Our analysis of quarterly 13F filings from hundreds of hedge funds and other notable investors such as Ken Heebner’s Capital Growth Management shows that the most popular small cap stocks among the group of filers we track outperforms the S&P 500 by an average of 18 percentage points per year. We think that this is because large institutional investors pay less attention to small cap stocks, leading them to be less efficiently priced and therefore making it more likely for research teams to uncover an undervalued (or overvalued) stock. We also like to check out filings from individual managers to see if any of their free small cap investing ideas look interesting. Read on for our quick take on Capital Growth Management’s five largest small cap holdings (defining small caps as those with market capitalizations between $1 billion and $5 billion) as of the end of March or see the full list of the asset manager’s stock picks.
Leading our list is $4.6 billion market cap homebuilder NVR, Inc. (NYSE:NVR); Heebner bought almost 100,000 shares of the stock during the first quarter of 2013. With the housing market doing well so far this year, NVR, Inc. (NYSE:NVR) experienced a 28% increase in revenue last quarter compared to the first quarter of 2012 with earnings rising at an even higher rate. The market price already incorporates expectations of some future growth, with a trailing P/E of 24, though recent growth has been high enough that investors willing to take on housing-related risks might be interested.
Heebner and his team disclosed ownership of almost 700,000 shares of Jones Lang LaSalle Inc (NYSE:JLL) after not having owned any shares at the beginning of the year. Jones Lang LaSalle Inc (NYSE:JLL) provides property management and investment management services to owners of real estate. While the company’s revenue was up in the first quarter of 2013 versus a year earlier, earnings were down and with a trailing P/E of 19 we would avoid it. Generation Investment Management, a fund co-managed by David Blood and Al Gore, had 1.9 million shares in its portfolio according to its own 13F (find Generation’s favorite stocks).
Sunstone Hotel Investors Inc (NYSE:SHO), another hotel-focused REIT which primarily owns upscale hotels, was another of Capital Growth Management’s small cap picks. This shows that the fund is quite interested in hotels and in real estate related companies in general- we can see a number of larger-cap stocks related to the same thesis in its portfolio as well. Currently common shareholders of Sunstone Hotel Investors Inc (NYSE:SHO) are not receiving dividends, but we’d note that some industry peers have been increasing their payments and we suppose the dividend could be reinstated if conditions are strong.
According to the 13F, the asset manager added another hotel REIT, Strategic Hotels and Resorts Inc (NYSE:BEE), to its portfolio between January and March. Strategic Hotels and Resorts Inc (NYSE:BEE) owns properties across the U.S. and in a few locations in Europe. As with Sunstone, the company suspended its common dividends during the financial crisis. The company’s most recent 10-Q showed a net loss for the quarter with cash flow from operations being barely positive, and while it’s also possible that the company could start paying dividends again we think that we’d avoid it for now.
We’d rather not speculate on these two hotel REITs reinstating their dividends, and while RLJ does currently offer an attractive yield it might be better to look for blue-chip companies in the 3.5% yield range. Jones Lang LaSalle Inc (NYSE:JLL) also looks to be of questionable value, given its recent financial performance. We’re interested in looking into homebuilders, though investors should be aware of the risks in the industry and we also aren’t sure that NVR would prove to be a better value than its peers.
Disclosure: I own no shares of any stocks mentioned in this article.
