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Small-Cap Stocks That Could Rise on Sowood's Demise

James Altucher

Here at Stockpickr we track the Sowood Capital Management portfolio, but we also created a portfolio of all of Sowood's small-cap stocks with analyses. This portfolio, Sowood Capital Small-Caps, may offer investors an interesting play as the liquidation of the firm's assets will likely knock down these small-cap stocks to interesting levels.

The strategy I would use here is to pick a few small-cap names that I happened to like and then follow them for a week or two before I initiated any position. Normally, liquidations of such funds are not done all at once as specialists try not to kill the price of small-cap names such as these.

One thing I have noticed while doing research into most of Sowood's small-cap positions is that the firm mainly made bets in the following three sectors: aerospace, eye-care services and phosphates.

First up is Gencorp(GY Quote), an aerospace and defense company in which Sowood held a nearly 3 million-share position.

Gencorp manufactures defense systems that include tactical missiles and precision-strike missiles. With the international war on terror just beginning and Gencorp trading near its 52-week low, the stock makes an interesting play here, offering inventors a company that generates total revenue of $668 million a year with 15% quarterly revenue growth. It also handily beat earnings estimates last quarter by 15 cents.

Gencorp, the parent company of Aerojet, enjoyed much stronger revenue from its space and defense programs, including the Orion, Standard Missile and Titan, which could result in a huge contract. It's also a possible takeover target for the likes of Boeing(BA Quote) or Lockheed Martin(LMT Quote).

Next up is TLC Vision(TLCV Quote), which is also trading near its 52-week low. The eye-care services company provides eye doctors with facilities, technologies and staffing support needed to deliver patient care in the U.S. and Canada.

With total revenue of $287 million and only $23 million in debt, TLC has an essentially clean balance sheet. Before Sowood went belly up I could make a strong case that the firm, which had held a large position in the company according to 13D regulatory filings, wanted a new management team at TLC.

TLC -- like OccuLogix(OCCX Quote), another eye-care company held by Sowood -- seems to be a great small-cap play on the aging baby boomer population. I would look for a different activist hedge fund to try to shake things up at TLC after Sowood's selling is done. If management is changed and the company expands into new markets, the stock could double.

Another interesting small-cap stock held by Sowood is Innophos Holdings(IPHS Quote), which produces specialty salts that are used in foods and beverages as well as for pharmaceutical applications, and also specialty acids used for industrial applications.

This stock could prove to be an interesting play if the economy should start to slow. Innophos also does a lot of business in detergents and in the phosphate fertilizers sector, which is in a total bull market -- look at Terra Nitrogen(TNH Quote) and Potash(POT Quote) as examples of this.

Innophos has a market cap of $260 million, yet its revenue is roughly $548 million. However, it does have nearly $400 million in debt.

Sowood also held positions in Diomed Holdings(DIO Quote), which is a great baby boomer play as the company produces lasers for varicose vein removal. It also held a stake in Multimedia Games(MGAM Quote), a supplier of online gaming systems that has a short position of 19%.

For the rest of Sowood's small-cap investments, check out the Sowood Capital Small-Caps portfolio on Stockpickr.com.