When hedge funds or other major investors buy enough shares to give themselves 5% ownership of a company, or if they subsequently make significant changes to that position, they must file either a 13D or a 13G with the SEC. This provides a relatively recent take on what a particular fund manager thinks about a particular stock. While the nature of the 5% threshold means that we usually only see 13D and 13G filings for small-cap and mid-cap stocks rather than big names, it can actually be particularly useful to see how hedge funds are trading smaller-cap stocks. This is because these companies receive less attention from mutual funds and the financial media and so are more likely to be found mispriced when a hedge fund’s research team investigates. In fact, the most popular small cap stocks among hedge funds, as listed in our August 2012 newsletter, achieved an excess return of 18 percentage points between September and January (read more about our hedge fund strategies). Here are five stocks regarding which hedge funds have filed 13Ds or 13Gs recently:
Billionaire Leon Cooperman’s Omega Advisors owns over 55 million shares of Chimera Investment Corporation (NYSE:CIM) per a recent filing. See more of Cooperman’s stock picks. Omega likes high yield stocks, and as a real estate investment trust Chimera is actually required to distribute a large share of its taxable income to shareholders. It has made quarterly payments of 9 cents per share the last three quarters (though dividend payments were higher before that) which implies an annual yield of close to 12%. We would note that Chimera has fallen behind in filing its financial statements.
Three more stocks that hedge funds have been buying:
Pine River Capital disclosed a position of 3.1 million shares of PHH Corporation (NYSE:PHH), which operates a mortgage servicing business as well as offers vehicle leasing services; Pine River is managed by Brian Taylor (check out more stocks Pine River likes). While PHH struggled earlier in 2012, a strong fourth quarter pulled it into the black for the year. The trailing P/E is still high, but the stock trades at only 8 times earnings estimates for this year and at a moderate discount to the book value of the equity. We had thought it might look more attractive if it can continue its profitability for another quarter or two.
WMS Industries Inc. (NYSE:WMS), which is in the process of potentially being acquired by smaller peer Scientific Games Corp (NASDAQ:SGMS) had John Rogers’ Ariel Investments report ownership of almost 8% of the company. Merger arbitrage can offer modest returns, but ones independent of market conditions, and there is a gap of about 4% between WMS’s current share price and the all-cash offer. However, the transaction would come at a large premium to WMS’s former share price and so there would be a significant downside if the deal fell apart. Learn more about merger arbitrage strategies.
Empire Capital Management, which is managed by Scott Fine and Peter Richards, has a stake of 5.4% in Jive Software Inc (NASDAQ:JIVE) with a position composed of both shares and call options. Jive is a cloud-based social business networking software company, a collection of buzzwords which have brought it to a valuation of nearly $1 billion even though it is unprofitable and high revenue growth has not improved its bottom line by much. Even in cash flow terms Jive has been just short of breaking even; 22% of the outstanding shares are held short.
Disclosure: I own no shares of any stocks mentioned in this article.
