By Matt Doiron
It's hard for many investors to be as informed about small-cap stocks as they are about large caps. Investors will tend to be more informed about large caps from their day-to-day lives, and because more investors are invested in large caps they receive more media coverage (including from us). One way to find good names in the small-cap space is to look at what hedge funds own. When a hedge fund buys a small cap, it is likely because the investment team has put in just as much research and analysis as it would put in to any other stock, making that fund particularly well informed about that company relative to the rest of the market. As a result, investing in the most popular small-cap stock picks among hedge funds has generated an alpha of about 120 basis points per month according to our own analysis (read more about our hedge fund small-cap strategy). Here are the five largest positions in small-cap stocks (defined as market caps between $250 million and $2 billion at the time) that Tiger Cub fund Tiger Global (see more of their stock picks) reported owning at the end of September:
Tiger Global reported a position of about 7.2 million shares in MakeMyTrip Limited (MMYT). MakeMyTrip provides travel services primarily for the Indian and U.S. markets, allowing customers to book airfare and hotels. The stock is down 34% in the last year, and the company is struggling with profitability. In its most recent quarter revenue growth was very low versus a year earlier, though MakeMyTrip did report a sizable cash position. We aren't sure it's that good a buy - investors such as Tiger Global may be hoping for an acquisition from a larger company in the industry.
TAL Education Group (XRS) was another of the fund's small-cap stocks, though we've reported some sales recently. TAL is a Chinese tutoring company. The stock is down 16% since a year ago, likely due to concerns about Chinese macro conditions as well as increased worries about fraudulent financials from many Chinese companies. The company's reported performance has been good; while numbers for the November fiscal quarter have not yet been released, in the previous fiscal quarter revenue and earnings were each up over 30% from the same period in the previous fiscal year. Wall Street analysts like TAL, with their earnings projections implying a forward P/E of 16 and a five-year PEG ratio of 0.7.
Footwear company Deckers Outdoor Corp (DECK), which is perhaps best known as the owner of the UGG brand, is down over 58% in the last year and that's made it a small-cap stock (the current market cap is $1.3 billion). Tiger Global owned 850,000 shares at the end of the third quarter and 1 million recently purchased call options. The troubled Deckers carries trailing and forward P/Es of 9 and 10, respectively, and its sales and net income have been down considerably. Christian Leone's Luxor Capital reported owning 2.6 million shares of Deckers at the end of the third quarter (check out Leone's stock picks).
The fund initiated a position of 2.4 million shares in biotech company Questcor Pharmaceuticals (QCOR). Questcor is something of a battleground: there is considerable hedge fund interest for a $1.5 billion market cap stock, and yet the most recent data have just over half of the outstanding shares held short. The trailing P/E multiple is 10, but the company has been attacked by short-oriented researcher Citron Research.
Tiger Global cut its stake in Live Nation Entertainment (LYV) but still owned 5.2 million shares according to its 13F. Fine Capital Partners, which is managed by Debra Fine, had Live Nation as one of its top five holdings for the quarter. The entertainment venue business is supposed to be unprofitable this year, but is currently valued at $1.9 billion. Earnings were up 12% in the third quarter of 2012 compared with the same period in 2011.