Billionaire David Einhorn’s Small Cap Picks Include Legg Mason, Inc. (LM)

Billionaire David Einhorn of Greenlight Capital is one of the most closely followed hedge fund managers in the world. We track quarterly 13F filings from Greenlight and hundreds of other hedge funds as part of our work researching investment strategies. One of our findings so far has been that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year, and our live testing of this strategy has returned 38% since September 2012. If hedge funds’ small cap picks are likely to do well, it’s at least possible to use individual managers’ top picks in this category as sources of initial investment ideas, performing further research on other interesting names. Read on for our thoughts on Greenlight’s five largest small cap holdings by market value as of the end of March and see a history of Greenlight’s stock picks.

The fund maintained a position of 4.9 million shares in Aspen Insurance Holdings Limited (NYSE:AHL), which acts as an insurance and reinsurance company. Aspen’s quantitative metrics indicate that it is in fact a potential value stock: it trades at a significant discount to the book value of its equity with a P/B ratio of 0.7, and its earnings multiples are in the 10-11 range. Revenue and earnings have also been up, and Aspen looks like it would be worthy of further research though of course peers in the industry might carry similar numbers.

Einhorn and his team reported owning 2.2 million shares of financial services and customer service software company DST Systems, Inc. (NYSE:DST) at the end of March. DST recently experienced a temporary boost in earnings unrelated to its core business, though during Q1 its revenue and operating income were both up moderately versus a year earlier. The stock currently trades at 14 times forward earnings estimates, so while it does need some earnings growth going forward to justify its current valuation expectations are not too high in terms of recent performance. As such it might be a prospective value play as well.