George Soros's most-promising picks

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. 

Last, but certainly not least, rounding out our top five is U.S. Airways Group LCC -0.74% . U.S. Airways is closing in on a merger with American Airlines, which, if completed, should generate around $500 million in cost savings, and additional revenue close to twice this estimate. Up 9.5% in the New Year, investors are certainly cheery on the prospects of a deal being done, but it's worth noting that in isolation, LCC still trades at a measly 0.18 times sales. The iconic David Tepper and his fund, Appaloosa Management, are also bullish on U.S. Airways.

Apple erases $17 billion from stock market

Apple Inc.’s near 4% drop wiped out $17 billion from the U.S. stock market on Monday, pushing two of the three benchmark indexes into negative territory.

Apple AAPL +0.15% shares fell $18.55, or 3.6%, to end at $501.75 after the Wall Street Journal and Japan’s Nikkei reported that the company had cut iPhone production plans because sales had come in below expectations.

The S&P 500 index SPX -0.09%  shed 1.37 point, or less than 0.1%, to 1,470.68, with telecommunications hardest hit and consumer staples faring best among its 10 industry groups.

“It would be positive without,” Apple, said Howard Silverblatt, senior index analyst at the S&P Indices, the stock’s impact on the index of 500 public companies.

The Dow Jones Industrial Average DJIA +0.14%  rose 18.89 points, or 0.1%, to 13,507.32, with Hewlett-Packard Co. HPQ +4.89%  leading the gains after J.P. Morgan upgraded the personal-computer maker to neutral from underweight. H-P also reclaimed the top PC-maker ranking from Lenovo Group Ltd.

International Business Machines Corp. IBM -0.14%  dropped 0.9% after J.P. Morgan downgraded it to neutral from overweight.

Shares of Dell Inc. DELL +12.96%  rallied 13% after Bloomberg News reported that the company was in buyout talks with private-equity firms.

Sprint Nextel Corp. S -3.89%  dropped 3.9% after the stock was downgraded by some brokerage firms. Read more about Monday’s biggest gaining and declining stocks.

The Nasdaq Composite COMP -0.26%  lost 8.13 points, or 0.3%, to 3,117.50.

Apple has a significant impact on the major stock indexes. It has a 3.8% weight in the S&P 500 and a 10% weight in the Nasdaq Composite, and is the largest stock on both. It’s not a member of the Dow average. Read more about the decline in Apple’s share price.

“In terms of the general negative sentiment, it’s a combination of Apple and a bit of poor industrial production number out of Europe. That was a pretty ugly wake-up call,” said Bill Stone, chief investment strategist at PNC Wealth Management. Industrial output for the 17-nation euro zone dropped 0.3% in November.

Decliners and advancers ran in a virtual dead heat on the New York Stock Exchange, where 590 million shares traded.

Composite volume approached 3 billion.

“As the week wears on, we’ll have a much more robust earnings calendar. Of those 27 S&P 500 companies reporting so far, they’ve lowered estimates significantly in the last three months,” said Art Hogan, market strategist at Lazard Capital Markets.

Companies reporting so far have managed to “squeeze out some sort of beat of lowered expectations,” said PNC’s Stone.

Of the first 27 companies in the S&P 500 to report fourth-quarter results, 67% exceeded earnings-per-share growth expectations, 15% were in line and 18% missed, according to Nick Raich, director of research at Key Private Bank. Of those companies, which represent 5% of the 500 that will eventually report, 11% raised their first-quarter 2013 guidance; 19% maintained and 70% lowered their outlooks.

“The new consensus expectation for fourth-quarter 2012 earnings growth is only 2%,” said Raich. “The guidance companies are providing after reporting results is still very weak.” 

In Washington, President Barack Obama talked about efforts to reduce the U.S. deficit at a Monday news conference in which he urged lawmakers not to use the debt ceiling as leverage in the political wrangling over government spending.

With a battle looming with Congress in the weeks ahead over hiking the $16.4 trillion debt ceiling, Republican lawmakers are mulling a government shutdown or default as a way to force cuts in government spending. Read a blog post on the U.S. Treasury thinking the unthinkable about the debt ceiling.

In separate statements, Senate Republican leader Mitch McConnell called the debt-ceiling debate the “perfect time” to confront government spending, and House Speaker John Boehner also indicated his intention to link spending cuts to hiking the debt ceiling.

The Treasury market did not signal distress over the danger of a government default, with yields on the benchmark 10-year note 10_YEAR +0.16%  off 1 basis point, or 0.01 percentage point, to 1.85%.

Federal Reserve Chairman Ben Bernanke spoke at 4 p.m. Eastern in Michigan, following comments delivered by Chicago Fed President Charles Evans that the central bank should continue to keep monetary policy accommodative as lawmakers cut U.S. spending.

“The market will be watching Bernanke to get a better take on when the Fed might start to take the punch bowl away,” said Stone of the Fed’s monetary policy.

Banks Find Promise Unfulfilled in China Forays

In June 2005, when Bank of America Corp.'s then-Chief Executive Ken Lewis flew to Beijing to sign a $3 billion pact to acquire a 9% stake in one of China's biggest state-run banks, he hailed the deal as "a long-term investment."

In Mr. Lewis's view, the money the bank put into China Construction Bank Corp. should have given the Charlotte, N.C., lender an entry into the world's fastest-growing economy and a clear shot at tens of millions of potential banking customers.

The Bank of America chief at the time was part of a parade of top international bankers who piled ...

