Steve Cohen's Best Ideas

 | Sep 21, 2013 | 2:00 PM EDT  | Comments
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Investing in the stock market is a zero-sum game. If one investor is producing alpha, another investor is losing alpha. Outperforming the market on a risk adjusted basis isn't as easy as you may think. You either need to spend countless hours researching stocks, or you need to outsource this responsibility.

Hedge funds actively manage more than $2 trillion in assets, and they are probably the most incentivized group of people to outperform the market. They hire the best people, consult with the top experts in their fields and sometimes cross the line and obtain illegal inside information.

The main problem with investing in hedge funds is that they manage too much money and they usually have only a few good ideas. In most cases they have excess capital to invest and they are forced to invest it in mediocre ideas. (The alternative is to return capital back to investors. but hedge funds don't want to give up juicy management fees.)

We at Insider Monkey take advantage of a loophole in regulatory requirements that forces hedge funds to disclose their holdings once a quarter. Even though they disclose their holdings with a 45-day delay, our research has shown that this delay doesn't degrade the usability of their ideas. We take a scientific approach and calculate the historical returns of each hedge fund based on their 13F holdings, and one of the hedge funds we've analyzed is Steve Cohen's SAC Capital. The firm managed to return north of 25% per year since the early 1990s. More recently, it achieved returns of between 10% and 15%.

Because of its legal problems, it isn't a good idea to invest in SAC Capital right now. But it may be a better idea to invest in Cohen's top five stock picks, as they are disclosed in its most recent 13F filings. Between 2008 and 2012, investors could have outperformed the market by 9.8 percentage points per year by simply buying SAC Capital's top five holdings two weeks after they were disclosed and holding them for three months. So what are Steve Cohen's best ideas right now?

Micron (MU) has the No. 1 spot. Cohen trimmed his position by 14% during the second quarter, yet Micron was still his biggest holding by the end of that reporting period. Micron returned 26.5% this month.

Zoetis (ZTS) has the No. 2 spot. Cohen boosted his stake in this stock by more than 900% during the second quarter. Zoetis has returned 11.5% so far in September.

Schlumberger (SLB) and Amazon (AMZN) are the two other positions are above the $200 million mark in the fund. This month, Schlumberger has gained 9.7% and Amazon has added 11.1%.

Finally, the fifth-largest position in Cohen's 13F portfolio was EOG Resources (EOG). Cohen boosted his stake in this stock by 81% during the second quarter, and it has returned 8.7% this month.

Overall, Cohen's top five picks have gained an average of 13.5% so far in September, vs. a gain of 5.6% for the S&P 500 ETF (SPY). The above stocks were Cohen's top picks at the end of June, and our research suggests that it would be worthwhile to imitate these picks starting in September. Many investors may think there is no value in doing this, and that this is outdated information -- but the data say otherwise. Even if you aren't comfortable with blindly following a quantitative investment strategy, we think you can benefit by at least using our approach as a screening criteria and conducting in-depth analyses of these ideas.

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