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TheStreet Open House

4 Small-Caps Favored by Fund Managers

NEW YORK ( TheStreet) -- Small-cap stocks, which have doubled the S&P 500 Index's 11% gain this year, may outperform again in 2011 if the economy continues to grow, fund managers say.

The S&P SmallCap 600 Index has jumped 24% so far this year, compared with an 11% increase for the large-cap S&P 500.

"We believe the next six to 12 months will provide plenty of opportunities for us to find smaller companies showing improving growth, explainable growth and sustainable growth as the economy improves," says Patrick Gundlach, manager of the Marshall Small Cap Growth Fund (MRSCX).

Gundlach's mutual fund has easily beaten the S&P SmallCap 600 Index this year, jumping 31%. His top two holdings are Energy XXI (EXXI), which has soared 126% this year, and Sonic Solutions (SNIC), down 8.3%.

Faster economic growth would be needed as a catalyst for small-cap companies' share prices, says Sam Dedio, manager of the Artio U.S. Small-Cap Fund (JSCAX). Dedio's fund has advanced 20% this year after rocketing 64% in 2009, beating 97% of his rivals.

Pimco, manager of the world's biggest bond fund, said last week the U.S. economy may grow 3% to 3.5% in the fourth quarter of 2011 from the same period this year, up from a previous forecast of 2% to 2.5%, as the government floods the country with money. The economy expanded 3.2% in the third quarter from a year earlier.

TheStreet searched for four small-cap stars for 2011 with the help of Gundlach and Dedio.

Energy XXI (EXXI)

Bermuda-based Energy XXI, which has a market value of $1.4 billion, is an oil and gas producer in the shallow waters off the Gulf of Mexico.

Reserves and production have soared, says Gundlach, as management focuses on its core oil assets, combined with some recent acquisitions. Energy XXI just announced the acquisition of $1 billion in oil and gas assets from Exxon Mobil (XOM), which will take the company's production from 26,000 barrels of oil equivalent per day to about 46,000.

Gundlach contends this growth will be sustained through its continued focus on core properties, and the effective exploitation of the newly acquired assets.

"Energy XXI's growth stands to improve even more via its exploratory program in the shallow-water-ultra-deep play with McMoRan Exploration (MMR)," says Gundlach. "Production is slated to commence from the Davy Jones discovery by the end of 2011, and upcoming results from Blackbeard East and Lafitte could also be impactful."

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