France bombs Islamist stronghold in north Mali

By Bate Felix and Chine Labbe

(Reuters) - French fighter jets pounded an Islamist rebel stronghold in northern Mali on Sunday as Paris poured more troops into the capital Bamako, awaiting a West African force to dislodge al Qaeda-linked insurgents from the country's north.
The attack on Gao, the largest city in the desert region controlled by the Islamist alliance, marked a decisive drive northwards on the third day of French air strikes, moving deep into the vast territory seized by rebels in April.

France is determined to end Islamist domination of north Mali, which many fear could act as a base for attacks on the West and for links with al Qaeda in Yemen, Somalia and North Africa.

France's Defence Minister Jean-Yves Le Drian said French intervention on Friday had prevented rebels driving southward to seize Bamako itself. He said air raids would continue in the coming days.
"The president is totally determined that we must eradicate these terrorists who threaten the security of Mali, our own country and Europe," he told French television.
In Gao, a dusty town on the banks of the Niger river where Islamists have imposed an extreme form of Sharia law, residents said French fighters and attack helicopters pounded the airport and rebel positions. A huge cloud of black smoke rose from the militants' camp in the north of the city.
"The planes are so fast you can only hear their sound in the sky," resident Soumaila Maiga said by telephone. "We are happy, even though it is frightening. Soon we will be delivered."

A Malian rebel spokesman said the French had also bombed targets in the towns of Lere and Douentza.
France has deployed about 550 soldiers to Mali, split between Bamako and the town of Mopti, 500 km (300 miles) north, Le Drian said. State-of-the-art Rafale fighter jets were also dispatched to reinforce "Operation Serval" - named after an African wildcat.
In Bamako, a Reuters cameraman saw more than 100 French troops disembark on Sunday from a military cargo plane at the international airport, on the outskirts of the capital.
The city itself was calm, with the sun streaking through the dust enveloping the city as the seasonal Harmattan wind blew from the Sahara. Some cars drove around with French flags draped from the windows to celebrate Paris's intervention.
AFRICAN TROOPS EXPECTED
More than two decades of peaceful elections had earned Mali a reputation as a bulwark of democracy, but that image unraveled in a matter of weeks after a military coup last March that left a power vacuum for the Islamist rebellion.
French President Francois Hollande's intervention in Mali has won plaudits from leaders in Europe, Africa and the United States, but it is not without risks.

It raised the risk level for eight French hostages held by al Qaeda allies in the Sahara and for the 30,000 French expatriates living in neighboring, mostly Muslim states.

Concerned about reprisals, France has tightened security at public buildings and on public transport. It advised its 6,000 citizens in Mali to leave as spokesmen for the Islamist groups have promised to exact revenge.
In its first casualty of the campaign, Paris said a French pilot was killed on Friday when rebels shot down his helicopter.
Hours earlier, a French intelligence officer held hostage in Somalia by al Shabaab extremists linked to al Qaeda was killed in a botched commando raid to free him.
President Hollande says France's aim is simply to support a mission by West African bloc ECOWAS to retake the north, as mandated by a U.N. Security Council resolution in December.
With Paris pressing West African nations to send their troops quickly, Ivory Coast President Alassane Ouattara, who holds the rotating ECOWAS chairmanship, kick-started the operation to deploy 3,300 African soldiers.
Ouattara, installed in power with French military backing in 2011, convened a summit of the 15-nation bloc for Saturday in Ivory Coast to discuss the mission.
"The troops will start arriving in Bamako today and tomorrow," said Ali Coulibaly, Ivory Coast's African Integration Minister. "They will be convoyed to the front."
Military analysts expressed doubt, however, that African nations would be able to mount a swift operation to retake north Mali - a harsh, sparsely populated terrain the size of France - as neither the equipment nor ground troops were prepared.
The United States is considering sending a small number of unarmed surveillance drones to Mali as well as providing logistics support, a U.S. official told Reuters. Britain and Canada have also promised logistical support.
Former French colonies Senegal, Niger and Burkina Faso have all pledged to deploy 500 troops within days. In contrast, regional powerhouse Nigeria, due to lead the ECOWAS force, has suggested it would take time to train and equip the troops.

HOUSE-TO-HOUSE SEARCHES
France, however, appeared to have assumed control of the operation on the ground. Its airstrikes allowed Malian troops to drive the Islamists out of the town of Konna, which they had briefly seized this week in their southward advance.

Calm returned to the town on Sunday after three nights of combat as the Malian army mopped up any rebel fighters. A senior Malian army official said more than 100 rebels had been killed.
"Soldiers are patrolling the streets and have encircled the town," one resident, Madame Coulibaly, told Reuters by phone. "They are searching houses for arms or hidden Islamists."

Human Rights Watch said at least 11 civilians, including three children, had been killed in the fighting.
A spokesman for Doctors Without Borders in neighboring Mauritania said about 200 Malian refugees had already fled across the border to a camp at Fassala and more were on their way.
In Bamako, civilians tried to contribute to the war effort.

"We are very proud and relieved that the army was able to drive the jihadists out of Konna. We hope it will not end there, that is why I'm helping in my own way," said civil servant Ibrahima Kalossi, 32, one of over 40 people who queued to donate blood for wounded soldiers.

(Additional reporting by Adama Diarra, Tiemoko Diallo and Rainer Schwenzfeier in Bamako, Joe Bavier in Abidjan, Leila Aboud in Paris and Phil Stewart in Washington; Writing by Daniel Flynn; Editing by Alison Williams and Will Waterman)