The most popular small cap picks among hedge funds have an average alpha of 120 basis points per month, according to our analysis, and between September and December a portfolio of hedge funds’ favorite small cap stocks- which we had identified as such in our August newsletter- returned 14% (read more about our hedge fund small cap strategy). Why do small caps do so well, even as hedge funds struggle in general? We think that it is because these stocks receive less coverage from the media and less attention from large institutional investors, and so it is easier for research teams to identify mispricings. As a result we think that small cap stocks can be a particularly interesting area to look at a hedge fund’s publicly disclosed positions and think of them as recommendations for further review (it’s of course unwise to blindly follow anybody). Here are five stocks which billionaire David Harding’s Winton Capital Management owned as of its most recent 13F filing and which had market capitalizations between $1 billion and $5 billion at the time (see more stocks Harding liked):
Winton’s top pick in this valuation range was Molex Incorporated (NASDAQ:MOLX), a $4.8 billion market cap electronics components manufacturer; the fund owned about 900,000 shares of Molex. The second quarter of the company’s fiscal year ended in December, with Molex reporting revenue and earnings growth of about 10% versus a year earlier. The trailing earnings multiple is 17, which seems about in line for that growth rate. Value investor Edgar Wachenheim’s Greenhaven Associates was another fund reporting a position in Molex at the end of the third quarter of 2012 (find Greenhaven’s favorite stocks).
Harding and his team also liked TECO Energy, Inc. (NYSE:TE), increasing the size of its position by 39% to a total of 1.3 million shares. TECO is an electric utility primarily operating in Florida; as with many utilities, it pays a high dividend yield- about 5%. It also has little exposure to movements in the broader market; from a statistical point of view, the stock’s beta is 0.6. We think that it could be well worth comparing to larger utilities such as The Southern Company (NYSE:SO) and Duke Energy Corp (NYSE:DUK) for an income investor.
Three more of Harding’s picks, including a newspaper publisher: