Activist Barry Rosenstein’s Small Cap Picks

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My analysis of investment strategies related to quarterly 13F filings has found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about my small cap strategy). We think that this is because small cap stocks are less widely owned by large institutional investors such as mutual funds and less intensely covered by the financial media and analysts, and therefore are more likely to be either undervalued or overvalued. I also like to go through individual filings to see which small cap stocks top managers like so that investors can perform further research on any interesting names. Read on for my quick take on the five largest small cap positions in value and activist investor Barry Rosenstein’s JANA Partners portfolio as of the end of March (or see the full list of the fund's stock picks from Q1).

Auto related companies

JANA reported a position of 6.4 million shares in $4 billion market cap auctioneer of used or damaged cars Copart (NASDAQ: CPRT). In its most recent quarter, earnings sunk by 4% compared to the same period in the previous fiscal year despite a double-digit percentage gain on the top line. With the stock valued at 22 times trailing earnings, markets seem to be expecting net income to begin rising in line with sales; Wall Street analysts, however, are not particularly optimistic and so the forward P/E is still fairly high at 18.

Rosenstein and his team increased their stake in Visteon (NYSE: VC), an auto parts company specializing in climate, electronic, and interior components, to a total of 2.3 million shares. The sell-side is a fan of Visteon: while the current valuation prices the company at a trailing P/E of 17, forecasts for 2014 are strong and with earnings growth expected to continue the five-year PEG ratio is 0.6. Revenue has been up a bit, though likely not enough to make Visteon worth buying yet. We’d note that the stock’s beta is 2.3, reflecting a tight connection to the overall economy.

More small cap picks from JANA

The fund moved heavily into Big Lots (NYSE: BIG) between January and March, closing Q1 with 3.8 million shares in its portfolio. The closeout retailer’s stock price is down over 20% in the last year; reports from the company show a similar decline in earnings even though revenue edged up slightly in its fiscal Q1 (which ended in early May) versus a year earlier. The earnings multiples are quite low, however- for example, the trailing P/E is only 11- and at that pricing it might be worth looking into to see if business might stabilize.

Ryman Hospitality Properties (NYSE: RHP) was another of Rosenstein’s small cap picks. Ryman is a real estate investment trust, and as such receives favorable tax status conditional on distributing a large share of pretax income to investors. This often results in high yields at REITs; Ryman currently offers quarterly dividend payments of 50 cents per share, which at current prices gives an annual yield of over 5% (though the company seems to be struggling). Billionaire John Paulson’s Paulson & Co. owned 2.2 million shares according to its own 13F (find Paulson's favorite stocks).

The filing disclosed ownership of 5.3 million shares of Fifth & Pacific Companies (NYSE: FNP). The designer of apparel and accessories has more than doubled in price since a year ago, and while it remains unprofitable on a trailing basis analysts are projecting that it will break into the black this year. Projections are then for 40 cents per share in EPS for 2014, though we’d note that still leaves a forward earnings multiple of over 50. Even with the business doing well in terms of revenue that valuation seems to high for us to consider buying right now.


Copart and Fifth & Pacific both seem quite dependent on high earnings growth, considering their current valuations, and in each case we don’t think recent results justify buying. Ryman, despite its high yield, also seems like a questionable pick. If we are interested in learning more about any of JANA’s picks here it would be Big Lots- which, even though it hasn’t been doing well, features attractive valuation metrics- and Visteon, which may be worth watching to see if it is in fact on track to meet analyst projections for the next year and a half.


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Meena Krishnamsetty has no position in any stocks mentioned. The Motley Fool recommends Copart. The Motley Fool owns shares of Big Lots and Ryman Hospitality Properties . 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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