In this article, we present the list of billionaire Ray Dalio’s top 10 small-cap stock picks.
Billionaire Ray Dalio is the co-chief investment officer of Bridgewater Associates, the world’s largest hedge fund. Dalio has served in that role since 1985 and is credited with creating the unique culture of transparency and self-analysis that is partly credited for the firm’s sustained and ongoing success over the decades.
That’s not to say it’s been an easy run of late for the fund. While its flagship Pure Alpha fund has averaged 10.5% returns since 1991, it’s nonetheless struggled over the past decade, posting a meager 1.6% annualized return. 2020 was a particularly disappointing one for Bridgewater, as Pure Alpha lost 12.6% even as the hedge fund industry as a whole posted big gains.
Sliding returns and a revolving door of executives joining and leaving the firm in recent years have allowed critics to contend that the company’s culture may have spiraled out of control, or that Dalio has simply lost his mojo. Nonetheless, Dalio is the most successful hedge fund manager of all time as of the end of 2020 according to LCH Investments, posting net gains of $46.5 billion. And Bridgewater also closed out 2021 with a bang, returning 7.8% in December to lift its 2021 returns to 8.14%.
Bridgewater’s mammoth $17.2 billion 13F portfolio is dominated by large-cap stocks like PepsiCo, Inc. (NYSE:PEP), Alibaba Group Holding Limited (NYSE:BABA), and McDonald’s Corporation (NYSE:MCD), all of which rank among the Top 10 Stock Picks of Billionaire Ray Dalio. However, the fund has also shown great conviction in several small-cap stocks, with clothing, food, and education stocks ranking among the favorite small-cap picks of Dalio’s firm.
In this article, we’ll take a look at the ten small-cap stocks that Bridgewater Associates likes the most as of December 31, 2021.
Our Methodology
We follow hedge funds like Bridgewater Associates because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns.
The following list is ranked according to the amount of money Bridgewater Associates has invested in companies that had a market cap of less than $5 billion as of February 25, 2022 according to the fund’s latest 13F filing for the Q4 2021 reporting period.
All hedge fund data is based on the exclusive group of 900+ funds tracked by Insider Monkey that filed 13Fs for the Q4 2021 reporting period.
Billionaire Ray Dalio’s Top 10 Small-Cap Stock Picks
10. Freshpet, Inc. (NASDAQ:FRPT)
Value of Bridgewater Associates’ 13F Position: $8.00 million
Number of Hedge Fund Shareholders: 26
Ray Dalio’s Bridgewater Associates owns 83,999 shares of Freshpet Inc (NASDAQ:FRPT) as of December 31, ranking the pet food supplier as the tenth-largest small-cap holding in its 13F portfolio. Bridgewater was one of 26 funds long FRPT, up by two quarter-over-quarter.
Freshpet Inc shares had a remarkable run between January 2018 and April 2021, gaining nearly 900%, but have fallen by nearly 50% since then. The pandemic proved to be a big boost for the company as pet ownership soared, but supply chain issues have been a drag on its productivity in recent months, leading to the company downgrading its 2022 guidance in December.
Nonetheless, Freshpet Inc remains the industry leader in refrigerated pet food and has plenty of markets left to penetrate. While his position in Freshpet may not be nearly as large as the ones he has in PepsiCo, Inc., Alibaba Group Holding Limited, and McDonald’s Corporation, Ray Dalio clearly believes in the company’s growth trajectory despite a rocky fourth quarter.
9. The Hain Celestial Group, Inc. (NASDAQ:HAIN)
Value of Bridgewater Associates’ 13F Position: $8.09 million
Number of Hedge Fund Shareholders: 26
There were an equal number of The Hain Celestial Group, Inc. (NASDAQ:HAIN) hedge fund shareholders as Freshpet, and that figure also inched up by two during Q4. Dalio boosted his stake in the supplier of organic food and personal products by 12% during Q4, lifting it to 189,810 shares.
