Assured Guaranty Ltd. (AGO), Tripadvisor Inc (TRIP): Do You Own This $2 Billion Hedge Fund’s Best Stock Picks?

Smaller cap stocks don’t get as much attention from bankers, analysts, and most other investors. Generally speaking, this leaves them less-efficiently priced than their larger peers. Hedge funds take advantage of this by dedicating their research teams to work on the little guys, and consequently, they produce a significant amount of their alpha from the small-caps. According to our analysis, investing in the smart money’s top small-cap picks has generated an annual alpha of more than 15 percentage points per month between 1999 and 2009 (learn more about this phenomenon here).

BRIDGER MANAGEMENTLet’s take a look at the top small-cap stock picks of one hedge fund in particular: Roberto Mignone’s Bridger Management. The stocks listed here had market capitalizations between $1 billion and $5 billion at the end of the third quarter, which is consistent with the criterion used in our strategy (see all of Roberto Mignone’s stock picks).

Assured Guaranty Ltd. (NYSE:AGO) is Mignone’s top small-cap holding, sitting at the No. 5 spot in his latest 13F filing with the SEC. Assured Guaranty’s subsidiaries offer a range of credit-related services to infrastructure projects, state governments and utility districts. Shares of the insurer are up more than 25% on the year, and it will report its fourth quarter earnings in close to a month. Assured Guaranty is coming off of two consecutive EPS beats by an average margin of 12.2%. A PEG ratio near 0.5 and a forward earnings valuation under 7x indicates that investors could see more upside if the company can impress with Q4 results. It’s tough to argue with Mignone here.

The fund manager’s second largest small-cap investment is Tripadvisor Inc (NASDAQ:TRIP). Shares of the online travel site have been a great investment over the past 12 months, returning a little over 45% in value. While Tripadvisor looks a little overvalued at the moment, the sell-side is expecting bottom line growth in excess of 20% annually over the next two years, so there are reasons for momentum-seeking investors to remain bullish. Over the long, long run, Tripadvisor has Google problems, as the tech giant’s acquisition of ITA Software gives it a greater foothold in this space. Still, for those focused on the shorter term, Tripadvisor offers solid growth.

Who’s the best of the rest?

Avis Budget Group (NASDAQ:CAR) is Mignone’s third largest small-cap holding, sitting at the No. 15 spot in his entire portfolio. Avis has been a booming investment over the past 3-month (32.7%), 6-month (47.0%) and 12-month (48.7%) periods, indicating that investors are using the stock to buy in on the bullish car rental marketplace. Avis announced it would acquire car-sharing service Zipcar earlier in January, and assuming that anti-trust regulators don’t put a stop to the deal, it should be completed by this spring.

Avis’ earnings currently trade at a 13% discount to the rental industry’s average, and Wall Street expects accelerating EPS growth over the next half-decade. Analysts predict 29.7% annual growth compared to Avis’ 13.9% average over the past five years.

Charles River Laboratories (NYSE:CRL), meanwhile, is Mignone’s fourth favorite small-cap stock, and is already up more than 10% year-to-date. The biotech company wasupgraded to overperform by JPMorgan and Wells Fargo at the end of last year, and it recently completed its acquisition of majority ownership of Vital River, a Chinese research model servicer. Charles River has beaten the Street’s earnings forecasts in four consecutive quarters, and reports its fiscal Q4 results about two weeks from now. If the company can meet or beat the sell-side’s 60-cent EPS and $281 million revenue estimates, shares could appreciate further. Charles River currently trades at a modest 14.5 times forward EPS, which is below peers Life Technologies and Idexx Labs by an average discount of 31%.

Last but certainly not least, Ironwood Pharmaceuticals (NASDAQ:IRWD) is Roberto Mignone and Bridger Management’s fifth largest small-cap holding, sitting at the No. 23 spot in the fund’s 13F portfolio. Ironwood may be best known for its drug Linzess, which is prescribed to those suffering from chronic constipation and irritable bowel syndrome. Some analysts think Ironwood’s drug can become a billion-dollar-a-year giant (see Will This Drug Be a Cash Cow?), and the company did report a blowout third quarter in its latest earnings.

A couple weeks ago, the stock saw major downgrades from UBS, Zacks and TheStreet, but Mizuho, WallachBeth and Ladenburg Thalmann raised their price targets. Still, at elevated price-to-sales (9.3x) and book (9.7x) multiples, it may be best for investors to find a more attractive entry point into Ironwood.

Disclosure: I have no positions in any of the stocks mentioned above

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

The 15 Most Murderous Countries in the World

10 Largest Colleges in the World: Bigger Isn’t Always Better

Comedians in Cars Getting Coffee: The 6 Comedians Seinfeld Needs to Interview

Easy Money: The 10 Most Successful Investors in the World Today

The 10 Most Deadly Diseases in the World Today

The 5 Most Expensive Luxury Motorhomes in the World

20 Largest Stock Exchanges in the World

6 Richest Painters In The World 2014

The 6 Countries with the Best Hospitals In The World

10 Largest Beer Brewing Companies in the World

The 10 Richest Fitness Gurus In the World to Pump You Up

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!