Our research has shown that the most popular small-cap stock picks ($1 billion – $5 billion market cap) amongst hedge funds have historically outperformed the wider market by 18 percentage points. Therefore, in this article, we will look into David Einhorn’s Greenlight Capital’s top small-cap picks for the second quarter (check out its first quarter small-cap picks and second quarter top stock picks) in order to elucidate if any of them stand as attractive investment options.
Same as in previous quarters, Mr. Einhorn proved to be quite fond of small and mid-cap companies. Amongst his top 20 stock picks, there are 10 companies with market caps below $10 billion -and 3 of them, below $5 billion.
The fund’s biggest small-cap bet was placed (just like in the first quarter) on Oil States International, Inc. (NYSE:OIS), a $3.34 billion market cap worldwide provider of specialty products and services to oil and gas drilling and production companies. For the third consecutive quarter, Greenlight Capital’s exposure to Oil States International, Inc. (NYSE:OIS) remained untouched; the fund currently owns 2.75 million shares of the company. Despite the fact that the position remained the same, its value fell substantially. As the stock price of Oil States International, Inc. (NYSE:OIS) fell by more than 34% over the second quarter, Greenlight’s stake passed from being worth more than $271 million, to its current value of approximately $176 million. This position makes of the fund, however, the largest hedge fund investor of record at the company.
I should highlight, nonetheless, that these holdings’ value fell, not because the stock price plummeted, but because the company spun-off one of its bussiness segments. According to Oil States International, Inc. (NYSE:OIS)’s Investor Relations department:
OIS’ stock price change is a direct result of the spin-off of our Accommodations business segment, Civeo Corporation, into a separately traded public company (NYSE:CVEO) effective as of May 30, 2014. CVEO began regular way trading on the NYSE on June 2, 2014, as did OIS.
OIS distributed the shares of CVEO to its shareholders on May 30, 2014 via a tax free spin. For each one share of OIS, a shareholder received two shares of CVEO (2 for 1). In terms of the relative value of the two publicly traded companies (OIS and CVEO), OIS closed today (August 20, 2014) at $62.70 and CVEO closed at $24.80. Thus, if you combined the stocks to get a consolidated stock price, today’s pro forma closing price would have been $112.30 per share ($62.70 + ($24.80 * 2)). As a frame of reference, on May 30, 2014, which was the last day OIS traded on a combined basis, OIS closed at $107.58 per share ($97.14 on April 30, 2014, 30 days prior to the distribution date).
Meanwhile, Barry Rosenstein’s Jana Partners, the second largest hedge fund investor of record for the second quarter, reduced its exposure to Oil States International, Inc. (NYSE:OIS) over June, after the spinoff, and now owns 2.6 million shares (down from the 6.1 million shares held by the end of the first quarter), worth roughly $167 million.
CONN’S, Inc. (NASDAQ:CONN), came in second. This $1.53 billion market cap specialty retailer of branded consumer durable goods saw Greenlight boost its exposure by 7% over the quarter, to 3.5 million shares. The stake, worth more than $172 million (which accounts for roughly 2.4% of the fund’s total equity portfolio), make it the largest hedge fund shareholder of record at the company.
In his 2014 Q1 Investor Letter, the hedge fund manager explained his bullish view on CONN’S, Inc. (NASDAQ:CONN):
“In February, the company announced 33% comparable store sales growth in Q4 with strong gross margins. However, it also announced increased credit losses and reduced earnings guidance from a range of $3.80-$4.00 to a range of $3.40-$3.70 for calendar 2014. Given the market’s past experience with deterioration in subprime credit, the stock reaction was severe: The price fell from $79 at the start of the year to $32 on the news. We believe that this is a retailer with 15-20% unit growth and current double digit comparable store sales growth, and that the market overreacted to moderately bad news. We acquired shares at an average price of $35.49 and they ended the quarter at $38.85.”
His prediction was not far from reality; since the late-February plunge, the stock has regained 36.5%. CONN’S, Inc. (NASDAQ:CONN)’s stock currently trades around $43.53 per share, and analysts expect it to continue to rise, reaching approximately $61.00 per share within the next 12 months.
On the opposite sidewalk, once again, the second largest hedge fund investor, Christian Leone’s Luxor Capital Group, trimmed its exposure to CONN’S, Inc. (NASDAQ:CONN) by 16%. The fund now holds 2.94 million shares, worth more than $145 million.
Last in this list is a newcomer to Einhorn’s equity portfolio: Civeo Corp (NYSE:CVEO). This is a $2.65 billion market cap provider of workforce accommodations services, which was spun-off by Oil States International, Inc. (NYSE:OIS) in June 2014, and now operates as a wholly owned subsidiary of the company. As of the end of June, Greenlight held 6.15 million shares of Civeo Corp (NYSE:CVEO), worth more than $154 million.
Once again, Barry Rosenstein’s Jana Partners can be counted amongst Civeo Corp (NYSE:CVEO)’s supporters. The fund disclosed ownership of 12.24 million shares of the company, which make it the largest institutional shareholder (this includes hedge funds, mutual funds and other investment management firms) of record.
Disclosure: Javier Hasse holds no position in any stocks or funds mentioned.
