Many believe that small-cap stocks have been overvalued for a while now, due to a lower interest rate environment that allows companies to acquire cheap debt and use it to artificially increase their stock prices rather than invest in viable projects. The Russell 2000 Index has surged by 60% in the last five years and in a recent report, Goldman Sachs expressed concerns regarding the current state of the small-cap space, saying that “the aggregate metric [P/E] continues to be biased upward by negative earners, which make up a larger part of the index than at any time outside of a recession. This continues to make us nervous about the direction of the overall index, and particularly for companies that are unlikely to generate positive earnings in any of the next three years.”
We are particularly interested in the small-cap stocks because we are following them as part of our small-cap strategy, which involves selecting the most popular small-cap picks among over 700 hedge funds and which has returned over 102% in the last three years, outperforming the market by over 53 percentage points (see details here). The recent correction has reduced the price of most small-caps, making many of these companies more attractive for investors, however, the risk of an upward trend among stocks that don’t generate enough income to justify their high stock prices still exists. Goldman Sachs has also presented a list of 19 stocks that it considers as overvalued, rating them as ‘Sell’ based on their high forward P/E ratios (above 40) for the next two years. However, we took a closer look at the stocks included in the Goldman Sachs’ list and noticed that the funds from our database are collectively bullish on some of them, as they held significant positions in them during the second quarter. With this in mind, we have selected five small-caps which we elite investors disagree with Goldman Sachs on.
Let’s start with Gulfport Energy Corporation (NASDAQ:GPOR), in which 43 funds from our database disclosed stakes that were in aggregate equal to almost 29% of its outstanding stock at the end of June. Moreover, the company witnessed an increase in popularity during the second quarter, as the number of funds went up by eight. Gulfport Energy Corporation (NASDAQ:GPOR) is a $3.9 billion independent oil and natural gas producer on which not only hedge funds, but also many other analysts are bullish, as many have reiterated their ‘Buy’ ratings on it in the past couple of months. Analysts also have a consensus price target of $52 per share on the stock, which indicates upside potential of over 46%. Billionaire quant managers Ken Griffin and Israel Englander are among the largest shareholders of Gulfport Energy Corporation (NASDAQ:GPOR). In the latest round of 13F filings, Griffin’s Citadel reported a position of 8.26 million shares, up by 86% on the quarter, while Englander’s Millennium Management lowered its stake by 40% on the quarter to 2.07 million shares.
Another stock elite investors disagree with Goldman Sachs on is California Resources Corp (NYSE:CRC), a $1.5 billion oil and gas exploration and production company, which was also included in our compilation of five energy stocks under $5 that hedge funds like (see the list). At the end of June, 37 funds reported positions worth $703.87 million in aggregate, equal to around 30% of the company, with the largest position being held by Eric Mandelblatt’s Soroban Capital Partners, which reported ownership of 33.91 million shares in its most recent 13F filing. Moreover, several key executives were buying shares of California Resources Corp (NYSE:CRC) in August (see here), which is another indicator that the stock is poised to grow in the near future.
Three more small-cap stocks that hedge funds and Goldman Sachs have differing opinions on can be found on the next page.
Scientific Games Corp (NASDAQ:SGMS) also made our list, as 29 funds from our database held over half of the company’s shares at the end of June. Among them, billionaire David Einhorn’s Greenlight Capital is bullish on the developer of products for the gaming industry, as it reported a 2.04 million-share position in Scientific Games Corp (NASDAQ:SGMS) as of the end of the second quarter. Most analysts are also optimistic regarding the company, as its stock currently has a consensus price target of $14.00, which represents upside of over 22%.
Windstream Holdings, Inc. (NASDAQ:WIN) was included in the equity portfolios of 21 funds at the end of June, up by three over the quarter, though the total value of their holdings slumped to $72.64 million from $107 million, which still represented over 11% of the company. Windstream Holdings, Inc. (NASDAQ:WIN) provides communication and technology solutions and among its shareholders are Tom Sandell’s Sandell Asset Management, Millennium Management, D. E. Shaw, and Citadel Investment Group. Most of the top shareholders of the company from our database either initiated new positions in Windstream Holdings, Inc. (NASDAQ:WIN) or boosted their existing holdings during the quarter. For example, Sandell initiated a stake of 2.57 million shares, while Citadel surged its position by 200% to 1.16 million shares.
Last but not the least is Peabody Energy Corporation (NYSE:BTU), in which the number of funds with long positions (among those we track) increased by eight to 27 between April and June, although the total value of their holdings slid to $142.06 million from $225.96 million amid a depreciation of the stock affected by low commodity prices. Still, many hedge funds are bullish on Peabody Energy Corporation (NYSE:BTU) as they amassed over 23% of the company at the end of June. Dmitry Balyasny’s Balyasny Asset Management held the largest position among these investors, reporting ownership of 18.40 million shares, down by 40% on the quarter, while Soros Fund Management was one of the funds that initiated a stake in it during the second quarter, disclosing ownership of 1.03 million shares in its latest 13F.
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