Editor’s Note: Related Tickers: The Goodyear Tire & Rubber Company (NASDAQ:GT), Tenet Healthcare Corp (NYSE:THC), Fifth & Pacific Companies Inc (NYSE:FNP), First Horizon National Corporation (NYSE:FHN), WellCare Health Plans, Inc. (NYSE:WCG)
We track 13F filings from hedge funds and other notable investors, and use the included information to help us develop investing strategies. One of our findings has been that the most popular small cap stocks among hedge funds (which we define as those with market capitalizations between $1 billion and $5 billion) outperform the S&P 500 by an average of 18 percentage points per year. Our theoretical explanation for this is that large institutional investors such as mutual funds pay less attention to smaller cap stocks, and so hedge funds are more likely to find an undervalued (or overvalued) company. Small cap picks from individual funds might therefore count as initial ideas which investors can research further if they seem interesting. Here are Robert Pohly’s hedge fund Samlyn Capital’s five largest small cap holdings as of the end of December (or see the full list of stocks the fund reported owning):
Samlyn reported a position of 7.7 million shares in The Goodyear Tire & Rubber Company (NASDAQ:GT) at the end of the fourth quarter of 2012. In the fourth quarter of 2012, Goodyear’s revenue was down by 11% versus a year earlier and this helped drive earnings down over 70%. Wall Street analysts expect the company to improve in terms of net income, resulting in a very low forward earnings multiple, but it might not be wise to be too dependent on their optimism. Billionaire David Tepper’s Appaloosa Management had 14 million shares in its own portfolio at the end of December (check out Tepper’s stock picks).
The fund owned a little over 2 million shares of Tenet Healthcare Corp (NYSE:THC) according to the filing. Tenet owns hospitals and outpatient health centers. The stock price is up 87% in the last year, and as a result the stocks stands out in the normally cheap hospital industry at a trailing earnings multiple of over 30. The bottom line is expected to improve over the next couple of years, however, bringing the forward P/E closer to that of its peers at 12. Glenview Capital, managed by Larry Robbins, was another major shareholder in Tenet Healthcare Corp (NYSE:THC) (find Glenview’s favorite stocks).
Fifth & Pacific Companies Inc (NYSE:FNP) was another of Samlyn’s small cap picks with the filing disclosing ownership of 4.7 million shares (up 50% from three months earlier). The apparel and accessories designer is unprofitable on a trailing basis, but sell-side consensus is for it to break even this year and then deliver 38 cents per share of earnings in 2014. However, that would still leave the current price at over 50 times forward estimates and we’d advise against buying the stock. The largest holder of the stock out of the hedge funds and other notable investors we track was billionaire Ken Fisher’s Fisher Asset Management.
Pohly and his team cut their stake in First Horizon National Corporation (NYSE:FHN), a $2.5 billion market cap Tennessee-based bank, by 10% to 5.4 million shares. First Horizon trades at a small premium to the book value of its equity with a P/B ratio of 1.1, and the forward earnings multiple of 11- while it may appear low- is higher than what we find at many larger banks as well as regional banks. As such we’re not sure that the stock is a good value for its industry. Richard Chilton’s Chilton Investment Company disclosed ownership of 3.1 million shares at the end of 2012 (research more stocks Chilton owned).
According to the 13F, Samlyn bought over 600,000 shares of WellCare Health Plans, Inc. (NYSE:WCG) between October and December after not having owned any shares at the end of Q3. WellCare focuses on government-sponsored programs including Medicaid and Medicare. Its trailing and forward P/E multiples are 14 and 10, respectively, which is about in line with other health care plan managers- the market may be concerned with future federal regulation of the insurance market. Mariko Gordon’s Daruma Asset Management was also buying the stock in the fourth quarter (see more stocks Daruma was buying).
Disclosure: I own no shares of any stocks mentioned in this article.
