Recently, Cohen and his firm have been in the news because of an insider trading investigation. The firm denies any wrongdoing, and no charges have been filed against Cohen. These allegations are a cloud over the firm's future, but there is no denying that SAC Capital has been very successful in the past.
Based solely on performance, Steve Cohen has built one of the most successful investment firms of all time. Since its founding in 1992, SAC has delivered annualized returns of more than 25% to its investors. By comparison, the S&P 500 gained an average of 8.2% a year over that time.
Cohen's hedge funds have a reputation for short-term trading. His firm has more than $14 billion under management, according to an estimate by Forbes. Cohen's personal wealth is estimated to be more than $9 billion.
Recent SEC filings show that in the first three months of 2013, managers at SAC added 393 new stocks to their portfolios, in addition to the 572 positions they already held, eliminated positions in 666 stocks, and sold part of their holdings in 620 stocks. Individual investors could not keep up with that pace even if they had access to what the firm was trading in real time.
Individuals also cannot diversify as broadly as SAC does. SAC's top 10 holdings accounted for only 9.8% of the firm's assets in the first quarter. Cohen and his managers hold small positions in hundreds of stocks and seem to trade quickly to capture small price moves. Based on the results, that strategy seems to work well for the firm.
Although there is no guarantee SAC is still holding any of the stocks it reported holding on March 31, there is still reason to look at those stocks as possible investments. We cannot know what exactly Cohen likes in a stock, but we can assume if he is buying it he expects it to go up.
These filings require a firm to show whether it owns the stock, has sold it short, owns options on the stock, or owns bonds in the company. Because we can see whether the firm is long or short, we can make an assumption that the firm likes the prospects of a stock it owns and believes a decline is ahead for companies that it shorts.
While SAC may be trying to capture only a small part of the expected price move, short-term trends do have a tendency to continue and become long-term trends.
We can benefit from Cohen's stock-picking skills by reviewing SAC's recent holdings. I screened that list to find the stocks with the strongest relative strength in price and strong cash flow to identify the best long-term candidates from SAC's holdings.
This screen is the same approach I have used to analyze the portfolios of Bill Gates and Warren Buffett. When applied to the holdings of SAC Capital, Micron Technology (Nasdaq: MU) and Owens Corning (NYSE: OC) are at the top of the buy list.
Micron is one of the world's largest manufacturers of computer memory chips. Cash flow increased by 140% in the past 12 months, even as the company lost $1.12 per share. MU has endured the ups and downs of the computer memory market and is a survivor at least partly because its operating cash flow has consistently been positive. Right now, traders seem to be happy with MU, and the stock is a buy.
Owens Corning makes glass fiber reinforcements and other residential and commercial building materials worldwide. The company could benefit from the recovery in homebuilding that seems to be underway or from an increase in the pace of global economic activity. OC is expected to begin a period of rapid earnings acceleration with earnings per share expected to average more than 35% a year in the next five years, more than doubling the 14% yearly average of the past five years.
Action to Take --> Despite being in the news as part of an insider trading investigation, Steve Cohen deserves credit for his stock-picking success. Over many years, Cohen has demonstrated the ability to find winners, and these two stocks seem to be among his best ideas right now. Consider adding positions in MU and OC for the long term.
This article originally appeared on ProfitableTrading.com
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