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Vivus, Inc. (VVUS) & Other Mind-Blowing Moves: Billionaire Richard Chilton’s Small Cap Picks

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According to our research, the most popular small cap stocks (those with market capitalizations between $1 billion and $5 billion) among hedge funds outperform the S&P 500 by an average of 18 percentage points per year (learn more about imitating small cap picks). We think that this is because small cap stocks are less widely followed by investors, including institutional investors such as mutual funds; when a hedge fund team looks at such a stock, then, it is more likely to find an undervalued name. We can also use our database of 13F filings to see which small cap stocks individual fund managers like. Here are five small cap stocks which billionaire Richard Chilton’s Chilton Investment Company owned at the end of December (or see the full list of the fund’s stock picks):

Chilton more than doubled the size of his position in DineEquity Inc (NYSE:DIN), the restaurant company which owns the Applebee’s and International House of Pancakes brands. DineEquity has converted itself to a franchisor of these restaurants, and now offers a very strong dividend yield of over 4% at current prices after instituting a 75 cent per share quarterly dividend this year. DineEquity Inc (NYSE:DIN) made our list of the most popular restaurant stocks among hedge funds for the fourth quarter of 2012 (find more restaurant stocks hedge funds loved), though we’d note that 10% of the float is held short.

CHILTON INVESTMENT COMPANYSemiconductor manufacturing products company Entegris Inc (NASDAQ:ENTG) was another of Chilton’s small cap picks. Entegris Inc (NASDAQ:ENTG) is quite dependent on broader economic activity, as shown by the fact that the stock’s beta is 2.5 despite a considerable net cash position. The stock trades at 19 times trailing earnings, a level which would generally suggest significant earnings growth, but in its most recent quarter net income was down compared to the same period in the previous year and revenue was up only slightly.

The fund cut its stake in VIVUS, Inc. (NASDAQ:VVUS), a drug developer currently working on a weight loss drug, but still owned 2.6 million shares of the stock at the end of December. Vivus is down 54% in the last year as some in the investing community claim that Arena Pharmaceuticals has developed a superior product, and short sellers are responsible for 25% of the float. Wall Street analysts are expecting VIVUS, Inc. (NASDAQ:VVUS) to be unprofitable both this year and in 2014, and losses per share have been higher than expected the past few quarters.

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