By Eric Winter
David Einhorn is a wunderkind of sorts, known for his stock-picking prowess that has earned his investors an annualized net return greater than twenty-five percent. Einhorn's success is in part due to his investment in small-cap stocks, with capitalizations ranging from $1bn to $5bn. They earned him and his fund Greenlight Capital blow-out gains in the past twelve months. Hedge funds are excellent stock pickers when it comes to small-caps. Our research has shown that the most popular small-cap stocks among hedge funds beat the market by 18 percentage points per year on the average over a 10-year analysis period (learn more about this strategy here). In this article we will discuss David Einhorn's small-cap plays which have been very rewarding since the end of 2011.
Greenlight's biggest winner on our list can be found in homebuilder NVR, Inc. NVR. The company rode the housing recovery wave in 2012, benefiting from increased home sales and new home production in a low interest rate environment. NVR is known amongst Wall Street analysts for their high degree of profitability and double-digit earnings per share; their last report on January 24th was no exception, ringing in a beat with $11.98 reported. Einhorn owned over 100,000 shares in Q4 2011, reducing his position by the end of 2012 and leaving his portfolio with 64,000 shares left. Billionaire Ken Griffin saw the same quarter as an opportunity to add to his position, bumping it up by 79%.
NCR Corporation NCR is Einhorn's largest small-cap position, accounting for 3.2% of Greenlight's $6bn in 13F assets. NCR is a global technology company that helps link businesses and consumers. The company recently gave positive guidance for 2013 on the heels of its latest earnings beat, and we particularly liked that revenues increased across a majority of their business operations. Einhorn currently owns about 8.3mm shares of the stock, down from 9.6mm a year prior. SAC Capital Advisors also saw fit to reduce their position slightly according to their last 13F Filing (view billionaire Steve Cohen's top stock picks here).
Global asset manager Legg Mason, Inc. LM finds its way onto our list, possessing a market cap south of $4bn. LM was the only small-cap in our group to post gains under 23%; it ended mostly flat on the past twelve months, unable to beat the S&P500's return of 12.3%. We are not quite hopeful for 2013 either, as analyst price targets a year out indicate some retracement needs to happen, although the stock has an added bonus of a 1.6% dividend yield. Legg Mason continues to see asset outflows from its fixed-income segment, with equity inflows unable to cover the spread. Einhorn has primarily sat on his position of 3.4mm shares throughout the past four quarters. Billionaire David Harding of Winton Capital Management took a more bullish view and tacked on 30% to his position, according to his last 13F filing.
DST Systems, Inc. (NYSE:DST) posted a 30% gain in the past twelve months, while additionally carrying a dividend yield of 0.9%. The company supports the financial services industry with third-party record-keeping applications. This coming year looks bright for the stock, as DST is augmenting the share buyback they started in Q4 2012 with a $250mm share repurchase plan. Alongside that announcement, DST declared that it will start paying its dividend quarterly at a rate of 30 cents per share. Einhorn has bumped his position up by almost double since Q4 2011, highlighting his positivity in the potential of DST. Millennium Management, spearheaded by Israel Englander, has $15.4mm invested in the stock.
Finally, Huntington Ingalls Industries HII rounds out our list, with its $2.2bn market-cap. This was another position that Einhorn gradually reduced each quarter in 2012, possibly taking profits on the stock's way to racking up a 23% gain in the past trailing twelve months. The shipbuilder operates under the assistance of government contracts, primarily supplying water-going vehicles for the U.S. Navy and Coast Guard. Sell-side analysts are seeing current pricing levels as indicative of prices one year out, so some of the great growth the stock recently experienced may be exhausted. Fellow billionaire George Soros owns nearly 200,000 shares of HII, amounting to $8.2mm.