Our analysis of investment strategies related to quarterly 13F filings has found 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). We think that this is because small cap stocks are less widely owned by large institutional investors such as mutual funds and less intensely covered by the financial media and analysts, and therefore are more likely to be either undervalued or overvalued. We also like to go through individual filings to see which small cap stocks top managers like so that investors can perform further research on any interesting names. Read on for our quick take on the five largest small cap positions in value and activist investor Barry Rosenstein’s JANA Partners’s portfolio as of the end of March (or see the full list of the fund’s stock picks from Q1).
JANA reported a position of 6.4 million shares in $4 billion market cap auctioneer of used or damaged cars Copart, Inc. (NASDAQ:CPRT). In its most recent quarter, earnings sunk by 4% compared to the same period in the previous fiscal year despite a double-digit percentage gain on the top line. With the stock valued at 22 times trailing earnings, markets seem to be expecting net income to begin rising in line with sales; Wall Street analysts, however, are not particularly optimistic and so the forward P/E is still fairly high at 18.
Rosenstein and his team increased their stake in Visteon Corp (NYSE:VC), an auto parts company specializing in climate, electronic, and interior components, to a total of 2.3 million shares. The sell-side is a fan of Visteon: while the current valuation prices the company at a trailing P/E of 17, forecasts for 2014 are strong and with earnings growth expected to continue the five-year PEG ratio is 0.6. Revenue has been up a bit, though likely not enough to make Visteon Corp (NYSE:VC) worth buying yet. We’d note that the stock’s beta is 2.3, reflecting a tight connection to the overall economy.
The fund moved heavily into Big Lots, Inc. (NYSE:BIG) between January and March, closing Q1 with 3.8 million shares in its portfolio. The closeout retailer’s stock price is down over 20% in the last year; reports from the company show a similar decline in earnings even though revenue edged up slightly in its fiscal Q1 (which ended in early May) versus a year earlier. The earnings multiples are quite low, however- for example, the trailing P/E is only 11- and at that pricing it might be worth looking into to see if business might stabilize.