Jim Simons’ Favorite Pharma Duo
As one of the most successful hedge fund managers of the past 50 years, Jim Simons has truly built an investment-driven empire. Simons’ Renaissance Technologies has a number of successful funds, most notably the Medallion Fund. Since 1989, the $5 billion fund has generated an average annual return of 35% after fees. Considering that typical performance fees have ranged from 20% to 44%, that is quite a feat. Known for his use of algorithmic high frequency trading (here’s a neat video), Simons invests in a variety of stocks, including those in the tech, consumer cyclical, and pharmaceutical sectors. Interestingly, two of the manager’s top stock picks are members of “Big Pharma”; they are detailed below.
Bristol Myers Squibb (NYSE: BMY)
In the past quarter, Simons’ 13F filings show that he increased his holdings of Bristol Myers Squibb by more than 100%, as he now holds more than $400 million worth of the stock. Shares of BMY have returned 13.2% over the past year, though a recent hiccup in its development of a hepatitis C (liver) drug has caused a modest selloff. With fears of a new epidemic arising the U.S.’s baby boomer population, Bristol Myers Squibb had high hopes for this drug, which it purchased for $2.5 billion earlier this year.
In addition to this bearish news, BMY also reported that its second quarter profits were down nearly 30% year-over-year, as it was forced to endure patent expirations for Avapro, Avalide, and most notably, Plavix. As was expected, the company reduced its year-end EPS guidance from $1.90-$2.00 to $1.78-$1.88. On an adjusted basis, the Street is still expecting earnings of $1.93 a share, down 15.5% from last year’s EPS of $2.28. By the end of 2013, this forecast falls a bit further, to $1.90.
Now, from a valuation standpoint, the stock is trading at a Price-to-Earnings ratio (15.0X) below the industry average (16.3) and competitors like Johnson & Johnson (NYSE: JNJ) at 21.6X, and Pfizer (NYSE: PFE) at 20.4X, but shrinking earnings warrant this discount. In fact, when Price-to-Book (3.3X) and Price-to-Sales (2.6X) ratios are taken into account, shares of BMY actually look overvalued in relation to its competitors. WealthLift’s Sentiment Index rates Bristol Myers Squibb as a hold, as the community’s users look to be skittish from the company’s less than stellar earnings outlook.
Eli Lilly and Company (NYSE: LLY)
In comparison to Bristol Myers Squibb, Simons owns slightly fewer shares of Eli Lilly, worth an estimated total of $382.9 million. This stock has generally proven to be a solid investment for the hedge fund manager, as it has returned 21.2% in the past year, outpacing the likes of BMY (13.2%) and JNJ (7.4%). While LLY does have a few of its most profitable drugs, including Cymbalta and Humalog, coming off of patent by the end of next year, there is still a potential gamechanger in the company’s pipeline. Solanezumab, a neuroprotector for patients with Alzheimer’s, is currently in Phase III trials. Projected as a $5 billion windfall, the market for Alzheimer’s is expected to triple in size over the next decade, and Eli Lilly can be a major beneficiary of this growth.
By the end of 2013, analysts are expecting the company to reach an EPS of $3.74; up 10.8% from the $3.38 forecasts are predicting this year. Intriguingly, shares of LLY are currently trading at a Price-to-Earnings ratio (11.8X) below industry peers and its own 10-year historical average (16.8X). Over the past decade, Eli Lilly’s earnings have traditionally traded at a 1% discount to those of the S&P 500; they are trading at a 19% discount this year. Despite strong growth in its operating and free cash flows, the company is similarly undervalued when using the Price-to-Cash Flow ratio (7.7X), which is below the industry average (10.6X), BMY (11.2X), JNJ (12.1X), and PFE (11.0X).
Assuming that the company can hit the Street’s year-end earnings targets, fairly valued shares of LLY can eclipse $51 by next summer, which would mark a near 20% appreciation from current price levels. It would be wise to stay updated on the fate of Solanezumab; WealthLift INSIDER will keep you in the loop.
Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.
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