Fund Managers Keeping Tabs On Small-Caps

Jonathan Vyorst, expecting a rebound, likes industrial stocks.
Jonathan Vyorst, expecting a rebound, likes industrial stocks. (Douglas Levere - AP)
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By Mark Jewell
Associated Press
Sunday, January 25, 2009

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.

No one's sure when markets will rebound, or whether small companies -- "small-caps" in trader talk -- will again help usher in a recovery. Generally defined as companies with market values of $300 million to $2 billion, small-caps recently have fallen out of favor.

But that may be changing.

Small-caps collectively suffered a 26 percent loss in the fourth quarter, compared with a 22 percent decline for large-caps, according to fund tracker Lipper. But that's mainly because small-caps had a terrible start to the quarter in October and November. In December, small-caps outperformed bigger categories by posting a 5 percent gain.

To find out what market opportunities small-cap stock fund managers see these days, here are the views of 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.

ยท 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. Intrepid Small Cap avoided the hard-hit financial and energy sectors to finish down 7 percent last year, compared with a nearly 35 percent loss for the Russell 2000, the most widely recognized index for small-cap stocks.

Cinnamond stayed away from energy stocks as oil prices peaked at more than $147 a barrel in July, only to plunge to around $40. But now he sees bargains in the battered sector, particularly for land-based oil drillers whose stocks have lost around 70 percent since last summer's peak prices.

The recession has led energy companies to halt work on new drilling rigs, leaving drillers with plenty of equipment in production well-positioned, Cinnamond says. Among his top picks: oil drillers Patterson-UTI Energy and Unit Corp., and Tidewater, which runs a fleet of boats serving offshore oil and gas rigs.

While energy stock prices may be down, demand for energy will stay relatively resilient despite the recession, Cinnamond says.

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