Our research on hedge funds has suggested that small cap stocks are a leading source of alpha; among our findings, we’ve concluded 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 think that this is because small cap stocks (which we define as those with market capitalizations between $1 billion and $5 billion) usually receive less attention from large institutional investors such as mutual funds. As such we like to screen small cap picks from top managers and treat them as free investment ideas which can be researched further if investors find them interesting. Read on for our quick take on billionaire David Tepper’s Appaloosa Management’s five largest small cap holdings as of the end of March or see the full list of stocks the fund reported owning.
One of Appaloosa’s five largest holdings by market value was its more than 15 million shares of The Goodyear Tire & Rubber Company (NYSE:GT). The stock’s beta of 2.3 demonstrates that The Goodyear Tire & Rubber Company (NYSE:GT) is highly exposed to the broader economy (with additional risks related to the company’s pension obligations). Wall Street analysts consider The Goodyear Tire & Rubber Company (NYSE:GT) a high upside potential stock, with their earnings expectations implying a forward P/E of 6 and a five-year PEG ratio well below 1. SAC Capital Advisors, managed by billionaire Steve Cohen, owned 8.6 million shares of the stock at the end of Q1 (check out Cohen’s stock picks).
The fund kept its stake of 7.4 million shares in chemicals company Huntsman Corporation (NYSE:HUN) about constant through the quarter. The chemicals industry is fairly dependent on macro demand, and so like The Goodyear Tire & Rubber Company (NYSE:GT) Huntsman features a relatively high beta at 2.6. Analysts expects earnings per share to improve considerably in the next year and a half, resulting in a forward P/E of 8, though revenue actually fell 7% last quarter compared to the first quarter of 2012. Doug Silverman’s Senator Investment Group initiated a position of 8 million shares between January and March (research more stocks Senator was buying).
Sealed Air Corp (NYSE:SEE) was another of Tepper’s small cap picks with the filing disclosing ownership of 1.3 million shares- though this did reflect net sales of the stock last quarter. Sealed Air Corp (NYSE:SEE) provides packaging products used for food and beverage preservation as well as general shipping uses (for example, it owns the Bubble Wrap brand). Revenue was about flat in the company’s most recent quarter compared to the same period in the previous year, with adjusted earnings per share coming in below expectations (as had been the case in two of the previous three quarters as well). At a forward P/E of 16 we would avoid the stock.
According to the 13F, Appaloosa had 2.4 million shares of $4 billion market cap real estate investment trust Two Harbors Investment Corp (NYSE:TWO) in its portfolio as of the beginning of April. The company primarily invests in residential mortgage-backed securities and other mortgage loans. Real estate investment trusts receive favorable tax treatment and distribute a large share of their taxable income to shareholders. In Two Harbors Investment Corp (NYSE:TWO)’s case, this results in a yield of over 10% at current dividend levels though of course its business is risky. Bain Capital’s hedge fund Brookside Capital was buying the stock in the first quarter of this year.
Disclosure: I own no shares of any stocks mentioned in this article.
