We maintain a database of 13F filings from hedge funds and other notable investors and use this information to develop investing strategies; one of our findings has been that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). We attribute this to large institutional investors such as mutual funds paying less attention to small caps, making them less efficiently priced. Our database also allows us to pick out individual fund managers’ top picks in a number of areas, including small caps, for investors to use as ideas for further research. Here are five stocks with market capitalizations between $1 billion and $5 billion which billionaire Louis Bacon’s Moore Global owned at the end of December (or see the full list of stocks the fund reported owning):
Bacon more than doubled the size of his position in Assured Guaranty Ltd. (NYSE:AGO), a $3.8 billion market cap insurer of public finance and infrastructure securities, to a total of over 5 million shares. The stock trades at a small discount to the book value of its equity with a P/B ratio of 0.8. The stock fell somewhat between 2010 and the beginning of 2012, likely on concerns over municipal default, but has since recovered. Invesco Private Capital reported owning close to 20 million shares of Assured Guaranty Ltd. (NYSE:AGO) as of the end of December (check out Invesco’s stock picks).
Oasis Petroleum Inc. (NYSE:OAS), a $3.1 billion market cap oil and gas exploration and production company with a focus on North Dakota’s Bakken Shale, was another of Bacon’s small cap picks. The company grew its revenue by 83% in its most recent quarterly report compared to the fourth quarter of 2011. Wall Street analysts expect Oasis Petroleum Inc. (NYSE:OAS)’s earnings to grow rapidly, with the stock trading at 10 times forward earnings estimates and a five-year PEG ratio of 0.5. Billionaire Ken Griffin’s Citadel Investment Group increased its own holdings to 1.8 million shares during Q4 (find Griffin’s favorite stocks).
The fund was buying Newcastle Investment Corp. (NYSE:NCT), a real estate investment trust which invests in commercial mortgage backed securities and other real estate loans, and closed December with 2.1 million shares in its portfolio. Real estate investment trusts are required to distribute a large share of their taxable income to shareholders in order to maintain their preferable tax treatment, which often results in high yields. Newcastle Investment Corp. (NYSE:NCT)’s own dividend yield is about 8%, though we would note that is somewhat risky; the company suspended dividend payments during the financial crisis and payments are still lower than they were in summer 2008.
Bacon and his team had 1.7 million shares of Kodiak Oil & Gas Corp (USA) (NYSE:KOG) in their portfolio. Similarly to Oasis, Kodiak Oil & Gas Corp (USA) (NYSE:KOG) is a small cap Bakken-focused oil and gas exploration and production company. The sell-side is bullish here as well: the trailing and forward P/E multiples are 16 and 8, respectively, and the five-year PEG ratio is 0.2. Revenue growth has been very strong, though we would note that 11% of the float is held short. Vinik Asset Management, managed by billionaire Jeffrey Vinik, bought 2.2 million shares during the fourth quarter of 2012 (see more stocks Vinik was buying).
Disclosure: I own no shares of any stocks mentioned in this article.
