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.

Obama Warns Republicans on Debt Limit

WASHINGTON—The next phase in the bitter, two-year-long battle between the White House and congressional Republicans began in earnest Monday, with President Barack Obama and GOP leaders digging in over spending and the debt limit.

Mr. Obama, speaking at a hastily called news conference, sought to blunt any momentum gathering around congressional Republican plans to use the vote on raising the debt limit as leverage in coming budget fights, saying it is "irresponsible" and "absurd" to even consider defaulting on U.S. debt in an attempt to extract spending cuts from Democrats.

The president said the threat of default already is harming ...

Bernanke: 'We're Not Out of the Woods' Despite 'Fiscal Cliff' Deal

Although the "fiscal cliff" deal made "some progress" in resolving the nation's debt problem, "we're not out of the woods yet," Federal Reserve Chairman Ben Bernanke said Monday.

"We are approaching a number of other fiscal critical watersheds," Bernanke told the University of Michigan's Gerald R. Ford School of Public Policy. "We have the funding of the government, we have the so called sequester…and we have the infamous debt ceiling which will come into play."

Echoing comments made earlier in the day by President Barack Obama, Bernanke said raising the debt ceiling merely gives the government the ability to pay its existing bills.

"It doesn't create new deficits, it doesn't create new spending," he said. He said it was like a family deciding that to save money, it won't pay its credit card bill.

"It's very, very important that Congress take necessary action to raise our debt ceiling to avoid a situation where our government doesn't pay its bills," Bernanke said.

(Read More: Geithner Letter Warns Congress: We Will Hit the Debt Ceiling Soon)
The Fed chairman also said it would actually be better if the country didn't have a debt ceiling.
"I don' think that's going to happen, I think it's going to be around," Bernanke added, "but I do hope Congress will allow the government to pay its bills, not raise the possibility of default , which would be very costly for our economy, and then address very seriously these fiscal issues."

While some progress was made in working out the country's fiscal problems with the tax deal beginning of January to extend tax cuts for all American families earning less than $450,000 a year, Bernanke said the big challenge remains finding long-run debt sustainability without unduly hampering the U.S. economic recovery.

He said that the fiscal cliff probably would have created a recession in the U.S. this year, but some of that risk has been avoided.

Bernanke downplays inflation risk of QE3

Worst thing Fed could do would be to hike rates prematurely

Federal Reserve Chairman Ben Bernanke played down fears on Monday from some more hawkish central bankers and investors that the Fed’s bond-buying program will lead to higher inflation.

“I don’t believe significant inflation is going to be the result of any of this,” Bernanke said in a speech at the University of Michigan. 

The Fed will watch closely to see whether the zero-interest rate policy that has been in place for four years could eventually lead investors to make unwise decisions, creating an asset bubble, he added.

Bernanke also said there is a continuing debate over whether Fed policy is a cause of asset bubbles. The Fed has an “open mind” on the issue, he remarked, and will continue to monitor markets and toughen bank supervision to guard against financial instability. 

But the worst thing for the central bank to do would be “to raise interest rates prematurely,” according to Bernanke. 

At their meeting in December, the Fed boosted its stimulus program by adding $45 billion of monthly Treasury purchases to an existing program to buy $40 billion in mortgage-backed securities a month.

Last week, several Fed officials expressed their concerns over the central bank’s loose policy. Read: Fed hawks get their day in the sun. 

Kansas City Fed Bank President Esther George noted that prices of assets such as bonds, agricultural land and high-yield and leveraged loans were at historically high levels.

In addition, Richmond Fed President Jeffrey Lacker dissented from all eight Fed policy statements in 2012, saying that the central bank might be undermining its ability to control inflation.

U.S. could hit debt limit in mid. Feb.: Geithner

WASHINGTON (MarketWatch) -- Treasury Secretary Timothy Geithner on Monday said the debt ceiling would be reached between mid-February and early March unless Congress acted to raise it. The U.S. would have hit the debt limit in December but Treasury took several accounting moves to delay it. Geithner's estimate, contained in a letter to Congressional leaders, updated his earlier, more general, estimate from December that the extraordinary measures would delay the debt ceiling for two months. Geithner said Treasury would provide a more targeted estimate at a later date. There is a lot of uncertainty given the tax filing system, he said.