Our analysis of quarterly 13F filings from hundreds of hedge funds and other notable investors such as Ken Heebner’s Capital Growth Management shows that the most popular small cap stocks among the group of filers we track outperforms the S&P 500 by an average of 18 percentage points per year. We think that this is because large institutional investors pay less attention to small cap stocks, leading them to be less efficiently priced and therefore making it more likely for research teams to uncover an undervalued (or overvalued) stock. We also like to check out filings from individual managers to see if any of their free small cap investing ideas look interesting. Read on for our quick take on Capital Growth Management’s five largest small cap holdings (defining small caps as those with market capitalizations between $1 billion and $5 billion) as of the end of March or see the full list of the asset manager’s stock picks.
Leading our list is $4.6 billion market cap homebuilder NVR, Inc. (NYSE:NVR); Heebner bought almost 100,000 shares of the stock during the first quarter of 2013. With the housing market doing well so far this year, NVR, Inc. (NYSE:NVR) experienced a 28% increase in revenue last quarter compared to the first quarter of 2012 with earnings rising at an even higher rate. The market price already incorporates expectations of some future growth, with a trailing P/E of 24, though recent growth has been high enough that investors willing to take on housing-related risks might be interested.
Capital Growth Management reported a position of 3.8 million shares in RLJ Lodging Trust (NYSE:RLJ), a real estate investment trust focused on hotels. Real estate investment trusts receive favorable tax treatment conditional on distributing a large share of their taxable income to shareholders, which can often result in high yields. Currently RLJ Lodging Trust (NYSE:RLJ)’s dividend yield is 3.5%, though the company only became publicly traded about two years ago and therefore has a limited history of paying dividends. In addition, we’d advise income investors against focusing too much of their portfolio on REITs.
Heebner and his team disclosed ownership of almost 700,000 shares of Jones Lang LaSalle Inc (NYSE:JLL) after not having owned any shares at the beginning of the year. Jones Lang LaSalle Inc (NYSE:JLL) provides property management and investment management services to owners of real estate. While the company’s revenue was up in the first quarter of 2013 versus a year earlier, earnings were down and with a trailing P/E of 19 we would avoid it. Generation Investment Management, a fund co-managed by David Blood and Al Gore, had 1.9 million shares in its portfolio according to its own 13F (find Generation’s favorite stocks).