Fund analysts are routinely sifting through the less popular, smaller cap stocks that stay out of the public eye, hoping to find arbitrage in these less-efficiently priced securities. When they succeed, they can uncover huge percentage gainers that fit under the sub-$5 billion market cap area. We have done our own analysis of many of the top funds’ largest small-cap holdings to compile a list that has proven to generate substantial alpha and beat major market indices.
We started publishing a quarterly newsletter at the end of August last year to share the stock picks of this strategy. Since then, this method has returned 25.4% vs. 7.4% for the S&P 500 (learn more about our hedge fund small cap strategy here).
We’ve searched through Markel Gayner Asset Management’s holdings listed in their 13F to determine which small caps Tom Gayner possesses the most conviction for; read below for the full list.
Gayner’s most substantial small-cap holding can be found in W.P. Carey Inc. REIT (NYSE:WPC), of which he owns roughly $47 million worth. WPC is a Real Estate Investment Trust, primarily investing in commercial properties within the States and abroad. The stock was a big winner this past year, garnering investors with a 30% gain in share price, in addition to paying a 4.7% dividend. While past performance has been impressive, future valuations put this stock at parity with current prices, representing an even representation of value and little room for growth. Billionaire Jim Simons of Renaissance Technology has a position in WPC, albeit a small one (read about more of his small-cap holdings here).
Federated Investors Inc (NYSE:FII) is another of Gayner’s more dedicated small-cap holdings, with over 2 million shares purchased of the financial service provider. 2012 saw a choppy trading range for FII, although they ended the year on a high note, jumping up a third in value (mostly attributed to first-quarter stock performance). This year could be a tricky one for FII, as government regulations and low interest rate environments could hurt their core money market strategies, which are already low-margin to begin with. SAC Capital Advisors, headed by Steve Cohen, has built a position as well.
Gayner’s next largest position with a market cap between $1 billion and $5 billion can be found in insurance underwriter RLI Corp. (NYSE:RLI). The stock saw positive revenue growth from Q4 2011 to Q4 2012, which included a $0.45 surprise over analysts’ estimates, helping to prop up their stock price by 5% since the start of this year. However, this pop in price might mean that RLI is overvalued, especially if earnings return to numbers that were more in-line with the rest of 2012’s reports. Forward price relative to earnings confirms this, so we would hold off on RLI for the time being. Chuck Royce of Royce & Associates saw fit to drop 35% of his position between his last two reported 13F filings.
Who's the best of the rest?