Hedge funds’ small cap stock picks can be sources of alpha, even when working off of the fairly old information from 13F filings. We have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year, and our live testing of this strategy which began in September 2012 has since returned 38%. Read more about imitating hedge funds’ small cap picks. Our explanation for this result is that small caps are more likely to be undervalued- or overvalued- because of less attention from mutual funds and other large institutional investors, making it more likely that hedge fund research teams will identify a good value. We can also examine individual funds’ filings as a source of initial small cap investment ideas. Read on for the five largest small cap holdings from billionaire Jim Simons’s Renaissance Technologies as of the end of March or review Renaissance’s stock picks over time.
The 13F showed the fund with 4.5 million shares of Alaska Air Group, Inc. (NYSE:ALK) at the end of the first quarter of 2013. Alaska Air Group, Inc. (NYSE:ALK) experienced a 9% increase in revenue in its most recent quarter compared to the same period in the previous year, but with net margins shrinking the company’s net income actually declined by 10% over the same time frame. While the earnings multiples are low, the same is the case for the airline industry as a whole so there’d have to be something particular to the geographic focus to make Alaska Air Group, Inc. (NYSE:ALK) a buy.
Renaissance was buying Domino’s Pizza, Inc. (NYSE:DPZ) during Q1, with a total of 2.5 million shares in its portfolio. Unlike airlines, quick service restaurants are receiving large earnings multiples in the current market environment and Domino’s Pizza, Inc. (NYSE:DPZ) is no exception with trailing and forward P/Es of 28 and 22 respectively. This follows a near doubling in the stock price over the last year, while earnings have surged in percentage terms as well. Unless high growth continues for the next few quarters, Domino’s Pizza, Inc. (NYSE:DPZ) actually looks to us like it might be overvalued. Billionaire Ken Fisher’s Fisher Asset Management reported a position of 2.2 million shares (find Fisher’s favorite stocks).
The investment team disclosed ownership of 3.5 million shares of Western Refining, Inc. (NYSE:WNR), an oil and gas refining and marketing company with a focus on the southwestern U.S. The business is expected to see a decline in earnings over the next couple of years, and revenue was in fact down 7% last quarter compared to the first quarter of 2012. That decline is apparently expected to continue: even with a valuation equal to only 9 times forward earnings estimates, 31% of the outstanding shares of Western Refining, Inc. (NYSE:WNR) are held short per the most recent data.