Billionaire Israel Englander’s Small Cap Picks

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Our analysis of hedge funds’ 13F filings over time has found that their most popular small cap stocks earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). We think that this is because large institutional investors such as mutual funds pay less attention to small caps (which we define as those with market capitalizations between $1 billion and $5 billion), making it more likely that they will be either undervalued or overvalued. Given this finding, we like to go through 13Fs from individual managers in search of overlooked opportunities which investors may appreciate. Read on for our quick take on the five largest small cap holdings in billionaire Israel Englander’s Millennium Management’s portfolio as of the end of March or see the full list of the fund's stock picks.

The Portfolio

One of Millennium’s largest holdings overall by market value was its 2.5 million shares of Gulfport Energy (NASDAQ: GPOR), a $3.6 billion market cap oil and gas exploration and production company whose assets include substantial acreage in the Utica and Bakken Shales. The company’s net income was up considerably in the first quarter of 2013 versus a year earlier, though the market has already priced in quite a bit of growth at Gulfport: the trailing P/E is quite high at 33. We’d want to wait for another quarter or two to see how earnings go.

Englander and his team increased their holdings of McDermott International (NYSE: MDR) to a total of nearly 6 million shares by the end of Q1. McDermott is an oilfield services company focusing on providing equipment and services related to offshore drilling. The stock price is down 17% in the last year as the company has suffered shrinking margins, which have in turn generated a decline in earnings going by recent reports. The combination of these trends has resulted in a market cap of $2 billion, or 12 times trailing earnings.

According to the 13F, Millennium owned about 870,000 shares of $3.7 billion market cap industrial machinery manufacturer Gardner Denver (NYSE: GDI) as of the beginning of April. Gardner Denver is another business that hasn’t been doing particularly well recently, reporting double-digit declines in both revenue and net income in its most recent quarter compared to the same period in the previous year. The valuation is fairly low here, but the stock is not in pure value territory (the forward P/E is 12, for example), so we’d avoid it.

Hillshire Brands (NYSE: SLE), the producer of packaged meat and other food products, was another of the fund’s small cap picks. The stock trades at 18 times forward earnings estimates, which is in the same range as many other food related companies as many investors look for fairly safe consumer staples investments. Others may be speculating about Hillshire as an M&A target, with Berkshire Hathaway recently buying Heinz and a Chinese company announcing a prospective purchase of Smithfield. Citadel Investment Group, managed by billionaire Ken Griffin, reported a position of 3.4 million shares in Hillshire in its own 13F (find Griffin's favorite stocks).

Rounding out our list is $3.4 billion market cap Missouri and Kansas electric utility Great Plains Energy (NYSE: GXP). As might be expected for a utility, Great Plains more or less fits the profile of a classic defensive stock: its beta is only 0.4, and its dividend yield is almost 4% at current prices. It should be noted that the company cut its quarterly dividend payment in half in early 2009, and there have only been a couple small increases since that time. Both the trailing and forward P/Es come in at 14.

The Bottom Line

We’re not particularly excited about any of Millennium’s picks, though McDermott and Gardner Denver are cheap enough on an earnings basis that if they can stabilize their business, or possibly even generate some earnings growth, they may be worth considering. Gulfport might also be worth monitoring as well, though we’ve mentioned that the current valuation is fairly aggressive, and the company would need to improve considerably in order to justify where it currently trades.

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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 has no position in any of the stocks mentioned. 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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