The Only 3 Small-Caps This Billion Dollar Hedge Fund Likes

Includes: MR, VIPS, WX
by: Insider Monkey

By Alex Oleinic

Horseman Capital Management is a London-based hedge fund managed by John Horseman. In its latest 13F, Horseman disclosed an equity portfolio worth $285.7 million, which contains 24 positions (see his historical filings here). Total AUM is estimated to be just over $1 billion. Most investors and the media pay attention to a hedge fund's top positions, which are usually large-cap stocks. Our research at Insider Monkey has shown that investors could have outperformed the S&P 500 index by double digits annually by imitating the hedge funds' small-cap picks (see the details here). That's why we're going to take a look at Horseman's favorite small-caps.

There are only three of them, and here's No. 1.


Vipshop Holdings (NYSE:VIPS) is Horseman's top small-cap bet, and it's the second-largest holding in the hedge fund manager's entire equity portfolio. He reported ownership of 401,563 shares of the company last quarter, worth around $22.8 million; this was a fairly large increase from the 315,000 shares held one quarter earlier. Vipshop's stock price has surged by 290% since the beginning of the year, and sports a forward P/E of 40.

Much of this appreciation has been driven by the Chinese e-commerce company's revenue growth; in its fiscal second quarter, Vipshop's top line was up 160% year-over-year. Amid the increase, the company posted a net income of $9 million versus a $5.8 million loss one year earlier. With the discount retailer market-particularly online-expected to continue its ridiculous growth over the next few years, it's clear why Horseman is long here. Wall Street expects Vipshop's earnings to double next year before averaging 60% annual growth over the next half-decade.

Mindray Medical

In Mindray Medical (NYSE:MR), Horseman disclosed a $432,000 stake, which was a new position in Q3. A developer and manufacturer of medical devices, Mindray bought Zonare Medical Systems earlier this year. The move strengthens Mindray's exposure to high-end radiology, and will give more upside to its direct sales efforts in the ultrasound marketplace.

In its latest quarter, Mindray reported a 15% year-over-year growth in revenue, while non-GAAP net income increased by a similar amount. A PEG of 1.5 indicates shares are neither cheap nor expensive. Robert Karr's Joho and Jim Simons' RenTech are also bullish, as is David Blood and Al Gore's Generation Investment Management.

WuXi PharmaTech

Another new position for Horseman, meanwhile, is WuXi PharmaTech (NYSE:WX). This is the hedge fund's third largest small-cap stock, and recently, the biotech R&D announced that its Shanghai genomics lab received a key certification from the U.S. DHS. The certification gives WuXi the only CLIA-approved facility in China, which will give it a key advantage over its geographical peers in the realm of lab testing with human samples.

In its last quarterly earnings call WuXi reported $142.3 million in revenue, up 9% on the year, and its GAAP diluted EPS rose by a whopping 45% to $0.41 per share. Wall Street's full-year estimates for WuXi's FY2013 are $1.62, and long-term estimates predict 13% to 14% growth annually through 2018. While shares are up 89% year-to-date, WuXi stock still trades at a meager PEG ratio of 0.6, indicating that the market isn't fully appreciating its growth prospects due to the DHS certification.

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, Alex Oleinic, and edited by Jake Mann. 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.