Billionaire Howard Marks’ Most Promising Stock Picks

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Some of the most valuable information from hedge funds and other notable investors comes in the form of the small-cap and mid-cap stocks which they own. These companies often receive less attention from the media and the investment community, so in theory it should be more likely for them to be mispriced relative to their fundamental value. As it turns out, the most popular small cap picks among hedge funds earn an alpha of 120 basis points per month on average. We expanded on this finding in our August newsletter by listing the most popular stocks in this market cap category and those picks proceeded to return 14% between September and December (read more about our hedge fund small cap strategy).

Of course, blindly following investors isn’t necessarily as smart as using their stock picks as free ideas (similar to the results of an investment screen), taking a brief look at the company, and then deciding whether or not it should be researched further. We looked at billionaire Howard Marks’ Oaktree Capital Management’s most recent 13F filing (see the full list of Oaktree’s stock picks) and found three stocks with market caps between $1 billion and $5 billion that it owned at the time. Oaktree is publicly traded as Oaktree Capital Group LLC (NYSE:OAK).

OAKTREE CAPITAL MANAGEMENTEXCO Resources Inc (NYSE:XCO), an oil and gas exploration and production company focused on U.S. shale plays, was one of Oaktree’s top picks with a position of 37 million shares. EXCO is not profitable on a trailing basis, and many market players do not like its current valuation seeing as 16% of the outstanding shares are held short. Analyst expectations imply a current-year P/E of 20. Wilbur Ross’s Invesco Private Capital had the stock as one of its top holdings at the end of the quarter as well, reporting ownership of 32 million shares (find Invesco’s favorite stocks). We can compare EXCO to Chesapeake Energy Corporation (NYSE:CHK), which had a very stressful 2012 (and is also a short target) but where analysts are slightly more optimistic: the natural gas producer trades at 16 times consensus earnings for this year.

A healthcare stock and a semiconductor company rounded out the list:

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Insider Monkey Small Cap Strategy
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