By John Melloy
You won't get a call from your broker or financial advisor about these names because his firm's analysts do not "cover" these smaller -- some would say boring -- stocks. And that's a shame, because they are often among the market's biggest winners.
But Wall Street certainly knows these stocks are out there. Firms receive orders to buy them from the biggest and most notable hedge- and mutual-fund managers in the business.
"Top managers look at these names as an opportunity -- because they aren't covered -- as a way to move in a stealth fashion," said Pete Najarian, co-founder of TradeMonster.com, who often tries to sniff out similar names using his firm's options software. "Lots of the big players get in early on the hope that when the story does get discovered, then analysts will begin covering it and the stock will go up."
So I set out to discover some of these under-the-radar stocks. Using the screening tool on CNBC.com, I found more than 1,000 companies with a market value of at least $500 million that are covered by three or fewer analysts (and often zero). Compare that with Apple (AAPL), which has 51 sell-side watchers.
I then took those names and ran them through the GuruFocus.com database, which tracks stocks most widely held by hedge-fund managers like Lee Cooperman of Omega Advisors and fund managers like Mario Gabelli, CEO of Gabelli funds.
Mueller Industries (MLI) makes copper fittings and plastic pipe, and is leveraged to the housing and construction industry with a market value of $1.5 billion. It is covered by two analysts. The shares have underperformed the S&P 500 by half this year and are up just 10 percent.
Gabelli and Chuck Royce, small-cap master and founder of the Royce Funds, were both holders as of the end of March, according to the most recent data available from GuruFocus. Investment advisor Ken Fisher had a position as of the end of June.
Dillards (DDS) is a fashion and home retailer with a $3.8 billion market value and only two analysts on it. Shares also haven't budged much in 2013.
But value maven Joel Greenblatt and legendary trader Paul Tudor Jones are holders, according to GuruFocus' latest data. Royce is also an investor.
Another retailer making the list: Sears Holdings (SHLD), the long-troubled company run by hedge fund manager Eddie Lampert. The sell side has given up on Sears, which has only three analysts bothering to cover it.
But some of Lampert's friends in the money management community are buying a position in the Sears-Kmart combo. Bruce Berkowitz's Fairholme Capital is the second-largest holder behind Lampert. And famed investor Jeremy Grantham is also in the name.
More and more names are being neglected by Wall Street firms: The crush in commissions, the surge in the number of hedge funds with their own analysts and the pervasiveness of online research resources have made big coverage lists not very cost-effective.
Yet, the Russell 2000 Index (^RUT) and the S&P 400 Midcap Index are at all-time highs and beating the S&P 500 handily this year.
"A lot of times these managers are looking for a catalyst like a takeover or spin-off," said Najarian. "Sears is a great example of that, as value could be unlocked by selling their real-estate portfolio."
Take Gardner Denver (GDI) for example. The maker of industrial machinery gets coverage from just six analysts, according to CNBC.com, but Gabelli, Greenblatt, Grantham, Tudor Jones and John Paulson are all owners.
In March, the company agreed to sell itself to private equity firm KKR after ending talks with SPX and shopping for a better deal.
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