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Cliff Asness’s Small Cap Picks Include GameStop Corp. (GME)

The most popular small cap stocks among hedge funds, as determined from quarterly 13F filings tend to outperform the S&P 500 by an average of 18 percentage points per year (learn more about our small cap strategy). We think that this is because small cap stocks receive less attention from large institutional investors such as mutual funds as well as the financial media, and so are more likely to be either overvalued or undervalued. Investors can also take advantage of this finding by reviewing 13Fs from top managers and doing further research on any interesting small cap picks. We have gone through Cliff Asness’s AQR Capital Management’s 13F for the first quarter of 2013 and here are the fund’s five largest small cap holdings as of the end of March (or see the full list of Asness’s stock picks):

AQR owned over 14 million shares of Hudson City Bancorp, Inc. (NASDAQ:HCBK) at the end of the first quarter of 2013. The bank operates in the New York City metropolitan area, and trades right about at the book value of its equity. M&T Bank plans to merge with Hudson City, and while there have been regulatory concerns recent developments have indicated that the deal should be back on. Merger arbitrage can be a useful investing strategy, as the return depend on whether or not the deal closes rather than on market conditions.

AQR CAPITAL MANAGEMENTAsness and his team had about 4 million shares of GameStop Corp. (NYSE:GME) in their portfolio at the beginning of April. The video game retailer and reseller (though the future of its used game business may depend on how Microsoft decides to treat used games on the Xbox One) has more than doubled in the last year, even as earnings slipped 25% in its most recent quarter compared to a year ago. 36% of the outstanding shares are held short, though analyst expectations imply a forward P/E of 10. Value investor Joel Greenblatt had GameStop Corp. (NYSE:GME) as one of his top picks in his own 13F (find Greenblatt’s favorite stocks).

American Capital Ltd. (NASDAQ:ACAS) was another of the fund’s small cap picks with the filing disclosing ownership of almost 7 million shares. American Capital makes private investments in equity and debt securities. It’s quite cheap in book terms, with a P/B of 0.6, though we acknowledge that many of these assets will be risky and we can understand why investors might demand a discount. The stock trades at 11 times forward earnings estimates from Wall Street analysts, and earnings per share are expected to increase beyond that point with a five-year PEG ratio less than 1.

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