The most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year, according to our work analyzing our database of 13F filings (learn more about our small cap strategy). We think that this is because small cap stocks- with the exception of some well-known consumer goods or technology companies- receive less attention from large institutional investors and the financial media, and so have a higher chance of being undervalued (or overvalued). Investors can also take advantage of this line of thinking by reviewing small cap picks from top fund managers, not to blindly follow their picks but to become familiar with less well known stocks and do further research on any which seem interesting. Read on for five stocks with market capitalizations between $1 billion and $5 billion which billionaire Leon Cooperman’s Omega Advisors owned at the end of December (or see the full list of stocks Cooperman reported owning):
The fund reported a position of 5 million shares in Atlas Pipeline Partners, L.P. (NYSE:APL) according to its 13F. Atlas Pipeline Partners is a $2.2 billion market cap company involved in gathering, processing, and transporting natural gas. Natural gas development in the onshore U.S. has been dramatic in recent years, potentially creating upside for pipeline companies, and the current dividend yield is 6.7% going by recent dividend payments. Dmitry Balyasny’s Balyasny Asset Management initiated a position of 1.1 million shares in Atlas during the fourth quarter of 2012 (check out Balyasny’s stock picks).
Cooperman and his team maintained ownership of almost 14 million shares of KKR Financial Holdings LLC (NYSE:KFN), a $1.9 billion market cap investor in various classes of high yield debt- including corporate debt and distressed securities- as well as some equity investments. KKR Financial Holdings LLC (NYSE:KFN) is another high yield stock going by recent dividend policy, with a yield of 7.6%, though this is in turn due to the relative risk of its assets. Cobalt Capital Management, which is managed by Cooperman’s son Wayne Cooperman, was another major holder of the stock.
Acquisition target Mcmoran Exploration Co (NYSE:MMR), which is set to be purchased by large basic materials company Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), was another of Omega’s favorite stocks. The acquisition- which diversifies Freeport-McMoRan into oil and gas- was criticized by most investors and the stock price suffered a substantial correction as a result. This is partly because the company is paying a large premium for Mcmoran Exploration Co (NYSE:MMR) (which had at one point been part of the same business) and a related oil company, but Cooperman has said that the deal will create shareholder value and he was buying shares of Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) in Q4.
Omega disclosed a position of 3.9 million shares in Atlas Energy LP (NYSE:ATLS), roughly even with what the fund had owned three months earlier. First Eagle Investment Management also owned Atlas Energy, with about 840,000 shares in its portfolio at the end of 2012 (find First Eagle’s favorite stocks). Atlas Energy LP (NYSE:ATLS) is an integrated producer, gatherer, and processor of natural gas, oil, and natural gas liquids with a market capitalization of $2.3 billion. We’d note that the stock price is very sensitive to market conditions, with a beta of 3.1. The dividend yield here is more modest than at Atlas Pipeline Partners, at 2.7%.
Disclosure: I own no shares of any stocks mentioned in this article.
