Small-Caps That Are A Favorite With Quantitative Hedge Funds

In the last couple of months there have been a series of good news coming from quantitative hedge funds. As an example quant funds have for the last 17 weeks posted gains in 15 of those weeks per data collected by Societe Generale SA (ADR) (OTCMKTS:SCGLY).

By nature quant funds employ algorithms in trading stocks and this is based on various preset conditions. This includes, for instance, the moving average of a particular stock as well as other technical indicators. Quant funds tend to record their best performance in periods of high volatility due to the fact that these times also tend to see increased trading opportunities. This has been the case for a large part of this year.

Most successful

Some of the most successful quant funds in the world are Two Sigma Advisors (David Siegel & John Overdeck), Renaissance Technologies (Jim Simons) and Winton Capital (David Harding). For the quarter that ended in December the 13Fs for all these three quant funds have been filed and this disclosed the stocks they held as of late last year. Some of these quant funds also took positions in 3 small-cap stocks we will be looking at shortly.

Smart bed firm Sleep Number Corp (NASDAQ:SNBR) is one of the small-cap stocks that both Renaissance Technologies and Winton Capital opened positions in. Currently Renaissance owns 59,820 shares of the smart bed company while Winton Capital owns 168,349 shares. Before changing its name to Sleep Number the smart bed firm used to be referred to as Select Comfort. The name change was effected last year in November with the aim of the aligning the company’s well-known adjustable mattresses.

Adjustable firmness

These mattresses employ a number system in order to denote the support level being offered by the mattress. Users can adjust this number as well as the firmness level of the mattress as they wish. Some of the mattresses made by the company also possess a feature known as DualAir technology. This feature two sides of a bed adjust separately in order to suit the distinct needs of the occupants of the bed.

Analysts are of the view that Sleep Number stands to benefit from an accounting scandal that has engulfed Steinhoff, a furniture firm based in South Africa. The scandal which has been heating up in the course of the last two months has even seen the company’s chief executive officer resign. In the meantime Steinhoff has made various moves in an effort to enhance liquidity. However Sleep Number will not benefit alone as a competitor, Tempur Sealy International also stands to gain from the upheaval at Steinhoff.

Consumer Electronics Show

During the 2018 Consumer Electronics Show that was held last month Sleep Number’s 360 smart bed was shown off at the annual technology gathering. The 360 smart bed is capable of detecting cases of sleep apnea as well as impending heart attacks. To do this the smart bed tracks hundreds of measurements in real time. Later in the morning users can conduct a review of their sleep data and this includes their breathing rate as well as how restful their sleep turned out to be. Sleep Number launched the bed last year in May.

Ciena Corporation (NYSE:CIEN) is another small cap stock that has proved a favorite with the quant funds. Two Sigma Advisors owns 24,455 shares of the small cap while Winton Capital owns 270,765 shares of Ciena Corporation. With 1.92 million shares in Ciena Corporation, Renaissance Techologies has the biggest stake in the networking services and products firm among the three quant funds.

Wireless carriers

Some of Ciena’s customers include business, governments and the telecommunications sector. One of its products is the Wavelogic AI tool which allows optical networks to run autonomously. Another product, Liquid Spectrum, is used in the monitoring and optimization of network performance by employing advanced software tools.

Recently Ciena Corporation was upgraded to a ‘Buy’ rating by Wall Street firm Goldman Sachs Group Inc (NYSE:GS). Previously the analyst at Goldman Sachs had a ‘Neutral’ rating on the stock. The upgrade was informed by the fact that there has been an increase in the capital spending by carriers in the United States as a result of an environment that has become competitive. Goldman has consequently issued a price target of $27 on shares of Ciena and this is 15% higher compared to the current price.

Last year analysts at Jefferies also expressed confidence that Ciena would see strong sales this year and even said that the estimates by the company’s management of 5% revenue growth was conservative.

Acquisition rumors

Recently shares of Ciena Corporation have appreciated and this has been attributed to speculation that the firm is on the verge of being acquired. This is not the first time that such speculation is swirling around as it has been the case for years. One of the potential suitors that has been mentioned in the past is Sweden-based Ericsson.

Ciena Corporation is not only enjoying strong growth domestically but also internationally especially in China and India. In Q4 the international revenues of Ciena Corporation rose to a figure of $326.2 million which was close to $50 million higher compared to the same period a year earlier. Most of the growth was witnessed in the Asia Pacific region – this region now brings in more than 20% of Ciena’s revenues.

Multi-level marketing firm

Yet another small-cap stock that the quant funds hold is Primerica, Inc. (NYSE:PRI). Two Sigma Advisors recently closed its position in this MLM firm but Renaissance Technologies still holds 56,250 shares of this firm while Winton Capital also owns 58,806 shares of Primerica. Currently there are a total of 18 hedge funds who are long Primerica.

In the most recent reported quarter Primerica’s operating revenues increase by 13% year-over-year while the operating income increased by 25% year-over-year. Additionally the dividend of the company was increased by 25% and this raised the yield to a little over 1%.

It is understood that part of the reason Two Sigma exited its position in Primerica is fears over the fact that Primerica may come under regulatory scrutiny in the future and suffer the same fate as Herbalife.

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