Billionaire Chase Coleman and Feroz Dewan’s Small Cap Picks
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tiger Global Management, a Tiger Cub hedge fund which counts billionaire Chase Coleman among its managers, filed its 13F with the SEC in mid May. We have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year -- defining small cap stocks as those with market capitalization between $1 billion and $5 billion -- and in fact our live testing of this strategy has returned 38% since we began tracking it in September 2012.
We think that small cap picks from individual funds such as Tiger Global can also serve as useful sources of investment ideas, with investors doing further research on any interesting names. Read on for our quick take on Tiger Global’s five largest small cap holdings by market value as of the end of March and compare these picks to those in the fund's previous filings.
One of Tiger Global’s top picks overall was Groupon (NASDAQ: GRPN), with the filing showing a position of 65 million shares. Even after its recent rally, Groupon is still down 33% from its levels a year ago; the company is barely profitable, and revenue growth has not been good. Analysts are expecting improvements on the bottom line in 2014, but with the stock still being valued at 25 times forward earnings estimates -- and therefore dependent on high growth from that point -- we are skeptical that Groupon deserves its current valuation.
The fund bought 2.9 million shares of Carter’s (NYSE: CRI), the children’s apparel designer and retailer which also owns the OshKosh brand, after not having owned any shares at the beginning of 2013. Carter’s is another stock which is well out of pure value territory, with trailing and forward P/Es of 25 and 18, respectively. While earnings have recently been up strongly, revenue grew only 7% last quarter compared to the first quarter of 2012, and that growth rate would likely have to pick up in order for Carter’s to turn out to be undervalued.
Colfax (NYSE: CFX) was another of Tiger Global’s small cap picks. According to the 13F, it bought 3.5 million shares between January and March. The diversified machinery company trades at 29 times forward earnings estimates, indicating that markets are expecting high earnings growth here as well. Given the industry, it’s not that surprising that Colfax carries a beta of 1.9. This shows that the stock price tends to react strongly to moves in broader market indices. Sales numbers, at least, have not been that strong recently and we think that we would avoid the stock.
Tiger Global disclosed ownership of 1.3 million shares of $3.4 billion market cap 3-D printing related company Stratasys (NASDAQ: SSYS). Sales more than doubled in its most recent quarter compared to the same period in the previous year, and many market participants are very optimistic about 3-D printing. Though we are a bit concerned that specific companies in the business might be overhyped, the fund’s participation here is somewhat notable. Analyst consensus for 2014 implies a forward earnings multiple of 35, so once again, the current valuation already assumes high growth for at least some time.
Talk about catching a falling knife, J.C. Penney (NYSE: JCP), which is down 31% in the last year and over 40% in the last two years, rounds out our list of Tiger Global’s top five small cap picks. The retailer experienced a 16% decline in revenue last quarter (fiscal Q1) compared to the first quarter of its last fiscal year, and has been unprofitable for some time; free cash flows are also highly negative. According to the most recent data, about a third of the float is held short. J.C. Penney looks like a highly risky investment -- we’re highly skeptical that its turnaround efforts will be successful.
We're not a fan of many of these small cap picks. As we've suggested, J. C. Penney and Groupon are quite speculative investments considering how the business has been doing recently. While the 3-D printing industry is quite interesting, we think that we'd prefer to hold off on investing in Stratasys as long as the market is already pricing in such high growth. As for Carter's, that stock is certainly not cheap, but it's not too out of place for apparel companies and we have been seeing at least some revenue growth to accompany expanded net margins. We think Carter's is the most promising pick out of these five small-cap stocks.
Groupon’s story is one of the American Dream. The company went from 400 subscribers in 2008 to over 150 million today. While this story is definitely one of triumph on a business level, its success most certainly hasn't been shared by investors. Company shares have fallen over 80% over the past year and left investors panicked. Will this company live out its American Dream, or leave shareholders empty-handed? In order to answer that question, our analyst has compiled a premium research report with in-depth analysis on whether you should buy or sell Groupon right now, and why. Simply click here now to get started.
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 Stratasys. The Motley Fool owns shares of Stratasys. 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!