Value Investor Joel Greenblatt’s Small Cap Picks Include GameStop Corp. (GME)

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Joel Greenblatt, the former manager of Gotham Capital, has achieved a more widespread following among investors through his books (including You Can Be A Stock Market Genius) and his “Magic Formula” among other activities (normally this degree of self-promotion worries us, but Greenblatt does actually offer useful lessons). We track Greenblatt’s 13F filings alongside those of hundreds of hedge funds and other notable investors as part of our work developing investment strategies; we have found, for example, that the most popular small cap stocks outperform the S&P 500 by an average of 18 percentage points per year. We attribute this result to large institutional investors such as mutual funds paying less attention to small cap stocks. If small cap stocks are often mispriced, we can scan individual 13Fs for which small caps top managers like so that investors can do further research on any interesting names. Here are Greenblatt’s five largest small cap holdings as of the end of March (or see the full list of his stock picks):

Warner Chilcott Plc (NASDAQ:WCRX), a $4.9 billion market cap pharmaceutical company, was Greenblatt’s top pick with the filing disclosing ownership of 1.4 million shares. The stock’s trailing earnings multiple of 12 makes it an arguable value play, though in the first quarter of 2013 the company recorded a 13% decline in revenue versus a year earlier. Wall Street analysts expect Warner Chilcott to recover- in fact, their consensus forecasts for 2014 show growth in earnings per share, and imply a forward P/E of only 6- but of course analysts are often too optimistic.

GOTHAM ASSET MANAGEMENTGreenblatt slightly increased his stake in GameStop Corp. (NYSE:GME) to a total of about 660,000 shares. GameStop Corp. (NYSE:GME) has more than doubled in price over the last year, even as business has struggled: in its most recent quarter revenue slipped 7% compared to the same period in the previous fiscal year, with earnings falling by over 20%. The most recent data shows that 36% of the float is held short. Cliff Asness’s AQR Capital Management owned almost 4 million shares of GameStop Corp. (NYSE:GME) at the beginning of April (find Asness’s favorite stocks).

According to the 13F, Greenblatt had close to 300,000 shares of $3.3 billion market cap biotech company United Therapeutics Corporation (NASDAQ:UTHR) in his portfolio at the end of the first quarter of this year. United Thereapeutics is another popular short target, with 17% of the float held by short sellers, despite the fact that its trailing and forward P/Es are 12 and 9 respectively. The sell-side predicts decent earnings growth over the next several years and as a result the stock’s five-year PEG ratio is well below 1.

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