Several weeks after the end of each fiscal quarter, hedge funds such as billionaire David Shaw’s D.E. Shaw file their 13Fs with the SEC, disclosing many of their long equity positions as of the end of the previous quarter. Our research has shown that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year, and in fact our live testing of this strategy has returned 38% since September 2012 (learn more about our small cap strategy). We can also use our database of 13F filings to look through top small cap picks from individual managers and treat these picks as initial investment ideas. Read on for our quick take on D.E. Shaw’s five largest small cap holdings as of the end of March and compare these picks to those in previous filings.
The fund reported a position of 1.4 million shares in Equity Lifestyle Properties (NYSE:ELS), a real estate investment trust which leases its land to residential operators. Real estate investment trusts receive favorable tax treatment conditional on distributing a large share of their taxable income to shareholders, often resulting in high yields. In Equity Lifestyle Properties (NYSE:ELS)’s case, the yield is currently 2.5% though quarterly payments have been increasing over the last several years. Of course, many other REITs (as well as larger, stable consumer stocks) offer higher current yields and may be better choices for income investors.
D.E. Shaw reduced its holdings of AOL, Inc. (NYSE:AOL) between January and March, closing the quarter with possession of 2.3 million shares. At 19 times forward earnings estimates, the market is expressing optimism about AOL, Inc. (NYSE:AOL) – which is now primarily a content portal (it owns the Huffington Post, for example) in addition to its dial-up Internet subscription service. A number of market players are skeptical, however, with 10% of the float held short. Renaissance Technologies, whose founder Jim Simons is now a multi-billionaire, increased its holdings of AOL, Inc. (NYSE:AOL) to a total of 1.6 million shares (find Renaissance’s favorite stocks).
According to the 13F, Shaw and his team were buying WABCO Holdings (NYSE:WBC) during Q1and owned 1.1 million shares at the beginning of April. WABCO Holdings (NYSE:WBC) is an auto parts company with a focus on braking, suspension, and transmission components. The business experienced declines in both revenue and net income last quarter compared to the first quarter of 2012, but the sell-side expects that to reverse (analysts are generally bullish on auto related companies) and the five-year PEG ratio is only 0.8. Warren Buffett’s Berkshire Hathaway is a fan of WABCO Holdings (NYSE:WBC), with the holding company reporting a position of 4.1 million shares (research more stocks Buffett owns).
Rounding out our list of D.E. Shaw’s small cap picks is meat producer Hillshire Brands Co (NYSE:HSH). Food companies are generally carrying high multiples in the current market- Berkshire recently bought H.J. Heinz Company (NYSE:HNZ) while one of Hillshire Brands Co (NYSE:HSH)’s closest peers, Smithfield Farms (NYSE:SFD) is on track to be acquired by a Chinese pork producer. Hillshire’s forward P/E is 20, in line with the food industry in general. Paulson & Co., managed by billionaire John Paulson, was selling Hillshire during the first quarter of this year but still had 3 million shares in its portfolio at the end of March (see more trades Paulson has been making).
Disclosure: I own no shares of any stocks mentioned in this article.
