Small- and mid-cap stocks don't get as much attention from bankers,
third-party analysts and the media, which often leaves them
less-efficiently priced than their larger peers. Generally speaking,
hedge funds take advantage of this by dedicating their research teams to
work on the little guys, and consequently, they generate a significant
portion of their alpha from the small-cap world.
At Insider Monkey, we've empirically tested this phenomenon, and
according to our own analysis, investing in the hedge fund industry's
top small-cap picks has generated an alpha of about 120 basis points per
month.
Let's take a look at the top small-cap stock picks of one hedge fund in
particular: George Soros's Soros Fund Management. The stocks presented
here have market capitalizations between $1 billion and $5 billion,
which is consistent with the criterion used in our strategy (
see all of George Soros's stock picks
).
According to its last 13F filing with the SEC, the No. 1 small-cap stock in Soros's fund was Adecoagro SA
AGRO
+1.34%
. With a little under 26 million shares, Soros owns approximately 21.3%
of Adecoagro's outstanding shares. Since its U.S. IPO roughly two years
ago, the agricultural holding company has lost 25.5% of its value, but
shares have been in the green since the start of 2013.
The crux of Adecoagro's bullish thesis lies in its exposure to one of
the best asset classes out there for the long run: arable land. The
company owns around 40 different farming properties throughout
Argentina, Brazil and Uruguay. Though most investors are aware that
farmland prices have been skyrocketing in the United States, Brazil, for
example, has also seen the average value of its arable land increase by
nearly fourfold over the past decade (
via
Informa Economics FNP). Uruguayan and Argentinian farmlands have experienced a similar boom.
Another benefit of Adecoagro's portfolio — which is most heavily
concentrated in Argentina — is its crop diversity, which reduces its
exposure to one commodity in particular, like corn or wheat. At a mere
14.9 times forward earnings, shares of Adecoagro are cheap at the
moment, and the sell-side expects the company to finish 2013 with
earnings of 63 cents a share — nearly twice its 2012 forecast. Ospraie
Management's Dwight Anderson is also very bullish about this stock (
see Anderson's top picks
).
Acacia Research Corporation
ACTG
-1.18%
is the second-largest small-cap stock in Soros's portfolio, worth a
little over 1.1% of his total 13F holdings. The company and its
subsidiaries match patent owners and inventors to corporate partners.
Acacia holds 250 different patent portfolios for use in medicine, media,
IT and energy. Oil and gas production is the company's latest play as
we head into the third week of 2013.
Some bears may cry "troll," while others may believe that its business
model is perfectly legitimate, but the fact is this: The number of
patent portfolios under Acacia's banner has close to quadrupled over the
past half-decade. The sell-side expects earnings growth of 38%
annually
through 2017. At a price-to-earnings growth multiple near 0.7, the
markets are clearly undervaluing these prospects, and we'll be watching
Acacia's presence in the energy industry closely. Famed "magic formula"
man Joel Greenblatt was also quite bullish on this company in his last
13F filing (
see all of Joel Greenblatt's stock picks here
).
Internet-based photo-publishing service Shutterfly
SFLY
+1.17%
is George Soros's third-largest small-cap investment. The hedge fund
manager owns about 8.4% of Shutterfly's outstanding shares, with
short-sellers shorting another 21% of the company. Despite this
abnormally high level of bearish investors, shares of Shutterfly have
actually gained 9.2% since the start of the year on the back of an
upgrade from Topeka Capital Markets and the acquisition of ThisLife, a
cloud-based media storage provider.
Topeka now holds a $40 price target on the stock, specifically citing
the belief "that current competitors will continue to struggle to
achieve sustained profitability." Generally speaking, Wall Street sees
an upside of 15%-16% from these levels. At depressed book (1.9x) and
sales (2.2x) multiples, Shutterfly offers investors value as well.
Cheniere Energy
LNG
-0.30%
, the liquefied-natural-gas company, sits at No. 38 in Soros's 13F
portfolio, and is his next largest small-cap holding. Cheniere has been a
beast since mid-November, gaining over 40% in value. As its ticker
symbol suggests, the company is currently the U.S.'s
only
approved LNG export terminal. The Department of Energy's Federal Energy
Regulatory Commission believes the site will have the capacity to ship
2.6 billion cubic feet of gas per day when export activity commences in
late 2015.
While it remains to be seen exactly how many of Cheniere's peers — like
Dominion Resources (D), for example — will gain terminal approval,
forward-looking investors can take solace in this exclusivity at the
moment.