The Hain Celestial Group, Inc. is also dealing with supply chain issues and has had to likewise lower some of its previous guidance in recent weeks, anticipating flat adjusted EBITDA growth in its fiscal year 2022 compared to previous guidance of mid-to-high single-digit growth.
One of the 12 Healthy and Sustainable Food Stocks to Buy, The Hain Celestial Group, Inc. is an intriguing organic and natural foods pure-play in an industry that’s expected to grow by at least 6% annually through 2025. Organic and healthy food sales rose by 27% in the U.S in 2020.
8. Herbalife Nutrition Ltd. (NYSE:HLF)
Value of Bridgewater Associates’ 13F Position: $8.33 million
Number of Hedge Fund Shareholders: 37
Herbalife Nutrition Ltd. (NYSE:HLF) is another health-focused small-cap company that Ray Dalio likes, owning 203,508 shares of it on December 31, a 17% increase quarter-over-quarter. It also ranks as one of the most popular small-cap stocks among hedge funds, with 37 long HFL shares at the end of 2021.
Herbalife Nutrition Ltd. has performed well during the pandemic despite the apparent issues the company’s distributors would have with social distancing and lockdown orders. In place of in-person selling, sales moved online and helped provide a social outlet for those looking to improve their health at the same time.
Bronte Capital, which owned 2.76 million shares of Herbalife Nutrition Ltd. on December 31, ranking it as the fund’s third-largest equity position, discussed why Herbalife’s personalized sales channels worked so well during the pandemic in its Q3 2021 investor letter:
“Herbalife is – as we have discussed many times before – a multi-level marketing scheme selling weight-loss shakes. The idea is simple. If I replaced six meals a week with low-calorie protein shakes and I walked an extra 15km a week I would quickly lose 15-20kgs. It would be good for me. It is also well-nigh impossible to do.
One solution is to hire a personal trainer (usually of the opposite sex) and have them nag you. You will do tough stuff for an attractive member of the opposite sex. More realistically you could just have your friends nag you. And that is why this works so well as a multi-level marketing scheme. The person who sells you the shakes has an incentive to keep you on the diet.
We have looked at many distributors and we see a weight-loss program – implemented for (literally) millions of people – which works about as well as any weight-loss health program that ever existed. That still means it fails most of the time – but it works enough that we can be proud of owning this stock and the health benefits it provides. Herbalife, it turns out, grew well during COVID. This was initially a surprise to us – as we thought Herbalife depended on the personal touch to make the sale. But, instead, weight loss and associated social clubs moved online – and – in many cases were the main social outlet the customers had.”
7. New Oriental Education & Technology Group Inc. (NYSE:EDU)
Value of Bridgewater Associates’ 13F Position: $8.75 million
Number of Hedge Fund Shareholders: 31
Dalio’s Bridgewater Associates was one of 31 hedge funds long New Oriental Education & Technology Group Inc. on December 31, owning 4.17 million shares after hiking the size of its position by 24% during Q4.
Bridgewater has held fast to its stake in New Oriental Education & Technology Group Inc., which it first built in mid-2018, even as other hedge funds have been fleeing the stock amid sweeping changes to China’s for-profit, after-school education sector last summer which decimated the company’s revenue by 80% and forced it to slash 60,000 workers. New Oriental Education & Technology Group Inc. is down by 93% over the last year.
Polen Capital’s Polen International Growth was one of the funds that abandoned its New Oriental Education & Technology Group Inc. position in recent quarters, explaining its decision to do so in its Q3 2021 investor letter:
“The quarter’s leading detractors were Chinese companies that were impacted by the CCP’s regulatory crackdown and liquidity concerns at property developer Evergrande. New Oriental Education—the largest provider of private educational services in China—moved sharply lower in July after policymakers implemented new rules which effectively turned Chinese tutoring companies into non-profits. Looking at New Oriental Education, we closed our position as soon as government policy became clear and used the proceeds to allocate to existing holdings.”
