We track quarterly 13F filings from hedge funds and other notable investors for a variety of purposes. For one, we can use the information to develop investing strategies; for example, our research has indicated that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). We can also see individual managers’ picks in a number of areas, including each one’s favorite small cap stocks (which we define as those with market caps between $1 billion and $5 billion). Blindly imitating these picks isn’t wise, but investors can think of this process as similar to a stock screen in outputting interesting names for further research. Read on for our quick take on the five largest small cap holdings in Larry Robbins’ Glenview Capital’s portfolio as of the end of December (or see the full list of the fund’s stock picks):
Glenview reported a position of a little less than 14 million shares in Tenet Healthcare Corp (NYSE:THC), a $4.9 billion market cap operator of hospitals and outpatient health care centers. While Tenet Healthcare Corp (NYSE:THC)’s adjusted earnings numbers have missed expectations the past couple quarters, Wall Street analysts expect the bottom line to improve over the next couple years with the result being a forward P/E of 11. Hospitals are trading at low multiples in general, however, and it might be wise to at least start with looking at Tenet Healthcare Corp (NYSE:THC)’s peers. Blue Ridge Capital, managed by Tiger Cub John Griffin, owned 1.7 million shares according to that fund’s own 13F (find Griffin’s favorite stocks).
Robbins and his team increased their stake in another hospital company, Health Management Associates Inc (NYSE:HMA), by 37% to over 35 million shares. In the fourth quarter of 2012, the company grew its revenues by 7% versus a year earlier with net income rising 57%. We would expect that earnings growth rate to fall more in line with what the business is doing on the top line, but even mid single digits would be about right given the trailing P/E multiple of 17. Health Management Associates Inc (NYSE:HMA) trades at 10 times forward earnings estimates, and as we’ve seen it’s less dependent on future improvements than Tenet.
Flextronics International Ltd. (NASDAQ:FLEX), a provider of design and engineering services to manufacturing companies which has a market capitalization of $4.4 billion, was another of Glenview’s small cap picks. While the stock is cheap in terms of its earnings multiples- for example, the trailing P/E is only 11- business has been poor recently. In its most recent quarter sales fell 18% compared to the same period in the previous fiscal year, driving earnings down substantially. As a result we would avoid the stock.
The fund moved heavily into Community Health Systems (NYSE:CYH), as Robbins added shares for a total of almost 26 million by the end of December. Community Health Systems (NYSE:CYH) operates hospitals and home health care agencies; its recent financials have been somewhat similar to those of Health Management Associates, with an almost certainly unsustainably high earnings growth rate but still decent revenue numbers. The stock carries trailing and forward P/Es of 14 and 9, respectively, making it at least a prospective value stock as well.
Glenview disclosed ownership of 3.7 million shares of URS Corp (NYSE:URS), unchanged from the beginning of October. The company is diversified among engineering services, infrastructure project management, and work with aerospace and defense companies. Like many of the fund’s small cap picks, it is priced somewhat cheaply (the trailing P/E is 11). In its last quarterly report revenue grew 24% compared to the fourth quarter of 2011, and earnings were much higher as well. While we wouldn’t put too much emphasis on one quarter’s results we certainly think it is worth doing more research on the company.
With many of the fund’s small cap picks featuring at least somewhat low multiples, we think the best “leads” are those which have been growing their business recently including the hospitals and URS. Of course we can also take Robbins’s bullishness on hospitals as a reason to look at the entire industry, including larger cap companies and peers which his fund did not own.
Disclosure: I own no shares of any stocks mentioned in this article.