Hillshire Brands Co (HSH), And The Rest Of $6 Billion Hedge Fund Carlson Capital’s Small Cap Picks

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We track 13F filings from hedge funds and other notable investors for a variety of purposes. One use for this information is in developing investing strategies; we have found, for example, 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). Our impression is that this is because small cap stocks receive less attention from large institutional investors and the financial media, and so are more likely to be mispriced. We can also look at top small cap picks from individual managers to see what they like in this range; investors can then do more research on any interesting names. Read on for five stocks with market capitalizations between $1 billion and $5 billion which Clint Carlson’s Carlson Capital owned as of the end of December (or see the full list of stocks the fund reported owning).

Carlson reported a position of 3.7 million shares in processed foods company Hillshire Brands Co (NYSE:HSH). The stock trades at 20 times forward earnings estimates, as the market is generally assigning high multiples to food companies at this time. Hillshire Brands Co (NYSE:HSH) deserves mention for a fairly weak relationship to the broader economy at a beta of only 0.5, though the dividend yield is not particularly strong. Billionaire John Paulson’s Paulson & Co. increased the size of its position in Hillshire Brands Co (NYSE:HSH) by 18% in the fourth quarter of 2012, to a total of over 5 million shares (check out Paulson’s stock picks).

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The fund disclosed ownership of over 10 million shares in Hudson City Bancorp, Inc. (NASDAQ:HCBK), a bank which operates in the New York City metropolitan area. The stock currently pays a 4% dividend yield, though dividend payments were reduced by almost 50% to these levels in early 2011. In addition, revenue has been down and the earnings multiples are high- specifically, the forward P/E is 21. AQR Capital Management, managed by Cliff Asness, was a heavy buyer between October and December, closing the year with over 13 million shares in its portfolio (research more stocks Asness was buying).

Exterran Holdings, Inc. (NYSE:EXH) was another of Carlson’s small cap picks. Exterran is an oil and gas equipment and services company with a focus on compressing and processing natural gas. Its stock price has nearly doubled in the last year; while unprofitable, it has crushed expectations the last couple quarters and sales have been up nicely. Still, analyst consensus for 2014 implies a forward P/E of 34 and we would be concerned about that pricing; many market players are bearish, with 11% of the float held short. Chuck Royce’s Royce & Associates owned about 950,000 shares of Exterran at the end of December.
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