Warren Buffett’s Top Small-Cap Picks Include USG Corporation (USG), NOW Inc (DNOW), and Media General Inc (MEG)

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When it comes to writing about Warren Buffett, a single post may not be sufficient; there is literally so much that can be said and written about the “Oracle of Omaha”. According to Forbes, Warren Buffett has a net worth of $71.2 billion, making him the fourth-richest person in the world and within easy striking distance of second. Meanwhile, the equity portfolio of his holding company Berkshire Hathaway stands at an impressive $107.13 billion as per the latest 13F filing from Buffett for the reporting period of March 31. The legendary investment manager primarily invests in finance, consumer staples, and technology, with his portfolio being highly concentrated: the top ten holdings of Buffett account for 81.89% of his overall portfolio and much of that is in his top five, with Wells Fargo & Co (NYSE:WFC) and The Coca-Cola Co (NYSE:KO) leading the way. However, it’s Buffett’s small-cap holdings in USG Corporation (NYSE:USG), NOW Inc (NYSE:DNOWand Media General Inc (NYSE:MEG) that we’ll discuss in this article, all of which remained untouched by Buffett during the first quarter.

Warren Buffett

First a quick word on why we are interested in the small-cap stock picks of hedge fund managers. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy, which identifies the best small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 139% since the launch of our small-cap strategy compared to less than 60% for the S&P 500 (see the details).

With 39.00 million shares valued at $1.04 billion, USG Corporation (NYSE:USG) is the largest small-cap holding of Berkshire Hathaway. The building material company has a market cap of $4.12 billion and its shares have grown 3.12% year-to-date. The most interesting financial figure of USG Corporation (NYSE:USG) is its P/E ratio, which stands at 269.75. The building products company was awarded ‘Innovator of the Year’ by The Executives’ Club of Chicago because of its Durock™ Brand EcoCap™ Self-Leveling Underlayment product that can reduce the environmental impact of industrial activity. Gates Capital Management and David Tepper‘s Appaloosa Management are among other major shareholders of the building materials company.

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