Billionaire Steve Cohen’s Top 10 Small-Cap Stock Picks

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In this article we presented billionaire Steve Cohen’s top 10 small-cap stock picks. You can skip our detailed discussion on Cohen’s investment philosophy and read Billionaire Steve Cohen’s Top 5 Small-Cap Stock Picks.

Steve A. Cohen is the owner of Point72 Asset Management, one of the most successful hedge funds in the U.S. He started off his Wall Street career as a junior trader at Gruntal & Co., where he dealt with options arbitrage. Cohen started his first hedge fund known as S.A.C. Capital Advisors in 1992, enjoying some success which allowed him to own 8 percent of Major League Baseball team, the New York Mets. He has also been involved in philanthropic causes in which he contributed $715 million.

Unfortunately, SAC Capital was allegedly involved in an insider trading scandal which led to a hefty $1.8 billion fine, and Cohen had to shut down the fund. This pave the way for the birth of his current hedge fund.

This is Cohen’s current hedge fund, based in Stamford. It has 17 clients, and its core strategy is long/short equity with investments in various asset classes across the globe. It has a particular focus on systematic, long/short, macro, and discretionary long/short strategies. The hedge fund attributes its success to the following:

  • Macro insights and highlights
  • Sector-aligned model
  • Multi-manager platform
  • A fundamental bottom-up research culture
  • Focus on multiple asset classes

Portfolio percentage

The fund has 10.5% of its portfolio invested in communications industry, 21.8% in healthcare was, 18.9% in information technology, 14.48% in consumer discretionary, and 14.74% in finance.

Point72 Asset Management’s performance highlights

The hedge fund’s market value in Q4 2020 was $20.5 billion, a notable improvement from the Q3 2020 market value of $19.53 billion. The performance in the last four quarters was up 35.28%. In comparison, the hedge fund gave a return of 14.9% net of fees in 2019. Point72 Asset Management added 357 new stocks to its portfolio and purchased additional shares in 216 stocks. The hedge fund also reported that 376 stocks were sold out. It also reduced its holdings in 287 stocks.

Some of the stocks at the top of Point72 Asset Management’s portfolio include Alphabet Inc. (NASDAQ: GOOG), Advanced Micro Devices, Inc. (NASDAQ: AMD), SPDR S&P 500 ETF Trust (NYSE: SPY), Facebook, Inc. (NASDAQ: FB), Visa Inc. (NYSE: V), Microsoft Corporation (NASDAQ: MSFT), AstraZeneca PLC (NASDAQ: AZN), Uber Technologies, Inc. (NYSE: UBER), Dell Technologies Inc. (NYSE: DELL), and SPDR S&P Biotech ETF (NYSE: XBI).

Cohen is an exception in an industry that is reeling from losses. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

Let’s take a look at Steve Cohen’s top 10 small-cap stock picks by analyzing his Q4’2020 portfolio.

Best Small-Cap Stocks to Buy According to Billionaire Steve Cohen

10. At Home Group Inc. (NYSE: HOME)

Number of Hedge Fund Holders: 31

At Home Group owns home décor stores that sell wall décor, home furniture, furnishings, houseware, rugs, and decorative accents. At Home Group sells its products across the U.S. CAS Investment Partners was the largest hedge fund investor with 10.4 million shares.

  • At Home Group reported a $1.08 non-GAAP EPS in Q4 2020, which was $0.38 more than the consensus estimate. Its GAAP EPS was $1.08, which was higher than the consensus estimates by $0.44.
  • The company’s revenue for the quarter was $561.99 million, which outperformed the consensus estimate by $36.18 million and represented a 41.3% gain YOY.
  • At Home Group’s adjusted EBITDA in Q4 2020 was $119.6 million, representing a 94.4% increase.

As of the end of the fourth quarter, 31 hedge funds in Insider Monkey’s database of 887 funds held stakes in HOME, compared to 34 funds in the third quarter. Clifford A. Sosin’s CAS Investment Partners is the biggest stakeholder in the company, with 10.4 million shares, worth $161.3 million.

Bonhoeffer Capital Management, in their Q4 2020 investor letter, said that At Home Group Inc. (NYSE: HOME)’s current opportunity for organic growth is high. Here is what Bonhoeffer Capital Management has to say about At Home Group Inc. in their Q4 2020 investor letter:

“At Home (HOME) is a home décor retailer. At Home provides home accessories (rugs, housewares, furniture, wall hangings, etc.) in a self-service format similar to Costco. The company has 219 stores in 40 states across the United States. The average size of an At Home store is 105,000 square feet offering over 50,000 SKUs. This is larger than other home décor retailer whose average store size is about 25,000 square feet. They also lease second-generation real estate resulting in a lower lease cost (average $6/ft2) than competitors. In Rochester, At Home is an old grocery location (the number two grocer in Rochester) which they have upgraded to remove the “grungy” grocer appearance.

The company’s value proposition is to provide a wide selection of goods at a low price point ($15 per item and less than $70 per basket). The stores have limited staff to support the self-service environment. In visits to local stores, At Home focuses on areas like carpets, barstools/seats, and wall decor of which other retailers have limited selections. Over 70% of the At Home merchandise is exclusive to At Home; so At Home can make both the retail and branded product margins for these products.

At Home is not the largest competitor in the home décor market. Much of home décor is sold by generalists such as Walmart, Target, Home Depot, Amazon, and Lowe’s. These firms have 35% of the home décor market. At Home is a home décor specialty store like HomeGoods (owned by TJ Maxx), Williams Sonoma, and Bed Bath & Beyond. The market is quite competitive and players who have not been able to generate profitability have gone bankrupt, including Pier 1, with 1,500 stores nationwide. At Home has also pivoted to provide “buy online, pick up in store” (BOPIS) during COVID to ensure sales
continue despite the pandemic.

