Billionaire Steve Cohen’s Favorite Small Cap Stocks Include Carter’s, Inc. (CRI)

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.

Steven CohenDrug 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).

The fund reported a position of 2.6 million shares in Visteon Corp (NYSE:VC), an auto parts company specializing in climate, electronic, and interior components. Once again, the financial community is looking for growth here (as is the case with many other auto related companies); Visteon Corp (NYSE:VC)’s trailing and forward earnings multiples are 17 and 12 respectively. Sales have been up, going by the company’s recent reports, but not at a particularly high rate. We’re not sure that Visteon Corp (NYSE:VC) is the most attractive source of potential value among auto related companies, and would suggest looking at its peers instead. JANA Partners, managed by Barry Rosenstein, was another major shareholder in the company (check out Rosenstein’s stock picks).

Cohen and his team nearly tripled their stake in Carter’s, Inc. (NYSE:CRI), the $4.1 billion market cap children’s apparel company (its brands include OshKosh). In the first quarter of 2013, Carter’s, Inc. (NYSE:CRI) experienced a 28% increase in net income though this came primarily from higher margins as revenue was up only 7%. With the stock valued at 18 times forward earnings estimates, it looks to us that it might be about fairly valued- growth rates will likely have to increase in order for it to prove undervalued at this price. Billionaire Andreas Halvorsen’s Viking Global owned 3.4 million shares of Carter’s, Inc. (NYSE:CRI) at the end of the quarter (find Halvorsen’s favorite stocks).

According to the 13F, SAC was buying shares of RenaissanceRe Holdings Ltd. (NYSE:RNR) between January and March, closing the quarter with 1.4 million shares in its portfolio. RenaissanceRe Holdings Ltd. (NYSE:RNR), which provides reinsurance coverage, is more of a traditional value stocks with both its trailing and forward P/Es under 10. However, revenue and earnings were both down modestly in its most recent quarter compared to the same period in the previous year. The company does have some potential if it can slow its decline, and RenaissanceRe is also a defensive name with a beta of 0.4.

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