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Guns, Funeral Homes and Colleges as Investments

NEW YORK (TheStreet) -- The Russell 2000 Index of small companies is hitting new highs, heightening awareness of Capella Education (CPLA), Sturm, Ruger (RGR), Service Corp. (SCI) and other stocks, says Jonathan Moody, manager of the Touchstone Small-Cap Core Fund (TSFAX).

The $199 million mutual fund has returned 10.4% this year, putting it in Morningstar's (MORN) 34th percentile for small-blend funds. Over the past year, the fund has risen 22%, also better than two-thirds of its rivals.

Welcome to TheStreet'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.

Why should investors chase small-cap stocks if they are hitting new highs?

Moody: When we look at the overall equity space, equities are way undervalued relative to bonds. Cash on corporate balance sheets today is at 50-year highs. A lot of companies are going to have a hard time showing organic growth, so they are going to put that cash to work by buying smaller companies. Most of that M&A will occur in small to mid-sized names.

For-profit education stocks have come under a lot of scrutiny from the government, so why do you like Capella?

Moody: Capella is a best-in-class operator. It's about an $800 million company with around $200 million in cash. It generates a nice amount of cash flow. And when we look at their student profile, we see that about 80% of their students are at the graduate level. That means they are probably already employed and going back to school to get advanced degrees to increase their earnings. We also like the fact that they are 100% online so it's almost like a publishing model where they have high incremental returns on capital.

Why is now a good time to own gunmaker Sturm, Ruger?

Moody: We like Sturm, Ruger because management there has done a phenomenal job in transitioning that company to lean manufacturing. That's important for the company because it increases their ability to manufacture new products. If you look at the most recent quarter, about 29% of their sales came from new products. Last year, it was 25%, so they are doing a good job generating nice amounts of cash and returning that excess cash to shareholders.

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