Billionaire George Soros’s Small Cap Picks Include US Airways Group Inc (LCC)

Small cap stocks- which we define as those with market capitalizations between $1 billion and $5 billion- are less widely owned by large institutional investors such as mutual funds, and generally- with the exception of an odd social media company- receive less attention from the financial media. As a result, it makes sense that these stocks would be less efficiently priced. We have found that when hedge fund investment teams buy a small cap stock it’s particularly likely to do well: their most popular small cap picks outperform the S&P 500 by 18 percentage points per year on average, and our live testing has returned 38% since September 2012. We can also look at top small cap picks from well known investors such as billionaire George Soros to see what these managers like specifically. Read on for our brief thoughts on Soros’s five largest holdings in small cap stocks by market value as of the end of March or check out his picks over time.

The billionaire roughly doubled his holdings of US Airways Group Inc (NYSE:LCC) with 7.8 million shares at the end of the quarter according to the 13F. US Airways Group Inc (NYSE:LCC) is currently moving towards an acquisition of American Airlines out of bankruptcy. This would not only create a larger carrier which would have a large market share on certain routes, but also significantly consolidate the airline industry in general; many investors and analysts believe that prices could rise as a result. Billionaire David Tepper’s Appaloosa Management included US Airways Group Inc (NYSE:LCC) among its top ten picks (find Tepper’s favorite stocks).

Soros reported a position of 2.5 million shares in digital photo website and app developer Shutterfly, Inc. (NASDAQ:SFLY). This stock features very high earnings multiples- for example, its current valuation places it at 50 times estimated earnings for 2014. Revenue numbers have been up nicely- rising 28% last quarter compared to the first quarter of 2012- but the pricing still seems quite speculative to us (and possibly dependent on the company being acquired). According to the most recent data, 18% of the float is held short demonstrating that many market players are bearish on Shutterfly, Inc. (NASDAQ:SFLY).

According to the 13F, Soros trimmed his stake in Acacia Research Corp (NASDAQ:ACTG) by 9% between January and March but he still owned 3.6 million shares of the $1.2 billion market cap licensor of patent portfolios. The stock price is down 33% in the last year against a rising market, as both revenue and net income have declined substantially. Wall Street analysts are calling for a recovery at Acacia Research Corp (NASDAQ:ACTG) over the next couple of years, but given how poorly the company has done recently we’d at least suggest waiting for a quarter or two of positive results.

Caesars Entertainment Corp (NASDAQ:CZR) was another of Soros’s small cap picks; he and his investment team more than doubled the size of their position in the struggling casino owner. The company is not expected to be profitable either this year or next year, and its financial statements show that it is highly levered. In addition, revenue was actually down last quarter compared to the first quarter of 2012. Caesars Entertainment Corp (NASDAQ:CZR) is also popular among short sellers, with 29% of the float held short, and we’d certainly advise against buying at this time.

The filing disclosed ownership of 1.1 million shares of Energen Corporation (NYSE:EGN), which acts as an oil and gas exploration and production company as well as a distributor of natural gas in the state of Alabama. With trailing and forward P/Es of 16 and 14, respectively, Energen Corporation (NYSE:EGN) doesn’t qualify as a pure value stock though it’s also not clearly overpriced as we suspect some of Soros’s other picks might be. While revenue was up strongly in its most recent quarter compared to the same period in the previous year, however, earnings fell slightly.

Shutterfly, Inc. (NASDAQ:SFLY) doesn’t seem like a good buy to us, and with Acacia Research Corp (NASDAQ:ACTG) we’d need to see the company do better going forward. Caesars Entertainment Corp (NASDAQ:CZR) seems like it is getting close to being distressed, given how much debt is on the company, and if anything we might want to look into the cost to borrow the company’s shares. US Airways Group Inc (NYSE:LCC) is a potential value play, though as we mentioned the industry as a whole carries low multiples and it might be worth comparing the company to peers which do not face integration risks.

Disclosure: I own no shares of any stocks mentioned in this article.