Small-cap and mid-cap stocks don’t get as much attention from bankers, third-party analysts, and the media, which often leaves them less efficiently priced than large- and mega-caps. Hedge funds sometimes take advantage of this by dedicating their research teams to work on these lower-valuation stocks as well, and so often earn substantial alpha from their investments. Retail investors can use smaller-cap stocks that hedge funds reported owning as a list of suggestions which may result in outperformance; we’ve determined that the most popular small-cap stocks among hedge funds can earn about 120 basis points of alpha per month (learn more about our hedge fund small cap strategy). Investors can’t buy every single small-cap stock that any hedge fund likes and so it probably works best to review each pick in search of those with the best potential. Here are five stocks which billionaire Steve Cohen’s SAC Capital Advisors reported owning on its most recent 13F (see the full list of Cohen’s stock picks) with market capitalizations between $1 billion and $5 billion:
Branded and generic drug manufacturer Endo Health Solutions Inc (NASDAQ:ENDP) was SAC’s top pick in that range with the fund reporting a position of 4.6 million shares. The stock price is down 27% in the last year, but sell-side analysts are confident that the company will deliver high earnings in 2013. D.E. Shaw, a large hedge fund managed by David Shaw, also had a large position in Endo at the end of the third quarter (check out more stocks D.E. Shaw liked).
Three more stocks SAC owned:
The fund cut its stake in Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA) but still reported 4.9 million shares of the $3.2 billion market cap cancer drug developer in its portfolio. As a development stage company Ariad is expected to be unprofitable when its 2012 numbers are fully in as well as for the current year, but the stock is up 36% since a year ago as investors have become more optimistic about its prospects. However, we think that we would avoid it for now. Billionaire Dan Loeb’s Third Point also had a position in the stock though he was selling as well (find Loeb’s favorite stocks).
Visteon Corporation (NYSE:VC), a provider of auto components including climate and electronics systems, was another midcap stock in SAC’s portfolio as the fund owned 2.6 million shares. A number of insiders have been buying Visteon (see a history of insider purchases at Visteon), which can signal confidence in the company. The P/E based on 2013 earnings estimates is 15, though the stock is highly exposed to the broader economy (the beta is 2.4) and revenue and earnings have been down. The consensus insider buying makes it worth a look, but we would need quite a bit of convincing considering Visteon’s recent financial performance.
Cohen and his team had about 4 million shares of NCR Corporation (NYSE:NCR), a provider of ATMs and other self-service kiosks. Greenlight Capital, managed by billionaire David Einhorn, had NCR as one of its ten largest single-stock holdings at the end of the third quarter (research more of Einhorn’s favorite stocks). This is another stock where Wall Street analysts see considerable upside: the current price is 10 times expected earnings for this year and the five-year PEG ratio is 0.8. We think that value investors should be considering this stock as well.
