NEW YORK — Small-cap stocks often endure a drubbing when the economy weakens and investors flock to the safety of large companies. But investors who rush for well-known names might miss some bargains.
While a Procter &Gamble Co. might offer investors shelter with its dividend payments and because people will always need toothpaste and laundry detergent, there can be other, less-obvious areas of safety. Investors willing to brave the volatility of small-caps can find some investments that can prosper even in a slowing economy.
Lately investors have worried that rising costs for energy and other commodities won’t leave much in consumers’ wallets for discretionary spending. So some investors are focusing on small-cap firms whose services or products aren’t easy to do without.
Jim Bell, portfolio manager at Liberty Ridge Capital in Berwyn, Pa., looks to firms such as Pactiv Corp., a small-cap name that makes packaging materials used by businesses. This type of operation, he said, could likely weather an economic downturn more easily than, say, a retailer.
“Their end demand has held up pretty well,” he said, referring to Pactiv. “They do and can pass on price increases.”
“I think that in the small-cap space you need to be selective and make sure you understand the type of company that you’re investing in in this market because just investing in broad swaths of any particular sector is probably not going to work out particularly well until you’re more confident about this economy.”
Robert Auer, senior portfolio manager at the Auer Growth Fund, is agnostic when it comes to the size of the companies he buys. He simply looks for bargains, and lately that’s meant many small-cap names.
He screens for stocks with 25 percent profit increases and 20 percent sales increases year-over-year and that are inexpensive. About half his holdings are now in small-caps — generally defined as having market capitalizations of less than $2 billion.
He points to a name like LMI Aerospace, a manufacturer that makes winglets. Airlines affix them to tips of an aircraft’s wings to help boost fuel efficiency. Auer said this is a type of small company that can do well in an uncertain economy because of soaring jet fuel prices.
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