Small cap stocks, those with market capitalizations between $1 billion and $5 billion, generally receive less attention from large institutional investors and the financial media. As a result, they should be more likely to be mispriced- either overvalued or undervalued- and in fact we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). Investors can also make use of the theory that hedge funds are likely to identify value in small caps by reviewing their top picks in this area and treating the results similarly to a stock screen, performing further research on any interesting names. Here are five small cap stocks which billionaire Israel Englander’s Millennium Management owned at the end of December (see more stocks that Englander reported owning):
One of the fund’s top picks was Ocwen Financial Corp (NYSE:OCN), which originates and services residential loans (including subprime loans). The stock is up almost 150% in the last year; revenue and earnings have been increasing rapidly, possibly in part because of acquisitions. The sell-side actually thinks Ocwen Financial Corp (NYSE:OCN) is still underpriced, as consensus earnings for 2014 imply a forward P/E of only 7. Of course, the nature of the business does indicate some risk related to the housing market. Billionaire Julian Robertson cut his stake between October and December but Ocwen Financial Corp (NYSE:OCN) was still one of his top picks as well (find Robertson’s favorite stocks).
Englander and his team increased their holdings of SemGroup Corp (NYSE:SEMG) by 53% to a total of 1.2 million shares. SemGroup Corp (NYSE:SEMG) provides gathering systems and transportation pipelines for crude oil, natural gas, and natural gas liquids. Net income has been up but the stock still looks quite expensive in terms of current business conditions and even analyst expectations of continued growth result in a forward earnings multiple of 20. Billionaire Stephen Mandel’s Lone Pine Capital initiated a position of 2.2 million shares in the fourth quarter of 2012 (check out Mandel’s stock picks).