5 Small Caps That Hedge Funds Love

by Jeff Reeves | July 12, 2013 8:27 am

5 Small Caps That Hedge Funds Love

SmallCap185 5 Small Caps That Hedge Funds Love[1]The “smart money” on Wall Street isn’t always very smart. After all, active management — that is, stock pickers who make their own portfolios instead of just following an index like the S&P 500 — chronically underperforms.

But it’s undeniable that the smart money has power. After all, hedge funds with billions of dollars at their disposal can move the market when they deploy that cash.

And if you’re in a stock they are buying before they let loose the fire hose of cash, you can make a pretty penny in the process.

The good news is that if you take the time to dig, you can find out what these big money managers are buying — and that’s exactly what the investing team over at NerdWallet did via its hedge fund tracker. NerdWallet recently examined the current and past holdings of some of the largest U.S. hedge funds by poring through their 13-F filings with the SEC to unearth the small-cap stocks that hedge funds are hoarding right now.

Here’s the list of the hottest small-cap stocks among hedge funds now:

#5. Polycom

Polycom185 5 Small Caps That Hedge Funds Love[2]Change in investment from last quarter: +$48 million
Total hedge fund investment vs. market cap:
$110.7 million of $1.8 billion
YTD returns: 4% vs. 17% for the S&P 500

Polycom (PLCM[3]) provides telecommuting and video conferencing tools. It has a very close relationship with Microsoft (MSFT[4]) and its Skype property, as well as its suite of Office software, to focus its business on enterprise clients looking to boost productivity of remote workers.

Polycom hasn’t exactly gone like gangbusters in 2013, lagging the market significantly and down about 60% from its 2011 peak. However, the company has turned around from a money-losing fiscal 2012 and is profitable once more, and hopefully will see an uptick in enterprise spending as the economy gains steam.

The bottom line is that Polycom is in a good segment of the business software market as telecommuting and remote access increasingly become the norm. Whether it can fend off competitors like Citrix (CTRX[5]) and its GoToMeeting or similar competitors is the million-dollar question for investors and hedge funds alike, however.

#4: Caesars Entertainment

Caesars185 5 Small Caps That Hedge Funds Love[6]Change in investment from last quarter: +$48.3 million
Total hedge fund investment vs. market cap:
$286.9 million of $1.9 billion
YTD returns: 131%

If you think Wall Street is already a casino, why not invest in a casino in a more literal sense via Caesars Entertainment (CZR[7]).

After all, it’s been an awfully profitable trade in 2013, with the stock doubling (and more) in a hurry.

In case you’re unfamiliar, Caesars resorts include Harrah’s, Caesars and Horseshoe brand names both in Vegas and elsewhere in the world. It also owns the World Series of Poker, if you’re a hold ‘em fan.

If the U.S. economy continues to gain momentum and tourists start to open up their wallets more both to take trips and to play the craps table, expect CZR to stay hot. And on a popularity basis, NerdWallet found that Caesars had the greatest ownership among top hedge funds with “14.43% of its shares held by activist investors Soros Fund Management and Paulson & Co.

Caesars continues to bleed cash, but apparently the hedgies are hoping that brighter skies lay ahead. Just be careful in this one after the big run-up and the fact that CZR continues to operate in the red.

#3: Vishay Intertechnology

Vishay185 5 Small Caps That Hedge Funds Love[8]Change in investment from last quarter: +$56.6 million
Total hedge fund investment vs. market cap:
$56.6 million of $2.1 billion
YTD returns: 34%

Vishay Intertechnology (VSH[9]) is a small semiconductor company that’s in favor with hedge funds right now and has nicely outperformed the market in 2013.

In this post-PC age, there’s a lot of focus on how many of the old chipmakers are doomed … but that simply hasn’t been the case for the past few months as the market has seen resilience in many semiconductor stocks. After all, people buy a host of electronics every year beyond smartphones and tablets, and their components have to come from somewhere.

Vishay admittedly has been suffering from top-line pressures in the past few years, but profits are forecast to grow a modest 16% this fiscal year and then a nice 27% in fiscal 2014.

#2: MGIC Investment

MGICinvestment185 5 Small Caps That Hedge Funds Love[10]Change in investment from last quarter: +$84.2 million
Total hedge fund investment vs. market cap:
$84.2 million of $2 billion
YTD returns: 128%

MGIC Investment (MTG[11]) is a private mortgage insurer that has gone gangbusters in 2013 along with a resurgent housing market. The company backs up loans for borrowers who can’t put down a lot of money on their home until there’s enough equity in the house to cover the cost of a bad mortgage should the borrower default.

These are typically FHA loans, since MGIC is the largest mortgage insurer for Freddie Mac and sister mortgage-financing company Fannie Mae.

With brisk homebuying lately and a drop in bad mortgages, MGIC is in the right place at the right time. Of course, like Caesars, this is a company that is having trouble turning a profit right now, so buyers should beware of expecting too much after a big run and a lack of earnings — even if the business is looking up.

#1: Radian Group

Radian185 5 Small Caps That Hedge Funds Love[12]Change in investment from last quarter: +$115.8 million
Total hedge fund investment vs. market cap:
$153.6 million of $2.5 billion
YTD returns: 100%

Radian Group (RDN[13]) topped all small-cap investments with $115.83 million worth of shares purchased during the past quarter, representing about 6.3% of the company’s market cap.

Radian, a “credit enhancement company” that also operates in mortgage insurance like MTIG, has had problems with profitability lately. But it, too, is in the right place at the right time as the housing market recovers and bad mortgages work their way out of the system. Financial stocks are much stricter about lending standards, and that has allowed for fewer defaults in recent years.

Just take care after the big run-up. And remember that hedge fund buying power works both ways — it can boost stocks with buys, but also weigh on stocks when the smart money sells.

Check out additional hedge fund resources on NerdWallet:

Jeff Reeves[17] is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[18] Write him at editor@investorplace.com[19] or follow him on Twitter via @JeffReevesIP[20]. As of this writing, he did not own a position in any of the stocks named here.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2013/04/SmallCap185.jpg
  2. [Image]: http://investorplace.com/wp-content/uploads/2013/07/Polycom185.jpg
  3. PLCM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PLCM
  4. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  5. CTRX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CTRX
  6. [Image]: http://investorplace.com/wp-content/uploads/2012/02/Caesars185.jpg
  7. CZR: http://studio-5.financialcontent.com/investplace/quote?Symbol=CZR
  8. [Image]: http://investorplace.com/wp-content/uploads/2013/07/Vishay185.jpg
  9. VSH: http://studio-5.financialcontent.com/investplace/quote?Symbol=VSH
  10. [Image]: http://investorplace.com/wp-content/uploads/2013/07/MGICinvestment185.jpg
  11. MTG: http://studio-5.financialcontent.com/investplace/quote?Symbol=MTG
  12. [Image]: http://investorplace.com/wp-content/uploads/2013/07/Radian185.jpg
  13. RDN: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDN
  14. Hedge Fund Tracker: http://www.nerdwallet.com/investing/hedge-funds
  15. Guide: Find New Investment Ideas Through Hedge Fund Filings: http://www.nerdwallet.com/blog/investing/hedge-fund-tracker-investment-ideas/
  16. Further Details on 13F Filings: http://www.nerdwallet.com/blog/investing/2013/track-hedge-funds-investments-13f-filings/
  17. Jeff Reeves: http://slant.investorplace.com/author/profile/jeff-reeves/
  18. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb
  19. editor@investorplace.com: mailto:editor@investorplace.com
  20. @JeffReevesIP: http://twitter.com/JeffReevesIP

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