3 Small-Caps Favored by Fund Managers

TheStreet.com

NEW YORK (TheStreet) -- The small-cap Russell 2000 Index has returned 29% over the past year, almost twice that of the S&P 500 Index of the largest U.S. stocks. And if the U.S. economy grows as expected, small-company stocks may widen that gap. Small- and micro-cap stocks allow investors "to gain exposure to companies that are more economically sensitive", says Sam Dedio, manager of the Artio U.S. Microcap Fund. TheStreet searched for superior small-cap stocks with Dedio and Chris Retzler, manager of the Needham Small Cap Growth Fund. Advanced Energy Industries Advanced Energy is a market leader in power-conversion technologies. It has a market value of $706 million. The company's main business is thin-film power-conversion systems that "customize" raw electricity from the utility grid to allow for use in the production of semiconductors, flat-panel displays, data storage and industrial equipment. The company recently diversified its business by entering the solar-inverter market, offering services for residential, commercial and utility solar, photovoltaic markets. After a tough 2009, the company's major end markets improved in 2010 and the outlook for 2011 is also favorable, says Dedio. "The company and its end markets are headed in the right direction," says Dedio. "And the stock is trading at 5.5 times 2011 EBITDA, which we think is seriously undervalued."

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QuinStreet QuinStreet operates as an online media and marketing company. It has a market value of just over $1 billion. The company provides direct-marketing services, including the delivery of leads or paid clicks, for clients in the direct-selling industry. QuinStreet operates Internet.com and Insure.com, an online insurance-quote service and brokerage business. It also runs a site called ReliableRemodeler.com that specializes in online home renovation and contractor referrals. QuinStreet recently reported second-quarter revenue of $97.6 million, an increase of 27% over last year, and Retzler says that's only the beginning. "QuinStreet is the leader in online lead generation, and they have expanded their business beyond education into financial services, which should serve them well. They have a high-quality management team and their margins are fantastic," says Retzler.

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Cenveo Cenveo is a printing-services company with a $340 million market cap. The company is an industry consolidator with a long, successful track record of integrating acquisitions. More recently, the company has been tending to its balance sheet, amending credit terms and reducing its sizeable long-term debt, which has kept some investors on the sidelines, says Dedio. "The company generates significant free cash flow, which it will continue to use to pay down debt and acquire businesses where it can boost earnings and free cash flow. And at 1.3 times 2011 EBITDA and three times the free cash flow we expect the company to generate in 2011, we firmly believe the shares are undervalued," says Dedio.

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