The most popular small cap stocks among hedge funds, according to our research tracking 13F filings, earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). We think that this is because small cap stocks- which we define as those with market capitalizations between $1 billion and $5 billion- are often ignored by large institutional investors and in turn by the financial media, making it more likely that they are either overvalued or undervalued. As a result we think it can be useful to see what top managers like in this valuation range. Here are five small cap stocks which billionaire Steve Cohen’s SAC Capital Advisors reported owning at the end of December (or see the full list of stocks the fund reported owning):
SAC increased its stake in Superior Energy Services, Inc. (NYSE:SPN) by 25% during the fourth quarter of 2012, to a total of 7.7 million shares. At a market capitalization of $4 billion, Superior trades at only 10 times its trailing earnings. At that level it barely needs to grow at all in order to be a good value, but analyst expectations are bullish with the forward P/E coming in at 9 and the five-year PEG ratio being only 0.6. Billionaire Ken Griffin’s Citadel Investment Group was also buying Superior, and reported a position of 3.1 million shares in its own 13F (check out Griffin’s stock picks).
Cohen and his team had 2.5 million shares of auto parts company Visteon Corp (NYSE:VC) in their portfolio at the end of December. Visteon Corp (NYSE:VC), which specializes in climate, electronic, and interior components, is highly dependent on the broader economy as shown by the beta of 2.3. While in terms of trailing earnings the stock looks expensive- the trailing P/E is 30- the sell-side is predicting that net income will recover nicely over the next couple years. Value investor Barry Rosenstein’s JANA Partners was another major shareholder in Visteon Corp (NYSE:VC) during Q4 2012 (find Rosenstein’s favorite stocks).
Cliffs Natural Resources Inc (NYSE:CLF) was another of SAC’s small cap picks, with the filing disclosing ownership of 3 million shares. As a producer of iron ore and metallurgical coal, Cliffs Natural Resources Inc (NYSE:CLF) is dependent on demand for steel; with steel demand weak recently, the stock is down 70% in the last year and over 20% of the float is held short. Multiple insiders were selling shares of Cliffs Natural Resources Inc (NYSE:CLF) in early March, though these sales took place well above where the stock is currently trading (see a history of insider sales at Cliffs) and insider selling is often rational as it can increase diversification.
The fund moved heavily into Owens Corning (NYSE:OC), building a small position as of the end of September up to 2.7 million shares by the end of 2012. The provider of glass fiber and other building materials is another bullish play, since it depends on construction activity: the stock’s beta is 1.8. We’d note that revenue was actually down slightly in the fourth quarter of 2012 versus a year earlier. Analyst consensus has the stock trading at 12 times forward earnings estimates with a five-year PEG ratio of 0.8. Blue Ridge Capital, managed by Tiger Cub John Griffin, owned 6.7 million shares of Owens Corning.
The 13F showed SAC with 3.9 million shares of NCR Corporation (NYSE:NCR) at the beginning of January. Billionaire David Einhorn also likes NCR, and his hedge fund Greenlight Capital was buying shares to close December with over 10 million shares (research more stocks Greenlight was buying). NCR, which provides kiosks and terminals such as ATMs and point of sale terminals (it was formerly known as National Cash Register), did not have a good performance in 2012 in terms of net income but analysts are optimistic. Their projections imply a forward earnings multiple of 9 and a five-year PEG ratio of 0.7.
Disclosure: I own no shares of any stocks mentioned in this article.
