Luxor Capital’s Under-the-Radar Picks: AMC Networks Inc (AMCX), Madison Square Garden Co (MSG)

In the stock market universe, small-caps don’t get as much attention from investors, which often leaves them less efficiently priced than their larger peers. As one would reasonably expect, hedge funds seek to take advantage of this, by dedicating their research teams to work on these lesser-known investments.

Interestingly, retail investors can use hedge funds’ top small-caps as a market-beating strategy; our analysis shows that the most popular small-cap stocks among hedge funds can earn about 120 basis points of alpha per month. We started publishing a quarterly newsletter at the end of August and since then, until the end of December, this strategy returned 14.3% vs. 2.1% for the S&P 500 index (learn more about our hedge fund small cap strategy).

With this in mind, it’s important to perform a fund-by-fund analysis, and in this article, we’re going to take a look at Christian Leone’s Luxor Capital Group. Leone has an equity portfolio in excess of $2 billion (see the mammoth fund’s entire profile), but let’s just concentrate on Luxor’s top five small-cap holdings. Each stock had a market capitalization between $1 billion and $5 billion at the end of the third quarter, as is consistent with our strategy.

AMC Networks (AMCX)

First up on our list is AMC Networks Inc (NASDAQ:AMCX), which is actually the No. 1 stock pick on Luxor’s entire 13F filing. The entertainment company holds a robust programming portfolio, which includes AMC, WE tv, IFC and independent filmmaker IFC Films. Last year’s snafu with Dish Network (DISH) briefly spooked investors, as the majority of AMC’s revenues are derived from affiliate fees.

Still, since both sides settled their dispute in late October last year, shares of AMCX are up more than 22%. A massive third quarter earnings beat a couple weeks later also had investors feeling cheery. The company identified two key takeaways in their conference call: (1) near-50% viewership growth in the newest seasons of Breaking Bad and The Walking Dead, and (2) increased licensing revenues from content partners like Netflix (NFLX).

It appears that the sell-side is optimistic on AMC’s prospects moving forward; they’re expecting about 20% annual EPS growth over the next half-decade. At a PEG near 1.2, investors aren’t over-hyping this potential, and the company’s focus on quality original programming isn’t going away any time soon.

Luxor Capital’s second favorite small-cap stock is The Madison Square Garden Co (NASDAQ:MSG), sitting at the No. 2 spot in Luxor’s portfolio. Even though there’s no more Linsanity in the Big Apple, MSG seemingly cannot be stopped. The stock has generated a positive return in 9 out of the past 12 months, and is already up over 9% year-to-date. The company’s media segment is the strongest area of MSG’s business, driven by above-average fan interest in the New York Knicks, and the launch of Fuse News.

Wall Street’s average price target on MSG ($48.12) is nearly at parity with the stock’s current market price, and a forward P/E in the upper 20s indicates that investors may be best served by waiting for a more attractive entry point. Interestingly, Mason Hawkins and Southeastern Asset Management hold a position in MSG that rivals Luxor’s (check out Mason Hawkins’ favorite stock picks).

What about the rest of Luxor’s top five?

In third place we have Tripadvisor Inc (NASDAQ:TRIP). Tripadvisor has been a particularly volatile stock in recent weeks, but over the long run, it is up nearly 50% in the past year and 70% over the past five years. Luxor more than doubled its stake in the online travel company in the third quarter—its last 13F filing with the SEC.

Generally speaking, the industry that Tripadvisor operates in is uncertain at best, as consolidation and Google’s ITA software gives it the ability to continually lurk in any travel site’s backyard. Obviously, that’s never a long-term positive, but most analysts still expect double-digit EPS growth over the next few years. Additionally, at 24 times forward earnings, the valuation is still decent.

Luxor Capital’s fourth largest small-cap holding is American Capital Ltd. (NASDAQ:ACAS), the business development corporation (BDC) that invests in a wide range of businesses. On the whole, this BDC has struggled since the recession, but most analysts expect earnings growth to average out in the mid-teens through 2017, and the metrics are cheap. American Capital may look like a value trap, but if it can continue at least meeting the Street’s forecasts—it has done so for the past two quarters—we should see solid appreciation.

Lastly, Deckers Outdoor Corp (NASDAQ:DECK) is the hedge fund’s fifth largest small-cap holding, sitting at No. 9 overall in its 13F portfolio. Deckers has lost more than half of its value in the past 12 months, driven by 2011’s unseasonably warm winter, which hurt sales of the company’s UGG and Teva footwear lines. Still, it is the strength of these brands that can ultimately boost Deckers again, but we have to wait until next month to see how the company did this past holiday quarter.

Wall Street is expecting Deckers to report a Q4 EPS of $2.64, down 17% from one year earlier. Shares seem to be in a holding pattern at the moment, as most shareholders are likely waiting until the Q4 report before making any rash investment decisions. In terms of its valuation, a PEG near 0.6 indicates that there is some value here, but Deckers will need to beat consensus to have a chance at padding investors’ pockets.

For more related coverage, continue reading here:

This Billionaire Loves Tripadvisor

Meet Luxor Capital’s Newest REIT

Are UGGs a Good Investment for the Winter?

Disclosure: I have no positions in any of the stocks mentioned in this article

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

The 15 Most Murderous Countries in the World

10 Largest Colleges in the World: Bigger Isn’t Always Better

Comedians in Cars Getting Coffee: The 6 Comedians Seinfeld Needs to Interview

Easy Money: The 10 Most Successful Investors in the World Today

The 10 Most Deadly Diseases in the World Today

The 5 Most Expensive Luxury Motorhomes in the World

20 Largest Stock Exchanges in the World

6 Richest Painters In The World 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!