Two of Bacon’s other top five small-cap picks are in the oil and gas industry: Oasis Petroleum Inc. (NYSE:OAS), its second largest small-cap holding, and Kodiak Oil & Gas Corp (NYSE:KOG), its fourth largest. With both trading below a $5 billion market cap, either could be a potential takeover target.
Both stocks trade at outsized P/E ratios when compared to peers. Oasis is at a 33x P/E and Kodiak trades at 42x earnings, compared to Apache (13x) and Warren Resources (15x). Oasis and Kodiak’s impressive growth rates appear to justify their high valuations. With very strong expected 5-year earnings expansion of 35% annually, Oasis appears to be a cheap growth stock with a forward PEG 0.66.
Its peer Kodiak, however, appears to be an even better deal, with a PEG of 0.4 on a 50% expected long-term earnings growth rate. These two oil and gas companies operate in the high profile mid-continent area, and should be driven higher by increased demand for oil and gas on the back of a rebounding economy. Ken Griffin and Steven Cohen both increased their stake in Oasis over 100% in their latest 13F filings (check out Steve Cohen’s top picks).
GNC Holdings Inc (NYSE:GNC), the nutritional supplement retailer, is Bacon’s fifth largest small-cap holding. Momentum has been solid for the stock as consumer spending for health products and supplements have held up despite a less than stellar economic backdrop. The stock is up 31% over the last twelve months and FY2012 earnings are expected to come in 50% above FY2011. The introduction of new products and marketing initiatives should be a big part of the nutrition company’s expected near term growth. Compared to other major nutrition supplement provider Vitamin Shoppe, GNC is cheap. GNC trades at a P/E of 17x, while Vitamin is at 28x. With GNC’s low P/E and high long-term growth rate of 22%, its PEG comes in at only 0.7.
To recap: The majority of hedge funds’ alpha is derived from investing in small-cap stocks, and by outlining billionaire Louis Bacon’s top five small-cap stocks we hope to give retail investors a starting point for generating their own alpha. Two of Cooperman’s small-cap picks are in the financial services industry, but pay investors modest dividends. Two stocks are in the oil and gas industry and could be possible takeover candidates, and its final pick, GNC, is a growth at a reasonable price opportunity.
Read more about Louis Bacon’s picks:
Louis Bacon and Jim Cramer Like AIG, Wells Fargo, and More
Billionaire Bacon’s Energy Picks
News Corp, Dollar General Are Among Bacon’s Bullish Bets
Disclosure: I have no positions in any of the stocks mentioned in this article
