The most popular small cap stocks (which we define as having market capitalizations between $1 billion and $5 billion) among hedge funds generate an average excess return of 18 percentage points per year, according to our research on 13F filings. Learn more about our research on small cap picks. We think that this is because these stocks are less widely owned by mutual funds and less frequently covered by the financial media, making them more likely to be undervalued or overvalued. We also like to review individual funds’ small cap picks and treat them as a list of initial ideas that investors can research further if a stock looks like a good value. Here are the five largest small cap holdings from Ken Heebner’s Capital Growth Management as of the end of December (or see the full list of Heebner’s stock picks):
The fund increased the size of its position in Herbalife Ltd. (NYSE:HLF) by 41% to a total of 3.4 million shares. Herbalife Ltd. (NYSE:HLF) has been quite volatile the past few months after billionaire Bill Ackman of Pershing Square accused the company of being a pyramid scheme and announced a large short position (find Ackman’s stock picks). The company does have very attractive value metrics- for example, the trailing earnings multiple is only 9- and has been experiencing decent growth in both revenue and earnings. Herbalife Ltd. (NYSE:HLF) also currently pays a dividend yield of over 3%.
Extra Space Storage, Inc. (NYSE:EXR), a real estate investment trust which owns and manages self-storage facilities across the U.S., was another of Capital Growth Management’s small cap picks. Real estate investment trusts are required to pay out a large share of taxable income to shareholders in order to preserve their favorable tax treatment. Extra Space Storage, Inc. (NYSE:EXR) recently increased its quarterly dividend payment to 25 cents per share, though this has left its yield at only 2.4%- considerably lower than can be found at other REITs.
The 13F showed Heebner disclosing ownership of 1.2 million shares of another self storage REIT, Sovran Self Storage Inc (NYSE:SSS). While this company pays a somewhat higher dividend yield than Extra Space, at 2.9%, its dividend has been much more stable in recent years: Sovran Self Storage Inc (NYSE:SSS) made quarterly payments of 45 cents per share from mid 2009 through the end of 2012, and then only hiked its distributions to 48 cents per share. It’s also considerably smaller than Extra Space in terms of market capitalization.
Capital Growth Management kept its holdings of RLJ Lodging Trust (NYSE:RLJ) constant over the course of Q4 at 3.8 million shares. RLJ Lodging Trust (NYSE:RLJ) is another REIT, but one which invests in full service hotels. It pays the highest dividend yield of the companies we’ve discussed in this article, at 3.6%, and so might be worth considering as an income stock. The company only went public in May 2011, so it does not have a long history of paying dividends, but RLJ has increased its quarterly payments by about a third in that time.
We’d be interested in taking a closer look at Foot Locker on a value basis, and while we certainly would play it carefully Herbalife Ltd. (NYSE:HLF) is cheap enough that the company needs to do very little to prove undervalued at current prices. As far as the REITs, RLJ certainly pays a decent yield but we’d advise income investors not to concentrate too much of their portfolio in real estate investment trusts.
Disclosure: I own no shares of any stocks mentioned in this article.
