Connecticut-based Bridgewater Associates is among the largest hedge funds in the world, with assets under management of $169 billion. Founded in 1973, Bridgewater and its founder, billionaire Ray Dalio, are well known for being a top performing firm and an industry innovator. Dalio, an MBA from Harvard business school, left the position of CEO at Bridgewater in 2012 and now serves as a mentor and co-CIO. 87% of the fund’s $12.83 billion public equity portfolio was invested in finance through the fund’s large positions in three index funds. We’ve previously covered the top tech picks as well as the top mining stock picks of Dalio as of March 31. This time we’ll take a look at his top small-cap stock picks, which our backtests for the period of 2006 to 2012 show have been tremendously successful. During this time, the holdings in Dalio’s public equity portfolio had overall average monthly returns of 0.76% compared to the 0.45% returns of the S&P 500. As impressive as that might be, it is nothing compared to the performance of his top five small-cap picks for the same period, which returned an average of 1.96% per month, with an average monthly alpha of 1.08%.
This is significant because like many wealthy investors, Dalio sinks the majority of his public equity, non-index capital (and by extension the capital of his investors) into large-cap stocks like Apple Inc. (NASDAQ:AAPL) and Johnson & Johnson (NYSE:JNJ), which collectively, haven’t generated nearly the same returns that his best small-cap ideas have. Why should investors pay hefty fees to have limited exposure to a fund’s best-performing picks, while the bulk of their exposure is to lesser-performing, large-cap stocks? This is why we focus solely on the best small-cap stock ideas of the best fund managers like Dalio. Through our research, we have found that collectively, hedge funds’ top small-cap picks perform just as Dalio’s do, easily outperforming their best large-cap stock picks. We launched our flagship strategy in August 2012 around this compelling research and it’s returned over 142% since then, easily besting the market by nearly 85 percentage points (see the details).
With that in mind, let’s take a closer look at the best small-cap picks of Dalio as of March 31, which are Joy Global Inc. (NYSE:JOY), Cree, Inc. (NASDAQ:CREE), and Urban Outfitters, Inc. (NASDAQ:URBN).
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In Philadelphia-based clothing corporation Urban Outfitters, Inc. (NASDAQ:URBN), Bridgewater increased its stake by 542% to 181,748 shares with a value of $8.30 million. The stock has returned 2.25% year-to-date, with a rally in March and a sharp decline of 11.7% over the last month caused by a disappointing earnings report, earnings that were affected by expenses in Urban Outfitters’ online business. For the company’s second quarter results, expected to be posted on August 17, analysts expect earnings to be $0.49 per share, which would be a big improvement over the $0.25 reported for the first quarter. While Urban Outfitters is increasing its sales, its earnings are not necessarily following suit, with increased online sales being fingered as a prime culprit due to their lower margins. Citadel Investment Group, led by billionaire Ken Griffin also increased its stake in Urban Outfitters, Inc. (NASDAQ:URBN) immensely in the first quarter, by 3,600% to 3.32 million shares.
A new pick of Dalio’s during the quarter was electronics company Cree, Inc. (NASDAQ:CREE), in which Bridgewater opened a stake of 239,237 shares with a value of $8.50 million. North Carolina-based Cree is a market-leading innovator of LED, lighting and semiconductor products for radio and power applications. However, with a decline in its share price by 7.4% year-to-date and 23.11% for the last three months, the stock hasn’t exactly lived up to expectations. The earnings posted for the first quarter were a disappointment, with earnings per share of $0.09 not meeting analysts’ expectations of $0.11. For the second quarter, ending on June 30, analysts are expecting earnings of $0.14 per share, while giving the stock a consensus rating of “Hold”, and a target price of $33.25, suggesting moderate potential upside of more than 10%. Investors have yet to have much reaction to Cree, Inc. (NASDAQ:CREE)’s announced spin-off of its Power and RF divisions, announced in mid-May, though that will undoubtedly drive sentiment going forward. A new stake in Cree was also built by Catapult Capital Management, a subsidiary of Israel Englander’s Millennium Management, which acquired 38,707 shares during the first quarter.
Another small-cap in which Bridgewater showed interest was in mining machinery producer Joy Global Inc. (NYSE:JOY). Bridgewater increased its stake by 89% to 274,096 shares with a value of $10.74 million during the first quarter. Joy Global, headquartered in Milwaukee, Wisconsin, has experienced a bumpy spring on the stock exchange, like Dalio’s other top small-cap picks, with shares down by 14.7% year-to-date. Earnings for the company’s fiscal second quarter of 2015 were released on Thursday with Joy Global posting earnings per share of $0.40 compared to $0.73 for the same quarter the year before, negatively impacted by declining commodity prices and high supply. Furthermore, Joy Global Inc. (NYSE:JOY) expects the tendency to continue throughout the year, with declining sales and earnings. Together with the posting of the second quarter earnings, Joy Global also announced the acquisition of a hard rock producer that is, according to Joy Global “A complete breakthrough for our customers with unparalleled direct service, technology, quality and safety expertise.” Also bullish about Joy Global is hedge fund Adage Capital Management, led by Phill Gross and Robert Atchinson, which increased its stake by 502% to 907,203 shares during the first quarter.
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