Our research on hedge fund investing strategies has shown that imitating hedge funds’ small cap picks can be profitable, with our reasoning for this being that small caps (which we define as those stocks with market caps between $1 billion and $5 billion) are less widely followed by large institutional investors and the financial media. The most popular small cap stocks among hedge funds- as determined by 13F filings- generate an average excess return of 18 percentage points per year, while in our live testing this strategy has returned 38% since September 2012 (learn more about imitating hedge funds’ small cap picks). Of course, we can also look at small cap picks from individual managers such as billionaire Steve Cohen of SAC Capital Advisors- not to blindly follow these managers, but to treat them as sources of initial investment ideas. Read on for Cohen’s five largest positions in small cap stocks as of the end of March and review SAC’s 13F portfolio over time.
SAC owned 3.1 million shares of SM Energy Co. (NYSE:SM), making the oil and gas exploration and production company one of the fund’s top ten holdings overall. SM Energy Co. (NYSE:SM) focuses on shale plays in the onshore United States, including the Eagle Ford and the Bakken. While its oil and gas sales have been up, costs have risen at an even faster rate and as a result its earnings fell 37% last quarter compared to the first quarter of 2012. Analysts expect high earnings growth at SM over the next several years, and the five-year PEG ratio is 0.8, but their projections may be optimistic.
Drug store GNC Holdings Inc (NYSE:GNC) was another of Cohen’s small cap picks with the filing disclosing ownership of 4.3 million shares. The company has been recording decent growth numbers on both top and bottom lines, but the market has already priced in substantial earnings growth over the next several years as the stock trades at 19 times trailing earnings. The sell-side is still bullish, with a five-year PEG ratio a bit below 1, and GNC Holdings Inc (NYSE:GNC)’s pricing is actually about in line with that of larger peers such as Walgreen and CVS Caremark. Doug Silverman’s Senator Investment Group initiated a position of over 2 million shares in GNC Holdings Inc (NYSE:GNC) last quarter (research more stocks Silverman was buying).