6. I-Mab (NASDAQ:IMAB)
Value of Bridgewater Associates’ 13F Position: $8.80 million
Number of Hedge Fund Shareholders: 19
Closing out the first half of the list is Chinese biotech company I-Mab (NASDAQ:IMAB), which Dalio’s hedge fund owned 185,614 shares of December 31, up 27% from a quarter earlier. Hedge fund ownership of IMAB increased more than five-fold during the second half of 2020 as the company began making promising gains in its pipeline.
I-Mab has several late-stage assets in its pipeline, including felzartamab for multiple myeloma, the long-lasting growth hormone TJ101, TJ107, lemzoparlimab in combination with rituximab for non-Hodgkin’s lymphoma, and uliledlimab. In addition, the company is developing an innovative second wave of treatments that will utilize novel differentiated bi-specific antibodies.
I-Mab has been building up its manufacturing capacity in China and announced in November that it will build an R&D facility in San Diego. While it may not have the cachet of PepsiCo, Inc., Alibaba Group Holding Limited, or McDonald’s Corporation, I-Mab is one of several small-cap Chinese stocks Dalio likes that could deliver exceptional returns in the coming years. See his top Chinese small-cap pick in the second half of this article.
5. Papa John’s International, Inc. (NASDAQ:PZZA)
Value of Bridgewater Associates’ 13F Position: $9.20 million
Number of Hedge Fund Shareholders: 36
Ray Dalio’s Bridgewater Associates has been a shareholder of Papa John’s International, Inc. (NASDAQ:PZZA) since Q2 of 2021 and hiked its stake by another 11% in Q4 to 68,900 shares. The pizza chain is one of the more popular small-cap stocks among hedge funds, is owned by 36 of them at the end of 2021.
One of the 11 Best Delivery Stocks To Buy Now, Papa John’s International, Inc. grew same-store sales by 11% in North America during Q4, hitting $528.9 million in revenue. That showing came on the heels of a strong Q3 in which systemwide sales also rose by 11%, two-year comps pushed near 30%, and adjusted EPS more than doubled. Papa John’s expects to grow sales again in Q1 despite a tough comp, as it’s coming up against its popular epic stuffed crust pizza launch of a year earlier.
Artisan Partners’ Artisan Small Cap Fund believes the international expansion will continue to drive attractive and sustainable profits for the company, having this to say about Papa John’s International, Inc. in its Q3 2021 investor letter:
“Papa John’s is a global operator and franchisor of pizza delivery and carryout restaurants. The company is tracking nicely against our turnaround thesis which hinges upon an improvement in store-level economics leading to accelerating growth in restaurant development activity. Improved store-level economics is being driven in part by market share gains resulting from menu innovation. New menu items—parmesan crusted Papadias, Epic Stuffed Crust, Shaq-a-roni— coupled with enhancements to the digital/loyalty platform and supportive advertising are attracting new customers to the brand, increasing frequency of its existing customers and driving higher unit volumes and returns. As a result, the company is experiencing incremental interest from new and existing franchisees to develop new restaurants. Papa John’s opened a record 123 units in the first half of 2021 and now expects to open 220-260 new stores this year (vs. 140-180 previously)—most of which are outside of the US. Combined with ample white space globally, we believe a higher unit growth trajectory will drive an attractive and sustainable profit cycle.”
4. Chegg, Inc. (NYSE:CHGG)
Value of Bridgewater Associates’ 13F Position: $9.62 million
Number of Hedge Fund Shareholders: 44
Chegg, Inc. (NYSE:CHGG) is another education-related small-cap stock in the 13F portfolio of Bridgewater. The fund held 313,402 shares at the end of 2021, a 13% increase quarter-over-quarter. 44 funds are long Chegg as of December 31, up from 35 a year earlier.
As with many other growth stocks, Chegg, Inc. shares have been battered recently, being down by 69% over the last year, and there are some concerns about its long-term growth. Chegg has 6.2 million services subscribers as of the end of 2021, which represents 36% of the entire undergraduate and graduate student market in the U.S.
