We have found, by analyzing our database of 13F filings from hedge funds and other notable investors, that the most popular small cap stocks among the filers we track earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). We think that this is because small cap stocks (which we define as those which have market capitalizations between $1 billion and $5 billion) receive less attention on average from large institutional investors and the financial media and so are more likely to be undervalued (or overvalued). Investors can treat top small cap picks as a list of initial ideas which can be researched further, similar to how stock screens are often used. Read on for five small cap stocks which William Gray’s Orbis Investment Management owned at the beginning of 2013 (or see the full list of stocks the fund reported owning).
Orbis disclosed ownership of 7.6 million shares of Sohu.com Inc (NASDAQ:SOHU), a Chinese Web portal. While many Chinese stocks are trading at low multiples as a result of accounting issues at some companies and investor uncertainty over the macro situation, Sohu.com Inc (NASDAQ:SOHU) is valued at 25 times its trailing earnings. While revenue numbers have been strong recently, earnings actually decreased in Q4 2012 versus a year earlier. Billionaire Kerr Neilson’s Platinum Asset Management had 2.3 million shares in its portfolio at the end of December according to that fund’s own 13F (find Neilson’s favorite stocks).
Gray and his team cut their stake in Mindray Medical International Ltd (ADR) (NYSE:MR) by 16% but still owned 6.1 million shares. Mindray Medical International Ltd (ADR) (NYSE:MR) is another Chinese company, developing and manufacturing medical devices and diagnostic products. It reported growth of close to 20% in both revenue and earnings in its last quarterly report compared to the fourth quarter of 2011, though the market is already pricing in expectations of high growth with a trailing P/E of 26. Eton Park Capital, managed by Eric Mindich (who was the youngest partner in Goldman Sachs’s history during his time at that firm), kept their holdings constant during the fourth quarter at 2.3 million shares.
Korean telecommunications company SK Telecom Co., Ltd. (NYSE:SKM) was another of Orbis’s small cap picks with the filing showing a position of a little over 10 million shares. Consensus estimates for 2014 imply a forward P/E of 10, so SK Telecom Co., Ltd. (NYSE:SKM) is at least somewhat in value territory, and while revenue growth has not been particularly high it has at least been positive (with net income rising at a faster rate, though we would expect it to converge to the revenue figures over time). The stock is up 42% in the last year.
The fund reported a position of 1.2 million shares in RenaissanceRe Holdings Ltd. (NYSE:RNR), a $4.2 billion market cap property and casualty insurance company, though this was down 60% from what it had owned at the beginning of October. Revenue has been growing rapidly at the company, but earnings have actually been down significantly going by recent reports. The earnings multiples are low but it still might be better to look elsewhere in the industry. Citadel Investment Group, managed by Ken Griffin, was taking the opposite tack in more than doubling its stake to a total of about 950,000 shares (check out Griffin’s stock picks).
According to the 13F, Gray was buying Spirit AeroSystems Holdings, Inc. (NYSE:SPR), the manufacturer of aircraft components, and closed December with 4.6 million shares of the stock. Spirit’s revenue was up 17% in its most recent quarterly report compared to the same period in the previous year, but earnings were actually flat. Wall Street analysts are bullish on the company, judging by the forward earnings multiple of 8. Spirit AeroSystems Holdings, Inc. (NYSE:SPR) was one of the largest holdings in Scopia Capital’s portfolio at the end of the fourth quarter of 2012 (research more stocks Scopia likes).
Disclosure: I own no shares of any stocks mentioned in this article.