position and reduced its call position in Teva during the second quarter, sending a bearish signal.
Millennium is moving into the U.S. oil and gas industry, and while we think much of the opportunities in that macro play have already been captured by investors, we see Schlumberger as still a buy. Despite making our list of the ten most popular energy stocks among hedge funds for the first quarter, its forward multiple is in the low teens. It is probably that other good values can be found in the area as well. We are generally wary of gold investments, as they are driven primarily by sentiment, and so think it might be right to reallocate funds from gold into value stocks. Teva also appears to us to be a good value find.