In most cases, small cap stocks (which we define as those with market caps between $1 billion and $5 billion) receive less attention from large institutional investors such as mutual funds. It’s sometimes suggested that this means that stocks in this range are more likely to be mispriced, and our analysis of 13F filings shows that the most popular small cap stocks among hedge funds earn an average excess return f 18 percentage points per year (learn more about our small cap strategy) as their research teams capitalize on the lack of focus on these names. We like to look through small cap picks from top managers so that investors can identify stocks which look interesting and do further research on them. Read on for our quick take on the five largest small cap positions in billionaire Julian Robertson’s portfolio as of the end of March (or see the full list of stocks he reported owning).
The legendary founder of Tiger Management’s top pick in this category was Dunkin Brands Group Inc (NASDAQ:DNKN). The quick service restaurant company- which owns Baskin Robbins in addition to Dunkin Donuts- is in an expansion phase, and with investors optimistic on its prospects the stock is valued at 23 times forward earnings estimates; in addition, markets are generally offering premium valuations to quick service restaurants. However, recent financial results at Dunkin Brands have been mixed. “Tiger Cub” Rob Citrone’s Discovery Capital Management had 1.3 million shares of Dunkin in its portfolio at the beginning of April.
Robertson owned a little over 1 million shares of Wuxi PharmaTech (Cayman) Inc. (ADR) (NYSE:WX) according to the filing. At a market cap of $1.4 billion, the medical laboratory services company is valued at 17 times its trailing earnings. In the first quarter of 2013, Wuxi experienced 12% revenue growth versus a year earlier though improvements on the bottom line were much more modest- specifically, net income was up only 3%. We think that we’d want to see higher earnings growth at the company’s current valuation in order to consider it as a potential “growth at a reasonable price” play.