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Billionaire Dan Loeb’s Small Cap Stock Picks Include Herbalife Ltd. (HLF)

Our work developing investment strategies has found that on average the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (read more about our small cap strategy). Investors can also use the general concept of hedge funds identifying value in small caps- on the grounds that these stocks receive less attention from the financial media and large institutional investors, and so are more likely to be mispriced- to see which small cap stocks top managers like. Read on for our quick take on billionaire Dan Loeb’s Third Point’s five largest positions as of the end of December in stocks with market capitalizations between $1 billion and $5 billion or compare them to previous filings.

The fund’s top pick in this range of market capitalization was Herbalife Ltd. (NYSE:HLF), with Third Point initiating a position of 3.1 million shares between October and December. Billionaire Bill Ackman of Pershing Square (see Pershing Square’s stock picks) argued late last year that Herbalife Ltd.
(NYSE:HLF) is a pyramid scheme, and that the stock will go to zero, but a number of other players- including Loeb apparently- took advantage of the resulting decline to buy shares. Herbalife Ltd.
(NYSE:HLF) currently trades at 9 times its trailing earnings and pays a dividend yield of over 3%, though short interest from Ackman and others remains high.

Dan Loeb Third PointLoeb cut his stake in WESCO International, Inc. (NYSE:WCC) by 21% but still owned close to 1.4 million shares at the end of 2012. WESCO is a $3.1 billion market cap distributor of electrical and industrial equipment. Given that line of business, it’s unsurprising that the stock has a beta of 2.1. Analyst expectations are for high earnings growth over the next several years, as while the company is valued at a trailing P/E of 18 the five-year PEG ratio is only 0.7. Alan Fournier’s Pennant Capital Management reported a position of 2.2 million shares in its portfolio (find Fournier’s favorite stocks).

Hillshire Brands Co  (NYSE:HSH) was another of Third Point’s picks as of the end of December with the 13F disclosing ownership of 2.7 million shares. The food company, which is best known for its variety of meat products, trades at 19 times forward earnings estimates. This level is line with many other food companies, but generally seems a bit high for a stable consumer stock with little chance of rapid earnings growth. Paulson & Co., managed by billionaire John Paulson, was buying Hillshire in the fourth quarter and closed December with a total of over 5 million shares (research more stocks Paulson was buying).

According to the filing, Loeb and his team bought 3 million shares of lumber products company Louisiana-Pacific Corporation (NYSE:LPX) after not having owned any shares at the end of September. Building products have quite a bit of upside if housing activity increases, and the stock has more than doubled in the last year. In the fourth quarter of 2012 revenue rose 47% versus a year earlier, though the current valuation already assumes significant improvements in earnings in the medium term. Impala Asset Management was another major shareholder of Louisiana Pacific according to that fund’s 13F.

Third Point owned 2.1 million shares of Foster Wheeler AG (NASDAQ:FWLT), an engineering and construction company serving energy companies and utilities. In its most recent quarterly report revenue was down 35% compared to the fourth quarter of 2011, with net income down to an even greater extent. The sell-side does expect Foster Wheeler to recover, with consensus implying a forward P/E of 11 and a five-year PEG ratio of 0.8, but we are skeptical. Billionaire Steve Cohen’s SAC Capital Advisors increased its stake in Foster Wheeler by 28% in Q4 to 3.8 million shares (check out more stocks SAC owns).

Disclosure: I own no shares of any stocks mentioned in this article.

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