Our research shows 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 large institutional investors such as mutual funds (as well as the financial media) pay less attention to small cap stocks, and so they are more likely to be either undervalued or overvalued in the market. We can also make use of this finding to some degree by reviewing small cap stocks (which we define as those with market caps between $1 billion and $5 billion) from top managers so that investors can do further research on any interesting names. Read on for our quick take on the five largest small cap holdings in billionaire Leon Cooperman’s Omega Advisors’ most recent 13F filing or see the full list of stock picks from the end of March.
Cooperman and his team reported a position of 5.1 million shares in Atlas Pipeline Partners, L.P. (NYSE:APL), which gathers, processes, and transports natural gas. The development of new shale plays has led to a rapid increase in natural gas production in the onshore U.S., increasing demand for midstream infrastructure. At current prices and dividend levels, Atlas Pipeline pays a dividend yield of just over 6% but we would note that the stock is highly exposed to the broader economy with a beta of 1.9- making it a poor choice for more defensive minded investors- and that quarterly payments have still not recovered to pre-crisis levels.
The fund disclosed ownership of nearly 49 million shares of $3.1 billion market cap real estate investment trust Chimera Investment Corporation (NYSE:CIM). Real estate investment trusts have been battered over the last month, with Chimera down close to 10% over that period, as interest rates have risen; because REITs receive favorable tax treatment conditional on distributing a large share of taxable income to shareholders, their yields are often high. Chimera pays investors an annual yield of over 10% at current prices, though as an investor in mortgage-backed securities its cash flow bear quite a bit of risk.
Another high yield stock that Cooperman liked was KKR Financial Holdings LLC (NYSE:KFN), though as with Chimera the yield (of nearly 8%) should be balanced against the riskiness of KKR Financial’s activities. Specifically, it often invests in mezzanine loans and other high yield debt. For what it is worth, the market capitalization of $2.2 billion places the stock’s valuation at 6 times its trailing earnings. Cobalt Capital Management, run by Leon’s son Wayne Cooperman, had 3.2 million shares of KKR Financial in its portfolio according to that fund’s own 13F.
Omega slightly increased its stake in natural gas producer SandRidge Energy Inc. (NYSE:SD) to a total of about 27 million shares. SandRidge Energy Inc. (NYSE:SD) has struggled recently due to low natural gas prices, and is currently unprofitable on a trailing basis with Wall Street analysts also forecasting net losses for this year and next year. The company has remained unprofitable despite increased production and a 34% rise in its revenue last quarter compared to the first quarter of 2012. Prem Watsa’s Fairfax Financial Holdings owned more than 32 million shares of SandRidge Energy Inc. (NYSE:SD) as of the beginning of April (find Watsa’s favorite stocks).
Disclosure: I own no shares of any stocks mentioned in this article.
