Compared to their larger peers, small and mid-cap stocks don’t get as much attention in the financial world. Understandably, then, we can expect hedge funds and other top-tier investment vehicles to take advantage of this information inefficiency; we’ve determined that the most popular small-cap stocks among hedge funds can earn about 120 basis points of alpha per month.
At Insider Monkey, we started publishing a quarterly newsletter at the end of August, and since then (through December) this strategy returned 14.3% vs. 2.1% for the S&P 500 index (learn more about our small-cap strategy).
Here are five small-cap stocks that billionaire Leon Cooperman’s Omega Advisors reported owning on its most recent 13F (see the full list of Cooperman’s stock picks). Market capitalizations are between $250 million and $2 billion.
Cooperman’s top small-cap stock pick is Atlas Pipeline Partners, L.P. (NYSE:APL). Atlas is also Omega’s 6th largest 13F holding and makes up 3.4% of the firm’s 13F portfolio. This processor of natural gas pays a dividend yielding 7%, making it a solid income play. The majority of gas processed by Atlas Pipeline in the Appalachian Basin is from wells operated by Atlas Energy Resources.
Another one of Cooperman’s top small-cap picks, its third largest, is Atlas Energy LP (NYSE:ATLS). Atlas Energy is an independent developer and producer of natural gas and oil. In a CNBC interview on January 2nd, Cooperman gave a shout out to both of his Atlas holdings saying “we like some of the energy companies Halliburton, Atlas Energy and Atlas Pipeline.”
Thanks to the December 2012 close of its Cardinal Midstream acquisition, Atlas Pipeline now expects to generate EBITDA of $335 million (mid-range) in 2013, well above its $164 million EBITDA over the trailing twelve months. This boost in earnings and cash generation could also help boost its dividend (currently a $123 million annual payout) or allow for strategic acquisitions.
Atlas Energy, meanwhile, gathers natural gas in the Appalachia and Mid-Continent regions. The natural gas company recently announced expectations that will put 2013 production 50% above annualized 3Q 2012 levels. Atlas Energy pays a dividend yield (3%) less than half that of its transport partner Atlas Pipeline.
Both companies trade below other major oil and gas companies, with Atlas Energy at 1.3x sales and Atlas Pipeline at 1.9x sales, compared to El Paso Pipeline Partners (5.7x) and Kinder Morgan Energy Partners (3.4x). Likewise, each represents bets on strong expected demand for natural gas over the long-term.
KKR Financial Holdings LLC (NYSE:KFN), meanwhile, pays a 7.7% dividend yield on a 30% payout of earnings. KKR Financial is a former REIT that converted to an LLC in early 2012 when it sold off a controlling interest in a real estate subsidiary to an investment firm in an effort to raise cash. Cooperman also owns KKR Financial’s parent company KKR & Co., which is his 10th largest 13F holding.
The investment company has grown cash flow, where trailing twelve-month funds from operations is $350 million, compared to $320 million for FY2011. The stock trades at a P/B of 1.1, far below its parent company KKR & Co., which trades at 2.1x book. Billionaire Jim Simons upped his stake by 20% during 3Q (check out Jim Simons’ big bets).
Who’s the best of the rest?