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Growth Stock Picking with Steve Cohen

By Michael Carr   |   Tuesday, 20 Jan 2009 10:33 AM

In 1992, Steve Cohen started SAC Capital with nine employees and $25 million. In July 2008, the firm reported that it had grown to over 800 employees with approximately $14 billion in assets under management.

SAC is widely regarded as the best trader in the world, and Cohen is well paid for being the best.

Most hedge funds charge a 2 percent management fee and get to keep 20 percent of the profits that exceed an index value. SAC charges its investors a 5 percent management fee and takes a 50 percent cut of the profits, believed to be the highest in the industry.

But investors aren’t complaining. Since 1992, Cohen’s funds have delivered average returns of more than 40 percent a year, after those exorbitant fees. Over the same time, the S&P 500 provided a 7 percent annual return on a total return basis.

According to Forbes magazine, Cohen's estimated net worth of $8 billion makes him the 36th richest American.

Cohen is a trader, rather than a buy-and-hold investor like Warren Buffett. It has been reported that SAC usually buys and sells at least 20 million shares of stock a day. This represents as much as 3 percent of the New York Stock Exchange's average daily trading plus another 1 percent of the Nasdaq's daily volume.

However, some of his stock picks are held for several months or even years. In recent Securities and Exchange Commission filings, Cohen offered some insight into what he is looking for.

In simplest terms, Cohen is a growth investor. His recent buys have very high estimated earnings growth rates compared to other companies in their industry. Among his larger holdings, recent sells include stocks that reported earnings that were below the estimates or had the estimates cut significantly by analysts.

I developed this week’s stock screen based upon his list of recent buys. This is not a passive portfolio that can be looked at once a year. Growth investing requires you to regularly check the stocks to make sure they are meeting expectations.

To find the nine stocks on this week’s list, I selected stocks which meet these criteria:

  • Have earnings estimates that exceed their five-year average of reported earnings, indicating that the company will be doing better than it has in the past.

  • Earnings growth rates should be at least twice as fast as the industry average, and in the top 10 percent of all stocks.

  • To ensure that we find companies with at least some staying power, I added a value criterion that the company must have at least a quarter of its market value available as cash on its balance sheet.

    The list includes:

    China Automotive Systems (CAAS) was recently trading at 3.20, with a P/E ratio of 6, in line with its peers in the automobile industry. While China’s economy will likely slow in the year ahead, CAAS should benefit from Chinese government support and their economic stimulus package because the government considers the automotive industry to be critical to economic recovery. Proposals to boost automobile demand include tax incentives for new purchases and providing rewards to trade-in older cars for new cars.

    Constant Contact (CTCT) provides e-mail marketing and online survey products for nearly 250,000 customers. Sales growth has averaged nearly 100 percent a year for the past five years, and earnings growth should exceed 500 percent next year before slowing to a long-term average of 40 percent a year. CTCT has the expensive infrastructure in place for an Internet business and is very likely to meet those earnings estimates since the incremental cost of new customers is very small. Recent price: 14.19.

    Delta Air Lines (DAL) has the highest revenue growth rate among major U.S. airlines. Jim Cramer, market analyst and host of CNBC's Mad Money, says it has the strongest balance sheet among the airlines. It has relatively low debt levels within its industry and is expected to be profitable in 2009. If oil prices remain low, DAL might actually be a long-term hold. It was recently trading at 11.43.

    Electronic Game Card (EGMI) is an under-followed stock with earnings of 0.10 a share and a recent stock price of only 0.49 a share. Only one analyst follows the stock and expects to see long-term earnings growth of 30 percent a year. EGMI is a very small but profitable company in the gaming field and is a possible takeover candidate for a larger player in the lottery or slot machine industry.

    The Medicines Company (MDCO) specializes in acute care hospital cardiology products. It acquires and develops products that are either in the later stages of clinical development or are already on the market. This is a growth market given the aging demographics in the United States and other developed countries. Recent price: 12.50.

    Neurocrine Biosciences (NBIX) is seeking a partnering deal for Elagolix, its endometriosis drug that fights a common health problem in women. At a recent price of 3.31, the company sells for little more than the value of the 2.51 in cash per share that it holds. This values the drug patent rather cheaply, making this a value stock with an enviable projected earnings per share growth rate of 35 percent a year.

    Starent Networks (STAR) is a provider of cellular telephone network equipment. The company is expected to profit from a recent announcement that China will install a 3G network estimated to cost $40 billion. At a recent price of 11.43, STAR has a P/E ratio of 18 and a projected earnings growth rate of 40 percent a year.

    TiVo (TIVO) may have competition from the digital video recorders offered by cable companies and satellite TV providers, but the company is fighting back. Their partnership with Netflix allows TiVo owners to access any movie in their Netflix queue on demand. At the recent Consumer Electronics Show they displayed new search capabilities that offer the opportunity to watch a show, buy an episode, or view outtakes. Recent price: 7.39.

    Unica (UNCA) is a marketing company with 800 clients. Hedge fund giant James Simons’ Renaissance funds is a large shareholder in UNCA, as is value manager Palo Alto Investors. Its 35 percent growth rate in long-term earnings is the second highest in the industry. Analysts think the stock can double in price from the recent level of 5.35.

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    In 1992, Steve Cohen started SAC Capital with nine employees and $25 million. In July 2008, the firm reported that it had grown to over 800 employees with approximately $14 billion in assets under management.SAC is widely regarded as the best trader in the world, and Cohen...
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