By Eric Winter
Small-cap and mid-cap stocks are usually lacking adequate attention from bankers, third-party analysts, and the media, which often leaves them less efficiently priced versus large- and mega-caps. Hedge funds sometimes take advantage of this by dedicating their research teams to work on these lower-valuation stocks; this can lead to significant double-digit alpha for the funds who hit it big. We've determined that the most popular small-cap stocks among hedge funds historically beat the market by more than 15 percentage points per year (learn more about our hedge fund small cap strategy here). Lee Ainslie's Maverick Capital is one of the hedge funds we track very closely. Maverick Capital is one of the most successful hedge funds over the past 15 years and has around $8 billion in assets under management. Here are the five largest positions which Maverick Capital reported owning on his most recent 13F with market capitalizations between $1 billion and $5 billion:
Analog and mixed signal semiconductor manufacturer Skyworks Solutions, Inc. (SWKS) is one of Ainslie's largest holdings in the small-cap range, comprising roughly 3.2% of his portfolio. They operate in the competitive industry of making chips for cell phones, tablets, etc. SWKS is starting 2013 on a good note with a small earnings beat and a number of firms initiating positive research. The firm is growing on both the revenue and earnings fronts, and is potentially 30% away from future price targets if analysts are right. Billionaire Paul Tudor Jones has a call position in SWKS (check here to see his other bullish holdings).
NVR, Inc. (NVR), valued at almost $5bn according to recent prices, is a homebuilder in the U.S. Not just any homebuilder however - Wall Street analysts see NVR as the most profitable homebuilder relative to a full housing cycle, often times with earnings per share in the double-digits. In their most recent announcement on January 24th, NVR revealed incredible earnings of $11.98 per share, nearly a dollar above expectations. Stock appreciation is complementary to their earnings; NVR has risen close to 40% in the last twelve months. Billionaire Ken Griffin has amassed a position half the size of Ainslie's in recent months.
Endo Health Solutions, Inc. (ENDP) is another small-cap of Maverick's; the company manufactures branded and generic pain relievers. Their pain-reducing patch Lidoderm has defined ENDP as a leader in their area of expertise, helping to push the stock price up almost 17% year to date. However, analysts are hesitant on the stock, with many downgrading their buy ratings to holds (with at least five downgrades in the past four months alone). We would watch for a pull-back before getting in and would recognize this as a longer-term hold. Jeffrey Vinik of his self-titled hedge fund has a little over 100,000 shares of ENDP.
Liquidity Services, Inc. (LQDT) has an interesting business model - they provide an auction market place for surplus and salvage assets. This enables commercial buyers to shop online for a wide range of excess or damaged goods. Perhaps due to their depressed stock price after a negative year, Wall Street loves this stock and the consistent earnings beats, overwhelmingly upgrading LQDT to a buy and calculating a very high future valuation. We are looking forward to seeing LQDT make up some of its pricing struggles in 2013. Renaissance Technologies, headed up by famed Jim Simons, has $29mm committed to LQDT.
Finally, retailer J.C. Penney (JCP) takes up the last spot on our list, with its current $4.3bn market cap (the stock lost nearly half of its market capitalization after the stock declined by over 40% in 2012). JCP has certainly seen better days, and analysts aren't convinced it will reach its glory days anytime soon; the stock has been hammered by downgrades from the likes of UBS and JP Morgan in recent history. Negative earnings estimates are shattered by even lower actual reported earnings, but many hedge funds are seeing this as a buying opportunity. One of those hedge fund owners is Robert Jaffe of Force Capital, who upped his call option in JCP by more than 240% between his last two 13F filings.