Arch Coal Inc (ACI), AGCO Corporation (AGCO) Among Billionaire Jeffrey Vinik’s Small Cap Picks

We track 13F filings from hedge funds and other notable investors as part of our work researching investment strategies; one of our findings so far has been that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). One way for investors to take advantage of this outperformance- which we attribute to small caps being more likely to be mispriced due to less attention from institutional investors and the financial media- is to review top picks in this valuation range from fund managers and do more research on any interesting names. Read on for our thoughts on billionaire Jeffrey Vinik’s top picks as of the end of December with market capitalizations between $1 billion and $5 billion (or see the full list of stocks Vinik, who manages money for friends and family, reported owning).

Vinik increased his holdings of Packaging Corp of America (NYSE:PKG) by 86% to a total of 1.8 million shares. The company produces containerboard and other packaging materials, and experienced double-digit increases in both revenue and earnings in its last quarterly report compared to the fourth quarter of 2011. Investors are expecting strong growth to continue for the next several years, and the trailing P/E is 27. Billionaire Dan Loeb of Third Point recently announced a large position in peer International Paper Company (NYSE:IP) in a letter to investors, arguing that industry consolidation will benefit the company, and we imagine the same would apply to Packaging Corp. (find Loeb’s favorite stocks).

Struggling coal company Arch Coal Inc (NYSE:ACI) was another of Vinik’s small cap picks. The stock is down 48% in the last year; metallurgical coal has seen low demand because of struggles in the steel industry, while steam coal has been somewhat replaced by cheap natural gas. Analysts expect Arch Coal to be unprofitable both this year and next year, and the most recent data shows 15% of the float held short. Our database shows that George Soros initiated a small position in the stock between October and December (research more stocks that Soros was buying).