GameStop Corp. (GME) & More: Cliff Asness’s AQR Capital Management’s Small Cap Picks

We track quarterly 13F filings from hedge funds, and use the included information to help develop investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year on average (learn more about our small cap strategy). We think that this is because small cap stocks (which we define as those with market capitalizations between $1 billion and $5 billion) are less widely owned by large institutional investors, resulting in them being more likely to be mispriced. Our database of 13F filings can also be used to identify top small cap picks from individual hedge fund managers, with investors then doing further research on particular names which seem interesting. Here are five small cap stocks which Cliff Asness’s AQR Capital Management owned at the end of December (or see the full list of stocks AQR reported owning):

The fund moved heavily into Hudson City Bancorp, Inc. (NASDAQ:HCBK) and closed the fourth quarter of 2012 with over 13 million shares in its portfolio. The bank, which is based in the New York metro area, is trading at a small discount to the book value of its equity; however, Hudson City Bancorp, Inc. (NASDAQ:HCBK) has not done particularly well at monetizing its assets and so its earnings multiples are in the 17-20 range. The stock does pay a dividend yield of nearly 4% going by current prices and recent dividend policy. Harvard Management was also buying the stock, as the endowment had 4.7 million shares according to its own 13F.

AQR CAPITAL MANAGEMENTAsness reported a position of 4.3 million shares in Gamestop Corp. (NYSE:GME), the $3.8 billion market cap electronic game and accessories retailer. 50% of Gamestop Corp. (NYSE:GME)’s float is held short as investors are very skeptical that the company can survive in an era of digital distribution, though sales were off only slightly in its most recent fiscal quarter versus a year earlier and earnings were actually up. The dividend yield here is 3.7%. While value investor Joel Greenblatt cut his stake during Q4, Gamestop Corp. (NYSE:GME) was still one of the five largest holdings by market value in his portfolio (find Greenblatt’s favorite stocks).

American Capital Ltd. (NASDAQ:ACAS) was another of AQR’s small cap picks with the filing disclosing ownership of 6.9 million shares. The company invests senior debt, mezzanine debt, and equity with a focus on energy-related businesses and government contractors. It too carries a P/B of less than 1- 0.8, to be precise- and the forward earnings multiple is 12. Those are value levels, and even with the complexity of the business it might be worth further research. Billionaire John Paulson’s Paulson & Co. reduced the size of its position by 30% to 3.8 million shares (check out Paulson’s stock picks).

According to the 13F, Asness and his team owned 2.2 million shares of $3.7 billion market cap insurance company Assurant, Inc. (NYSE:AIZ). Assurant, Inc. (NYSE:AIZ) looks quite cheap: it trades at 8 times earnings, whether we use trailing numbers or analyst consensus for 2014, and at a P/B ratio of 0.7. Wall Street analysts expect at least moderate growth over the next several years, and as a result the five-year PEG ratio is 0.8. As such we’d be interested in taking a closer look at the company. Ric Dillon’s Diamond Hill Capital had 1.8 million shares in its portfolio at the beginning of January (research more stocks Diamond Hill owns).

AQR increased its holdings of Brocade Communications Systems, Inc. (NASDAQ:BRCD) by 31% between October and December to a total of nearly 14 million shares. The $2.6 billion market cap data storage company grew its revenue by 5% in the quarter ending in January 2013 (the first of its fiscal year). The sell-side is expecting considerable improvements in net income over the next couple years, and as a result the forward P/E is 8. Elliott Management, managed by billionaire Paul Singer, reported a position of 15 million shares in its filing following significant sales in the previous quarter.

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