We track 13F filings from hedge funds and other notable investors as part of our work researching investment strategies; one of our findings so far has been that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). One way for investors to take advantage of this outperformance- which we attribute to small caps being more likely to be mispriced due to less attention from institutional investors and the financial media- is to review top picks in this valuation range from fund managers and do more research on any interesting names. Read on for our thoughts on billionaire Jeffrey Vinik’s top picks as of the end of December with market capitalizations between $1 billion and $5 billion (or see the full list of stocks Vinik, who manages money for friends and family, reported owning).
Vinik increased his holdings of Packaging Corp of America (NYSE:PKG) by 86% to a total of 1.8 million shares. The company produces containerboard and other packaging materials, and experienced double-digit increases in both revenue and earnings in its last quarterly report compared to the fourth quarter of 2011. Investors are expecting strong growth to continue for the next several years, and the trailing P/E is 27. Billionaire Dan Loeb of Third Point recently announced a large position in peer International Paper Company (NYSE:IP) in a letter to investors, arguing that industry consolidation will benefit the company, and we imagine the same would apply to Packaging Corp. (find Loeb’s favorite stocks).
The filing showed that Vinik more than doubled the size of his stake in AGCO Corporation (NYSE:AGCO), a $5 billion market cap manufacturer of agricultural machinery and equipment. We’ve noticed considerable purchases of AGCO Corporation (NYSE:AGCO) in the last month by a company tied to a member of the Board of Directors; insider purchases are often taken to be bullish signals, and studies provide some support for this (see a history of insider purchases at AGCO Corporation (NYSE:AGCO)). The stock does look like a prospective value play at only 10 times trailing earnings, though many of its peers are trading at similar levels and might make better buys.
According to the 13F, Vinik owned 1.8 million shares of KT Corporation (ADR) (NYSE:KT), a Korean telecommunications company. In the fourth quarter of 2012, revenue fell 10% versus a year earlier and this contributed to earnings coming in 60% lower. Even though the valuation metrics look low, we’d suspect that the picture here is complicated; however, the stock does look cheap enough for the company to be worthy of further research. Arrowstreet Capital was another major shareholder in KT Corporation (ADR) (NYSE:KT) at the end of the fourth quarter of 2012 (check out Arrowstreet’s stock picks).
Avery Dennison Corp (NYSE:AVY) rounds out our list of small cap picks from the former manager of Fidelity’s Magellan Fund. At a market capitalization of $4.3 billion, the business equipment company trades at trailing and forward P/Es of 21 and 15 respectively. Earnings were up strongly in percentage terms in Avery Dennison Corp (NYSE:AVY)’s most recent quarter compared to the same period in the previous year, but revenue growth was only 5%. AQR Capital Management, managed by Cliff Asness, added shares during Q4 and closed 2012 with 1.3 million shares in its portfolio (find more stocks Asness and his team like).
Disclosure: I own no shares of any stocks mentioned in this article.
