Platinum Asset Management is an Australian hedge fund firm co-founded by its current managing director and chief executive officer, Kerr Neilson, in 1994. Neilson’s long/short hedge fund, which specializes in international stocks, is Australia’s largest hedge fund with AU$23.19 billion (US$17.93 billion) in assets under management. Even more than that, Neilson is considered the most successful investment manager in Australia, while his AU$12.12 billion (US$9.37 billion) flagship fund, Platinum International Fund, has generated a return of 13.1% per annum since its inception in April 1995. Kerr Neilson’s value-based investing approach has earned him comparisons to Warren Buffett. Interestingly, Neilson bought his first stock at the age of 13, so there is no doubt that his long-lasting experience is quite valuable. As stated by the most recent 13F filing of his fund with the SEC, the value of Neilson’s public equity portfolio is valued at US$5.01 billion as of March 31. Considering the fact that Neilson is a value-based hedge fund manager, it is evident that his stock picks represent very healthy and strong companies. In this article we’ll discuss his top small-cap stocks that may represent untold value for investors, those being Stillwater Mining Company (NYSE:SWC), Qlik Technologies Inc. (NASDAQ:QLIK) and KBR Inc. (NYSE:KBR).
First a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy, which identifies the best small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 144% since the launch of our small-cap strategy compared to less than 60% for the S&P 500 (see the details).
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First up on our list is Stillwater Mining Company (NYSE:SWC). Platinum Asset Management reported selling 121,722 shares of the company during the first quarter, decreasing its overall holding to 13.72 million shares valued at $177.25 million. The shares of Stillwater Mining Company have plummeted by 15% since the start of the year as the stock has embarked on a strong downtrend lately, making it the only under-performer of Neilson’s top small-caps. However, this significant slump might represent a great buying opportunity for bottom fishing investors. In the meantime, the union workers at this mining company have recently rejected a four-year contract that stipulates a reduction to their take-home pay. The management of Stillwater Mining Company intends to reduce the company’s costs in the midst of declining prices of precious metals. Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital is among the hedge fund firms that remain bullish on Stillwater Mining Company (NYSE:SWC), owning 1.5 million shares.
The second spot on our list of Neilson’s top small-cap stocks is taken by Qlik Technologies Inc. (NASDAQ:QLIK). Platinum Asset Management increased its position in the company by 5.20 million shares to 5.22 million shares, which are worth $162.44 million as of March 31. The shares of Qlik have grown by over 21% year-to-date and the stock might keep rising in the upcoming months and years as Qlik has been constantly expanding its operations lately. On June 11, Qlik entered into an agreement to assist a marketing and data intelligence company, Hyphen, to deliver better digital marketing strategies for its clients and empower smarter and quicker decision-making within its business. Therefore, despite achieving this significant gain since the beginning of the year, Qlik may yet have more room to run. Within our database, Eric Bannasch’s Cadian Capital represents the largest shareholder in Qlik Technologies Inc. (NASDAQ:QLIK), owning 8.27 million shares.
Our list of top small-cap stock picks of Neilson’s is concluded with KBR Inc. (NYSE:KBR). Platinum Asset Management augmented its position in the homebuilder by 1.68 million shares during the first quarter, ending the quarter with 19.94 million shares valued at $158.45 million. The stock has increased by nearly 21% this year and is currently trading at $20.48 per share. Some analysts believe that KBR’s stock may be an attractive pick, as the company has a forward PE ratio of 17.73, a P/S ratio of 0.48 and a decent dividend yield of 1.56%. All these indicators suggest that investors have to pay a comparatively low amount of money for each dollar of earnings the company generates. Within our database, Joe Huber’s Huber Capital Management represents the second-largest investor in KBR Inc. (NYSE:KBR), trailing only Neilson’s fund, as it owns 9.21 million shares.
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