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5 Small-cap Stocks Billionaires Are Piling Into

Although they are not always right, billionaire investors did not become wealthy without a sterling track record of stock picking success. We have found that historically, their picks in the small-cap space have done particularly well.

Given that, we decided to create a list of 5 small-cap stocks that billionaires were loading up on in the third quarter, which are Dynegy Inc. (NYSE:DYN), Viavi Solutions Inc (NASDAQ:VIAV), WebMD Health Corp. (NASDAQ:WBMD), Platform Specialty Products Corp (NYSE:PAH), and KLX Inc (NASDAQ:KLXI). Read on for all the details.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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– Number of Billionaire Shareholders (as of September 30): 5
– Total Value of Billionaire Holdings (as of September 30): $256.37 million

According to our database of 64 billionaires, 5 of them were long $256.37 million worth of KLX Inc (NASDAQ:KLXI) shares at the end of September. Bulls are optimistic on the stock due to the perception that the company will benefit from the new aircraft-maintenance cycle (aerospace distribution makes up for almost all of KLX’s bottom-line). If OPEC can get its act together and cut production meaningfully, oil prices could rebound and help KLX’s energy business do well too. Richard Safran of Buckingham Research has a $45 sum-of-parts price target on KLX.

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#4 Platform Specialty Products Corp (NYSE:PAH)

– Number of Billionaire Shareholders (as of September 30): 5
– Total Value of Billionaire Holdings (as of September 30): $600.1 million

Although he is more famous for investing in other stocks, billionaire Bill Ackman‘s Pershing Square was among the five billionaire investors in our system that reported holding stakes in Platform Specialty Products Corp (NYSE:PAH) as of the end of Q3. With a holding of 42.7 million shares at the end of September, Ackman had 6.4% of his 13F portfolio dedicated to the stock. Aleksey Yefremov of Nomura has a ‘Buy’ recommendation and $11 price target on Platform Specialty, citing the stock’s discount valuation and its free cash flow strength.

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On the next page, we’ll check out three more small-caps that billionaire fund managers were piling into during the third quarter.

#3 WebMD Health Corp. (NASDAQ:WBMD)

– Number of Billionaire Shareholders (as of September 30): 6
– Total Value of Billionaire Holdings (as of September 30): $101.84 million

Although Google is showing more health information directly in its search results and the stock has retraced since June on slowing growth concerns, WebMD Health Corp. (NASDAQ:WBMD) shares are still up by 10.9% year-to-date. Traffic to the company’s health network sites brought in 184 million unique users per month in the third quarter, down by 11% year-over-year. Revenue for Q3 rose by 15% year-over-year, however, as management improved targeting. 6 billionaires that we track reported holding stakes in the internet health portal as of the end of the third quarter.

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#2 Viavi Solutions Inc (NASDAQ:VIAV)

– Number of Billionaire Shareholders (as of September 30): 6
– Total Value of Billionaire Holdings (as of September 30): $123.66 million

Six billionaire investors also reported holding stakes in Viavi Solutions Inc (NASDAQ:VIAV) as of the end of September, up from four at the end of June. Shares of the company have rallied by 31.5% year-to-date, aided by a strong fiscal first quarter earnings report in which Viavi beat both top- and bottom-line expectations with EPS of $0.09 on sales of $210.8 million. Rod Hall of JPMorgan believes that spending in testing end markets could strengthen in 2017 and that Viavi could potentially benefit from 3D sensing in smartphones as well. Hall has a $10 price target and an ‘Overweight’ rating on the stock.

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#1 Dynegy Inc. (NYSE:DYN)

– Number of Billionaire Shareholders (as of September 30): 8
– Total Value of Billionaire Holdings (as of September 30): $448.44 million

With 8 billionaire investors holding $448.44 million worth of the equity at the end of Q3, Dynegy Inc. (NYSE:DYN) is the top small-cap stock among the billionaires in our database. Despite (or rather, because of) the fact that it’s down by 33% year-to-date, analyst Devin McDermott of Morgan Stanley views Dynegy’s valuation as compelling given the stock’s long-term fundamentals. In addition, McDermott believes Dynegy’s free cash flow will bounce back in 2018 and 2019 and help reduce the company’s leverage. Given the cheap valuation, McDermott believes Dynegy has optionality in that the stock could be a buyout candidate or the company could participate in some M&A that might unlock value.

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Disclosure: None