Why Do Customers Keep Coming Back?

Retailers who do not have recurring revenue can create recurring revenue by ensuring customers have a reason to return to the store or website. This brings to mind a local store in Rochester, Wegmans, that makes the shopping experience pleasurable and provides a wide selection of grocery items. The wide selection brings folks in, and the experience keeps them coming back. [read complete letter here]

9. Aurinia Pharmaceuticals Inc. (NASDAQ: AUPH)

Number of Hedge Fund Holders: 24

This is a biopharma that develops immunosuppressive treatments. The stock jumped earlier this year after the company received FDA approval for LUPKYNIS (voclosporin) for adults with active lupus nephritis, a rare disease that affects about a third of people diagnosed with systemic lupus erythematosus. Investment firm Cantor Fitzgerald expects the treatment to deliver over $00 million in sales for the company.

Healthcor Management LP currently owns 6.9 million shares of AUPH, worth $95.9 million. AUPH occupies 3.7% of Healthcor’s overall equity.

8. Boot Barn Holdings, Inc. (NYSE: BOOT)

Number of Hedge Fund Holders: 20

It is one of the leading retailers in the U.S, with a robust portfolio of products that include apparel, footwear, and accessories for adults and children regardless of gender. It offers both lifestyle and work-related products from numerous brands. Boot Barn has 266 stores distributed across 36 states and an e-commerce website called bootbarn.com.

  • Boot Barn Q3 2020 financials revealed that it underperformed its top and bottom lines.
  • It reported a gross profit of $106.8 million from the previous $97 million, while its margin increased from 34.2% to 35.3%.
  • Net sales were reported at $302.3 million, representing 6.5%. Same-store sales were up 4.6%, largely aided by the impressive 16.3% improvement in e-commerce sales, which overshadowed the meager 1.9% increase in same-store sales.
  • Boot Barn’s operating income was $41.6 million, representing a 19% gain while margin improved from 12.5% to 13.8% during the quarterly period. The company’s net income for the same period was $29.6 million, an improvement from the $24.8 million reported in the previous quarter.
  • The company had $76.3 million in cash and cash equivalents at the end of the quarter.
  • Boot Barn CEO, Jim Conroy acknowledged the 150-basis-point improvement in the company’s operating margin, which he believes aligns with the growth observed in same-store sales.

Boot Barn’s performance during its fiscal Q3 2020 validates its inclusion in Steve Cohen’s top 10 small-cap stocks list.

Israel Englander’s Millennium Management currently holds 519,273 shares of Boot Barn that amounts $22.5 million. BOOT occupies 0.01% of Millennium Management’s total portfolio. Boot Barn attracted 20 hedge fund investors in Q4 2020, which was higher than 13 hedge funds in Q3 2020.

7. Amarin Corporation plc (NASDAQ: AMRN)

Number of Hedge Fund Holders: 24

Amarin is a pharmaceutical company that makes innovative new treatments for treating central nervous system disorders. The company has an R&D facility in Scotland, although its headquarters are in London. The company has lead pipeline drug is known as Miraxion, developed as a potential treatment for Huntington’s disease. Miraxion is currently in phase 3 clinical trials.

  • Amarin recently announced that its CEO, John Thero, notified the company’s board of his plan to retire effective August 1, 2021.
  • Thero will be succeeded by Karim Mikhail, the company’s current senior VP and head of commercial operations in Europe.
  • Thero will guide the company through the transition for the remainder of the year after stepping down by taking an advisory position.
  • Mikhail founded a commercial strategy consultancy firm called THEODON in 2018. He previously worked at Merck for more than 20 years.
  • Amarin shares dropped 2.6% in pre-market trading before the next trading session after news broke about Thero’s retirement.
  • Jefferies analyst Michael Yee believes that the weaker stock price performance might indicate less probability of a merger or acquisition shortly, thus disappointing some investors. Jefferies analysts maintain a hold rating at $7.

AMRN has lost 25% over the last 12 months. According to our database, the number of Amarin’s long hedge funds positions decreased at the end of the fourth quarter of 2020. There were 24 hedge funds that hold a position in AMRN compared to 30 funds in the third quarter. The biggest stakeholder of the company is Baker Bros. Advisors, with 27.99 million shares, worth $136.9 million.

6. Knowles Corporation (NYSE: KN)

Number of Hedge Fund Holders: 27

It is one of the leading global players in the manufacture of precision device solutions and advanced micro-acoustic audio processing. Some of its markets include the communications, consumer mobile, automotive, defense, medtech, and industrial segments. The company leverages its advantageous position in advanced audio processing and MEMS (micro-electro-mechanical systems) microphones to enhance user experience in IoT, ear, and mobile applications.

Knowles Corp is also one of the leading authorities in mmWave RF, high-end capacitors, and acoustic components. This makes it a key player in supplying important components for technologies such as 5G, strategic for growth.

  • Knowles reported a $0.41 non-GAAP EPS in Q4 2020, outperforming the consensus EPS estimate by $0.04. Its GAAP EPS for the same period was $0.32, outperforming the estimate by $0.02.
  • The company’s revenue for the quarterly period was $243.2 million, representing a 4.0% gain year-over-year.

As of the end of the fourth quarter of 2020, John W. Rogers’ Ariel Investments owns 4.6 million shares of Knowles Corp. worth $85.7 million. KN accounts for 0.96% of Ariel Investments’ total portfolio. There were 27 hedge funds that realized KN’s potential and invested in the company in the fourth quarter of 2020.

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Disclosure: None. Billionaire Steve Cohen’s Top 10 Small-Cap Stock Picks is originally published on Insider Monkey.