Goldman Sachs And Hedge Funds See Big Things For These Small-caps

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The recent pull back in the Russell 2000 index left it down about 10% on a year-to-date basis just before the start of this month. During October these losses have dwindled to 3.5% and there is still room for further growth as the index remains about 4.4% below the all time high that it achieved in June. In a note to its clients, Goldman Sachs apprised them about the interesting entry point that has developed in the the small-cap space, while at the same time voicing the concern that a larger part of the index is formed by companies that are currently negative earners, but investors have attached great growth expectations to them leading to large earnings multiples.

The investment bank released a list of small-cap companies that it expects to double their operating earnings between 2014 and 2017, while posting double digit growth on their top line. We decided to cross reference this list with small-cap companies that have garnered the most support from hedge funds, and today we are going to share the top five companies that headed this list.

This is the second article we published today on this topic. Earlier, we took a look at Goldman’s other small-cap picks in the same report that aren’t admired by hedge funds.


5. Criteo SA (ADR) (NASDAQ:CRTO)

 – Investors with Long Positions (as of June 30): 21

 – Aggregate Value of Investors’ Holdings (as of June 30): $304.96 Million

– Goldman Sachs Rating and Price Target: ‘Buy’ $59 (28% upside to the current trading level)

These hedgies held about 10.4% of the $2.51 billion technology company’s outstanding stock at the end of June. Although the interest is sizable it dropped during the second quarter as five more hedge funds had investments in the company at the end of March. However, the aggregate value of these holdings was about $4.4 million lower than at the June end. Keeping in mind that the stock price rose by about 25% during the second trimester, it can be safely concluded that the general sentiment was bearish. Josh Resnick‘s Jericho Capital Asset Management is the largest stockholder of Criteo SA (ADR) (NASDAQ:CRTO) within our database holding some 1.87 million shares valued at $88.96 million.

The grounds of this bearish sentiment and a 25% dip in Criteo’s stock price after its all time high in July can be traced to the recent popularity of ad-blocking software and companies like Apple Inc. (NASDAQ:AAPL) allowing their users to download such software. However, Criteo SA (ADR) (NASDAQ:CRTO)’s COO Erich Eichman remains unperturbed by this as this hasn’t affected the company’s operating numbers and he believes that in the long run consumers cannot break the implicit agreement to have free content in exchange for advertisement.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

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