“In the financial universe, large-caps receive the most focus from investors, which often leaves their smaller peers less efficiently priced,” said Jake Mann in his Motley Fool piece, The Small Cap King’s Five Best Stock Picks. In the article, Mann goes on to zero in on issues that hedge funds are buying. “Retail investors can use hedge funds’ top small-caps as a market-beating strategy”
Specifically, Mann highlights the equities being accumulated by Chuck Royce – known as the “Small Cap King”–and his fund, Royce & Associates. According to Mann, Royce has a portfolio in excess of $31 billion, but for the purposes of his story, he concentrates on Royce’s small-cap holdings. Each stock listed had a market capitalization between $1 billion and $5 billion at the end of the third quarter.
Number one on Royce’s list is Westlake Chemical Corporation (WLK), which was Royce’s No. 1 overall holding at the end of the last 13F filing period with the SEC. High gross margins and specific pricing conditions in the chemical industry are adding to the company’s healthy bottom line.
The Buckle (NYSE: BKE) comprised Royce’s second largest small-cap investment. “Shares of the apparel retailer hit an all-time high above $51 a share late last year, and its latest financials (Q3 FY2013) represented a solid beat on the top and bottom lines.” Mann said, “The sell-side expects slowing EPS growth over the next five years, averaging about 8.5% annually, but Buckle’s stock price still trades at a cheap 13.4 times forward earnings.”
The other three companies rounding out the top five include Teradyne ( TER), the automatic test equipment company, Lincoln Electric Holdings (NASDAQ: LECO) , which is already up more than 9% since the start of the new year, and Reliance Steel & Aluminum (RS). “The company has beaten the sell-side’s earnings consensus in each of the past five quarters, despite a less than stellar economic environment for steel-related companies.”
The author does not have any positions in the stocks discussed in this article.