$2 Billion Fund's Largest Small-Cap Positions

Includes: FLIR, ICON, MLM, RWT, SD
by: Insider Monkey

By Eric Winter

Many hedge fund models have managers busy looking for the "next big thing" amongst smaller public companies, often requiring extreme due diligence before making a hefty investment. This can lead to considerable profits for the manager who can identify mis-pricings of these small-cap stocks, which are typically grouped between market capitalizations of $1bn and $5bn. Based upon our analysis of many hedge funds' small-cap holdings, we've compiled and analyzed a list that has collectively outperformed the market by more than 15 percentage points per year (learn more about our hedge fund small cap strategy here). This is a ripe area for investors who are seeking significant alpha. Wallace R. Weitz, a long-tenured value investor, has no doubt scoured through stocks that fit our small-cap definition and seen success thereafter; here are five such holdings as indicated by his 13F filings:

Redwood Trust, Inc. (NYSE:RWT) commands the largest percentage of Weitz's funds in the small-cap realm, with over 4% of his portfolio dedicated to the stock. RWT is structured like a REIT, meaning that it invests in primarily real estate assets and is required to distribute most profits to shareholders to receive preferential tax treatment. The stock performed extremely well in the past year, garnering returns near the 65% mark, all while providing a respectable dividend yield of 5.2%. Sell-side analyst love RWT for its favorable price to earnings ratio and growth in revenue compared to a year prior. Billionaire Ken Griffin of Citadel Investment Group fame has $1.2mm invested in the REIT (click here to see Griffin's other top picks).

Infrastructure building materials supplier Martin Marietta Materials, Inc. (NYSE:MLM) is next on Weitz's list, and he has built a roughly $70mm position. The $4.5bn market cap company saw a 2012 performance that was roughly in line with the S&P500's near 13% gain, all while providing a 1.6% dividend yield in the process. On the 25th of January they announced their latest dividend, which will be $0.40 for shareholders as of March 1st. We don't see massive growth opportunity just yet for MLM, as one year price targets are too close to current valuations, but the speculative portion combined with dividend income make it a fair bet. Southeastern Asset Management, a $32 billion fund headed by Mason Hawkins, has a hefty $515mm investment in MLM.

SandRidge Energy, Inc. (NYSE:SD) is a smaller speculative oil and natural gas play for Weitz. They hold a primary presence in West Texas, which is now ripe with rumors of the Cline Shale, a supposed reserve that has oil majors Devon and Chesapeake taking notice. Oil findings may not come fast enough to prop up SD's stock price however, who recently suffered through three downgrades this year alone and contributed to a decline in stock price since this time last year. Perhaps not surprisingly, oil magnate T. Boone Pickens has a stake in the company with his BP Capital fund (see Boone Pickens' top picks).

Iconix Brand Group, Inc. (NASDAQ:ICON) takes up nearly 3% of Weitz's assets under management, although he reduced it slightly from his previous 13F filing. The company owns brands such as Joe Boxer, Mossimo, and Sharper Image. ICON beat the market by over four percentage points in the last year, and forward price to earnings ratios have dropped versus trailing twelve months calculations, possibly indicating an increase in projected earnings for 2013. Mark Travis of Intrepid Capital Management has nearly a million shares to his name.

Finally, FLIR Systems, Inc. (NASDAQ:FLIR) rounds out Weitz's list of largest small-cap holdings, and the stock has kept analysts busy as it continues to make multiple acquisitions. December 2012 saw two purchases alone, Lorex Technology and Traficon International NV. The company designs and builds thermal imaging systems, oftentimes used in commercial or government applications. FLIR beat earnings three times out of four last year, and is set to improve last quarter's earnings by $0.14 when they announce on February 7th. Billionaire Thomas Steyer's Farallon Capital has snatched up almost 200,000 shares of the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Eric Winter, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.