This Tiger Cub’s Under-the-Radar Stock Picks Include Electronic Arts Inc. (EA)

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Generally speaking, small-cap stocks don’t receive as much coverage from analysts and the media, which often leaves them less efficiently priced than their larger peers. Hedge funds, meanwhile, choose to take advantage of this by dedicating their research teams to work on the small-cap space, generating a significant portion of their alpha in the process.

Electronic Arts Inc. (NASDAQ:EA)

In fact, retail investors can use hedge funds’ top small-caps as a market-beating strategy. At Insider Monkey, we’ve determined that the most popular small-cap stocks among hedge funds can earn about 120 basis points of alpha 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 hedge fund small cap strategy).

Keeping this in mind, we’re going to take a look at one fund in particular: Kris Kristynik’s Longhorn Capital. Kristynik is a member of the famed “Tiger Cub” club, and manages a relatively small 10-stock equity portfolio (see all of Kristynik’s holdings here), two of which are small-cap stocks. In the spirit of our market-beating strategy, we’ll discuss them here. Each had a market capitalization between $1 billion and $5 billion at the end of the third quarter.

According to Kristynik’s latest 13F filing with the SEC, Cash America International, Inc. (NYSE:CSH) is the hedge fund manager’s top small-cap holding, sitting at the No. 8 spot in his overall portfolio. Cash America has been a great investment over the past six months, up close to 30%, and momentum has been rather strong since the start of the New Year.

The company offers pawn and payday advance loans, and has seen annual revenue (14.3%) and earnings (16.3%) growth soar over the past three years, and has reported better-than-expected bottom line results in two consecutive quarters. In its latest Q4 FY2012 financials, which were reported last week, Cash America’s adjusted EPS of $1.29 beat Wall Street’s consensus by 11 cents per share. More importantly, loan demand—particularly for online loans—was a key factor behind this positive surprise.

From a valuation standpoint, shares of Cash America don’t look quite as attractive in comparison to key peer EZCORP Inc (NASDAQ:EZPW), but growth prospects sway slightly in favor of Cash America. EZCorp, which has operations in the United States and Mexico, generates about half of the revenue that Cash America does, and has historically experienced quicker EPS growth. Over the past half-decade, EZCorp has seen its bottom line expand by an average of 26.3% a year, far above Cash America’s 16.3% annual growth rate.

Over the next five years, however, analysts predict both companies’ yearly EPS growth to fall in the 15% range, meaning that EZCorp investors have to worry about a much larger falloff, logically speaking.

What else should investors pay attention to?

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Insider Monkey Small Cap Strategy
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