BOSTON – As market observers watch for early signs that better times are around the corner, they’re paying close attention to small-company stocks, which tend to recover earlier than large-company stocks coming out of a recession.
To find out what market opportunities “small-cap” – generally defined as companies with market values of $300 million to $2 billion – stock fund managers see these days, the Associated Press interviewed three managers with strong track records. They see hidden opportunities in volatile energy stocks and the recession-sensitive industrial sector. But they remain cautious in predicting the timing of a broader market turnaround, and are wary of any company with a debt-heavy balance sheet.
– ERIC CINNAMOND, INTREPID SMALL CAP FUND (ICMAX): This value fund has roughly doubled its assets to $40 million in recent months, as investors were drawn by its relatively strong performance in a lousy market.
While energy stock prices may be down, demand for energy will stay relatively resilient despite the recession, Cinnamond says.
“You make money in energy stocks when there is a glut, and people are dropping rig projects, and nobody is drilling,” Cinnamond said. “It’s cyclical. And we don’t buy a lot of cyclical companies.
“But we view energy as more of a consumable commodity, where you’re not going to just turn off your heat or stop driving. Oil demand might drop, but it might drop from 85 million barrels a day to 83 million. It’s not something like steel consumption, where it can really cut off entirely.”
– BRAD EVANS, HEARTLAND VALUE PLUS FUND (HRVIX): This $705 million value fund posted a relatively small loss of nearly 18 percent last year, thanks in part to a portfolio light on financial stocks. Like Cinnamond, Evans sees plenty of opportunity in energy, particularly natural gas.
One of his top energy picks is oil and gas producer Cimarex Energy Co., which Evans touts as having a solid balance sheet and low debt.
As for financial stocks that continue to take a beating, Evans sees emerging opportunities in regional banks that escaped the credit troubles battering bigger banks. But he isn’t jumping in yet.
“The case for the financials is starting to become a little more interesting to us,” he said. “We’re starting to do our homework.”
– JONATHAN VYORST, PARADIGM VALUE FUND (PVFAX): This $82 million fund had an off year last year, losing nearly 34 percent, after outperforming its peers with a 3.5 percent average annual return over the past five years. Vyorst, the fund’s co-manager, is cautious about placing any bets on specific sectors. These days, it’s all about which companies have reduced their risks from the credit and housing bubbles.
He likes industrial stocks, reasoning demand for their products will eventually rebound once the economy turns around. His fund’s top holding is Kaman Corp., a distributor of aerospace and industrial parts.
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