By: Jake Mann
Paul Tudor Jones, the manager of Tudor Investment Corp, is widely known as one of the most successful traders of the past century. With a net-worth above $3 billion, PTJ focuses his efforts on a range of investments, but his most promising asset class may be his small-cap stock picks.
See, while most investors would inherently focus on hedge funds' large-cap stocks-the Apples (AAPL) and Exxons (XOM) of the world, if you will, our research shows that the most popular small-cap stocks among hedgies have outperformed the market by more than 15 percentage points per year over the long run.. This makes sense, as large-caps typically receive the most attention from analysts and the rest of the blogosphere.
With this in mind, let's take a look at the top five small-cap picks in Paul Tudor Jones' portfolio by using data from his latest 13F filing with the SEC. Each stock listed here had a market capitalization between $1 billion and $5 billion at the end of the third quarter, which is the same standard used in our research mentioned above.
First up we have Abercrombie & Fitch Co. (ANF), Tudor Jones' top small-cap holding, sitting at the No. 5 spot in his 13F portfolio. Shares of the specialty retailer have risen a whopping 47.9% over the past six months, and a massive beat in its last earnings report has improved investor sentiment dramatically. Bolstered by generally bullish macro-demand for apparel products, Wall Street is optimistic on Abercrombie & Fitch's growth prospects, as analysts' consensus expects 17-18% annual EPS expansion over the next half-decade. This, coupled with the company's bargain-bin forward earnings valuation (14.0x), makes it easy to understand why PTJ's behind this stock.
Marvell Technology Group Ltd. (MRVL) is the hedge fund manager's second favorite small-cap pick, and unlike Abercrombie, shares of this tech company have been mired in a yearlong swoon. Marvell's stock price has lost 41.4% over the past 12 months, as investors have adjusted their outlook in the face of worse-than-expected results in mobile, particularly in China.
The sell-side expects bottom line growth to slow over the next five years, and a cash flow ratio below 3.0x and a forward P/E under 13.0x has some analysts crying "value-trap." Still, a dividend yield near 2.6% and a mountain of cash has its fair share of bulls, Paul Tudor Jones included. David Einhorn and David Tepper have also bought into Marvell as a value play.
Next we have PerkinElmer, Inc. (PKI), the diversified diagnostics and biotechnology company. Strong organic revenue guidance and earnings beats in each quarter of its 2012 fiscal year have pushed shares of PKI higher in recent months; the stock has generated impressive 1-month (8.7%), 3-month (14.5%), and 6-month (39.3%) returns. For investors wanting exposure to the ever-hyped "pharma boom," PerkinElmer offers multifaceted growth prospects at a decent price. On a forward earnings basis, the stock trades at a 35% discount to its industry's average.
Frontier Communications Corp (FTR) is PTJ's fourth largest small-cap holding. This U.S.-based telecom has expanded its broadband internet offering in recent years, which is the chief reason that many growth-oriented investors are bullish. Wall Street expects Frontier's earnings to average just 3-4% annual growth over the next half-decade, and shares aren't particularly cheap, but a dividend yield near 8.8% is tough to argue with. Couple this with the fact that analysts' average price target on this stock represents an upside of 13% from current levels, and we can see why Paul Tudor Jones is a buyer.
Last but certainly not least, we have Magellan Health Services Inc (MGLN). The managed care provider has beaten the Street's bottom line estimates in four of the past five quarters, and shares actually trade at a discount in excess of 10% to their industry's earnings and book valuations. Magellan hasn't been a very strong investment over the past year- gaining only 2.4%. But of the six analysts who cover the company, four hold buy ratings. The group's average price target indicates a double-digit discount as well, and healthcare reform should act as a long-term positive for the managed care field.