According to our research based on our database of 13F filings, 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 small cap stocks tend to receive less attention from large institutional investors such as mutual funds as well as the financial media, and so hedge funds are more likely to uncover an undervalued (or overvalued) stock when looking in this valuation range. As a result we also like to take a brief look at individual managers’ small cap picks to see if any of their holdings might be hidden gems. Read on for our quick take on billionaire James Dinan’s York Capital Management’s five largest small cap holdings as of the end of March or see the full list of stocks the fund reported owning.
York increased the size of its position in Chemtura Corp (NYSE:CHMT), a specialty chemicals company with a market capitalization of $2.2 billion, by 73% to a total of 4.7 million shares. That valuation is high in terms of Chemtura Corp (NYSE:CHMT)’s trailing earnings, and while analysts expect earnings per share to increase significantly over the next year and a half (the forward P/E is 13) we are skeptical of their optimism. The stock is tied tightly to the overall economy, and as a result its beta is 2.7. Billionaire David Shaw’s D.E. Shaw reported owning 1.5 million shares in its own 13F (check out D.E. Shaw’s stock picks).
According to the 13F, York initiated a position of 2.8 million shares in natural gas storage and pipeline transportation company Spectra Energy Partners, LP (NYSE:SEP). Spectra Energy Partners, LP (NYSE:SEP) has at least slightly increased its dividend payment each quarter since it began paying dividends in late 2007; at current prices and dividend levels, the yield is over 5%. The payout ratio is fairly high, however, with the stock valued at over 20 times consensus earnings for 2014. Further increases would place an awful lot of strain on cash flow, and we’re concerned that Spectra might even have to cut its dividend in the future.
The fund reduced its holdings of Visteon Corp (NYSE:VC) to 1.4 million shares between January and March. Visteon Corp (NYSE:VC) provides auto parts with a focus on climate and electronics components. As with many auto parts companies, Wall Street analysts expect earnings to improve considerably over the next several years: as a result, the five-year PEG ratio is 0.7. However, revenue growth was fairly light last quarter- up 8% compared to the first quarter of 2012. SAC Capital Advisors, managed by billionaire Steve Cohen, owned 2.6 million shares of Visteon at the end of the first quarter (find Cohen’s favorite stocks).
Dinan and his team added shares of $2.3 billion market cap satellite imagery provider DigitalGlobe Inc (NYSE:DGI) with 2.7 million shares according to the 13F. The company is unprofitable on a trailing basis, and is expected to lose money this year as well; analysts to expect it to break into the black in 2014 but the forward P/E is still quite high at 49. The stock price has more than doubled in the last year on very strong revenue growth- sales were up 47% in Q1 2013 versus a year earlier. Brian Jackelow’s SAB Capital Management disclosed ownership of 4.7 million shares (research more stocks SAB owns).
Disclosure: I own no shares of any stocks mentioned in this article.
