$6 Billion Blue Ridge Capital’s Top Small-Cap Holdings
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Hedge funds have been known to seek alpha in small- and mid-cap stocks, as their pricing is often less efficient due to poor coverage by analysts and the media. This arbitrage can be significant with lower-valuation stocks, oftentimes leading to considerable winnings by the funds that have done their due diligence. Based upon our analysis of many hedge funds’ small-cap holdings, we’ve compiled an impressive-performing list of stocks valued between $1 billion and $5 billion that have handily outperformed the market. We started publishing a quarterly newsletter at the end of August with the list; since then, the strategy has returned 23.9% vs. 7.4% for the S&P 500 (learn more about our hedge fund small cap strategy here). Ex-Tiger Management member John Griffin of Blue Ridge Capital sees the value in small caps and has employed his fund’s capital in a number of them; here are his largest small-cap holdings:
Owens-Corning (NYSE: OC) is Griffin’s biggest holding south of the $5 billion market cap line, with approximately 2.5 million shares owned. The company produces composite materials used in real estate applications. Although suffering through a Chapter 11 bankruptcy in 2006, the company emerged as a leader in its market segment and went on to return 20% to investors who hopped in one year ago. Earnings and revenue are still challenged by misses and negative growth, hinting that OC may still be in hot water. Billionaire David Tepper has roughly the same sized position as Griffin; (check out more of his fund’s holdings here).
Blue Ridge Capital's next largest small-cap holding is in Martin Marietta Materials (NYSE: MLM). The stock squeezed out a slightly better performance than the S&P in 2012, but it also rewarded investors with a 1.6% dividend yield. In their last earnings report, MLM reported a significant $1.36 EPS, representing a beat and pushing both quarterly earnings and revenue to be significantly positive over the same quarter last year. Earnings due out for the last quarter of 2012 are a more conservative $0.48, so stay on the sidelines until actual numbers are reported. Commodity-guru John Arnold of Centaurus Advisors holds over 100,000 shares.
Colfax Corporation (NYSE: CFX) commands almost $200 million of Griffin’s funds, making it his largest small-cap position, and possibly his best small-cap winner. The stock returned a 33% gain in the last twelve months, all with a market cap of roughly $4 billion. 2013 may be the year of the retracement for CFX, as analysts think the stock should be priced 10% less a year out than where it currently stands. As such, CFX has faced a number of downgrades to Hold recently. Griffin’s position trumps most other funds, although Andreas Halvorsen of Viking Global has built a sizable 3.75 million share position.
Commercial auto parts manufacturer WABCO Holdings (NYSE: WBC) is another nine-figure position for Blue Ridge, and they increased their overall holdings by 9% going into their last 13F filing. The stock has had lackluster performance, and Griffin’s accumulation could be a hint that the growth in price per share is still yet to come. While price-to-earnings is a respectable 13, negative earnings and revenue growth might turn value investors elsewhere. That said, famed turnaround buyer and billionaire Warren Buffett has almost $100 million invested in WBC (see his other position here) – as such, it might be wise to take a closer look at WABCO’s potential.
American Depository Receipt Youku Tudou (NYSE: YOKU) rounds out Griffin’s largest small-cap positions, with a little less than half the position size of WBC. YOKU is China’s answer to Youtube, providing users with a platform to view and share video content through the country’s highly-regulated Internet. YOKU is still struggling with monetizing their content, leading to negative earnings and negative overall absolute return for 2012. However, analysts have high hopes for the tech-company, given Youtube’s success and China’s large user base. Billionaire Ken Griffin has his eyes on YOKU as well, upping his position by 30% as of his last 13F filing.
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