Tiger Cub Lee Ainslie’s Small Cap Picks

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By going through quarterly 13F filings from hundreds of hedge funds and other notable investors, we’ve found that their most popular small cap stocks outperform the S&P 500 by an average of 18 percentage points per year. We think that this is because large institutional investors (such as mutual funds) and the financial media tend to pay less attention to small cap stocks, which leads to them more often being mispriced, and therefore serving as an attractive long (or short) opportunity.

Investors can also screen individual funds’ filings for small cap stocks and do further research on any interesting names which they might not have heard of. Read on for out quick take on Tiger Cub Lee Ainslie’s Maverick Capital’s five largest small cap holdings as of the end of March (or see the full list of the fund's stock picks).

Maverick increased the size of its position in Skyworks Solutions (NASDAQ: SWKS) by 21%, to a total of nearly 9 million shares. The second quarter of the semiconductor company’s fiscal year ended in March, with Skyworks reporting a 17% increase in its revenue versus a year earlier and a large percentage gain on the bottom line as well. Wall Street analysts are quite optimistic about the company, and so, while the trailing earnings multiple is a bit outside value territory at 17, the stock is priced at 9 times forward earnings estimates and a five-year PEG ratio of 0.60.

MGIC Investment (NYSE: MTG) is up over 80% year to date, bringing it to a market capitalization of $2 billion; Ainslie and his team disclosed ownership of about 24 million shares in the 13F after not having owned any of the stock at the beginning of 2013. The provider of mortgage insurance is likely seen as benefiting from an improving housing market, even though recent reports haven’t quite shown the business improving yet. We’d note that the stock has a beta of 3.9, reflecting extreme dependence on broader economic conditions.

The fund initiated a position of 2.5 million shares in hospital company Community Health Systems (NYSE: CYH) between January and March. There was very little growth in revenue or earnings last quarter compared to the first quarter of 2012, though the sell-side is bullish for the next year and a half. Their forecasts show EPS rising to the point where the forward P/E is only 10, not particularly out of the ordinary for a hospital, but certainly cheap on an absolute basis. Viking Global, managed by billionaire and fellow Tiger Cub Andreas Halvorsen, was also buying Community Health during Q1 (find Halvorsen's favorite stocks).

Ainslie cut his stake in $4.5 billion market cap homebuilder NVR (NYSE: NVR) by about 50% but still had over 100,000 shares in his portfolio at the beginning of April. A strong housing market helped power revenue up 28% in NVR’s most recent quarter compared to the same period in the previous year, and net income increased 74%. Markets have already priced in some amount of growth, as shown by the fact that the stock trades at 24 times trailing earnings, though we’d be interested in following NVR to see if its high growth continued in Q2.

According to the 13F, Maverick owned 2.1 million shares of Qlik Technologies (NASDAQ: QLIK) at the end of the first quarter of 2013. The enterprise software company saw a loss last quarter, in terms of adjusted earnings, and net income has been quite low on a trailing basis compared to Qlik’s valuation. Analysts predict that earnings per share will increase both this year and next year, but the stock still looks expensive according to their forecasts at a forward earnings multiple of 45. As a result, we would avoid the stock.

MGIC also seems a bit speculative to us, but Ainslie’s other three picks seem to at least be worthy of placing on a watchlist. Skyworks, NVR, and Community Health are all dependent on future growth given where they currently trade, but analysts seem optimistic enough on Skyworks that we suppose the company is worth checking out -- there is certainly enough room for the company to underperform expectations and still prove undervalued. Community Health also seems within striking range of being a value play, although we suppose the same is true for some of its peers.

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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 recommends Qlik Technologies. 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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