Billions to Billions
If you haven’t heard of Billionaire Steven Cohen, you may already know a little about him if you’ve watched Showtime’s hit series Billions. Damian Lewis plays the show’s main character Bobby Axelrod that very loosely portrays Cohen and his former hedge fund SAC Capital.
The show focuses on a district attorney (played by Paul Giamatti) whose sole focus is to take down Axelrod on securities fraud. Cohen's hedge fund, SAC Capital, was similarly charged with insider trading in 2013 and ultimately settled out of court for $1.8 billion in the largest securities fraud case ever. The Showtime series is very entertaining, albeit pure entertainment, and not entirely an accurate representation of Cohen.
Investing morality aside, Cohen's real-life results are undeniable. He was the third highest-earning hedge fund manager of 2012 when he made $1.4 billion. But as part of the settlement deal, Cohen agreed to manage only his own money with the inability to take outside investment. However, that part of the settlement expires this January and it has been widely rumored that Cohen plans to launch a new $20 billion fund as soon as February.
Dov Gertzulin's DG Capital is having a strong year. According to a copy of the hedge fund's letter to investors of its DG Value Partners Class C strategy, the fund is up 36.4% of the year to the end of June, after a performance of 12.8% in the second quarter. The Class C strategy is Read More
Although institutional money may be balking at the idea of investing with Cohen due to fear of bad press, his status as a hedge fund legend remains firmly intact.
Cohen's Investing Strategy: there needs to be a catalyst
Steven Cohen has generally shied away from the press even before the SEC's investigation making it difficult to truly understand his investment approach. However, Jack Schwager shared a rare look into Cohen's process in 2003 when he published Stock Market Wizards: Interviews with America's Top Stock Traders. Leading up to the interview with Cohen, Schwager highlighted that "in the seven years he has managed money, Cohen has averaged a compounded annual return of 45 percent."
In an excerpt from the interview, Cohen reveals that his Wharton education only taught him a handful of things. One being:
"That 40 percent of a stock's price movement was due to the market, 30 percent to the sector, and only 30 percent to the stock itself, which is something that I believe is true. I don't know if the percentages are exactly correct, but conceptually the idea makes sense."
Cohen also shared his reasoning for why he once shorted IBM's stock and what he did when it went completely wrong:
"A basic principle in going short is that there has to be a catalyst. [Then] the first thing I check is whether the catalyst still applies. For example, about a month ago, I expected that IBM would report disappointing earnings, and I went short ahead of the report. I was bearish because a lot of computer and software companies were missing their numbers (reporting lower than expected earnings) due to Y2K issues. Customers were delaying the installation of new systems because, with the year 2000 just around the corner, they figured that they might as well stick with their existing systems. I went short the stock at $169. The earnings came out and they were just phenomenal - a complete blowout! I got out sharply higher in after-hours trading, buying back my position at $187. The trade just didn't work. The next day the stock opened at $197. So thank God I covered that night."
And when asked what Cohen looks for when hiring traders:
"I'm looking for people who are not afraid to take risks. One of the questions I ask is: ‘Tell me some of the riskiest things you've ever done in your life.’ I want guys who have the confidence to be out there; to be risk takers."
Cohen obviously encouraged too much risk-taking as we know how the story ends for SAC Capital ($1.8 billion settlement). However, his approach is fascinating and worthwhile for investors to understand. In his final words of the interview, Cohen says:
"You can't control what the market does, but you can control your reaction to the market. I examine what I do all the time. That's what trading is all about."
Cohen has undoubtedly shown a knack for reacting appropriately to a changing market throughout his investing career. He recently invested $250 million into Quantopian, a free online platform that gives its 85,000 members the infrastructure to build algorithmic investment strategies. Cohen's $250 million investment will be placed into the platform's most promising strategies. This is a move that allows Cohen an exclusive view into various quantitative programs, a trending strategy on Wall Street.
So would you choose to invest your money with him? Here's a summary of his current investment portfolio released by his family-run office.
Point72's Latest Form 13F Filing
On November 14th, Cohen's firm Point72 Asset Management filed their quarterly Form 13F regulatory filing which consisted of 757 positions with no single stock making up more than 4.3% of the portfolio; that being Time Warner (NYSE: TWX).
I found that the entire portfolio totals over $22.4 billion according to the latest filing. Additionally, the list value of stock holdings is up a tremendous 25.7% when compared to the last quarter. As a benchmark, the S&P 500 was up only 3.9% over the same period.
