Small-cap stocks have a history of outperforming the market during various economic cycles. Generally speaking, the sector is undercovered by Wall Street and represents some decent value in this bear market.
One great place to start looking for small cap ideas is in the portfolio of Renaissance Technologies, a quantitative-based hedge fund managed by Jim Simons.
Renaissance Technologies' manager Jim Simons' flagship Medallion Fund is rumored to be up as much as 49% year-to-date. Renaissance Technologies uses complex trading algorithms to pick cheap and undervalued stocks. It has reportedly boasted returns 10% higher than the industry average.
Here are a few of Renaissance Technologies' small-cap positions.
Renaissance-Technologies currently owns 9,669,478 shares, or 7.66% of shares outstanding, of LTX-Credence (LTXC). Formed in 2008 by the merger of LTX and Credence Systems, the company designs and sells automated test equipment solutions for the wireless, computing, automotive and entertainment markets.
LTX-Credence has a negative enterprise value of $30 million. It has $71 million in cash and $18 million in debt. LTX is trading for below its cash in the bank by about 70 cents per share, assuming zero sales and cash flow from LTX-Credence's ongoing business.
Shares of LTX-Credence are down about 85% for the year.
Renaissance Technologies currently owns 2,182,082 shares of Integrated Silicon Solution (ISSI), which designs and markets integrated circuits for digital consumer electronics, networking, mobile communications and automotive electronics markets. Integrated is trading below its cash in the bank of $50 million, sporting a negative enterprise value of $800,000.
Renaissance currently owns 479,800 shares, or 8.5% of UFP Technologies (UFPT), a software and engineering packaging solutions company that offers industrial software for the automotive, computer and electronic space.
The company just reported fairly impressive net income of $1.2 million, or 20 cents per share, for the third quarter of 2008, compared with net income of $883,000, or 15 cents per share, for the third quarter of 2007. Sales for the quarter were $27.5 million, or 19.9% higher than 2007 third-quarter sales of $22.9 million.
Since Nov. 21, directors have bought almost $75,000 worth of stock.
Renaissance also owns 4,619,445 shares of Trident Microsystems (TRID), which Stockpickr highlighted recently as a stock with ample cash on its balance sheet.
Finally, Renaissance Technologies also owns 1,574,000 shares of Sturm Ruger (RGR), which is involved in the sale of firearms and precision investment casting within the U.S. It currently has $22 million in cash and zero debt.
The fund is making calculated bets on these small-cap technology firms, which have high levels of cash and low debt-to-capital ratios. Not all of these ideas are going to be home runs, of course, but when one of the world's top hedge funds tells us it expects a stock to rebound, we might want to pay attention.
Posted on Nov. 7, 2008