Chegg, Inc. is making efforts to grow internationally, where it has just 1.5 million subscribers, as well as hunting out synergistic growth opportunities like its recent acquisition of language learning company Busuu, which could pair well with college students who are eager to learn new things and broaden their horizons.
3. The Boston Beer Company, Inc. (NYSE:SAM)
Value of Bridgewater Associates’ 13F Position: $10.13 million
Number of Hedge Fund Shareholders: 32
Hedge fund ownership of The Boston Beer Company, Inc. (NYSE:SAM) rebounded by 60% in Q4 after sliding by more than 50% during Q3. Bridgewater has been a shareholder of the company since Q3 2020 and owned 20,060 SAM shares on December 31.
One of the 15 Most Valuable Beer Companies in the World, The Boston Beer Company, Inc. is another small-cap growth stock that’s been hit hard in the last year, with shares tumbling by 63%. The company was forced to slash its full-year guidance recently due to waning demand for its hard seltzer beverages, the potential for which had the market all excited just a year earlier.
Those oversupply issues are temporary but nonetheless took a big bite out of The Boston Beer Company, Inc.’s 2021 earnings. While growth in the hard seltzer category has slowed ahead of schedule, Boston Beer has several other innovative drinks in the offing that could provide a boost in the future, most notably cannabis drinks.
2. Helen of Troy Limited (NASDAQ:HELE)
Value of Bridgewater Associates’ 13F Position: $12.33 million
Number of Hedge Fund Shareholders: 16
Ray Dalio’s hedge fund owned 50,032 shares of Helen of Troy Limited (NASDAQ:HELE) at the end of December, a 7% increase quarter-over-quarter. He’s maintained his HELE holding throughout 2021 even as 43% of the stock’s former hedge fund shareholders have jumped ship since Q1.
Helen of Troy Limited grew sales by 37.1% and adjusted earnings by 21.1% during its fiscal Q3 2022 despite tough comps, supply chain issues, and growing inflation. All three of the company’s segments exceeded management’s expectations during the quarter, which was attributed to its strong and diversified portfolio of brands.
Importantly, Helen of Troy Limited has also largely overcome the issues it was having with the EPA in terms of some of its product packaging and labeling, which temporarily hit both its top and bottom lines.
1. Zai Lab Limited (NASDAQ:ZLAB)
Value of Bridgewater Associates’ 13F Position: $12.33 million
Number of Hedge Fund Shareholders: 32
Topping the list of Ray Dalio’s top small-cap stock picks is another Chinese pharmaceutical company, Zai Lab Limited (NASDAQ:ZLAB). Bridgewater Associates was one of the 32 hedge funds long ZLAB on December 31, owning 196,144 shares, a 23% increase from the previous quarter.
Zai Lab Limited shares are down 62% over the last year, which has some analysts saying there’s an extreme value disconnect in the stock right now. Several analysts, including Citi’s Yigal Nochomovitz, have price targets that are 2x-5x higher than the stock’s current levels.
The recent weakness has partly been attributed to misinformation being spread across media outlets concerning how Congress’ H. R. 1155 bill regarding a ban on imported goods from China’s Xinjiang region that utilized forced labor, would impact the company. Zai Lab does not believe the bill will impact it in any way.
ClearBridge Investments is another big fan of Zai Lab Limited, which ranked as the ClearBridge International Growth EAFE Strategy’s only Chinese stock at the end of Q3. The fund explained why in its Q3 2021 investor letter:
“Biotechnology company Zai Lab is now our only holding in China. The government wants to grow the domestic health care space as part of its social mission, so although Zai is not a big position, we still believe it is a growth story with immense optionality. The stock was hurt in the quarter by negative sentiment spreading into more areas of the Chinese market.”
You can also take a peek at the 10 Undervalued Dividend Kings To Buy In 2022 and 10 Smart Home Technology Stocks To Buy Today.
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This article is originally published at Insider Monkey.
