I think it is important to consider stocks that prominent investors recently added to their portfolios. As it is explained in one of the blog posts in Warren Trades, top value managers have more resources and information than any individual investor to analyze companies. In general they do not buy stocks for daytrading or short term trading. Hedge funds with billions under management are long term oriented so tracking their picks is one important step when analyzing stocks. In this article I will detail 3 small cap companies that prominent institutional investors added to their portfolios in the recent quarter.
3-D Systems (DDD)
Top institutional investor AQR Capital management bought the stock in the last quarter. 3D Systems is the leader in the 3D printing category and the company continues to invest and innovate to keep generating solid growth. The Consumer Electronics Association says overall 3-D printer sales will hit $5 billion in five years, a 30% compounded annual rate of growth from the $1.7 billion level it currently sits at. Investor's Business Daily previously pegged the long-term growth rate at 16% through 2020. In fact, the company reported a solid second-quarter growth, increasing revenue 52% over Q2 2011 on 112% printer unit growth and 20% organic growth across all categories. Backlog grew by 28% sequentially to $12.3 million at the end of the quarter on continued strong demand. I like the fact that the company grew its gross profit significantly, increasing 71% on higher revenue and 570 basis points GPM expansion to 51.4% over Q2 2011, driven by significant on-demand parts and printers GPM improvement.
The stock is up 158% year to day but it has been consolidating in the range of $43 and $33 for the past 8 weeks. I think that the stock will keep moving inside its consolidation range for the next weeks before resuming its current uptrend. By analyzing the stock´s recent price history and current price of $37, it is clear that the market is bullish on 3D Systems' future prospect.
Lamar Advertising (LAMR)
Perry Capital bought the stock last quarter. When I evaluate LAMR I note that shares are undervalued. In order to value LAMR it is important to compare it to Clear Channel (CCO). Lamar now trades at a mere 8.7% premium to CCO on the EV/EBITDA metric on F2012 EBITDA. I believe that premium should be wider in an efficient market as LAMR is clearly the most liquid way to play the Outdoor advertising sub-space and also is focused completely on North America. In addition, LAMR is not focused on transportation advertising (which carries lower margins due to revenue share) and has a much broader digital platform, ROICs and margins of which are vastly superior to static signage (CCO expertise).
Lamar has grown its localized billboard advertising businesses through a combination of organic growth and strategic acquisitions. The company invested roughly $107 million in 2011 and plans to invest similar amount in 2012 to improve its existing displays, construct new advertising structures which are expected to help Lamar to increase its market share in outdoor advertising markets.
I like this pick considering LAMR current undervaluation and business prospects.
Apollo Global Management (APO)
Top investors Pzena Investment Management and Fidelity purchased the stock in the last reported quarter. Apollo Global Management is one of the best private equity institutions in the world. It is a leading alternative asset management firm with $68 billion in assets under management (AUM). Apollo is primarily focused on private equity and credit investing. The N.Y.-based investment firm also has a growing real estate business and is expanding, with 485 employees worldwide, including 171 investment professionals.
Apollo's stock offers an attractive exposure to strong secular growth trends, such as the growing interest in big institutions to allocate money in private equity funds; some 17% of global pension assets are allocated to alternative investments versus just 7% a decade ago. Also, there are further improvements in capital market dynamics for private equity and credit investing (LP diversification, appetite for superior returns, increased funding pressures). Moreover, I consider the "zero-rates for an extended period" scenario favorable for private equity investing (improved M&A and underwriting plus low high yield rates).
A solid track record of investment performance with significant realization opportunities ahead makes me interested in Apollo shares. The fact I find most compelling is not Apollo's weighting towards performance fees, but the under-appreciating of more than $1 billion of accrued carried interest ($3.00+ per share) that should convert to cash as gains are realized. Nearly half of this relates to fairly liquid investments in publicly-traded equities and debt securities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.