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Small-Caps Set for 'Another Strong Year'

Stocks in this article: PREOX ASGR DM GROW ASCMA

NEW YORK ( TheStreet) -- Small-cap stocks, which have posted double the returns of the Dow this year, will record a "strong" 2011, says Michael Corbett, manager of the Perritt Emerging Opportunities Fund (PREOX).

The mutual fund has jumped 41% over the past year, better than 98% of its Morningstar peers and the 29% increase of the S&P 600 Small-Cap Index. Over five years, Perritt Emerging Opportunities has returned an average of 1.6% annually, putting it in Morningstar's 74th percentile for small-cap blend funds.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

What are your expectations for small caps in 2011? The S&P 600 Small-Cap Index has climbed 22% this year, beating the Dow's 9.1% gain.

Corbett: We will have another strong year, just like we have had over the past two years. Small-caps tend to have what we call a serial correlation. In other words, if they perform well in one period, then they will continue to perform well until there is some very significant, disruptive change in the market.

Why do you like prison health-care provider American Service Group (ASGR)?

Corbett: American Service Group has been around for decades. This is a company that has about $130 million in market cap, more than $15 million in the bank, over $600 million in revenue and no debt. A lot of states have had some issues in raising money so there is going to be a big push for privatization. We believe there are going to be nearly a billion dollars worth of new contracts that could be coming out over the next few years and the business could grow dramatically.

Why is Dolan Media (DM) a smart play in 2011?

Corbett: Dolan Media is basically a company that helps out law firms with their paperwork. A big part of their customer base is law firms that are helping out in the foreclosure market. The foreclosure market is still growing despite the federal government's best efforts. And Dolan is diversified as well, so it's not just a pure play on foreclosure litigation.

What's different about asset manager U.S. Global Investors (GROW)?

Corbett: More than ever, people are putting commodities and gold in their portfolios, and this is an interesting way to play that trend. The CEO, Frank Holmes, knows what he is doing in the commodities markets, so instead of investors going out and buying individual gold-mining stocks, this is a way for you to buy a money manager who knows the business. And if the commodities markets continue to do well, it's a great diversifier for your portfolio.

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