When most people think of hedge-fund managers, the first thing that comes to mind are brash, Gordon Gecko types with big mouths and even bigger egos.
While this is the picture painted by the media, the reality is far different. In fact, one of the world's top-performing hedge-fund managers could easily fit the description of a nearly nerdy, shy math professor.
While contradicting the common stereotype, this super successful money manager started a firm that now has more than $15 billion in managed assets. He is also in the top 100 wealthiest people on Earth -- not bad for a humble ex-mathematician and university professor.
If you haven't guessed it yet, I am talking about Jim Simons, founder and chairman of Renaissance Technologies, one of the top-performing hedge funds of all time.
Simons believes in applying the scientific method and extensive testing when choosing stocks for investment. Rather than hiring Wall Street professionals for his firm, he prefers to hire scientists and experts in various nonfinancial-related disciplines such as astrophysics and computer programming.
Simons firmly believes that, when it comes to investing, the ability to think scientifically is far more beneficial than even advanced financial knowledge.
Fortunately, due to disclosure rules, investors like you and me can follow Simon's footsteps. So after analyzing his current holdings, I found tremendous potential in a currently out-of-favor stock: Monster Beverage Corp. (Nasdaq: MNST).
Monster is among Simon's top 20 stock holdings, as Renaissance owns nearly 3 million shares. In the third quarter, Simon ramped up his holdings by 4%, indicating confidence in the stock. And Simons is not the only one who believes in this company -- insiders do as well. Company insiders own more than 14% of the outstanding shares. This a lot more than what insiders at PepsiCo (NYSE: PEP) own (0.13%), or insiders at Coca Cola (NYSE: KO) (5%), for instance.
Up until June 18, 2012, Monster Beverage experienced a tremendous upward trend. Shares traded higher by more than 34% in 2010 and by more than 76% in 2011.
Then, bad news emerged.
There have been five reported deaths linked to the highly-caffeinated drink, not to mention a wrongful death lawsuit from the parents of a 14-year-old girl who died after drinking two cans of the energy drink in a 24-hour period. The Food and Drug Administration has an ongoing investigation into possible health hazards surrounding the energy drinks.
Needless to say, shares plunged shortly thereafter. Take a look at the chart below...
I think this selloff created a perfect buying opportunity for the stock. The company will likely settle the lawsuit for a nominal amount, while the FDA investigation is likely already priced into shares, since it dates back to 2004.
Despite the controversy over energy drinks, Monster and its privately-held competitor, Red Bull, reported 16% of consumption growth in the energy drink segment in September alone. Remember, this growth is in the face of the FDA investigation, negative press and a wrongful death lawsuit. The reality is, people love this stuff and simply don't seem to care about the possible health concerns.
As a stock, Monster is nothing short of amazing.
Earnings per share (EPS) have been increasing during the past year. In the third quarter of the year, the company posted EPS of 59 cents, almost 44% higher than the previous quarter. And this is not even the best part.
What I really like about Monster's fundamental picture is its return on equity (ROE) and operating margin numbers, which total 31.1% and 27.5% respectively. This ROE beats those of Coca-Cola and Pepsi, each in the 26% range. Operating margin also beats the ones from Coca-Cola (22.3% ) and Pepsi (13.92%).
Technically, shares have sold off sharply prior to finding a bottom in the $40 range. The stock price has since bounced higher but has hit resistance in the $47.50 area. This has set up a classic technical breakout play. I would buy Monster on any break above $50. My target price is back to the $77 highs within 18 months.
Risks to Consider: There is a possibility that class-action lawsuits occur. In addition, the FDA may clamp down on the business. These risks, although I believe are small, remain a possibility. The risk of consumer taste changing is always a potential with these types of products. Remember to use stops, position size properly and diversify when investing.
Action to Take --> I like this stock's fundamentals, the fact that Jim Simons and many of the insiders own it, and the fact that it recently sold off, providing a solid buying opportunity for a 68% gain from current levels.