According to our research, the most popular small cap stocks (those with market capitalizations between $1 billion and $5 billion) among hedge funds outperform the S&P 500 by an average of 18 percentage points per year (learn more about imitating small cap picks). We think that this is because small cap stocks are less widely followed by investors, including institutional investors such as mutual funds; when a hedge fund team looks at such a stock, then, it is more likely to find an undervalued name. We can also use our database of 13F filings to see which small cap stocks individual fund managers like. Here are five small cap stocks which billionaire Richard Chilton’s Chilton Investment Company owned at the end of December (or see the full list of the fund’s stock picks):
Chilton more than doubled the size of his position in DineEquity Inc (NYSE:DIN), the restaurant company which owns the Applebee’s and International House of Pancakes brands. DineEquity has converted itself to a franchisor of these restaurants, and now offers a very strong dividend yield of over 4% at current prices after instituting a 75 cent per share quarterly dividend this year. DineEquity Inc (NYSE:DIN) made our list of the most popular restaurant stocks among hedge funds for the fourth quarter of 2012 (find more restaurant stocks hedge funds loved), though we’d note that 10% of the float is held short.
The fund cut its stake in VIVUS, Inc. (NASDAQ:VVUS), a drug developer currently working on a weight loss drug, but still owned 2.6 million shares of the stock at the end of December. Vivus is down 54% in the last year as some in the investing community claim that Arena Pharmaceuticals has developed a superior product, and short sellers are responsible for 25% of the float. Wall Street analysts are expecting VIVUS, Inc. (NASDAQ:VVUS) to be unprofitable both this year and in 2014, and losses per share have been higher than expected the past few quarters.
Chilton reported ownership of 5.3 million shares of Atmel Corporation (NASDAQ:ATML), a $3 billion market cap semiconductor designer and developer. Here the stock price is down 28% in the last year as business has been weak- to be specific, in the fourth quarter of 2012 sales were down 10% versus a year earlier. The sell-side expects Atmel Corporation (NASDAQ:ATML) to recover, and in fact the forward P/E of 12 would appear to be quite low, but we aren’t convinced that the company is going to be able to improve its earnings in line with expectations and so we would avoid the stock.
First Horizon National Corporation (NYSE:FHN) rounds out our list of small cap picks from the fund. Chilton had 3.1 million shares of the Tennessee-based regional bank in its portfolio at the end of 2012 after adding a small number of shares during Q4. First Horizon National is valued at a small premium to the book value of its equity with a P/B ratio of 1.1. The bank struggled with profitability in 2012 as a whole, but did deliver profits in the second half of the year and consensus earnings for 2014 imply a forward P/E of 11.
First Horizon National Corporation (NYSE:FHN) therefore looks like it does have some value prospects, though we’d have to look into what caused the poor conditions in early 2012 to help us determine if the bank is actually in the clear. DineEquity also looks somewhat interesting- as a high yield restaurant stock it could be an alternative to Darden Restaurants, and it’s possible that the franchise model will provide a particularly stable source of cash flow and earnings with little dependence on macro factors.
Disclosure: I own no shares of any stocks mentioned in this article.
