Billionaire Julian Robertson’s Small Cap Picks Include Dunkin Brands Group Inc (DNKN)

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.

The billionaire increased his holdings of Sealed Air Corp (NYSE:SEE), which provides packaging solutions for food and beverage companies as well as general shipping needs (it owns the Bubble Wrap brand, for example) to a total of about 680,000 shares. Sealed Air’s recent revenue numbers have been about flat, and so the forward earnings multiple of 16- and that figure assumes significant increases in earnings per share both this year and next year- seems a bit high for a value stock. Billionaire David Tepper’s Appaloosa Management reported a position of 1.3 million shares of Sealed Air in its own 13F (find Tepper’s favorite stocks).

Ryman Hospitality Properties, Inc. (REIT) (NYSE:RHP) was another of Robertson’s small cap holdings with the filing disclosing ownership of about 350,000 shares. Ryman is a real estate investment trust (it focuses on hotels, convention centers, and Nashville-area attractions), and as such receives favorable tax treatment conditional on distributing a large share of taxable income to shareholders. The current dividend yield is 5.5%, though business has been struggling and it may be forced to cut its dividends. Paulson & Co., the hedge fund managed by billionaire John Paulson (though Paulson has been struggling in recent years) was another major shareholder of Ryman (see Paulson’s stock picks).

Chinese staffing company 51job, Inc. (ADR) (NASDAQ:JOBS) rounds out our list of Robertson’s small cap picks. Last quarter 51job saw its revenues come in about flat compared to the first quarter of 2012, and with margins shrinking the company’s earnings were down 10%. With the stock carrying trailing and forward P/Es of 25 and 18, respectively, we aren’t sure that the business can generate enough growth to justify the current valuation. Platinum Asset Management owned about 710,000 shares at the end of Q1; that fund is managed by billionaire Kerr Neilson (research more stocks Platinum owns).

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