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Top 10 Stock Picks of Prescott Group Capital Management

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·10 min read
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In this article, we discuss the top 10 stock picks of Prescott Group Capital Management based on Q3 holdings of the fund. If you want to skip our detailed analysis of Frohlich's history, investment philosophy, and hedge fund performance, go directly to the Top 5 Stock Picks of Prescott Group Capital Management.

Phil Frohlich earned a bachelor's degree in economics from the University of Oklahoma. He also holds a master's degree in business administration from the University of Texas in Austin. Phil Frohlich then went on to get his law degree from the University of Tulsa.

Prescott Group Capital Management, located in Tulsa, was founded in January 1999 and is owned by Phil Frohlich. With over 19 years of financial experience, he is an investment advisor representative at the hedge fund. Phil Frohlich's Prescott Group Capital Management focuses on small and mid-cap companies. According to the firm's Q3 13F filings with the SEC, the market value of its public stock portfolio was $364.15 million at the end of the third quarter of 2021. Prescott Group Capital Management was quite active during the same quarter, buying 30 new equities and growing its interests in over 23 businesses. At the same time, the investor cut its holdings in 16 firms and sold out over 11 companies.

NVIDIA Corporation (NASDAQ:NVDA), Adobe Inc. (NASDAQ:ADBE), and Cloudflare, Inc. (NYSE:NET) are among the most significant equities in Phil Frohlich's Prescott Group Capital Management's third quarter portfolio.

In the third quarter, Phil Frohlich increased his position in NVIDIA Corporation (NASDAQ:NVDA) by 62%, and the stake which represents 0.87% of his total portfolio is now worth about $3.18 million. In January, BofA analyst Vivek Arya initiated coverage of NVIDIA Corporation (NASDAQ:NVDA) with a "Buy" rating and set a price target of $375.

Prescott Group Capital Management holds 3,900 shares in Adobe Inc. (NASDAQ:ADBE), worth $2.25 million, representing 0.61% of its portfolio. In January, UBS analyst Karl Keirstead, lowered his rating on Adobe Inc. (NASDAQ:ADBE) to "Neutral" from "Buy" and also trimmed his price target to $575, down from $635. According to the analyst, marketing expenditure in 2020 and 2021 has been pushed forward more than investors expect, which might impair the company's growth rate in 2022.

The hedge fund of Phil Frohlich entered the third quarter of 2021 with 42,228 shares of Cloudflare, Inc. (NYSE:NET) in the portfolio, valued at approximately $4.76 million. On January 18, KeyBanc analyst Thomas Blakey initiated coverage of Cloudflare, Inc. (NYSE:NET), with an "Overweight" and a price target of $132.

Photo by Nicholas Cappello on Unsplash

Our Methodology

Here is a list of top 10 stock picks of Prescott Group Capital Management. We used Phil Frohlich's 13F portfolio for Q3 2021 for this analysis.

Top Stock Picks of Prescott Group Capital Management

10. Ross Stores, Inc. (NASDAQ:ROST)

Prescott Group Capital Management Stake Value: $4,769,000

Percentage of Prescott Group Capital Management's 13F Portfolio: 1.3%

Number of Hedge Fund Holders: 41

Ross Stores, Inc. (NASDAQ:ROST) owns and operates off-price retail clothing and home accessory stores. Ross Stores, Inc. (NASDAQ:ROST) brought in $4.57 billion in revenue and $1.09 in EPS in Q3 2021, beating analyst estimates by $220 million and $0.29, respectively.

In January, Wells Fargo analyst Ike Boruchow downgraded Ross Stores, Inc. (NASDAQ:ROST) to “Equal Weight” from “Overweight” with a price target of $120, down from $135. The analyst is increasingly concerned about the low-end consumer, where Ross Stores, Inc. (NASDAQ:ROST) plays a more significant role than any other company he covers.

Ross Stores, Inc. (NASDAQ:ROST) was in 41 hedge funds' portfolios at the end of the third quarter of 2021, as compared to 51 hedge funds in Insider Monkey's database with Ross Stores, Inc. (NASDAQ:ROST) holdings at the end of the previous quarter.

