Hedge funds and other major investors file a 13D or a 13G with the SEC when they acquire 5% ownership of a company or later change this position. Since these filings are made relatively quickly, they provide a more or less up-to-date recommendation that investors can research further. While the 5% threshold results in filings being made almost exclusively for small-cap and mid-cap stocks, it’s actually particularly important to see what investment teams think of these companies. Because less attention is paid to them, they are more likely to be mispriced and a given amount of research is more likely to uncover value. As a result it’s no surprise that the most popular small cap stocks among hedge funds tend to outperform the S&P 500; we have shown this by listing these stocks in our newsletter and then following their performance over the next few months (learn more about our hedge fund small cap strategy). Here are five stocks which hedge funds have bought recently:
Renaissance Technologies, whose founder Jim Simons is now a multi-billionaire, reported a position of 1.2 million shares in Altisource Portfolio Solutions S.A. (NASDAQ:ASPS), giving the fund 5.3% of the total shares outstanding (see more of Renaissance’s stock picks). This was up over 20% from what Renaissance had owned at the beginning of October. Altisource is a provider of mortgage portfolio management services and has a market capitalization of $2.1 billion. Revenue and earnings were each up over 30% in the third quarter of 2012 compared to the same period in the previous year. At a trailing P/E of 21 we think that investors should take a look at it as a growth play.
Billionaire Ken Griffin’s Citadel Investment Group disclosed ownership of 1.4 million shares of homebuilder Beazer Homes USA, Inc. (NYSE:BZH). Beazer’s market capitalization is only about $420 million but on average over 1 million shares are traded per day. As a homebuilder Beazer is tied closely to the housing market and the broader economy, though even strong revenue growth has not yet pulled it into profitability; the stock’s beta is 3.4 and the most recent data has 27% of the outstanding shares held short. Find Griffin’s favorite stocks. Investors who are interested in homebuilders but find Beazer unattractive because of its losses or other factors could look at peers such as KB Home (NYSE:KBH) and Lennar Corporation (NYSE:LEN).
Read on for two more stocks that hedge funds have reported buying:
Rowan Companies PLC (NYSE:RDC), a $4.4 billion market cap contract driller, had First Pacific Advisors report owning 7.3 million shares of the stock or nearly 6% of the company. First Pacific is managed by Robert Rodriguez and Steven Romick (check out more stocks First Pacific owns). While Rowan’s sales have been up, this seems to have been due to higher production with poorer pricing conditions contributing to a steep fall in net income. While the drop in prices has resulted in Rowan being valued at 26 times trailing earnings, the sell-side expects the company to recover and so the current-year P/E and the five-year PEG ratio are 15 and 0.5 respectively.
First Pacific also reported that it had increased its ownership of Trinity Industries, Inc. (NYSE:TRN) to a total of 3.1 million shares. Trinity is a $3.3 billion market cap company which is primarily a manufacturer and lessor of railcars. Its other lines of business include construction materials and barges. In the third quarter of 2012, the company reported a 19% increase in revenue versus a year earlier and earnings were up sharply. Being as tied to transportation as it is the stock carries a beta of 2.4. At 14 times trailing earnings, it is a candidate for value status given its strong performance as long as investors are comfortable with that level of exposure to the broader economy.
Disclosure: I own no shares of any stocks mentioned in this article.
