Small-cap stocks are in the doghouse of the
stock market these days
. The iShares Russell 2000Index (
) has lagged the S&P 500 for three straight quarters.
The market tilt toward large caps has brought small-cap
valuations down -- although not to compelling levels, says Dave
Wagner, who took over the $10.1 billion T. Rowe Price Small-Cap
Value Fund on June 30.
But Wagner and other managers of
top-performing mutual funds
, which can benefit from encouraging inflow, say that they still
see small-cap stock investment ideas.
Over long periods, small caps tend to outperform large caps.
They're likelier to produce growth-driving innovations, Wagner
notes. And they're likelier to be takeover targets.
"In a slow-growth environment like we have now, large caps can
find growth through acquisitions of small companies," said Craig
Hodges, lead manager of $1.5 billion Hodges Small Cap Fund .
Also, small caps tend to get far less revenue and earnings
from activities abroad. "So they're less susceptible to world
events like we're seeing now," Hodges said.
Even when small caps in general are out of favor, "there are
attractive individual opportunities," Hodges added.
Hodges likes all three ofEagle Materials ' (
) business lines, including its newest, the fast-growing area of
producing specialty sand used in fracking. The company owns a
mine in Illinois where appropriate sand is near the earth's
surface and near a river, where it can be loaded onto barges for
transport to key oil and gas fields such as the Eagle Ford Shale
and Permian Basin in and near Texas.
"And their cement and wallboard operations are more profitable
than in the last economic cycle," Hodges said.
A key reason why Hodges likesUnited States Steel (
) is the consolidation in its industry.
"There are far fewer players, and it is extremely hard to get
into this business," he said.
Surviving companies, like U.S. Steel, that can expand and add
capacity are doing well, he adds.
U.S. GDP growth and rising car sales in particular benefit
U.S. Steel. Hodges sees the company going from a $1.11 a share
loss last year to earning $1.70 this year and about $2.50 in
Wagner likesGenesee & Wyoming (
). Short-line railroads run generally peripheral routes as
opposed to main routes run by major big railroads likeUnion
"Genesee is a blue chip in its space," Wagner said. "They are
leaders in safety and efficiency."
The firm operates in North America and Australia. Wagner lauds
its capital allocations and shareholder orientation. And there
are huge barriers to entry by rivals.
think of railroads as low-growth, there is little coverage. "That
creates volatility opportunities," Wagner said.
He likesLandstar System (LSTR), a networking service that
provides shippers with trucking by independent operators.
Landstar lets truckers control their schedules while giving them
access to regulatory compliance service and record-keeping, as
well as to lower-cost fuel, insurance, parts and repairs. In
return, Landstar avoids the costs of owning trucks.