In addition to NVIDIA Corporation (NASDAQ:NVDA), Adobe Inc. (NASDAQ:ADBE), and Cloudflare, Inc. (NYSE:NET), Ross Stores, Inc. (NASDAQ:ROST) is a notable stock from Phil Frohlich's Q3 portfolio.

9. HCA Healthcare, Inc. (NYSE:HCA)

Prescott Group Capital Management Stake Value: $4,854,000

Percentage of Prescott Group Capital Management's 13F Portfolio: 1.33%

Number of Hedge Fund Holders: 72

HCA Healthcare, Inc. (NYSE:HCA) operates hospitals, freestanding surgery centres, emergency rooms, and urgent care facilities. HCA Healthcare, Inc. (NYSE:HCA) was upgraded by Citi analyst Jason Cassorla from "Neutral" to "Buy" in January, with a price target of $306, up from $274. Frohlich has been a long-time HCA Healthcare, Inc. (NYSE:HCA) shareholder, and in the fourth quarter of 2017, he added 10,000 shares to his portfolio. His hedge fund owns 20,000 shares of HCA Healthcare, Inc. (NYSE:HCA) stock as of Q3 2021, worth $4.85 million.

HCA Healthcare, Inc. (NYSE:HCA) is also attracting the attention of the smart money, with 72 hedge funds tracked by Insider Monkey reporting ownership holdings in the firm at the end of the third quarter, up from 60 funds a quarter earlier.

First Eagle Investment Management, in its third-quarter 2021 investor letter, mentioned HCA Healthcare, Inc. (NYSE:HCA). Here is what the fund said:

“HCA Healthcare owns and operates 185 hospitals and approximately 2,000 sites of care in the US and UK. Admissions to its facilities, depressed during the worst of the Covid-19 outbreak in 2020, have begun to rebound. HCA reported a nearly 20% year-over-year increase in admissions during the second quarter and a 14% increase in revenue, and forecast that volume would continue to improve throughout the year. We maintain our positive opinion of the company’s management team, believing them to be effective stewards of both the balance sheet and HCA’s business operations.”

8. CarMax, Inc. (NYSE:KMX)

Prescott Group Capital Management Stake Value: $5,118,000

Percentage of Prescott Group Capital Management's 13F Portfolio: 1.4%

Number of Hedge Fund Holders: 36

CarMax, Inc. (NYSE:KMX) is a holding business specializing in the retail of used cars and the wholesale of car auctions. CarMax, Inc. (NYSE:KMX) purchased 383,215 automobiles from customers in the third quarter, up 91% from the previous quarter.

In December, Wedbush analyst Seth Basham lowered his price target on CarMax, Inc. (NYSE:KMX) to $140 from $160 and reiterated a “Neutral” rating on the shares. According to Basham, market pressures are anticipated to impede the business in 2022 significantly.

At the end of the third quarter of 2021, 36 hedge funds in the database of Insider Monkey held stakes worth $1.54 billion in CarMax, Inc. (NYSE:KMX), down from 39 in the preceding quarter worth $1.62 billion.

Giverny Capital cited CarMax, Inc. (NYSE: KMX) in its Q2 2021 investor letter and detailed its stance on the company. Here is what the fund said:

“We’re quite optimistic about Carmax, our second-largest position. For several years, investors have gravitated to a thesis that a handful of start-ups that sell used cars in an online-only format will end up with a lower cost structure than Carmax. This even though Carmax appears today to have lower costs to buy used cars for its inventory, recondition them for resale and transport them to stores – all problems that are not solved by a good web site. Carmax also amortizes its national advertising over a much larger sales base than competitors, giving it lower marketing expense per vehicle.

Nevertheless, Carmax was slow to respond to the emerging market for online car shopping. The good news is that it ultimately responded with vigor. Over the past few years it has seen operating margins contract as it invested in an omnichannel capability that lets customers buy fully online or do a portion of the transaction online and a portion in the store. Importantly, the customer chooses exactly which parts of the transaction to complete online or in store. …” (Click here to see the full text)

7. Skechers U.S.A., Inc. (NYSE:SKX)

Prescott Group Capital Management Stake Value: $5,545,000

Percentage of Prescott Group Capital Management's 13F Portfolio: 1.52%

Number of Hedge Fund Holders: 35

Skechers U.S.A., Inc. (NYSE:SKX) is a lifestyle footwear company that designs, develops, and markets footwear for men, women, and children of all ages. Prescott Group Capital Management first bought a stake in the firm in the first quarter of 2012. The hedge fund holds 131,641 shares in Skechers U.S.A., Inc. (NYSE:SKX) worth over $5.55 million as of the end of the third quarter of 2021.

Following checks with suppliers, buyers, and retail management sources that suggested COVID-19 had an impact on sales in China and Western Europe, OTR Global changed its view on Skechers U.S.A., Inc. (NYSE:SKX) from “Positive” to “Mixed” on January 13.

Overall, 35 hedge funds monitored by Insider Monkey in the third quarter were bullish on Skechers U.S.A., Inc. (NYSE:SKX). The stakes of these funds are valued at $744.49 million.

6. NVR, Inc. (NYSE:NVR)

Prescott Group Capital Management Stake Value: $6,012,000

Percentage of Prescott Group Capital Management's 13F Portfolio: 1.65%

Number of Hedge Fund Holders: 32

NVR, Inc. (NYSE:NVR) is a residential building corporation. It also has a mortgage banking division and a title services division. Out of the hedge funds being tracked by Insider Monkey, Ric Dillon’s Diamond Hill Capital is a leading shareholder in NVR, Inc. (NYSE:NVR), with 118,816 shares worth more than $569.61 million.

In the third quarter of 2021, new orders of NVR, Inc. (NYSE:NVR) fell by 22% to 5,201 units, down from 6,681 units in the third quarter of 2020. On the other hand, the company reported a revenue of $2.34 billion, up 17.6% YoY, beating the estimates by $70 million. In October, JPMorgan analyst Michael Rehaut trimmed his price target on NVR, Inc. (NYSE:NVR) to $5,770 from $6,300 and maintained a “Neutral” rating on the shares. In 2022 and 2023, the analyst expects a strong industry backdrop to drive significant growth in profits. As a result, he retains a positive outlook on the homebuilding industry.

Overall, hedge funds are loading up on NVR, Inc. (NYSE:NVR), as 32 out of the 867 funds tracked by Insider Monkey held stakes in the company in Q3 2021, compared to 28 funds a quarter earlier.

NVR, Inc. (NYSE:NVR) is one of the stocks that gained the attention of Phil Frohlich's Prescott Group Capital Management, in addition to NVIDIA Corporation (NASDAQ:NVDA), Adobe Inc. (NASDAQ:ADBE), and Cloudflare, Inc. (NYSE:NET).

Bretton Fund, an investment management firm, in its second-quarter 2021 investor letter, mentioned NVR, Inc. (NYSE:NVR). Here is what the fund said:

“It’s no secret that we’re in the middle of a housing boom. Interest rates are low, household balance sheets are strong, millennials are aging into the house-buying market, and perhaps most of all, a combination of the 2008 housing bust and ever-tightening zoning restrictions mean that we have a huge shortage of housing.

In 1960, there were about 180 million Americans, and about 1.2 million houses were built. There are now roughly 330 million Americans—the population has almost doubled in 61 years—and we’re making only a million new houses a year. And this was the highest pace since 2007. To take an extreme example, California had fewer than 16 million people and built 190,000 houses in 1960; it has nearly 40 million people today, and builds just 120,000 houses a year. The federal mortgage company Freddie Mac estimates the current shortage of homes is 3.8 million units, or slightly more than the entire housing stock of New Jersey…” (Click here to see the full text)

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Disclosure: None. Top 10 Stock Picks of Prescott Group Capital Management is originally published on Insider Monkey.