Tom Gayner’s Top 5 Small-Cap Values

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Fund analysts are routinely sifting through the less popular, smaller cap stocks that stay out of the public eye, hoping to find arbitrage in these less-efficiently priced securities. When they succeed, they can uncover huge percentage gainers that fit under the sub-$5 billion market cap area. We have done our own analysis of many of the top funds’ largest small-cap holdings to compile a list that has proven to generate substantial alpha and beat major market indices. We started publishing a quarterly newsletter at the end of August last year to share the stock picks of this strategy. Since then, this method has returned 25.4% vs. 7.4% for the S&P 500 (learn more about our hedge fund small cap strategy here).  We’ve searched through Markel Gayner Asset Management’s holdings listed in their 13F to determine which small caps Tom Gayner possesses the most conviction for; read below for the full list.

Gayner’s most substantial small-cap holding can be found in W. P. Carey (NYSE: WPC), of which he owns roughly $47 million worth. WPC is a Real Estate Investment Trust, primarily investing in commercial properties within the States and abroad. The stock was a big winner this past year, garnering investors with a 30% gain in share price, in addition to paying a 4.7% dividend. While past performance has been impressive, future valuations put this stock at parity with current prices, representing an even representation of value and little room for growth. Billionaire Jim Simons of Renaissance Technology has a position in WPC, albeit a small one (read about more of his small-cap holdings here).

Federated Investors (NYSE: FII) is another of Gayner’s more dedicated small-cap holdings, with over 2 million shares purchased of the financial service provider. 2012 saw a choppy trading range for FII, although they ended the year on a high note, jumping up a third in value (mostly attributed to first-quarter stock performance). This year could be a tricky one for FII, as government regulations and low interest rate environments could hurt their core money market strategies, which are already low-margin to begin with. SAC Capital Advisors, headed by Steve Cohen, has built a position as well.

Gayner’s next largest position with a market cap between $1 billion and $5 billion can be found in insurance underwriter RLI Corp. (NYSE: RLI). The stock saw positive revenue growth from Q4 2011 to Q4 2012, which included a $0.45 surprise over analysts’ estimates, helping to prop up their stock price by 5% since the start of this year. However, this pop in price might mean that RLI is overvalued, especially if earnings return to numbers that were more in-line with the rest of 2012’s reports. Forward price relative to earnings confirms this, so we would hold off on RLI for the time being. Chuck Royce of Royce & Associates saw fit to drop 35% of his position between his last two reported 13F filings.

Colfax Corporation (NYSE: CFX), a manufacturing and engineering company that operates under the Howden and ESAB brand names, lays claim to about $40 million of Gayner’s assets. He bumped up his position by about 30% relative to his previous 13F filing, piling into the impressive run-up that CFX had going into the end of the year (nearly 30% for the latter half of 2012). CFX may need to cool its jets for the next few months, as analyst are expecting future value a year out to be less than current prices. Blue Ridge Capital, a $6 billion fund headed up by John Griffin, has almost $200 million invested in CFX.

International Game Technology (NYSE: IGT) rounds out our list of Tom Gayner’s main small-cap holdings. The $4 billion company designs and develops multiple gaming applications including casino machines and mobile applications. Forward price-to-earnings shows strength, as does IGT’s recent earnings announcement in January; both revenue and earnings growth were positive compared to the same quarter last year. The outlook for 2013 is optimistic, with most analysts recommending a buy or hold, weighing in to give the stock a one year mean price target of $17.20. John Rogers of Ariel Investments has nearly ten million shares under his ownership.


This article is written by Eric Winter and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Federated Investors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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