Many large institutional investors such as mutual funds do not consider many small cap stocks for their portfolio due to size or liquidity concerns, and these stocks are often less widely followed by the financial media as well. It is sometimes thought that as a result these stocks are more likely to be mispriced, which is our explanation for why 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). We can also look at the top small cap picks from individual managers and think of them as initial ideas for investors to research further if they so desire. Here are $2.5 billion AUM hedge fund PAR Capital Management’s five largest holdings in stocks with market caps between $1 billion and $5 billion as of the end of December (or see the full list of stocks the fund reported owning):
PAR disclosed a position of 4.1 million shares in Alaska Air Group, Inc. (NYSE:ALK). The stock is up 78% in the last year, rallying along with many other airlines on hopes that industry consolidation will unlock higher prices. Alaska Air trades at 10 times forward earnings estimates; while cheap in absolute terms, that is a bit higher than where we see other airlines and the company reported a decline in net income in the fourth quarter of 2012 versus a year earlier. Renaissance Technologies, whose founder Jim Simons is now a billionaire, owned 4.2 million shares at the end of December (check out Renaissance’s stock picks).
The fund kept its stake in Avis Budget Group Inc. (NASDAQ:CAR) constant through the fourth quarter of 2012 at 7.4 million shares. The car and truck rental business has also been on a tear over the last year, more than doubling in price. Even so, Wall Street analysts are currently calling the stock undervalued with their consensus forecasts implying a forward earnings multiple of 10 and a five-year PEG ratio of 0.4. David Cohen and Harold Levy’s Iridian Asset Management bought 4.5 million shares of Avis Budget Group Inc. (NASDAQ:CAR) in Q4 after not having owned any shares at the end of September (research more stocks Iridian was buying).