This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Isis, Teledyne and Pandora Among Top Small-Cap Picks

NEW YORK (TheStreet) -- Small-cap managers are calling a stock-picker's market after a strong run last year triggers valuation concerns.

But opportunities abound for investors willing to do their research, with financials, biotechs, tech and energy stocks cited as sectors thick with good stock picks.

The Russell 2000 index gained 38.8% in 2013 to outpace the S&P 500's 26% gain. As a result, valuations among large-cap stocks are generally more attractive, though managers say the exposure of small caps to the recovering domestic economy goes some way to redressing the balance.

The biotech sector is a favorite of many managers, with many small-cap biotechs seen as more innovative than their larger peers. This week, Illumina (ILMN) announced that the human genome could be mapped for just $1,000, a development that helps scientists understand underlying causes of traits and medical conditions. Russell Investment's Jon Eiggins noted the innovation in small-cap biotechs has seen a trend in which large companies wait for smaller rivals to make discoveries then buy them, magnifying share price gains.

Must Read: 25 Stocks in Nuveen Asset Management's New 2014 Portfolio

Intercept Pharma (ICPT) illustrated the benefits of backing innovative small caps; its drug to treat liver disease was found effective in a trial and appears set to be the first approved treatment for the chronic condition. Shares jumped from $72.39 to $252.63 this month on the news.

Artisan Small Cap Fund Associate Portfolio Manager Jason White pointed to Isis Pharmaceucticals (ISIS) as another promising biotech, noting the company has a variety of drugs in the pipeline and partnerships with big companies like GlaxoSmithKline, Merck and Roche.

In other sectors, White likes Teledyne (TDY - Get Report), a company focused on the proliferation of sensors across industries such as deep water oil, medical imaging and gas and aircraft control. "The company had its roots in defense but have repositioned so 80% of their profit is from commercial industry," he said in a phone interview.

White also pointed to upside for personalized radio station Pandora (P). "They're now the largest radio station and are monetizing their listeners with advertising -- the trend of streaming on radio is durable and they work across all platforms," he said.

More broadly, Eiggins said he likes the technology and energy sectors, noting the latter is appealing on both a fundamental and valuation case after failing to keep pace with the broader rally.

Motley Fool Funds Management portfolio manager Bill Mann said he likes small-cap financials, especially conservative stocks with utility-like qualities. He cites Access National (ANCX - Get Report) and Carter Bank & Trust as two examples of niche-focused lenders operating in supportive regulatory environments. In the retail sector, he also pointed to restaurant chain Texas Roadhouse (TXRH) as a small-cap stock that is well-run with good returns on capital.

But concerns remain. "I've never had a more stressful time than now (stock picking)," Mann said in a phone interview. "Many companies are quite expensive and when you look at whether their cash flows over a full earnings cycle (3-5 years) you would have to be very bullish to think they could live up to their valuations."

Eiggins agreed that large-cap stocks look slightly better on a valuation basis than their smaller peers. He also noted that microcap stocks outpaced small-cap stocks in 2013, with the Russell MicroCap index posting 45.6%. This further underlines the need for stock-picking when valuations are stretched, Eiggins said.

"But while valuations have expanded, small companies have high leverage (good exposure) to the recovery in the domestic economy," he added.

-- Written by Jane Searle in New York.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
ANCX $18.95 0.32%
ISIS $34.01 -2.58%
TDY $93.91 -0.27%
AAPL $92.69 -0.59%
FB $119.49 1.40%


Chart of I:DJI
DOW 17,740.63 +79.92 0.45%
S&P 500 2,057.14 +6.51 0.32%
NASDAQ 4,736.1550 +19.0610 0.40%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs