Our research on hedge funds has suggested that small cap stocks are a leading source of alpha; among our findings, we’ve concluded 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). We think that this is because small cap stocks (which we define as those with market capitalizations between $1 billion and $5 billion) usually receive less attention from large institutional investors such as mutual funds. As such we like to screen small cap picks from top managers and treat them as free investment ideas which can be researched further if investors find them interesting. Read on for our quick take on billionaire David Tepper’s Appaloosa Management’s five largest small cap holdings as of the end of March or see the full list of stocks the fund reported owning.
One of Appaloosa’s five largest holdings by market value was its more than 15 million shares of The Goodyear Tire & Rubber Company (NYSE:GT). The stock’s beta of 2.3 demonstrates that The Goodyear Tire & Rubber Company (NYSE:GT) is highly exposed to the broader economy (with additional risks related to the company’s pension obligations). Wall Street analysts consider The Goodyear Tire & Rubber Company (NYSE:GT) a high upside potential stock, with their earnings expectations implying a forward P/E of 6 and a five-year PEG ratio well below 1. SAC Capital Advisors, managed by billionaire Steve Cohen, owned 8.6 million shares of the stock at the end of Q1 (check out Cohen’s stock picks).
Tepper and his team cut their stake in US Airways Group Inc (NYSE:LCC) by 11%, but at nearly 11 million shares the airline remained another of the ten largest positions in their portfolio. US Airways Group Inc (NYSE:LCC) is merging with American Airlines, which has the potential to help airlines raise their prices though it also poses integration risks for the company. The sell-side is also excited about the airline, with US Airways trading at 6 times forward earnings estimates. Billionaire George Soros was another major shareholder in the stock according to his 13F filing for the first quarter of 2013 (find Soros’s favorite stocks).