For some time we have been tracking 13F filings from hedge funds and other notable investors and using this information to develop investment strategies. With the help of backtesting we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 18 percentage points per year. We think that this is because small cap stocks are less widely followed and so are more likely to be mispriced, and so hedge fund research teams are more likely to uncover an undervalued stock when they apply their resources to analyzing the company. One way to use this general finding is to look at top managers’ favorite small cap stocks. Read on for our quick take on the five largest positions in stocks with market caps between $1 billion and $5 billion in billionaire James Dinan’s York Capital Management’s portfolio at the end of December or see the full list of Dinan’s stock picks.
Dinan and his team initiated a position of almost 17 million shares in PetroLogistics LP (NYSE:PDH) between October and December 2012. Petrologistics operates a facility which converts propane into propylene, which is then used as an input by petrochemical companies. Currently the stock pays a high dividend yield going by recent payments, but the stock is down about 20% since becoming publicly traded last May and the company has missed earnings the last couple quarters. Steadfast Capital Management, managed by Robert Pitts, was another major holder of the stock according to that fund’s own 13F.
Manitowoc Company, Inc. (NYSE:MTW), a $2.6 billion market cap company which manufactures cranes and other construction equipment as well as food service equipment, was another of York’s small cap picks. The emphasis on construction equipment ties Manitowoc particularly closely to the broader economy, and so the stock’s beta is 3.9. Revenue was up 10% in the fourth quarter of 2012 versus a year earlier, contributing to high earnings growth in percentage terms. Citadel Investment Group, managed by billionaire Ken Griffin, was buying Manitowoc and closed 2012 with about 3 million shares in its portfolio (check out more stocks Griffin was buying).
The fund owned just under 2 million shares of Corrections Corp Of America (NYSE:CXW), an operator of prisons and other detention facilities. Revenue was flat in its most recent quarter compared to the same period in the previous year but net income grew 12% on higher margins. Corrections Corp Of America (NYSE:CXW) is priced for growth at trailing and forward P/Es of 25 and 19, respectively, so it would need to sustain its good growth rates for some time to justify the current valuation. Richard McGuire’s Marcato Capital Management also had a large position in the stock (research more stocks Marcato likes).
Dinan added shares of Brookdale Senior Living, Inc. (NYSE:BKD) to York’s portfolio and owned 2.5 million shares at the beginning of January. Brookdale operates a range of senior living facilities, including retirement centers and assisted living communities. The company has been unprofitable in recent quarters- and has underperformed expectations to boot- and revenue growth has been only modest. The bull case is that Brookdale will either get bought or convert to a real estate investment trust (which would allow the company to pay a favorable tax rate).
Disclosure: I own no shares of any stocks mentioned in this article.
