Billionaire Kerr Neilson’s Small Cap Picks

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We track 13F filings from hedge funds and other notable investors as part of our work researching investment strategies, and one of our findings has been that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year. We think that this is because small cap stocks receive less attention, and are therefore more likely to be undervalued (or overvalued for that matter).

As such, the small cap picks of individual funds can serve as potential sources of ideas for further research if after a brief look they seem to be good values. Read on for the five largest positions of billionaire Kerr Neilson’s Platinum Asset Management in stocks with market capitalizations between $1 billion and $5 billion as of the end of December (or see the full list of Platinum's stock picks).

SINA (NASDAQ: SINA), a Chinese web portal providing advertising services, was one of Platinum’s top picks with the fund owning 4.8 million shares at the end of December. Sina’s stock price has fallen 18% in the last year, and business in the fourth quarter of 2012 was not particularly good: revenue was up only slightly versus a year earlier, and earnings fell 75%. That’s not good for a stock which currently trades at 32 times forward earnings estimates. Tiger Cub Robert Karr’s Joho Capital increased its holdings of Sina by 73% in the fourth quarter of 2012.

Neilson and his team owned 9.3 million shares of Foster Wheeler (NASDAQ: FWLT), a $2.3 billion market cap engineering and construction company that builds facilities for energy companies and utilities, according to the 13F. Foster Wheeler carries a high beta at 2.2, showing that the company is dependent on broader economic activity. Its most recent quarter showed steep declines in revenue and earnings; Wall Street analysts are projecting a recovery, so the forward P/E is only 11, but we’d be hesitant considering the recent poor performance.

The fund reported a position of almost 16 million shares in Stillwater Mining (NYSE: SWC), which extracts metals including palladium and platinum. It’s another stock which tends to move in line with broader market indices, as the beta here is 2.8. Business has been down here as well, and the trailing earnings multiple is 26--so Stillwater will have to improve its financials considerably in order to justify its current valuation, let alone prove undervalued. A number of market players are bearish as the most recent data shows that 20% of the outstanding shares are held short.

According to the 13F, another Chinese Web portal, Sohu (NASDAQ: SOHU), was another of Neilson’s top small cap picks. Sohu is also in a somewhat questionable business position, going by reported financials: its last quarterly report showed a 22% increase in revenue compared to the fourth quarter of 2011 but a slight decline in net income. The sell-side is counting on strong earnings growth, with Sohu posting trailing and forward P/Es of 24 and 14 respectively, but there’s considerable short interest here as well, and we wouldn’t consider the stock a good value.

Platinum disclosed ownership of 6.7 million shares of Ciena (NASDAQ: CIEN), a provider of communications equipment and software. At a market capitalization of $1.7 billion, the stock trades at 17 times consensus earnings for the fiscal year ending in October 2014. However, Ciena has been struggling with profitability in the past few quarters and sales increased only slightly in its most recent quarter compared to the same period in the previous year. Like some of these other companies we’ve discussed, Ciena is a favorite among short sellers.

We’re generally not fans of Platinum’s small cap picks. We have two Chinese Internet companies where growth has recently been low, and earnings multiples have generally been pricing in strong future performance. Foster Wheeler could have some value prospects if it hit Street targets for the forward fiscal year, but given the company’s poor numbers recently it is at best a stock to watch for more information; we’d consider it too speculative to buy on analyst promises alone.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends SINA and Sohu.com. 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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