We have come to realize that the most popular small-cap picks ($1 billion – $5 billion market cap) amongst hedge funds have historically outperformed the wider market by 18 percentage points. Thus, looking into hedge fund holdings can provide us with great invesotment ideas. In this article we will look into David Einhorn’s Greenlight Capital’s top small-cap picks, for you to decide if any of them are worthy of your consideration as investments.
Mr. Einhorn seems to love small-cap companies. Amongst his 20 most valuable long equity positions, 6 are placed at companies with market caps below $4 billion. The fund’s biggest small-cap bet is the on the Oil States International, Inc. (NYSE:OIS), a $3.35 billion market cap worldwide provider of specialty products and services to oil and gas drilling and production companies. Although Greenlight Capital’s position in Oil States International, Inc. (NYSE:OIS) remained unchanged over the last reported quarter, a series of stock sales that Barry Rosenstein’s Jana Partners made over June have transformed Mr. Einhorn’s fund in the largest hedge fund shareholder of Oil States International, Inc. (NYSE:OIS) –amongst the 700 funds that we track. Its 2.75 million shares are worth more than $270 million, and account for roughly 4% of its total equity portfolio’s value. Following the June disposals, Jana Partners owns 2.6 million shares, down from the 6.1 million shares held by the end of Q1.
Second in this list is CONN’S, Inc. (NASDAQ:CONN), a $1.8 billion market cap specialty retailer of branded consumer durable goods, and a provider of consumer credit, oriented at supporting its customers’ purchases. As reported in late April, this was a newcomer to Mr. Einhorn’s portfolio in Q1. In his 2014 Q1 Investor Letter, the hedge fund manager stated:
“CONN’S, Inc. (NASDAQ:CONN) is a specialty retailer of appliances, furniture, mattresses and electronics with 79 locations in Texas and the Southwest. CONN finances 77% of customer purchases through its proprietary subprime credit portfolio. In February, the company announced 33% comparable store sales growth in Q4 with strong gross margins. However, it also announced increased credit losses and reduced earnings guidance from a range of $3.80-$4.00 to a range of $3.40-$3.70 for calendar 2014. Given the market’s past experience with deterioration in subprime credit, the stock reaction was severe: The price fell from $79 at the start of the year to $32 on the news. We believe that this is a retailer with 15-20% unit growth and current double digit comparable store sales growth, and that the market overreacted to moderately bad news. We acquired shares at an average price of $35.49 and they ended the quarter at $38.85.”
Greenlight Capital last declared owning 3.3 million shares, worth more than $128 million. In addition, Christian Leone’s Luxor Capital Group holds 3.499 million shares, which account for more than 2.5% of its total equity portfolio. CONN’S, Inc. (NASDAQ:CONN) is also a newcomer at Luxor Capital’s equity portfolio.
Babcock & Wilcox Co (NYSE:BWC) is a $3.6 billion market cap technology innovator in power generation systems, a specialty manufacturer of nuclear components and a service provider, of which Greenlight Capital owns 3.829 million shares, worth more than $127 million by the end of Q1. While the fund slightly decreased its stake in Babcock & Wilcox Co (NYSE:BWC) over the last reported quarter, Clifton S. Robbins’ Blue Harbour Group almost quintupled its bets over the period, and continued to buy its stock in Q2. The fund last declared ownership of 6.62 million shares of Babcock & Wilcox Co (NYSE:BWC), a 6.0% -activist- stake.
Next is McDermott International (NYSE:MDR), a $1.9 billion market cap engineering, procurement, construction and installation company, engaged on designing and executing complex offshore oil and gas projects. After almost doubling his stakes over Q1, Mr. Einhorn is the largest hedge fund shareholder of record at the company. His 14.04 million shares, worth more than $109 million, account for more than 1.6% of his total equity portfolio. The second largest hedge fund investor of McDermott International (NYSE:MDR) trails Greenlight from far behind. We’re talking about Mark Mcgoldrick and Jason Maynard’s Mount Kellett Capital Management, which started a position over Q1 and now owns 4.497 million shares of McDermott International (NYSE:MDR).
Finally, there’s Take Two Interactive Software Inc. (NASDAQ:TTWO), a $2.2 billion market cap developer, marketer and publisher of interactive entertainment for consumers, responsible for hit game sagas like Grand Theft Auto. Once again, Greenlight Capital is the largest hedge fund shareholder of Take Two Interactive Software Inc. (NASDAQ:TTWO), with 4.8 million shares -after a 15% increase in its stake over Q1, the fund’s position is worth more than $105 million. Another prominent investor betting on this company is Ken Griffin (Citadel Investment Group), who recently more than doubled his exposure to the gaming company, and last declared owning 3.895 million shares of Take Two Interactive Software Inc. (NASDAQ:TTWO).
Disclosure: Javier Hasse holds no position in any stocks mentioned