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Steven Cohen Has a Track Record of Impressive Returns

July 31, 2014 | About:
ovenerio

ovenerio

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In this article, let´s see Steven Cohen (Trades, Portfolio)´s return, a guru who has a net worth of about $12 billion, and in a wealth ranking is situated in the place 19 in the industry and 43 in the U.S.; continues having impressive returns. He had generated average annual returns of 30%, on top of the hedge-fund industry, since SAC Capital launched in 1992.

SAC Capital

SAC Capital becomes Point72 Asset Management in April, because the hedge fund was accused of running insider trading. Eight money managers and analysts have pleaded guilty or been convicted of using confidential and material information, while two have settled with federal regulators without admitting or denying wrongdoing. After a $1.2 billion penalty it was shut down. So Cohen turned the fund into a family office. The Securities and Exchange Commission claims he failed to supervise employees. Despite this situation, Cohen's new fund is up 9% this year, according to Bloomberg.

Point72

Cohen is the owner of Point72, a Stamford, Connecticut-based investment adviser that manages about $12 billion with six funds. According to a February regulatory filing, the family office has $11.9 billion in assets under management (AUM). It charges with as much as 3% of assets and 50% of profits for its investment advisory services.

Industry Comparison

According to data compiled by Bloomberg, other hedge funds averaged a 2.5% year-to-date return. Point72 manages about $10 billion of Cohen's personal wealth, and has seen a profit of about $1 billion this year. More than a third of that gain (almost $370 million) was made in two days in January from its stake in Intercept Pharmaceuticals Inc. (ICPT) after the company had a successful liver drug trial.

Revenues, Margins and Profitability

Now, let´s see how is performing this pharma company. Looking at profitability, revenues remained constant, while earnings per share decreased tremendously in the most recent quarter compared to the same quarter a year ago (-$13.21 vs -$0.62). During the past fiscal year, the firm reported poor results of -$3.70 versus -$2.28 in the prior year. For the next year, Wall Street expects a new contraction in earnings. Moreover, the net income has decreased falling from -$10.21 million to -$257.67 million when compared to the same quarter one year ago, as well as the net operating cash flow.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

ICPT

Intercept Pharmaceuticals

-82.27

AZN

AstraZeneca PLC

11.01

SLXP

Salix Pharmaceuticals Ltd.

19.31

 

Industry Median

7.00

The company has a negative current ROE which is lower than the one exhibit by its peers: AstraZeneca (AZN) and Salix Pharmaceuticals (SLXP).

It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

1406781689312.png

Relative Valuation

In terms of valuation, the stock sells at a price-to-sales ratio of 2568.5x which is obviously above the industry average. This ratio indicates that the stock is relatively overvalued.

1406781762524.png

As we can see in the graph, compared to its closing price of one year ago, ICPT's share price has jumped by 381.85%.

Final Comment

Several weaknesses such as the cero revenue growth, its declining earnings per share, net income and operating cash flow; as well as it´s negative ROE, makes me feel bearish on this stock.

Although the company has seen very good gains over the past year, I don’t see any further upside potential. I believe Cohen has made the gain in the appropriate time, that´s why he reduced at almost all his position. So we have to pay attention to his next move.

On the other hand, hedge fund gurus like Andreas Halvorsen (Trades, Portfolio), Jim Simons (Trades, Portfolio), Columbia Wanger (Trades, Portfolio) and RS Investment Management (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned.

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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