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 (NASDAQ:AAPL) and Exxons (NYSE: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. (NYSE: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. (NASDAQ: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. (NYSE: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 (NASDAQ: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 (NASDAQ: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.