A series of 13G filings with the SEC have shown that billionaire Steve Cohen’s SAC Capital Advisors is far from idle as some outside investors seek redemptions due to the fund’s legal problems relating to insider trading investigations and charges. 13Gs are filed when a hedge fund or other major investor controls 5% of a stock’s total shares outstanding. This does mean that they only disclose positions in smaller cap stocks rather than larger cap names- Amazon (NASDAQ:AMZN) and Visa (NYSE:V) were two of SAC’s largest holdings at the end of March but the fund certainly fell far short of 5% ownership. Find Cohen’s favorite stocks from Q1.
However, we at Insider Monkey are quite interested in following what hedge funds are doing in smaller cap stocks because we believe that hedge funds have more opportunity for alpha in this area. Our strategy based on buying the most popular small cap stocks among hedge funds has outperformed the S&P 500 by 33 percentage points in the last 11 months, and our research shows that even over the long term the average excess return is about 18 percentage points per year (learn more about our small cap strategy). It’s also possible to screen individual small cap names hedge funds have been buying to see if they might be good values. Read on for our quick take on these three stocks SAC has been buying recently.
Cohen and his team have increased their stake in Blue Nile Inc (NASDAQ:NILE) to a total of about 670,000 share. While the stock trades at a premium valuation of 51 times its trailing earnings during the second quarter of 2013 sales grew nearly 20% versus a year earlier and year to date Blue Nile Inc (NASDAQ:NILE)’s earnings per share doubled compared to the prior year period. We do expect earnings growth to slow as the base amount of net income increases, however, and the stock is a popular short target. Renaissance Technologies, founded by billionaire Jim Simons, initiated a position of close to 300,000 shares in the first quarter of the year (see Renaissance’s stock picks).
SAC disclosed ownership of about 4 million shares of $2.5 billion market cap health insurer Health Net, Inc. (NYSE:HNT), or 5% of the company. Last quarter Health Net’s revenue was down modestly compared to the second quarter of 2012, but due to cost cutting operating income increased considerably in percentage terms. Earnings per share for the first half of the year were $1.05, which when annualized makes for a P/E multiple of 15 at current prices. The stock has steadily risen over 70% in the past year. D.E. Shaw had owned 1.9 million shares of Health Net according to its most recent 13F; that fund is managed by billionaire David Shaw (research more stocks D.E. Shaw owns).
We don’t expect Health Net, Inc. (NYSE:HNT) to continue to be able to drive significant increases in operating profits from lower costs if revenue continues to lag, but the stock is cheap enough that it may be worth comparing to other health insurers (many companies in the industry trade at low multiples due to investor uncertainty). Foster Wheeler AG (NASDAQ:FWLT) is dependent on its financials recovering, and so might be better placed on a watch list for now. As for Blue Nile Inc (NASDAQ:NILE), the recent growth rates have been good but the stock seems too aggressively priced to be worth buying at this time.
Disclosure: I own no shares of any stocks mentioned in this article.
