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Groupon Inc (GRPN) and More: Tiger Global Management’s Small Cap Picks

Tiger Global Management, a Tiger Cub hedge fund which counts billionaire Chase Coleman among its managers, filed its 13F with the SEC in mid May. We have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year- defining small cap stocks as those with market capitalizations between $1 billion and $5 billion- and in fact our live testing of this strategy has returned 38% since we began tracking it in September 2012. We think that small cap picks from individual funds such as Tiger Global can also serve as useful sources of investment ideas, with investors doing further research on any interesting names. Read on for our quick take on Tiger Global’s five largest small cap holdings by market value as of the end of March and compare these picks to those in the fund’s previous filings.

TIGER GLOBAL MANAGEMENT LLC

One of Tiger Global’s top picks overall was Groupon Inc (NASDAQ:GRPN), with the filing showing a position of 65 million shares. Even after its recent rally, Groupon is still down 33% from its levels a year ago; the company is barely profitable, and revenue growth numbers have not been good. Analysts are expecting improvements on the bottom line in 2014 but with the stock still being valued at 25 times forward earnings estimates- and therefore dependent on high growth from that point- we are skeptical that Groupon deserves its current valuation. Barry Rosenstein’s JANA Partners was buying the stock during Q1 (see more of Rosenstein’s stock picks).

The fund bought 2.9 million shares of Carter’s, Inc. (NYSE:CRI), the children’s apparel designer and retailer which also owns the OshKosh brand, after not having owned any shares at the beginning of 2013. Carter’s is another stock which is well out of pure value territory, with trailing and forward P/Es of 25 and 18 respectively. While earnings have recently been up strongly, revenue grew only 7% last quarter compared to the first quarter of 2012, and that growth rate would likely have to pick up in order for Carter’s to turn out to be undervalued.

Colfax Corp (NYSE:CFX) was another of Tiger Global’s small cap picks; according to the 13F, it initiated a 3.5 million shares position between January and March. The diversified machinery company trades at 29 times forward earnings estimates, indicating that markets are expecting high earnings growth here as well. Given the industry, it’s not that surprising that Colfax carries a beta of 1.9; this shows that the stock price tends to react strongly to moves in broader market indices. Sales numbers, at least, have not been that strong recently and we think that we would avoid the stock.

Tiger Global disclosed ownership of 1.3 million shares of $3.4 billion market cap 3-D printing related company Stratasys, Ltd. (NASDAQ:SSYS). Sales more than doubled in its most recent quarter compared to the same period in the previous year, and many market participants are very optimistic about 3-D printing. Though we are a bit concerned that specific companies in the business might be overhyped, the fund’s participation here is somewhat notable. Analyst consensus for 2014 implies a forward earnings multiple of 35, so once again the current valuation already assumes high growth for at least some time.

Talk about catching a falling knife: J.C. Penney Company, Inc. (NYSE:JCP), which is down 31% in the last year and over 40% in the last two years, rounds out our list of Tiger Global’s top five small cap picks. The retailer experienced a 16% decline in revenue last quarter (fiscal Q1) compared to the first quarter of its last fiscal year, and has been unprofitable for some time; free cash flows are also highly negative. According to the most recent data, about a third of the float is held short. J.C. Penney looks like a highly risky investment- we’re highly skeptical that its turnaround efforts will be successful.

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

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