So I was interested in finding out which of Cohen's positions performed the best and still had nice upside potential.
Steven Cohen's Best Performing Stocks
I then wanted to find out which of these best-performing stocks still has upside potential. I determined the upside potential by using finbox.io's Fair Value estimate which is derived by applying valuation and risk models like discounted cash flow analysis, dividend discount model, earnings power value and more.
I found that the following six stocks clearly stood out from the rest.
Groupon, Inc. (NasdaqGS: GRPN) operates online local commerce marketplaces that connect merchants to consumers by offering goods and services at a steep discount.
Cohen currently owns just under $9 million worth of Groupon stock as of September 30th. Shares of the company appreciated a massive 35% QoQ. The catalyst being managements announcement of a strategic partnership with GrubHub (NYSE: GRUB) on food delivery which led to several analyst upgrades.
Groupon's stock still looks undervalued on a fundamental basis. Nine separate valuation analyses calculate a fair value of $6.02 per share implying 16.2% upside. Expect the stock to continue its run-up.
#2 Spirit Aerosystems
Spirit Aerosystems Holdings (NYSE: SPR) designs and manufactures commercial aerostructures worldwide.
The company announced a Q2 earnings beat and an agreement with Boeing (NYSE: BA) that would end a four-year contract dispute on August 2nd. Shares jumped nearly 18% on the news. The stock continued its climb higher by appreciating 34% QoQ. Cohen's family office owns more than $10.3 million worth of Spirit Aerosystems stock as of September 30th.
The company's stock could still trade higher. Finbox.io's ten cash flow analyses highlight that shares are still 15% undervalued.
The Gap, Inc. (NYSE: GPS) operates as an apparel retail company worldwide. It provides apparel, accessories, and personal care products for men, women, and children under the Gap, Banana Republic, Old Navy, Athleta, and Intermix brands.
Management announced positive Q2 results on August 17th in a report that showed strength in the company's Old Navy business. Gap then updated investors on its new strategy of opening 270 Old Navy stores in the next three years while closing 200 underperforming Gap and Banana Republic shops. The market took the news well and the stock traded 34% higher QoQ.
The company's shares last traded at $26.73 as of Tuesday, November 14th, slightly above its 200-day moving average. Although the stock has traded higher over the last several months, ten valuation models imply there's still 23.9% upside.
#4 American Eagle
American Eagle Outfitters (NYSE: AEO) operates as a specialty retailer offering on-trend clothing, accessories, and personal care products under the American Eagle Outfitters and Aerie brands.
Similar to Gap, American Eagle announced a positive Q2 earnings surprise in late August. This helped lead to the retailer's 20% QoQ gain as of September 30th.
Although shares have made impressive gains in the last quarter, shares are still trading at only 71.7% of their 52-week high. In mid August, FBR upgraded the company to a Buy rating after citing an "attractive valuation." Our twelve separate analyses agree with FBR's conclusion.
Magna International (NYSE: MGA) designs, develops and manufactures automotive systems and components worldwide.
Cohen's Point72 currently holds a $37.3 million position in Magna and enjoyed the stock's 16% QoQ increase. Shares now trade near their 52-week high and are set to climb even higher.
The consensus price-target of $59.47 per share calculated from 17 Wall Street analysts implies a margin of safety of 12.5%. Finbox.io's eleven models calculate an even higher margin of safety of 29.3%.
Biogen Inc. (NasdaqGS: BIIB) is a biopharmaceutical company that engages in the discovery, development, and manufacturing of therapies for the treatment of neurological and autoimmune diseases.
Cohen's firm currently holds a large $159 million position in Biogen as of the recent 13F filing. Although shares of the company increased 15% QoQ, it is important to note that Cohen actually decreased his position by $120 million over the quarter.
Finbox.io's ten valuation models suggest that Biogen's stock should be trading 20.7% higher based on the company's projected future cash flows.
6 Best Performing Stocks That Still Have Big Upside
In conclusion, the table below ranks all six stocks by their QoQ Performance.
|Company Name||Ticker||Ownsership Value as of 9/30||finbox.io Upside||QoQ Return|
|American Eagle Outfitters||AEO||$1,122,000||15%||20%|
Steven Cohen is one of the more controversial money managers that you'll find. But investing morality aside, you cannot deny his superior returns. That's why investors should take a closer look at the stocks mentioned above.
As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.