Should You Follow This Investor Into His Top Small-Cap Picks?

Peter A. Wright started his fund, P.A.W Capital, back in 1990 and in the current round of 13F filings, the fund reported an equity portfolio worth $87.20 million as of the end of September, which was down from $99.15 million a quarter earlier. During the third quarter, the investor initiated five new positions and exited nine former holdings. Wright is still bullish on the tech sector, which amasses around half of P.A.W.’s 13F portfolio. In this article we will talk about P.A.W.’s top five small-cap holdings, which are of particular interest to us at Insider Monkey (more on that below).

P.A.W. Capital is one of the more than 730 funds that we track as part of our small-cap strategy. Through extensive research, we have determined that analyzing their 13F filings can help a retail investor generate market-beating returns by following the small-caps that these funds are collectively bullish on. Our strategy imitates a portfolio of the 15 most popular small-cap picks among the funds that we track and it has returned 102% since August 2012, beating the S&P 500 ETF (SPY) by around 53 percentage points (see more details here).

In Web.com Group Inc (NASDAQ:WWWW), P.A.W. reported a stake containing 340,000 shares worth $7.17 million and even though the investor trimmed the position by 10% during the third quarter it still remained at the top of its portfolio. The stock of the provider of Internet services for small businesses lost around 13% in the third quarter, but is still 27% in the green in year-to-date terms. Web.com Group Inc (NASDAQ:WWWW)’s stock may gain even more ground, taking into account that it currently trades at around 9.5-times forward earnings and sports a PEG ratio of 0.71. At the end of June, 21 funds from our database held stakes that collectively amassed over 25% of Web.com Group Inc (NASDAQ:WWWW)’s outstanding stock.

On the other hand, in Allot Communications Ltd (NASDAQ:ALLT), P.A.W boosted its position by 45% between July and September and disclosed holding 960,000 shares valued at $4.71 million as of September 30. Allot Communications Ltd (NASDAQ:ALLT) is engaged in broadband solutions and is another favorite tech pick of Peter Wright. The stock lost 31% in the third quarter and the fact that P.A.W. acquired more shares seems to suggest that Wright believes in the future potential of the company. The stock plunged in May after Barclays downgraded the company, expressing concern with its guidance and transparency. In July, a corporate litigation boutique announced that it would investigate Barclays’ claims on behalf of certain investors. During the second quarter, the number of funds bullish on Allot Communications Ltd (NASDAQ:ALLT) declined to nine from 12, while the aggregate value of their stakes was equal to 16.80% of the company’s outstanding stock.

P.A.W.’s other top three picks are Lifelock Inc (NYSE:LOCK), Lendingtree Inc (NASDAQ:TREE), and Virtusa Corporation (NASDAQ:VRTU), and we will discuss them in more detail on the following page.

In Lifelock Inc (NYSE:LOCK), P.A.W. reported holding 325,000 shares, up by 125,000 shares over the quarter; the value of the stake amounted to $2.85 million. Similar to Allot, the investor increased its stake amid a 47% drop registered by the stock during the third quarter. It seems to have been the right call, as Lifelock Inc (NYSE:LOCK)’s stock surged by over 40% a week ago, after the company reported better-than-expected financial results and announced a settlement with the Federal Trade Commission (see more details here). The stock is still down by 22% since the beginning of the year and trades at around 19-times forward earnings. Billionaire Ken Fisher‘s Fisher Asset Management is also bullish on Lifelock Inc (NYSE:LOCK), owning 335,998 shares as of September 30.

Lendingtree Inc (NASDAQ:TREE) is Wright’s top financial pick as P.A.W. disclosed a $2.79 million stake in the company that contains 30,000 shares, down by 25% on the quarter. Lendingtree operates an online loan marketplace for consumers, connecting them with lenders and providing other credit-based services. The stock has more than doubled since the beginning of the year and sports a rather high forward P/E of 34.x. Currently, Lendingtree Inc (NASDAQ:TREE) is planning to raise more capital by selling 725,000 shares. At the end of October, Needham & Company and BWS Financial reaffirmed their ‘Buy’ ratings on the stock and raised their price targets to $140 and $150 respectively. However, Lendingtree Inc (NASDAQ:TREE) is not very popular among the funds that we track, with only 18 of them holding shares of the company at the end of June. In addition, Clifford Fox’s Columbus Circle Investors reported holding 111,000 shares of the company in the current round of 13F filings.

Virtusa Corporation (NASDAQ:VRTU) represents P.A.W.’s fifth-largest holding, the fund owning 48,000 shares worth $2.46 million as of the end of September. The company provides IT services and its shares have gained over 33% since the start of 2015. Just yesterday Virtusa Corporation (NASDAQ:VRTU) reported its financial results for the second quarter of its fiscal year 2016, delivering EPS of $0.50 and revenue of $143 million, beating analyst estimates of $0.34 in EPS and $142 million in revenue. Billionaire quant fund Renaissance Technologies, managed by Jim Simons, was another shareholder of Virtusa Corporation (NASDAQ:VRTU) at the end of the second quarter, with a stake of 63,800 shares.

Disclosure: None