Hedge Funds Were Heavily Buying These Small-Caps in Q2

With the deadline to file 13Fs officially over, most smart money investors have revealed their equity portfolios for the end of the second quarter. We compiled the data from more than 750 equity portfolios and used the data to assess the aggregate sentiment towards different stocks.

In this article, we are going to take a look at five small-cap stocks that saw an increase in the number of bullish investors from our database during the second quarter. Particularly, we are going to discuss, Southwestern Energy Company (NYSE:SWN), ARRIS International plc (NASDAQ:ARRS), Blue Buffalo Pet Products Inc (NASDAQ:BUFF), Lions Gate Entertainment Corp. (USA) (NYSE:LGF), and Pandora Media Inc (NYSE:P). Without further ado, let’s dive in and take a closer look at the five stocks.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see the details here).

#5 Lions Gate Entertainment Corp. (USA) (NYSE:LGF)

– Number of Hedge Fund Holders (as of June 30): 40
– Total Value of Hedge Fund Holdings (as of June 30): $1.01 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 34.00%

The number of funds from our database long Lions Gate Entertainment Corp. (USA) (NYSE:LGF) went up by eight to 40 during the second quarter. Although the Chinese box office has slowed recently, Lions Gate and other movie studios will nevertheless benefit from the tailwind of rising Chinese consumption for movies in the medium to long term. As time goes on, many bulls believe the Chinese government will allow Hollywood to import more movies into China and Hollywood studios will get a larger share of the total receipts. Lions Gate could also be a potential takeover target.

#4 ARRIS International plc (NASDAQ:ARRS)

– Number of Hedge Fund Holders (as of June 30): 36
– Total Value of Hedge Fund Holdings (as of June 30): $1.02 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 25.60%

ARRIS International plc (NASDAQ:ARRS) recently found a new CEO, Bruce McClelland, who will replace Bob Stanzione on September 1. McClelland was previously the VP of engineering at the firm. Hedge fund sentiment in the stock was pretty bullish in the second quarter. The number of investors from our database long ARRIS International rose to 36 at the end of June, from 26 at the end of March and the aggregate value of their holdings surged to $1.02 billion from $882.19 million in the same time period.

#3 Pandora Media Inc (NYSE:P)

– Number of Hedge Fund Holders (as of June 30): 46
– Total Value of Hedge Fund Holdings (as of June 30): $1.29 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 45.30%

A net 11 funds added Pandora Media Inc (NYSE:P) to their equity portfolios in the second quarter, partly due to Pandora’s takeover prospects. On May 16, activist Keith Meister‘s Corvex Capital filed a 13D indicating that it established a 8.3% stake in Pandora. The fund later raised its stake to 9.9% and petitioned the FCC to allow it to buy another 5% of the company. Corvex wants Pandora to talk with investment banks about potentially selling itself, which Pandora subsequently did. On July 21, the Wall Street Journal reported that Liberty Media had in previous months offered to buy Pandora for around $15 per share. However, Pandora’s management rejected the offer for being $5 per share too low.

#2 Blue Buffalo Pet Products Inc (NASDAQ:BUFF)

– Number of Hedge Fund Holders (as of June 30): 26
– Total Value of Hedge Fund Holdings (as of June 30): $268.83 million
– Hedge Fund Holdings as Percent of Float (as of June 30): 5.90%

With the number of investors tracked by us with holdings in the stock rising by 14 quarter-over-quarter to 26 at the end of June, Blue Buffalo Pet Products Inc (NASDAQ:BUFF) is the second ‘most-added’ small-cap company on our list. Blue Buffalo Pet Products reported solid results for the second quarter, with EPS of $0.19 on revenue of $286.85 million, up by 45.2% and 12.9% year-over-year, respectively. For the full year, the company’s management expects EPS of $0.74 to $0.76 and sales of $1.14 billion to $1.15 billion.

#1 Southwestern Energy Company (NYSE:SWN)

– Number of Hedge Fund Holders (as of June 30): 48
– Total Value of Hedge Fund Holdings (as of June 30): $1.35 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 27.40%

A total of 48 funds from our database owned $1.35 billion of Southwestern Energy Company (NYSE:SWN)’s stock, which accounted for 27.40% of the float on June 30, versus 28 funds and $656.97 million, respectively, a quarter earlier. In June, Southwestern put much of its debt fears to rest by issuing 86 million shares in a secondary that raised gross proceeds of around $1.1 billion. Although the equity issuance increased the company’s float by around 25%, the public offering basically removes any debt maturity concerns for the next two years and helps Southwestern to avoid any forced asset sales. The offering will also help Southwestern Energy return to growth. Due to improved production efficiencies and more planned rigs made possible by the extra money raised, the company’s management raised their full 2016 production forecast by 5% to 865-875 Bcfe. Hedge funds expect Southwestern to outperform if natural gas prices keep rising. 

Disclosure: none