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Small-Caps: Hedge Fund Favorites

We sent this to subscribers of our free small-cap newsletter with ValueWalk 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%

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.

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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.

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