The most popular small cap stocks (which we define as those with market capitalizations between $1 billion and $5 billion) among hedge funds outperform the S&P 500 by an average of 18 percentage points per year, according to our analysis of 13F filings (read more about our research on small cap stocks). This makes sense to us since most small cap stocks are ignored by large institutional investors such as mutual funds, as it is hard for them to take a large liquid position; as a result small caps are more likely to be undervalued or overvalued. So we think that it can be useful to review a manager’s top picks and treat them as a list of initial ideas which can then be researched further. Here are billionaire Michael Price’s MFP Investors’ top small cap picks as of the end of December (or see the full list of stocks the fund reported owning):
Price had 1.8 million shares of Symetra Financial Corporation (NYSE:SYA) in his portfolio at the end of 2012. Symetra is a $1.9 billion market cap life insurance company; that valuation represents a large discount to the book value of Symetra’s equity, with a P/B ratio of 0.5. Earnings multiples are low as well, with both the trailing and forward P/E multiples coming in at 9. While the stock is cheap on both grounds, we would note that sales and net income have been down and so it should be reviewed carefully before actually deciding whether or not it is a value stock.
The fund slightly increased the size of its position in marine energy services company GulfMark Offshore, Inc. (NYSE:GLF) to a total of about 620,000 shares. Business has not been good recently at Gulfmark, with revenue down and earnings being low enough to result in fairly low earnings compared to the stock’s valuation. Wall Street analysts expect Gulfmark to recover in 2014, and as a result the forward earnings multiple is 10, but we’d hesitate to take their optimism at face value given recent performance.
Kaiser Aluminum Corp. (NASDAQ:KALU) was another of Price’s small cap picks, with the filing disclosing ownership of a little over 300,000 shares. In the fourth quarter of 2012, earnings rose 49% versus a year earlier but revenue actually slipped slightly; with both the trailing and forward earnings multiples in the low teens, that seems like an important factor to investigate. Kaiser needs some earnings growth over the next several years to justify its current valuation, but even moderate improvements could make it a good value.
MFP owned 800,000 shares of J.C. Penney Company, Inc. (NYSE:JCP) at the beginning of October, and apparently kept that stake constant through Q4. The stock price is down 60% in the last year as the retailer’s turnaround strategy has failed for the time being, which has resulted in the departure of CEO Ron Johnson. Billionaire Bill Ackman’s Pershing Square has been a major shareholder, with over 39 million shares as of the end of 2012 (find Ackman’s favorite stocks). J.C. Penney Company, Inc. (NYSE:JCP) is not expected to be profitable this year or next year.
The 13F showed the fund with 810,000 shares of Barnes & Noble, Inc. (NYSE:BKS) at the beginning of 2013. Barnes & Noble has done well year to date as the market looks for some sort of breakup of the retail and Nook businesses to create shareholder value, though the most recent data shows that over 30% of the float is held short as neither of those business segments is considered that attractive. Barnes & Noble, too, is expected to report net losses in this fiscal year (which ends at the end of April) and in the next one.
The retailers therefore look too turnaround-dependent for us to consider them as good buys at this time. Gulfmark, with the considerable discrepancy between trailing earnings and forward estimates, is also better avoided. In the case of Kaiser and Symetra, there is at least something of a value prospect but in each case revenue has been declining recently and so we would need to assure ourselves that net income will be stable to moderately increasing going forward.
Disclosure: I own no shares of any stocks mentioned in this article.
