Our research shows 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 large institutional investors such as mutual funds (as well as the financial media) pay less attention to small cap stocks, and so they are more likely to be either undervalued or overvalued in the market. We can also make use of this finding to some degree by reviewing small cap stocks (which we define as those with market caps between $1 billion and $5 billion) from top managers so that investors can do further research on any interesting names. Read on for our quick take on the five largest small cap holdings in billionaire Leon Cooperman’s Omega Advisors’ most recent 13F filing or see the full list of stock picks from the end of March.
Cooperman and his team reported a position of 5.1 million shares in Atlas Pipeline Partners, L.P. (NYSE:APL), which gathers, processes, and transports natural gas. The development of new shale plays has led to a rapid increase in natural gas production in the onshore U.S., increasing demand for midstream infrastructure. At current prices and dividend levels, Atlas Pipeline pays a dividend yield of just over 6% but we would note that the stock is highly exposed to the broader economy with a beta of 1.9- making it a poor choice for more defensive minded investors- and that quarterly payments have still not recovered to pre-crisis levels.
The manager of Atlas Pipeline’s general partner, Atlas Energy LP (NYSE:ATLS), was another of Omega’s small cap picks. Atlas Energy also acts as a producer of oil and gas, with interests in over 10,000 wells in the onshore U.S. with a focus on Appalachian shale plays such as the Marcellus and Utica. It’s even more dependent on macro conditions, with a beta of 2.9. Brian Jackelow’s SAB Capital Management initiated a position of just over 1 million shares in Atlas Energy during the first quarter of 2013 (check out more stocks SAB was buying).
The fund disclosed ownership of nearly 49 million shares of $3.1 billion market cap real estate investment trust Chimera Investment Corporation (NYSE:CIM). Real estate investment trusts have been battered over the last month, with Chimera down close to 10% over that period, as interest rates have risen; because REITs receive favorable tax treatment conditional on distributing a large share of taxable income to shareholders, their yields are often high. Chimera pays investors an annual yield of over 10% at current prices, though as an investor in mortgage-backed securities its cash flow bear quite a bit of risk.