Assured Guaranty Ltd. (AGO) Just One of Billionaire Louis Bacon’s Most Promising Stock Picks

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Small and mid-cap stocks don’t get as much attention from analysts and the financial press, which often leaves them less efficiently priced than the large and mega-caps. Hedge funds sometimes take advantage of this by dedicating their research teams to work on these stocks as well, and so often earn substantial alpha from their investments.

Retail investors can use hedge funds’ top small-caps as a screening device; we’ve determined that the most popular small-cap stocks among hedge funds can earn about 120 basis points of alpha per month. We started publishing a quarterly newsletter at the end of August and shared the stock picks of this strategy. Since then, this strategy returned 14.3% (through December) vs. 2.1% for the S&P 500 index (learn more about our hedge fund small cap strategy).

MOORE GLOBAL INVESTMENTSTaking a look at one money manager in particular, here are five small-caps that billionaire Louis Bacon’s Moore Global Investments reported owning in its most recent 13F (see the full list of Bacon’s stock picks). To remain consistent with our strategy, each stock has a market capitalization between $1 billion and $5 billion.

Two of Bacon’s top small-cap stock picks are in the financial services field. Assured Guaranty Ltd. (NYSE:AGO) is Bacon’s top small-cap pick and is also his 13th largest 13F holding. The Bermuda-based holding company provides credit enhancement products to the municipal finance and mortgage markets. Assured has performed well lately, beating analysts’ earnings estimates each of the last four quarters and is expected to grow 5-year EPS at 12% annually.

This outperformance has helped its stock beat other major bond insurer MBIA by 37 percentage points over the last twelve months. Billionaire Jim Simons is one of the top-name investors in Assured (check out Jim Simons’ top picks).

Alterra Capital Holdings Ltd (NASDAQ:ALTE), meanwhile, is Bacon’s other financial services pick and is his third largest small-cap position. Alterra provides diversified specialty insurance and reinsurance products to corporations, public entities and property/casualty insurers.

Alterra is trading higher on the news that Markel would buy the company for close to $3 billion in cash and stock. Following the news, Deutsche downgraded the stock and placed a $29 price target on it – shares currently trade around $29.50. On the bright side, both financial services investments do offer investors a dividend; Assured pays a 2.4% yield and Alterra pays a 2.2% yield. Billionaire Ken Griffin – founder of Citadel Investment Group – is the top fund owner of those we track with 6.9 million Alterra shares (check out Ken Griffin’s newest picks).

What are Bacon’s other small-cap picks?

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