NCR Corporation (NCR), Newfield Exploration Co. (NFX): Billionaire Bruce Kovner’s Small Cap Picks

Small cap stocks tend to be less widely followed by institutional investors, which in theory results in them being more likely to be mispriced. When a hedge fund does research on such a company, then, it should be more likely to identify an overvalued (or undervalued) stock. As it turns out, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year. As such we think that investors would be well served to take a brief look at the top small cap picks from fund managers and do more research if they appear to be good values. We have gone through billionaire Bruce Kovner’s Caxton Associates’ most recent 13F filing (from the end of December) and here are the five largest holdings in stocks with market caps between $1 billion and $5 billion (or see the full list of Kovner’s stock picks):

CAXTON ASSOCIATES LP

Caxton owned close to 15 million shares of Synovus Financial Corp. (NYSE:SNV), a $2.1 billion market cap regional bank based in the southern U.S. Synovus currently trades at a moderate discount to the book value of its equity, with a P/B ratio of 0.8. In terms of its earnings the valuation is a bit more challenging: analyst expectations for 2014 imply a forward P/E of 15, which is not particularly attractive compared to larger banks. We’d note that Synovus carries a beta of 2.5, meaning that its stock price is very responsive to broader market indices.

The fund initiated a position of just over 1 million shares in Newfield Exploration Co. (NYSE:NFX) between October and December of last year. The oil and gas exploration and production company’s stock price is down 38% in the last year, and in fact in the fourth quarter of 2012 revenue declined versus a year earlier as Newfield Exploration Co. (NYSE:NFX) missed earnings expectations. The Street expects the company to recover, and as a result the forward earnings multiple is only 9, but it’s possible that their forecast is too optimistic and we think that we would avoid the stock.

Kovner and his team moved heavily into NCR Corporation (NYE:NCR) during the quarter. Formerly known as National Cash Register, NCR Corporation (NYE:NCR) manufactures self-service kiosks (including ATMs) as well as point of sale machines. It’s another stock dependent on future earnings growth: consensus earnings estimates result in a forward P/E of 9 and a five-year PEG ratio of 0.7, though the valuation in terms of trailing earnings is not that attractive. Billionaire David Einhorn’s Greenlight Capital reported owning over 10 million shares at the beginning of January (find Einhorn’s favorite stocks).

The filing showed that Caxton increased its stake in Saks Inc (NYSE:SKS) by 63% to a total of 1.5 million shares. The retailer is priced for growth with trailing and forward P/Es of 28 and 22, respectively; however, recent financial results have not look particularly strong as in the fourth quarter of Saks’s fiscal year (which ended in early February) sales grew only 6% compared to the same period in the previous fiscal year and earnings were down. The most recent data shows that 27% of the outstanding shares are held short.

The St. Joe Company (NYSE:JOE) rounds out our list of Kovner’s small cap picks, with the 13F showing about 410,000 shares in his portfolio. St. Joe is a $1.8 billion market cap developer of residential, commercial, and resort real estate in Florida. It’s another popular short target, with short sellers accounting for 41% of the float. St. Joe has been showing low profitability, and though revenue has been up the valuation does look challenging to us.

We don’t like St. Joe or Saks based on valuation, and in fact Saks could be a potential short as a hedge against cheaper retailers if the cost to borrow was not too high. Newfield Exploration Co. (NYSE:NFX) has a low forward P/E but we think the stock is speculative at this time. If we were to look at one of these stocks on value terms it would be NCR Corporation (NYE:NCR), and even there we would probably try to determine how well the company would have to do in the near future and then wait to see how its next quarterly report turned out.

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