The most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year, according to our analysis of 13F filings (learn more about our small cap strategy). We think that this is because large institutional investors such as mutual funds are less invested in small caps and so these stocks are more likely to be mispriced. Our database of filings can also be used to identify individual managers’ favorite small caps, so that investors can review these names and then do further research on any companies which seem to be good values. Read on for our brief thoughts on five of Murray Stahl’s Horizon Asset Management’s largest positions as of the end of December in stocks with market capitalizations between $1 billion and $5 billion (or see the full list of stocks the fund reported owning).
One of the Horizon’s largest holdings by market value was its just over 3 million shares of Howard Hughes (NYSE:HHC). The $3.7 billion market cap real estate developer was spun out from in 2010, and a stronger real estate market has caused its price to more than double from its levels shortly after the company became independently traded. There is significant exposure to the broader economy here, as shown by the beta of 2. Billionaire Bill Ackman’s Pershing Square reported a position of 3.6 million shares at the end of December in its own 13F filing (check out Ackman’s stock picks).
Stahl and his team disclosed ownership of 4.1 million shares of Dreamworks Animation (NASDAQ:DWA), the $1.6 billion market cap animated entertainment company. Dreamworks was unprofitable last year, but given the nature of the film business we’d expect wild swings in business depending on the timing of new releases. Earnings per share for this year and next year are not expected to be particularly strong compared to the valuation, however, and 46% of the float is held short. SAC Capital Advisors, managed by billionaire Steve Cohen, bought 1.2 million shares during Q4 (research more stocks Cohen was buying).
CBOE Holdings (NASDAQ:CBOE), which operates market exchanges, was another of Horizon’s small cap picks. In the fourth quarter of 2012, the company’s revenue grew by 8% versus a year earlier and combined with wider margins this pushed net income up by 25%. However, the market is already pricing in significant growth at CBOE Holdings (NASDAQ:CBOE) going by the fact that the trailing earnings multiple is 21; at that valuation, we’d like to see revenue numbers doing better. Renaissance Technologies, whose founder Jim Simons is now a billionaire, added shares to its portfolio between October and December (find Renaissance’s favorite stocks).
The fund was a heavy buyer of The Wendy’s Co (NYSE:WEN), closing 2012 with a total of almost 13 million shares of the quick service restaurant. The Wendy’s Co (NYSE:WEN) stock price is high in terms of its trailing earnings, though it reported 9 cents in EPS in the fourth quarter of 2012 and annualizing that figure would give it a P/E multiple of 15. That is a discount to where some other QSRs trade, though of course buying the stock based on one quarter’s good results might not be wise. Billionaire Nelson Peltz’s Trian Partners is a major shareholder in The Wendy’s Co (NYSE:WEN) (see more stocks Peltz likes).
Horizon had 2.4 million shares of Brookfield Residential Properties Inc (NYSE:BRP) in its portfolio at the beginning of this year. Brookfield Residential Properties Inc (NYSE:BRP) is another real estate developer, with a focus (obviously) on residential communities and buildings. It roughly doubled both its revenue and net earnings in its last quarterly report compared to the fourth quarter of 2011, and the stock price has reacted by rising a similar amount. The earnings multiples are high here as well- the trailing and forward P/Es are 26 and 18, respectively- though recent growth rates have been high enough that the company might be worth a look.
Disclosure: I own no shares of any stocks mentioned in this article.
