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We have found, by analyzing our database of 13F filings from hedge funds and other notable investors, that the most popular small cap stocks among the filers we track earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). We think that this is because small cap stocks (which we define as those which have market capitalizations between $1 billion and $5 billion) receive less attention on average from large institutional investors and the financial media and so are more likely to be undervalued (or overvalued). Investors can treat top small cap picks as a list of initial ideas which can be researched further, similar to how stock screens are often used. Read on for five small cap stocks which William Gray’s Orbis Investment Management owned at the beginning of 2013 (or see the full list of stocks the fund reported owning). Inc (NASDAQ:SOHU)

Orbis disclosed ownership of 7.6 million shares of Inc (NASDAQ:SOHU), a Chinese Web portal. While many Chinese stocks are trading at low multiples as a result of accounting issues at some companies and investor uncertainty over the macro situation, Inc (NASDAQ:SOHU) is valued at 25 times its trailing earnings. While revenue numbers have been strong recently, earnings actually decreased in Q4 2012 versus a year earlier. Billionaire Kerr Neilson’s Platinum Asset Management had 2.3 million shares in its portfolio at the end of December according to that fund’s own 13F (find Neilson’s favorite stocks).

Gray and his team cut their stake in Mindray Medical International Ltd (ADR) (NYSE:MR) by 16% but still owned 6.1 million shares. Mindray Medical International Ltd (ADR) (NYSE:MR) is another Chinese company, developing and manufacturing medical devices and diagnostic products. It reported growth of close to 20% in both revenue and earnings in its last quarterly report compared to the fourth quarter of 2011, though the market is already pricing in expectations of high growth with a trailing P/E of 26. Eton Park Capital, managed by Eric Mindich (who was the youngest partner in Goldman Sachs’s history during his time at that firm), kept their holdings constant during the fourth quarter at 2.3 million shares.

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