Our evaluation of hedge fund returns have showed that small-cap stocks are a significant source of alpha for many funds. Because small caps receive less media attention, and because they may be ignored by many large investors, they are more likely to be mispriced. We have found that the most popular small cap picks among hedge funds tend to have an alpha of about 120 basis points per month. We put our theory to the test in our August newsletter, listing an investment strategy that proceeded to return 14% in the fourth quarter of 2012 (read more about our hedge fund small cap strategy). We wouldn’t guarantee that kind of results, but we do think that a list of small cap picks can serve as free “suggestions” from top managers that investors can then evaluate on their own. Here are five stocks which billionaire Israel Englander’s Millennium Management (see more of Englander’s stock picks) owned at the end of September and which had market capitalizations between $1 billion and $5 billion at that time:
Millennium increased its stake in Ultra Petroleum Corp. (NYSE:UPL) by 14% to a total of 2.7 million shares. Ultra is a natural gas producer with acreage in Pennsylvania’s Marcellus, Colorado’s D-J Basin, and Wyoming’s Green River basin. Poor market conditions in natural gas have driven the stock price down 28% in the last year, roughly matching the decline in revenues, and Ultra is unprofitable on a trailing basis. Ultra was one of Marathon Asset Management’s top stock picks in the third quarter of 2012 (find more of Marathon’s favorite stocks).
The fund reported a position of about 980,000 shares in Macquarie Infrastructure Company LLC (NYSE:MIC), a $2.3 billion market cap company operating in a variety of businesses including aircraft storage and liquids storage and handling. Macquarie Infrastructure, which pays a high dividend yield, was one of Jamie Zimmerman of Litespeed Management’s favorite stocks (research more stocks Zimmerman likes). Analyst consensus for 2013 has the stock trading at 12 times earnings estimates. Macquarie Infrastructure is up 74% in the last year with little change in sales.
These three stocks have been performing strongly as well: