SAC Capital Advisors, a large hedge fund managed by billionaire Steve Cohen and his team, has reported a position of 5.7 million shares in Arris Group, Inc. (NASDAQ:ARRS), a $1.9 billion market cap communications equipment designer and manufacturer. This is up from the 2.6 million shares that SAC reported owning at the end of September 2012, and the fund now owns 5% of the total shares outstanding (see more of Cohen’s stock picks).
13D and 13G filings such as this one are not as comprehensive as quarterly 13F filings, and reporting requirements mean that they are generally only filed for small-cap and mid-cap stocks, but we think that it’s actually more important to know what hedge funds and other notable investors think of these companies. Because they receive less attention from mutual funds and the financial media, hedge fund teams are more likely to uncover a mispriced stock when they analyze a small-cap or mid-cap company. In fact, the most popular small cap stocks among hedge funds which we reported in our August 2012 newsletter produced an excess return of 18 percentage points between September and January (read more about our hedge fund strategies).
Last quarter Arris’s revenue grew by 22% from its levels a year earlier, and operating income was up 70% if we add back an impairment charge to Q4 2011 which had left the company unprofitable in that quarter. While these growth rates would slow as Arris Group, Inc. starts to grow from a larger base, we would say that the company looks quite healthy for now. The trailing earnings multiple is 36, with Wall Street analyst consensus for $1.20 in earnings per share this year (for a current-year P/E of only 14) and for forward numbers which have the stock trading at 11 times 2014 estimates. If the company can hit those targets and still have significant growth potential than it could turn out to be a good value.
David Dreman’s Dreman Value Management had cut its own stake in Arris Group, Inc. by 17% during the third quarter of 2012 but still closed September with 2.5 million shares in its portfolio (find Dreman’s favorite stocks). First Pacific Advisors, which is co-managed by Robert Rodriguez and Stephen Romick, was the largest holder of the stock in our database of 13F filers at that time with 4.9 million shares (check out more stocks First Pacific owned). Valinor Management was another major shareholder, reporting ownership of 4.2 million shares at the end of Q3.