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Stockpickr: Top Picks From a Top Hedge Fund

James Altucher

Jim Simons, founder of Renaissance, was very polite and told me that they only hire Ph.D.s. So that's why I didn't land a job at the best hedge fund in the world.

It would've been a great experience to work there, because Renaissance is considered the most consistently successful hedge fund out there. It has averaged returns of 35% per year since 1989 after all fees. And those fees aren't trivial: There is a 5% management fee and a 44% performance fee.

At Stockpickr, we keep track of some of the fund's top holdings, as well as some of the smaller, more speculative positions that it is adding to.

Renaissance prides itself on extensive modeling and using statistics to determine where the data suggest it has an edge. I like to look at the holdings and try to find patterns.

The main pattern I can see in the stocks accumulated over the past year is that the fund likes micro- and small-caps that have little or no debt and enormous amounts of cash when compared with market capitalization. The fund probably has done a study and determined that these types of companies tend to outperform.

Let's take a look at one of Renaissance's holdings, semiconductor name Advanced Analogic Technologies(AATI Quote). The company has a $243 million market cap, as well as $107 million in cash in the bank with no debt. In other worlds, almost half of its market cap is in cash.

It's almost as if Wall Street believes the company is going bankrupt, but nothing could be further from the truth.

Advanced Analogic Technologies had $11 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) over the past 12 months, and Wall Street believes earnings are going to go up to 16 cents a share in 2007 and to 35 cents in 2008 -- where it would trade at eight times earnings, if you back out the cash.

Also, the company has met or exceeded analyst expectations in each of the past four quarters, and they also expect revenue to go up a healthy 30% from 2007 to 2008 -- from $93 million in 2007 to $124 million in 2008.

Hedge fund Citadel also owns Advanced Analogic Technologies, as does a do-it-yourself Stockpickr portfolio called Cheetah Capital Value Fund. That fund says that the company "is undervalued based on its potential cash flow and growth rate for the next five years." Click here to see its other holdings and comments.

In prior columns, I've mentioned how United Online(UNTD Quote) and CMGI(CMGI Quote) are also owned by Renaissance. United Online is known for being in the declining dial-up Internet access business, and CMGI is a failed Internet incubator.

Wall Street has basically abandoned them, although both companies have cleaned up their act lately. United Online has $156 million in cash in the bank, no debt, a forward P/E of 12, and is quickly redefining itself as a social network through its popular Classmates.com Web site.

CMGI has just about $200 million in net cash and a $647 million market cap, and has become a growing -- and highly profitable -- IT services firm.

The key thing for Renaissance in these positions is that it's almost impossible for either of these companies to go out of business. If you have $200 million in cash, you have no debt, you're still generating $100 million in cash every year and you have an enterprise value of $400 million, you would have to make a lot of mistakes to go under. And before that happened, activists probably would step in and clamor for changes to be made. Renaissance likely anticipates this scenario by taking positions in these types of names first.

Renaissance also owns a chunk of security software firm Symantec(SYMC Quote). The company has taken a hit over the past year because it had the right idea (buying storage firm Veritas), but the wrong execution (the integration has gone poorly). Yet the $16 billion market-cap company has almost $1.6 billion in cash flow, 25% year-over-year earnings growth, and a forward P/E of just 16, according to analysts.

Several great hedge funds own Symantec, including activist hedge fund Chapman Capital, activist Carl Icahn and deep value fund Private Capital.

This brings to mind the following point: I tend to believe most of these funds piggyback each other. They probably say, "Oh, Carl Icahn owns Symantec, so I should take a look too." I'm sure they all employ their own analysts, but I also think they are communicating with each other all day long saying, "Hey, check out CMGI."

Check out some of Renaissance Technologies' other interesting positions.

Stockpickr tip of the day: I first heard about Renaissance from the folks at a Brazilian fund of funds who suggested I speak with Renaissance. I had never heard of it before and asked what it was. "Only the best fund ever," the Brazilian fund manager told me, "and it has an approach similar to yours where they model out different patterns. For instance, it can tell you what the markets will do if there's a blizzard outside. Unfortunately for us, we can't even give it any more money. It's returning money to us."

So I figured I could do that, too. I downloaded all the weather data since 1920 about snow amounts in Central Park, and the results can be found in The Blizzard System portfolio on Stockpickr. This is a tongue-in-cheek system, not meant to be taken seriously, but it's interesting what people can model out there.