At Insider Monkey, we track the investment activity of hedge funds and other large investors by studying their 13F filings. These filings report many equity positions held by the funds at the end of the quarter. As might be expected, the most widely held shares by hedge funds tend to be megacap companies; of the ten most popular stocks among hedge funds, only one has a market capitalization of under $50 billion. So we went through our database and found three stocks which are valued at under $10 billion but still have substantial hedge fund ownership:
Equinix Inc (NASDAQ:EQIX), a $9.5 billion market cap telecommunications company which provides data center services worldwide, was owned by 47 funds at the end of June, up from 37 at the end of March. One of the funds getting into the stock was billionaire John Paulson’s Paulson & Co., which initiated a position of 1 million shares (see more of John Paulson’s favorite stocks). Equinix is a growth stock: it trades at 95 times trailing earnings, but in its most recent quarter it grew its earnings by 19% compared to the same period a year earlier (and its revenue increased 18%). Wall Street analysts expect $3.86 in earnings per share in 2013, up from an anticipated $2.68 this year, yielding a forward P/E of 51. The stock has nearly doubled this year, and has risen 12% so far this quarter, so it may no longer be a good buy.
Delta Air Lines Inc. (NYSE:DAL) was owned by 47 hedge funds (up from 37 at the end of the first quarter). Delta has seen insider buying recently, which tends to be a bullish sign for a stock (read more about the transaction and insider buying). We like Delta on valuation terms, with a trailing P/E of 8. Many investors might shy away from it due to industry concerns, but due to consolidation (for example, US Airways Group, Inc. (NYSE:LCC) is pushing to buy American Airlines out of bankruptcy) Delta and its peers may have latitude to raise prices in the future. Delta trades at only 3 times forward earnings estimates, and even if we are not quite as optimistic as the sell-side we still think it is a good value. Appaloosa Management, managed by billionaire David Tepper, increased its stake in Delta by 41% during the second quarter and owned 9.5 million shares at the end of June (research more of Appaloosa’s favorite stocks).
45 hedge funds had positions in Hertz Global Holdings Inc. (NYSE:HTZ), making it another relatively common pick despite a $6 billion market capitalization. Hertz is in between Equinix and Delta in terms of the value-growth spectrum: it has a trailing P/E of 23 but reported 69% earnings growth in its most recent quarter compared to the same period in the previous year. Hertz is another potential beneficiary of consolidation as it pursues fellow rental company Dollar Thrifty Automotive Group, Inc. (NYSE:DTG), and analysts believe that between a potential successful acquisition and historical growth the company will prosper in the coming years. Hertz’s forward P/E multiple is 9, and the five-year PEG ratio is 0.9. One fund which owned Hertz at the close of the second quarter was Highbridge Capital Management; Highbridge, managed by billionaire Glenn Dubin, reported a position of over 15 million shares (find more stocks that Highbridge has invested millions of dollars in).
As mentioned, we suspect that the stock price at Equinix may have outpaced the value opportunity. Many funds in the stock may be “letting the winners run”. We would note that several funds initiated positions at some point during the second quarter, but depending on the timing they could be substantially up by now as well. Delta and Hertz are more appealing to us. In particular, Delta combines favorable valuation multiples with substantial insider buying, and is enough for us to get over concerns about investing in major airlines. It would be our top pick out of these three hedge fund favorites.