Multi-Billion Dollar Hedge Fund’s Best Investments: SINA Corp (SINA), Yelp Inc (YELP)

Hedge funds generate a significant fraction of their alpha from small-cap stocks, primarily because the information surrounding this space is less efficient. At Insider Monkey, we’ve empirically tested this phenomenon, and according to our analysis, hedge funds’ top small-cap picks generate an alpha of about 120 basis points 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 small-cap strategy).

With this in mind, it’s important to do a fund-by-fund analysis. Let’s take a look at one hedge fund in particular: Robert Karr’s Joho Capital. Using our database of 13F filings from the SEC, we’ll take a look at the fund’s small-cap holdings in its 11-stock portfolio (see Joho Capital’s full fund profile). Each had a market capitalization between $1 billion and $5 billion at the end of the third quarter, which is the same benchmark used in our market-beating strategy.

New Oriental Education & Tech Group (NYSE:EDU) is Karr’s favorite small-cap stock, sitting at the No. 4 spot in the hedge fund manager’s 13F portfolio. The Chinese company provides private educational services, and has lost over 25% of its market capitalization over the past 12 months. Most of this decline occurred last July, when news broke that the SEC was investigating the company’s accounting practices.

Sentiment has since improved over this situation, as the federal agency found no wrongdoing had occurred, but shares of New Oriental still trade at cheap forward P/E (14.8x) and PEG (0.86) multiples. With a long-range annual EPS growth forecast in excess of 20%, this stock represents a nice ‘growth at a reasonable price’ opportunity at the moment.

SINA Corp (NASDAQ:SINA)

Next up we have SINA Corp (NASDAQ:SINA), Karr’s second largest small-cap holding. Sina is one of the most dominant Internet companies in China, and is most widely known for its Weibo micro-blogging site. On the whole, analysts expect Sina to generate earnings growth of 23-24% a year over the next half-decade, and the company is coming off of two consecutive quarterly EPS beats. Shares of Sina currently trade at 5.4 times its cash and 3.3 times book, indicating that investors can still snatch up this growth stock at a relatively decent price.

Who’s the best of the rest?

Veeco Instruments Inc. (NASDAQ:VECO), meanwhile, is the hedge fund manager’s third favorite small-cap stock, sitting at the No. 8 spot in his portfolio. Veeco experienced precipitous appreciation in 2009, 2010 and the first half of 2011 before concerns over the company’s reliance on the solar energy segment cut shares in half. The stock has since recovered slightly, but is still down 23.9% over the past two year-timeframe. Ignoring short-term headwinds, Veeco is a good buy for any investor looking for exposure to renewables, and the company’s earnings trade at a near 50% discount to the semiconductor industry’s average.

Last but certainly not least, Yelp Inc (NYSE:YELP) is Karr’s final small-cap stock pick, and was actually purchased in the fourth quarter of 2012, according to Joho Capital’s 13G filing with the SEC. Karr joins prominent hedge fund managers Steven Cohen and Ken Griffin in the company (see all of Ken Griffin’s stock picks). Shares of the leisure search and review site have bounced by double-digit percentage points this year, but on the whole, Yelp hasn’t been a very solid investment since its IPO last March, losing almost 14% in total.

A major issue for Yelp going forward is increased competition from larger social networking sites Facebook (FB) and Google Inc (NASDAQ:GOOG). Facebook’s January 15th announcement of Graph Search sent Yelp’s stock price down more than 6% on the day, as investors expect the feature to give users their friends’ business reviews, hurting Yelp in the process. Google’s acquisitions of Zagat and Frommer’s over the past couple years gives the company an edge in the professional review space, for users unwilling to trust the average consumer.

From a valuation standpoint, Yelp is expensive despite the fact that the sell-side expects it to finish 2013 with positive EPS of 2 cents a share—the company is expected to record a FY2012 loss of 31 cents per share. While this year’s growth forecast is impressive, shares still trade at earnings (1058x), sales (11x) and book (9x) multiples far above industry averages. Google, in comparison, sports P/E (23x), P/S (5x) and P/B (3.5x) multiples that are much more reasonable.

Of the 11 Wall Street analysts who cover Yelp, just 2 hold buy ratings on the stock, but the group’s average price target does represent a 16-17% upside from current levels. There will always be debate over Yelp’s review filtering process, in addition to its ongoing battle with Google and Facebook, but momentum-seeking investors have plenty of justification if they do choose to mimic Robert Karr and Wall Street’s bullishness.

For more related coverage, continue reading here:

Karr’s Stake in Google Continues to Grow

This Tiger Cub Added to Joho Capital

These Hedgies Love Veeco

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

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 Click to see monthly returns in table format!

Lists

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

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!