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3 Top Overlooked Small-Caps, Hodges Says

NEW YORK ( TheStreet) -- In a year when many investors expect large-cap stocks to outperform, there are opportunities to make money in smaller companies such as Atwood Oceanics (ATW - Get Report), PriceSmart (PSMT - Get Report) and Tempur-pedic International (TPX - Get Report), says Craig Hodges, manager of the Hodges Small-Cap Fund (HDPSX).

The mutual fund has returned 45% over the past year, better than 94% of its Morningstar (MORN) peers. Over the past five years, the Hodges Small-Cap Fund has returned an average of 6.5% annually, better than 60% of its rivals.

Welcome to'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.

Will small-cap stocks outperform large-caps in 2011?

Hodges: I personally think they will, but I would not put it past the large-caps to finally have their year. We have been saying for a long time that the large-caps are the most undervalued part of the market. And I believe they are. That said, there are always opportunities in small-caps. There are always new ventures and, of course, acquisitions as big companies look for ways to fuel their growth.

We have seen some M&A in the drilling business recently with the Ensco (ESV) purchase of Pride International. Is this one of the reasons why you like Atwood Oceanics (ATW - Get Report)?

Hodges: I would say so. Energy companies have historically been proactive in making acquisitions and a company like Atwood would be a good candidate. You saw the Pride deal so that is a good sign. 2011 will be a good year for the oil-drilling industry, which is still coming off the tragic spill in the Gulf of Mexico. And 2012 is shaping up to be even better because of the shortage in deepwater rigs. Atwood is growing its rig count so it has a lot of upside.

Why would you want to own shares of PriceSmart with all the worry about the strength of the consumer?

Hodges: It's based in San Diego, but the majority of their business is in Latin America and the Caribbean. This is a company that is knocking the cover off the ball. Their same-store sales are running well into the double digits quarter after quarter. It's a company that has little analyst coverage, but it has great management. It was founded by the same people that originated Costco (COST) so they clearly know the warehousing business.

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