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

A few days ago I recorded a video with Jim Cramer for the TheStreet.com TV called Cramer & Altucher: Sowood Reduced to Kindling. In it, Cramer and I talk about the recent demise of Sowood Capital and how inventors could profit from the investment firm's liquidation.

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).