We track 13F filings from hedge funds and other notable investors as part of our work developing investing strategies; for example, we have found that the most popular small cap stocks (defined as those with market caps between $1 billion and $5 billion) among hedge funds generate an average excess return of 18 percentage points per year (read more about our research on small cap picks). Large institutional investors and the financial media do not pay as much attention to stocks in this valuation range, and as a result we think that they are more likely to be mispriced. Read on for our thoughts on five small cap stocks which Barry Rosenstein’s hedge fund JANA Partners owned at the end of December (or see the full list of stocks the fund reported owning):
JANA initiated a position of 6.1 million shares in Copart, Inc. (NASDAQ:CPRT) during the fourth quarter of 2012. Copart is a $4.2 billion market cap online auctioneer and marketer of vehicles. While the company’s revenue was up significantly in its most recent quarter compared to the same period in the previous fiscal year, net income actually shrunk 2%. In addition, at the current valuation Copart trades at 23 times trailing earnings and so we think that it’s best to avoid the stock unless the company begins to convert sales growth into earnings.
Rosenstein and his team increased their stake in Rockwood Holdings, Inc. (NYSE:ROC), a specialty chemicals company. Many chemicals companies are dependent on broader economic activity, and Rockwood Holdings, Inc. (NYSE:ROC) is no exception with the stock’s beta coming in at 2.5. Earnings have not been looking good here as well, though the current valuation of 13 times trailing earnings means that the company does not need to generate much growth. Analyst expectations seem to be for very little if any earnings growth over the next couple years.
The fund reported ownership of 1.9 million shares of Visteon Corp (NYSE:VC) as of the beginning of January. Visteon is an auto parts company providing climate and interior components. As with chemicals, auto demand is tied to macro factors and as a result the beta is high here as well, at 2.3. Visteon Corp (NYSE:VC)’s forward P/E is low, at 11, but many other auto related companies including the domestic automakers are as cheap or even cheaper on that basis. Billionaire Steve Cohen’s SAC Capital Advisors had 2.5 million shares in its portfolio according to its own 13F (find Cohen’s favorite stocks).
JANA bought 2.4 million shares of Ryman Hospitality Properties, Inc. (NYSE:RHP) between October and December after not having own any shares according to its previous filing. The real estate investment trust owns and operates Gaylord branded hotels and convention centers as well as several Nashville attractions. As a REIT, Ryman Hospitality Properties, Inc. (NYSE:RHP) is required to distribute a large share of its cash to shareholders in order to preserve its favorable tax status and as at many such companies this results in a high dividend yield, of 4.5% judging by recent dividend levels and current prices.
Teekay Corporation (NYSE:TK) rounds out our list of Rosenstein’s small cap picks as the filing disclosed a position of 1.3 million shares. The company transports petroleum products such as crude oil and natural gas, and also deserves mention for a considerable dividend yield of 3.7%. We are a bit concerned about the valuation here, however: at a market capitalization of $2.4 billion, the stock is valued at 36 times forward earnings estimates. Cash flow multiples aren’t much better, with the enterprise value being 10.5x trailing twelve month EBITDA.
Income investors could certainly consider Ryman Hospitality Properties, Inc. (NYSE:RHP), although we would advise them not to concentrate their portfolio too much on real estate investment trusts. From a value perspective, we actually don’t like a lot of these companies and would actually wonder if Teekay is a short candidate. Rockwood Holdings, Inc. (NYSE:ROC) and Visteon Corp (NYSE:VC) (assuming that company hits its earnings targets) have at least some value potential but we don’t think those businesses are particularly attractive compared to their peers and other companies exposed to similar factors.
Disclosure: I own no shares of any stocks mentioned in this article.