In an interview on Bloomberg, Leon Cooperman claimed to have added a major (or rather mega, as in cap) new entrant to his fund Omega Advisors’ equity portfolio, which was headed by Actavis plc (NYSE:ACT), Citigroup Inc (NYSE:C), and Comcast Corporation (NASDAQ:CMCSK) at the end of 2014. Cooperman has added Google Inc (NASDAQ:GOOGL) to his fund’s portfolio, mainly driven by its strong cash position amounting to some $60 billion. The seasoned money manager believes that the Mountainview, California-based tech giant’s management ought to take steps to increase shareholder value soon, especially when a lot of Google Inc (NASDAQ:GOOGL)’s own employees own the stock and would like to see their wealth grow.
Taking a step back, this brings us to the issue of how profitable such large-cap bets of hedge funds are. Historically, this category has produced very little alpha for these investment firms, the main reason being the multitude of analysts covering these companies, which leads to their shares being efficiently priced in the market. On the other hand, hedge funds generate much greater alpha from their small-cap investments. The real gems of this under-researched market-cap space are often selling at discounts to their true market valuation and future prospects. Firms like Omega Advisors invest tons of money to successfully unearth these gems. However, owing to the large amount of capital at hedge funds’ disposal, not all the money can flow into these small-caps so bigger counterparts such as Google Inc (NASDAQ:GOOGL) are ushered in to fill the gap.
Let us dig a little deeper into this. Through the research of Insider Monkey’s founder, Dr. Ian Dogan, we discovered that a portfolio of the 15 most popular small-cap picks of hedge funds beat the S&P 500 Total Return Index by nearly a percentage point per month between 1999 and 2012. On the other hand the most popular large-cap picks of hedge funds underperformed the same index by 7 basis points per month during the same period. In forward tests from August 2012 through March 2015 these top small-cap stocks beat the market by a hefty 79.4 percentage points (read the details here). Hence a retail investor needs to isolate himself from the herd and take advantage of the prevalent arbitrage opportunities in the market by concentrating on these lesser-known small-cap stocks.
Although up by a decent 3.88% year-to-date, Google Inc (NASDAQ:GOOGL)’s stock is up by a mere 5.97% over the last calendar year. In comparison, the S&P 500 ETF (SPY) has appreciated by nearly 3% year-to-date and 12.8% over the past year. Google’s first quarter financial results relieved many of its investors, who were fearing a worse outcome. This was mainly driven by Google Inc (NASDAQ:GOOGL)’s less than expected spending and an improvement in profit margins, which consequently led to the company’s price target being hiked by quite a few analysts. Two other significant stockholders of the $373.22 billion tech giant are Boykin Curry‘s Eagle Capital Management and Ken Fisher‘s Fisher Asset Management.
