Billionaire Ken Fisher’s Small Cap Picks
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Our analysis of quarterly 13F filings has shown that on average, the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). We think that this is because small cap stocks tend to receive less attention from most institutional investors and the financial media, and so, are more likely to be either undervalued or overvalued.
We can also use our database of 13Fs to review small cap picks from individual managers; while blindly following these picks may not be wise, they can at least be treated similarly to the results of a stock screen with investors performing further research on any interesting names. Read on for our quick take on the five largest small cap stocks in billionaire Ken Fisher’s Fisher Asset Management’s portfolio as of the end of March or see the full list of Fisher’s stock picks.
The asset management firm owned a little over 2 million shares of sporting goods retailer Cabela’s (NYSE: CAB). Cabela’s has become known primarily as a way to play demand for guns; gun sales have been up dramatically in recent years, powering the stock price up more than 400% over the last five years. Earnings grew 73% last quarter compared to the first quarter of 2012, with revenue rising close to 30%; management attributed a large portion of this strength to continued high gun demand. The trailing P/E is 25 as markets anticipate even more growth.
Another strong performer in recent times -- its stock price has roughly doubled in the last year -- is Domino’s Pizza (NYSE: DPZ). This has come coupled with significant improvements in terms of the bottom line, with recent reports showing much higher net income numbers. However, with markets generally assigning high multiples to quick service restaurants, we think Domino’s looks a little expensive -- its forward P/E is 22. Renaissance Technologies, whose founder Jim Simons is now a billionaire, owned 2.5 million shares according to its own 13F (find Renaissance's favorite stocks).
Ryland Group (NYSE: RYL), a $2 billion market cap homebuilder and mortgage finance company, was another of Fisher’s top small cap picks with the filing disclosing ownership of 2.6 million shares. Homebuilding has been a hot industry, and Ryland is up close to 100% in the last year as well. The stock carries trailing and forward P/Es of 33 and 12, respectively, showing that both the market and Wall Street analysts are generally quite optimistic. However, a number of market players are bearish and 16% of the float is held short.
Fisher reported a position of 2.7 million shares in PAREXEL International (NASDAQ: PRXL), a clinical research and trials services company with a market capitalization of $2.7 billion. In its most recent quarter, PAREXEL recorded revenue and earnings growth of close to 30% compared to the same period in the previous fiscal year. Markets expect sustained growth, and have bid up the stock price to the point where PAREXEL trades at 33 times trailing earnings; while performance has been strong, we’d want to see the multiple come down before considering it as a growth stock.
Rounding out our list of Pacific regional bank and private investor SVB Financial Group (NASDAQ: SIVB). The “SVB” stands for “Silicon Valley Bank” reflecting the emphasis on providing financing for technology and tech related companies. The stock is valued at 19 times earnings, whether we compare the $3.4 billion valuation to trailing results or sell-side forecasts for 2014. This is despite significant growth on both top and bottom lines in Q1 2013 versus a year earlier, and we’d be interested in looking into the source of those improvements.
Fisher’s small cap picks have generally succeeded in terms of delivering high earnings growth in recent quarters, though as a consequence, they generally trade quite a bit above value territory. We’re worried that Cabela’s is exposed to the risk of gun sales remaining at high levels or even declining, rather than growing further. As we’ve mentioned, we’d have some interest in looking into SVB Financial though we’d note that normally optimistic analysts are forecasting little growth at the bank. The other three stocks certainly have potential, but just seem too pricey at this time for us to recommend buying.
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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!