Hedge Funds Are Hoarding Shares of These 5 Small-Caps

Through extensive research we have determined that the best approach to outperform the broader indices is to follow hedge funds into their top small-cap ideas. In our backtests, a portfolio of the 15 most popular small-cap stocks generated monthly alpha of 81 basis points, versus 0.7 percentage points posted by hedge funds’ top large- and mega-cap picks (see more details here). With that in mind, in this article we’ll look at five small-cap stocks that the investors in our database absolutely adore, as they collectively own a higher percentage of these companies’ shares than that of any other small-cap stock.

Let’s start with HRG Group Inc (NYSE:HRG), formerly known as the Harbinger Group. Although the company saw a 15% decline in fund support over the fourth quarter of 2015, it remains one of the most popular small-cap stocks among the firms that we track, counting 22 backers as of December 31. These firms held 67.3% of the company’s shares, valued at $1.83 billion at the end of 2015. The largest institutional investor of record was Ian Cumming and Joseph Steinberg’s Leucadia National, which had ownership of 46.6 million shares. Other notable investors included Michael Novogratz’s Fortress Investment Group, Phil Falcone’s Harbinger Holdings and Leon Cooperman’s Omega Advisors, with those firms holding 32.99 million shares, 13.50 million shares and 12.15 million shares, respectively.

HRG Group Inc (NYSE:HRG) has not appeared much in the news recently, though its stock is down by 12% this year. About a month ago, the company reported fiscal year 2016 first quarter earnings of $0.06 per share, considerably above the net loss of $0.63 per share that it reported for the previous fiscal quarter. Revenue of $1.23 billion also implied a 10.9% year-over-year surge. The stock currently trades at 6.2-times the company’s book value, at what seems like a premium in relation to its peers. However, a three-year average revenue growth rate of 9.1% seems to make the valuation more justifiable.

Even more popular than HRG is Qunar Cayman Islands Ltd (NASDAQ:QUNR), a Chinese mobile and online commerce platform provider that had 25 funds among those we track disclose long positions in it as of the end of the fourth quarter. The aggregate value of their holdings amounted to $2.11 billion, which accounted for roughly 62% of the company’s ownership. Among notable investors was Daniel S. Och’s OZ Management, which held the largest stake in the company on December 31, however the billionaire investor decided to sell off his position during the first quarter of 2016. On the other hand, Tiger Cub Andreas Halvorsen’s Viking Global disclosed on February 16 that it had boosted its exposure to the company to 25.56 million shares from 8.52 million shares, probably taking advantage of the depressed stock price; shares of the company are down by more than 32% year-to-date, with most of the losses being registered during January and early February. This move made Viking Global the largest institutional investor of record to date in Qunar Cayman Islands Ltd (NASDAQ:QUNR).

Genomic Health, Inc. (NASDAQ:GHDX) saw an increase of more than 30% in the number of hedge funds long its stock during the fourth quarter. By December 31, the 17 firms with long positions in the company owned 59.4% of its stock, valued at more than $680 million. The largest stake, by far, was the one held by Julian Baker and Felix Baker’s Baker Bros. Advisors; the position comprised 13.65 million shares, worth roughly $480 million.

On Wednesday, Genomic Health, Inc. (NASDAQ:GHDX) announced that the German Association of Gynecological Oncology had distinguished the company’s Oncotype DX® as “the only multi-gene breast cancer test with the highest 1A level of evidence,” according to a press release. Despite the good news, shares lost 3.7% on Wednesday, pulling their year-to-date losses down to more than 29%.

Next up is Loral Space & Communications Ltd. (NASDAQ:LORL), a satellite communications company that saw its stock tumble by 13.5% during the fourth quarter, which did not affect hedge fund support. On December 31, the 24 funds in our system long the stock held 57.9% of its outstanding shares, with the aggregate value of their holdings totaling just under $730 million. The largest stake among them was held by Mark Rachesky’s MHR Fund Management and comprised 8.12 million shares worth more than $330 million.

Shares of Loral Space & Communications Ltd. (NASDAQ:LORL) are down by more than 15% year-to-date, even after having recuperated more than 12% over the last month. Taking advantage of the depressed stock price, MHR Fund Management boosted its exposure further early in the first quarter, disclosing ownership of 8.35 million shares on March 7. Shares gained 7.82% on the day that this increase was made public.

Finally, there’s Avis Budget Group Inc. (NASDAQ:CAR), which remained extremely popular, although the number of funds long its stock fell by 25% over the October-to-December period. By December 31, 33 funds in our database held long stakes in the stock, with their aggregate value surpassing $2 billion. These positions accounted for 55.7% of the company’s total shares. Karthik Sarma’s SRS Investment Management held more than 9.45% of the company’s shares, 9.5 million in total.

SRS was recently displaced as the largest shareholder of Avis Budget Group Inc. (NASDAQ:CAR), however. On February 16, Fir Tree, founded by Jeffrey Tannenbaum, declared a large increase to its holding in the stock, to 10.98 million shares from 6.18 million shares. With shares down by almost 30% year-to-date, it is not only hedge funds that are buying the stock. A few days ago, Director W. Alun Cathcart purchased 20,000 shares of the company; while not huge, the move is relevant because it marks Cathcart’s first acquisition since he joined the Board in 2011.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned in this article.