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Billionaire James Dinan’s Small Cap Picks Include Corrections Corp Of America (CXW)

For some time we have been tracking 13F filings from hedge funds and other notable investors and using this information to develop investment strategies. With the help of backtesting we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 18 percentage points per year. We think that this is because small cap stocks are less widely followed and so are more likely to be mispriced, and so hedge fund research teams are more likely to uncover an undervalued stock when they apply their resources to analyzing the company. One way to use this general finding is to look at top managers’ favorite small cap stocks. Read on for our quick take on the five largest positions in stocks with market caps between $1 billion and $5 billion in billionaire James Dinan’s York Capital Management’s portfolio at the end of December or see the full list of Dinan’s stock picks.

Dinan and his team initiated a position of almost 17 million shares in PetroLogistics LP (NYSE:PDH) between October and December 2012. Petrologistics operates a facility which converts propane into propylene, which is then used as an input by petrochemical companies. Currently the stock pays a high dividend yield going by recent payments, but the stock is down about 20% since becoming publicly traded last May and the company has missed earnings the last couple quarters. Steadfast Capital Management, managed by Robert Pitts, was another major holder of the stock according to that fund’s own 13F.

YORK CAPITAL MANAGEMENTYork was also buying Visteon Corp (NYSE:VC), a $3 billion market cap auto parts company specializing in climate, electronic, and other components; the fund increased its stake by 56% to a total of 1.8 million shares. Visteon is trading at a premium to many other auto related companies, with its forward earnings multiple coming in at 11. We’d also note that the stock is very sensitive to movements in market indices with a beta of 2.3. Billionaire Steve Cohen’s SAC Capital Advisors reported owning 2.5 million shares of Visteon at the end of the fourth quarter of 2012 (find Cohen’s favorite stocks).