The most popular small cap stocks among hedge funds, according to our research tracking 13F filings, 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 with market capitalizations between $1 billion and $5 billion- are often ignored by large institutional investors and in turn by the financial media, making it more likely that they are either overvalued or undervalued. As a result we think it can be useful to see what top managers like in this valuation range. Here are five small cap stocks which billionaire Steve Cohen’s SAC Capital Advisors reported owning at the end of December (or see the full list of stocks the fund reported owning):
SAC increased its stake in Superior Energy Services, Inc. (NYSE:SPN) by 25% during the fourth quarter of 2012, to a total of 7.7 million shares. At a market capitalization of $4 billion, Superior trades at only 10 times its trailing earnings. At that level it barely needs to grow at all in order to be a good value, but analyst expectations are bullish with the forward P/E coming in at 9 and the five-year PEG ratio being only 0.6. Billionaire Ken Griffin’s Citadel Investment Group was also buying Superior, and reported a position of 3.1 million shares in its own 13F (check out Griffin’s stock picks).
Cohen and his team had 2.5 million shares of auto parts company Visteon Corp (NYSE:VC) in their portfolio at the end of December. Visteon Corp (NYSE:VC), which specializes in climate, electronic, and interior components, is highly dependent on the broader economy as shown by the beta of 2.3. While in terms of trailing earnings the stock looks expensive- the trailing P/E is 30- the sell-side is predicting that net income will recover nicely over the next couple years. Value investor Barry Rosenstein’s JANA Partners was another major shareholder in Visteon Corp (NYSE:VC) during Q4 2012 (find Rosenstein’s favorite stocks).