NEW YORK (TheStreet) -- Small-cap stocks, which have outperformed large-company shares, are still cheap, especially in the technology industry, says Andrew Morey, manager of the ASTON/Crosswind Small Cap Growth Fund (ACWDX) - Get Report. He favors stocks such as Kelly Services (KELYA) - Get Report and Knology( KNOL).
The mutual fund, which was started in November, has returned 2% so far this year, according to fund-tracker
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.
Are you bullish or bearish?
We are cautiously optimistic. Our investment philosophy seeks to identify unrecognized growth potential at the individual-company level. The process is 100% bottom-up stock selection, and we seek out companies growing their revenues, expanding their margins, and have the potential to surprise upwards on their estimates. There is also a valuation component to our process, which helps us determine if the growth potential is truly unrecognized. We continue to see strong company-specific fundamentals that meet our valuation criteria.
What is your top stock pick?
We like Kelly Services, which provides temporary staffing in North America, Europe and the Pacific Rim. Kelly has been benefiting from the economic recovery as temporary staffing usually increases before permanent staffing. Kelly has a strong management team and has been expanding internationally, while also closing down some remote offices that were not profitable. We believe this could help revenue increase and help margins to continue to expand in the future. As some additional upside, there is also a possibility that we may see a secular shift in temporary-staffing rates. Given the economic shocks of the past few years, some companies are using more temporary workers as opposed to hiring back permanent workers. If this continues, Kelly could see its addressable market share grow significantly.
What is your favorite sector?
As a bottom-up fundamental manager, we do not intentionally overweight or underweight specific sectors. That said, we are currently identifying many individual companies in the technology sector with sound fundamentals that meet our valuation requirements. The strong fundamentals are being driven by unique product offerings and solutions that are well-positioned to benefit from the growth in trends such as e-commerce and cloud computing.
What is your top "beneath the radar" stock pick?
Knology, which is a regional cable and telecommunications provider in the southeastern United States. It services smaller cities such as Charleston, S.C., Knoxville, Tenn., and Augusta, Ga. We like the relatively fixed-cost base of the cable and telecommunications companies because when they grow revenues, their margins naturally expand. Knology has been growing revenue with the expansion of high-speed data, VoIP (Voice over Internet Protocol) and cable in bundled offerings. Knology also has a strong management team and has been making selective acquisitions leading to further growth in their business.
Which sector or stock would you avoid?
We continue to avoid regional banks in the small-cap growth arena. Most individual companies are still struggling with difficult credit trends, which can put negative pressure on margins and earnings. The few regional banks with more positive fundamentals appear to be fully valued. This suggests less opportunity for unrecognized growth potential.
-- Reported by Gregg Greenberg in New York.
Readers Also Like:
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.