Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds, including billionaire Stephen Mandel’s Lone Pine Capital. We’ve found that 13Fs can be useful in developing investment strategies; for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year. In addition, while we don’t recommend blindly imitating hedge fund managers, their picks can serve as initial investment ideas (similarly to the results of a stock screen) with investors performing further research on any interesting names. Here are our thoughts on three of Lone Pine’s small cap (defined as those with market capitalizations between $1 billion and $5 billion) picks from the first quarter of 2013 (or see the full list of Mandel’s stock picks).
The fund reported owning 3.4 million shares of WABCO Holdings Inc. (NYSE:WBC), a $4.9 billion market cap auto parts company. Specifically, WABCO Holdings Inc. (NYSE:WBC) focuses on braking, transmission, and suspension systems. Many investors like the auto and auto parts industries at this time, believing that since the U.S. auto fleet is old compared to historical averages there is a good deal of pent-up car demand among consumers which could drive strong revenue growth.
The most recent U.S. auto sales data (from the first half of the year) show only modest growth in unit sales among cars but more than 10% higher sales of light trucks, SUVs, and crossovers. WABCO Holdings Inc. (NYSE:WBC) trades at 18 times trailing earnings, but with analyst expectations of high growth over the next several years the forward P/E is 14 with a five-year PEG ratio of only 0.8. Warren Buffett’s Berkshire Hathaway had 4.1 million shares in its portfolio according to the holding company’s own 13F (find Buffett’s favorite stocks).
Another of Mandel’s small cap picks is $2.4 billion market cap oil and gas transportation, storage, and processing company SemGroup Corp (NYSE:SEMG). A decline in business in Semgroup’s Mexican segment contributed to revenue declining 8% in its last quarterly report compared to the first quarter of 2012. The company earned an increased amount of income from equity investments, however, and so operating income of $22 million was considerably higher than it had been in the prior year period.
The company generated roughly that much cash from its operations, but also invested heavily in capital expenditures and in subsidiaries. It should be noted that a good deal of growth in operating income was driven by the oil segment, and over the long term it is likely that there will be more demand for midstream services as onshore shale plays become more developed in the U.S. Semgroup carries trailing and forward earnings multiples of 36 and 26, respectively, so the company is highly dependent on its business growing over the next several years.