Goldman Sachs And Hedge Funds See Big Things For These Small-caps

The recent pull back in the Russell 2000 index left it down about 10% on a year-to-date basis just before the start of this month. During October these losses have dwindled to 3.5% and there is still room for further growth as the index remains about 4.4% below the all time high that it achieved in June. In a note to its clients, Goldman Sachs apprised them about the interesting entry point that has developed in the the small-cap space, while at the same time voicing the concern that a larger part of the index is formed by companies that are currently negative earners, but investors have attached great growth expectations to them leading to large earnings multiples.

The investment bank released a list of small-cap companies that it expects to double their operating earnings between 2014 and 2017, while posting double digit growth on their top line. We decided to cross reference this list with small-cap companies that have garnered the most support from hedge funds, and today we are going to share the top five companies that headed this list.

This is the second article we published today on this topic. Earlier, we took a look at Goldman’s other small-cap picks in the same report that aren’t admired by hedge funds.

5. Criteo SA (ADR) (NASDAQ:CRTO)

 – Investors with Long Positions (as of June 30): 21

 – Aggregate Value of Investors’ Holdings (as of June 30): $304.96 Million

– Goldman Sachs Rating and Price Target: ‘Buy’ $59 (28% upside to the current trading level)

These hedgies held about 10.4% of the $2.51 billion technology company’s outstanding stock at the end of June. Although the interest is sizable it dropped during the second quarter as five more hedge funds had investments in the company at the end of March. However, the aggregate value of these holdings was about $4.4 million lower than at the June end. Keeping in mind that the stock price rose by about 25% during the second trimester, it can be safely concluded that the general sentiment was bearish. Josh Resnick‘s Jericho Capital Asset Management is the largest stockholder of Criteo SA (ADR) (NASDAQ:CRTO) within our database holding some 1.87 million shares valued at $88.96 million.

The grounds of this bearish sentiment and a 25% dip in Criteo’s stock price after its all time high in July can be traced to the recent popularity of ad-blocking software and companies like Apple Inc. (NASDAQ:AAPL) allowing their users to download such software. However, Criteo SA (ADR) (NASDAQ:CRTO)’s COO Erich Eichman remains unperturbed by this as this hasn’t affected the company’s operating numbers and he believes that in the long run consumers cannot break the implicit agreement to have free content in exchange for advertisement.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

4. Pacira Pharmaceuticals Inc (NASDAQ:PCRX)

 – Investors with Long Positions (as of June 30): 25

 – Aggregate Value of Investors’ Holdings (as of June 30): $367.67 Million

– Goldman Sachs Rating and Price Target: ‘Buy’ $90 (131% upside to the current trading level)

While the total number of hedge funds with investments in the specialty pharmaceutical company reduced by two since the end of March, the total value of hedge funds’ holdings, among those that we track, increased by about $113.38 million despite a drop in Pacira Pharmaceuticals Inc (NASDAQ:PCRX)’s stock price of about 18% during this period. The concentration of these holdings at June end stood at  14.30% in terms of the company’s market cap. Hoplite Capital Management, which is led by John Lykouretzos initiated a stake of 1.26 million shares in Pacira during the second quarter.

Pacira Pharmaceuticals Inc (NASDAQ:PCRX)’s star drug, the post surgical pain medicine Exparel, accounts for 99% of the company’s revenues and in the second quarter posted a 27% increase in sales on a year-over-year basis. Analysts estimate that the drug could boost the company’s EPS from $0.02 in 2015 to $5.84 in 2019. However, there are a number of companies that have similar drugs under development that could shrink Pacira Pharmaceuticals Inc (NASDAQ:PCRX)’s future revenues, but until then the company enjoys an almost monopoly in the market.

3. Zeltiq Aesthetics Inc (NASDAQ:ZLTQ)

 – Investors with Long Positions (as of June 30): 26

 – Aggregate Value of Investors’ Holdings (as of June 30): $352.13 Million

– Goldman Sachs Rating and Price Target: ‘Buy’ $43 (34% upside to the current trading level)

The total June end hedge fund holdings accounted for a hefty 31% of the company’s market cap. So far this year Zeltiq Aesthetics Inc (NASDAQ:ZLTQ)’s stock price has surged by more than 15%, even though this development is not entirely captured by the sentiment during the second quarter as number of hedge funds holding the company in their portfolios only grew by one and the total value of these investments increased merely by one million. Aisling Capital, which is led by Dennis Purcell heads this list of investors with some 2.60 million shares.

Although the $1.21 billion medical technology company helping freeze off stubborn fat cells with its CoolSculpting machines posted a 37% increase in its top line during the second quarter compared with the year-ago number, it also marked the weakest growth since the 2013 June quarter. While it is still to be seen whether the growth trajectory will continue to tone down, Zeltiq Aesthetics Inc (NASDAQ:ZLTQ) is in terrific shape as far as the company’s fundamentals are concerned.

2. GrubHub Inc (NYSE:GRUB)

 – Investors with Long Positions (as of June 30): 31

 – Aggregate Value of Investors’ Holdings (as of June 30): $545 Million

– Goldman Sachs Rating and Price Target: ‘Buy’ $39 (24% upside to the current trading level)

GrubHub Inc (NYSE:GRUB)’s stock has depreciated by about 16% so far this year and this is reflected by a reduction of 2 hedge funds from the end of March, which held the company in their portfolios and a corresponding slide of $102.87 million in the total value of hedge fund holdings in the company. Still professional money managers hold about 19.1% of the company’s outstanding stock. Christian Leone’s Luxor Capital Group is the largest stockholder of GrubHub Inc (NYSE:GRUB) within our database holding about 7.55 million shares after raising its stake in the company by 114% during the June trimester.

The $2.56 billion online and mobile platfrom for restaurant pick-up and delivery orders recently released a research report highlighting how it has catalysed the growth of its 35,000 restaurant partners. The results included an average monthly growth of 30% in takeout revenue for restaurants opting for GrubHub Inc (NYSE:GRUB) and a slashing of processing time by more than 50% as restaurants no longer had to worry about managing orders.

1. Restoration Hardware Holdings Inc (NYSE:RH)

 – Investors with Long Positions (as of June 30): 41

 – Aggregate Value of Investors’ Holdings (as of June 30): $914.26 Million

– Goldman Sachs Rating and Price Target: ‘Buy’ $111 (11% upside to the current trading level)

Hedge funds exhibited mixed sentiment about the luxury home furinishings retailer during the June quarter with the value of their aggregate holdings amassing 23.4% of the company’s outstanding shares. The total number of funds holding Restoration Hardware Holdings Inc (NYSE:RH) in their portfolios increased by 6, but the aggregate value of holdings slid by about $45.74 million during the second trimester despite an increase of 2.4% in the company’s stock price during this period. Chase Coleman‘s Tiger Global Management is the largest stockholder of Restoration Hardware within our database holding some 3.19 million shares.

Restoration Hardware Holdings Inc (NYSE:RH) has been able to significantly outpace the industry’s average growth of 9.9% as it delivered an almost 17% growth in the second quarter on a year-over-year basis. This consequently led to an EPS growth of 7.6% to $0.85. Analysts expect this trend to continue in the future.

Disclosure: None