Our research from our database of 13F filings indicates that the most popular small cap stocks (which we define as those with market capitalizations between $1 billion and $5 billion) among hedge funds outperform the S&P 500 by an average of 18 percentage points per year (learn more about our research on small cap picks). We think that this is because small cap stocks are less widely owned by large institutional investors such as mutual funds, and less covered by the financial media; as a result hedge funds are more likely to uncover an undervalued (or overvalued) stock when looking in this range. Hedge fund small cap picks can therefore serve as a useful screen, identifying ideas for further research. Here are four small cap stocks which Kahn Brothers, managed by Irving and Thomas Kahn, owned at the end of December (or see the full list of stocks the fund reported owning); the fund mostly makes small changes on a q/q basis:
One of Kahn Brothers’ top five picks was The New York Times Company (NYSE:NYT), with a position of 4.8 million shares. Despite the troubled newspaper industry, the stock price has rallied 52% in the last year though this still leaves it down about 50% from its levels five years ago. In addition, the stock trades at 23 times forward earnings estimates- a level which seems quite high to us. Billionaire Ken Griffin’s Citadel Investment Group increased its stake in the The New York Times Company (NYSE:NYT) in the fourth quarter of 2012, to a total of 4.1 million shares (find Griffin’s favorite stocks).
The investment team reported a position of 3.3 million shares in Old Republic International (NYSE:ORI), a $3.4 billion market cap surety and title insurance company. Old Republic is unprofitable on a trailing basis, and in the fourth quarter of 2012 revenue slipped slightly versus a year earlier. Sell-side expectations are for 42 cents in EPS this year and then 80 cents next year, making for a forward P/E of only 16, but we aren’t sure it’s wise for a value investor to be so dependent on their forecasts. Old Republic could be interesting as an income stock, with a dividend yield of over 5%.