Jeffrey Vinik’s Most Promising Stock Picks

We follow hedge fund activity in general, but we are particularly interested in finding small-cap and mid-cap stocks that hedge funds like. This is because stocks in this valuation range are less followed and covered and so we believe they are more likely to be inefficiently priced. As it turns out, the most popular small cap picks among hedge funds tend to have an alpha of about 120 basis points per month. In our August newsletter, we put together a strategy based on this finding and named a set of stocks which on average returned 14% between September and December (read more about our hedge fund small cap strategy).

Our explanation of these results is that because the rest of the market is not paying attention to these stocks, but a fund’s qualified research team is going as in depth as they would for a large-cap or mega-cap stock, any particular fund’s small-cap picks are likely to be sources of alpha. Though we wouldn’t recommend blindly following any picks from any fund, they may be useful as potential investment ideas that other investors can then evaluate. Here are five stocks which Jeffrey Vinik reported owning at the end of September (see more of Vinik’s stock picks) which had market capitalizations between $1 billion and $5 billion at that time:

Vinik’s top pick in this valuation range was NovaGold Resources Inc. (NYSE:NG), a $1.3 billion market cap miner producing gold, silver, copper, and other metals. He had over 14 million shares of the stock in his portfolio after not owning any at the end of June. The stock price is down 45% in the last year and the company is unprofitable on a trailing basis; analyst expectations are for net losses in the current fiscal year (ending in November 2013) as well. Seth Klarman’s Baupost Group owned 21 million shares of the stock (check out Klarman’s stock picks).

The 13F reported a position of about 790,000 shares in Westlake Chemical Corporation (NYSE:WLK). Westlake has since crossed the $5 billion market cap threshold after rising 16% since the end of September. The chemicals company’s stock has a beta of 2.6, reflecting high dependence on the broader economy, and its trailing earnings multiple of 18- while not particularly high itself- is higher than the figure at some other chemical companies. Billionaire Dan Loeb’s Third Point was buying shares during the third quarter (find more stocks Loeb liked).

Does Vinik’s coal pick make sense?