Our research shows that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy), and our own portfolio attempting to take advantage of this finding outperformed the S&P 500 by 33 percentage points in the last 11 months. As part of our work researching these strategies we maintain a database of quarterly 13F filings from hundreds of hedge funds and other notable investors, which also comes in handy in evaluating changes in individual managers’ portfolios over time. We have gone through the most recent 13F from billionaire Leon Cooperman’s Omega Advisors and compared it to previous ones (see a history of the fund’s stock picks) and here are three things we noticed in our analysis:
Sprint. Sprint Corporation (NYSE:S) had been Omega’s largest 13F holding at the end of March, and over the following three months the fund increased its stake further to a total of about 95 million shares. SoftBank recently acquired a majority stake in Sprint Corporation (NYSE:S) and added billions in cash to the company’s balance sheet, which was desperately needed as Sprint Corporation (NYSE:S) had been recording net losses. The rest of the company remains publicly traded as Sprint Corporation, which has risen about 10% since the transaction in July. Billionaire John Paulson’s Paulson & Co. has also been a major shareholder in Sprint Corporation (NYSE:S) (find Paulson’s favorite stocks).
Communication equipment. Cooperman and his team also added about half a million shares of QUALCOMM, Inc. (NASDAQ:QCOM) during the second quarter of 2013 and increased their stake in Motorola Solutions Inc (NYSE:MSI) as well. Motorola Solutions Inc (NYSE:MSI), which now focuses on communications infrastructure and equipment following the sale of its Mobility division to Google, continues to struggle with both revenue and operating income about flat compared to a year ago. The company is aggressively buying back shares, but at the trailing P/E is 16 we’d prefer to see at least modest sustainable increases in profits as well.
QUALCOMM, Inc. (NASDAQ:QCOM) has been doing considerably better, with growth rates of over 30% on both top and bottom lines in its most recent quarter compared to the same period in the previous fiscal year. This is in line with what the company had been doing in earlier reports as well. With trailing and forward P/Es of 18 and 14, respectively, it is a good candidate for a prospective “growth at a reasonable price” stock, and the sell-side is bullish with their estimates for the next several years resulting in a five-year PEG ratio of 0.9. Billionaire Stephen Mandel’s Lone Pine Capital reported a position of over 9 million shares in QUALCOMM, Inc. (NASDAQ:QCOM) in its most recent 13F (check out more stocks Mandel likes).
Trimming AIG. The fund reduced the size of its position in American International Group Inc (NYSE:AIG) from 7.7 million shares to 5.8 million. With a number of hedge funds selling Apple last quarter, American International Group Inc (NYSE:AIG) rose to the #2 place on our list of the most popular stocks among hedge funds for the second quarter of 2013. After selling off some of its assets, there is a case to be made for the insurer as a value stock: it trades at 0.7 times the book value of its equity (though at least some discount would be expected for some time due to the company’s poor performance during the financial crisis). Wall Street analysts also like the stock, and their expectations for 2014 imply a forward P/E of only 11.
We can understand some profit taking in American International Group Inc (NYSE:AIG) (the stock has outperformed the market year to date), though the stock still looks at least somewhat interesting to us. While Motorola Solutions Inc (NYSE:MSI) is a bit too dependent on share repurchases to look like a good buy given its current financial performance, its fellow buy QUALCOMM, Inc. (NASDAQ:QCOM)- even though we’d certainly expect growth rates to come down over time- would seem to have good prospects and be trading at an earnings multiple which has priced in only modest increases in net income over the next several years. That stock therefore looks like a good target for further research as well.
Disclosure: I own no shares of any stocks mentioned in this article.