Small-Caps: Hedge Fund Favorites

We sent this to subscribers of our free small-cap newsletter with ActivistStocks last week. Sign up to get all our small-cap updates as we send them out.

Last week we talked about the fact that small-caps aren’t dead. Well, this week we’re looking at hedge funds that are betting on that very fact. Here are the top small- and mid-caps that hedge funds own – noting that hedge fund ownership is one of the six small-cap laws.

The number one pick in the mid-cap space is CDK Global (NYSE: CDK), which is the most widely held stock among the Evercore ISI universe. Some 30 hedge funds now own CDK. Major CDK hedge fund owners include a couple activist investors, Sachem Head Capital and Fir Tree, which own 6.9% and 6%, respectively. As well, Elliott Associates owns right at 5% and Blue Ridge Capital owns 3.8%

Michael Mauboussin: Here’s what active managers can do

michael mauboussin, Credit Suisse, valuation and portfolio positioning, capital markets theory, competitive strategy analysis, decision making, skill versus luck, value investing, Legg Mason, The Success Equation, Think Twice: Harnessing the Power of Counterintuition, analysts, behavioral finance, More Than You Know: Finding Financial Wisdom in Unconventional Places, academics , valuewalkThe debate over active versus passive management continues as trends show the ongoing shift from active into passive funds. Q2 2020 hedge fund letters, conferences and more At the Morningstar Investment Conference, Michael Mauboussin of Counterpoint Global argued that the rise of index funds has made it more difficult to be an active manager. Drawing Read More

The mid-cap that made up the greatest weighting in hedge fund portfolios last quarter includes the likes of Post Holdings (NASDAQ: POST) and Akorn (NASDAQ: AKRX). For Post Holdings, major hedge fund owners include Paulson & Co. and Ratan Capital. Akorn also calls Paulson a shareholder, as well as Sachem Head.

For small-caps, Impax Laboratories (NASDAQ: IPXL) is the top pick, with 21 funds owning the stock. Hound Partners owns close to 10% of Impax. A small-cap hedge funds saw added to their portfolios last quarter was Four Corners Property Trust (NASDAQ: FCPT), with 15 funds now owning the stock. Starboard Value is the major Four Corners shareholder, but so is V3 Capital and Yost capital.

Here’s the top 15 stocks that small-cap hedge funds are overweight:

In terms of weighting in hedge fund portfolios, the embattled Viasat Inc. (NASDAQ: VSAT) is the largest overweight stock in hedge fund portfolios. This has The Baupost Group as a 23.5% shareholder, but also has FPR Partners as a 12% owner and Southeastern Asset Management a 9% owner.

Here’s another way of looking at what hedge funds are doing, the small-cap sector exposure. Notice that hedge funds were largely decreasing their exposure to small-caps in the materials and discretionary stocks. Funds are now underweight materials. Meanwhile, they appear to be moving that money into technology and healthcare stocks.

small-cap 2.png

As part of our new small-cap coverage, we’ll be using our own insights and network of underrated small-cap hedge funds to flip the script on finding investable small-caps. This starts with a free small-cap email newsletter – non-spammy and non-penny stock to offer some ideas you won’t find elsewhere.

P.S. We’ll be launching a quarterly subscription service that profiles underrated small-caps and under-the-radar hedge fund managers. The idea is to fish in a pond where there are less fishermen. We’ll be profiling managers that have a history of outperforming – the April issue features a manager that’s generated ~15% annualized returns since inception and has a proven track record of finding micro-caps with impressive upside – learn more here.