We track 13F filings from hedge funds and other notable investors as part of our work developing investment strategies; one of our findings so far has been that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). We think that this is because institutional investors and the financial media pay less attention to most small cap stocks (though some tech companies in this range are widely followed) and so hedge funds or more likely to uncover an overvalued or undervalued stock. Here are our brief thoughts on five stocks with market capitalizations between $1 billion and $5 billion which Tiger Cub Philippe Laffont’s Coatue Management owned at the end of December (or see more stocks the fund reported owning):
Coatue reported a position of 4.5 million shares in Informatica Corporation (NASDAQ:INFA), a provider of enterprise software which helps businesses integrate and manage data. The company’s stock price is down 34% in the last year, and earnings have been performing poorly as well- they fell 27% in the fourth quarter of 2012 versus a year earlier. The sell-side expects net income to improve, but at a forward P/E of 21 we don’t think that Informatica is a good value. Billionaire and fellow Tiger Cub Stephen Mandel’s Lone Pine Capital initiated a position of 1.9 million shares during Q4 (check out Mandel’s stock picks).
Laffont and his team disclosed ownership of 1.9 million shares of The Hain Celestial Group, Inc. (NASDAQ:HAIN), whose packaged food products focus on natural and organic foods. These are two strong segments of the food market, and buoyed by recent acquisitions the company has been reporting strong growth in its financials. However, the stock is expensive- it trades at 30 times trailing earnings- and Hain is a popular short target. Hain Celestial is one of Carl Icahn’s picks, with the billionaire activist investor holding 7.2 million shares at the end of December (find Icahn’s favorite stocks).
First Solar, Inc. (NASDAQ:FSLR), which has risen 75% in the last year following an enormous pop in early April, was another of Coatue’s small cap picks. The manufacturer of solar modules and power systems had previously been hit hard by terrible times for the solar industry- the stock price is still down 73% from its levels two years ago, even after the rally- and it is widely shorted as well. Bullish Street expectations imply a forward P/E of only 11. Hedge funds generally didn’t like First Solar, Inc. (NASDAQ:FSLR) in the fourth quarter of 2012; Tiger Global Management was the only other filer we track to have over $25 million invested in the company’s equity.
According to the 13F, Coatue owned a little less than 6 million shares of $3 billion market cap semiconductor company Atmel Corporation (NASDAQ:ATML) at the end of 2012. Atmel is another company which has not been doing well financially- revenue fell 10% in its most recent quarterly compared to the same period in the previous year- and the market has reacted accordingly. Wall Street analysts expect Atmel to improve, resulting in a forward P/E of 13, but we would still avoid the stock. Citadel Investment Group, managed by Ken Griffin, increased its stake by 55% according to its own filing (research more stocks Griffin was buying).
The fund bought over 7 million shares of Groupon Inc (NASDAQ:GRPN) between October and December, after not having owned any of the daily deals company at the end of Q3 2012. Groupon is still well down from its IPO price but the stock has rallied year to date as CEO Andrew Mason has departed the company. The business is still struggling with profitability, however. Even though the sell-side expects earnings per share to rise considerably over the next couple years, the forward earnings multiple is still high at 20 and we wouldn’t want to depend on their forecasts in any case.
Disclosure: I own no shares of any stocks mentioned in this article.
