Fund manager Mark Travis discusses his small-cap investing strategy with Gregg Greenberg in this video. Contrary to popular belief, the credit crisis isn't crushing all small caps. Some of the market's minnows are in better shape than the biggest whales on Wall Street. "There are a lot of businesses that make products people use and need every day. A lot of them have no liabilities on their balance sheet," says Mark Travis, President of Intrepid Capital Management. "A lot of the financing risks are in the big-cap arena, because many small-cap companies are run like efficient private businesses." Travis knows how to fish for small-cap winners -- stocks with market capitalizations under $2 billion. His Intrepid Small Cap ( ICMAX) and Intrepid Capital ( ICMBX) mutual funds sport five-star ratings from fund specialist Morningstar ( MORN). The Small Cap fund has lost 14% in the past year, outperforming the 37% drop of the Russell 2000 Index, a measure of small companies. The fund, which started trading in 2005, has gained 2.8% a year, on average, in the past three years compared with the Russell's 14% decline. Intrepid's bet on kitty-litter maker Oil-Dri Corp. of America ( ODC) reflects Travis's stock-picking style. Oil-Dri's market value is only $110 million, but it sells its product to the nation's largest retailer. "They have a private label agreement with Wal-Mart ( WMT), which is a big seller, and they have their own brand as well," Travis says. "From our perspective, if you discount back the free-cash flows at an appropriate rate, or if you value their clay reserves, we get an asset valuation that's a good bit higher than the shares trade for today." Another mighty mite Travis likes is Gencor Industries ( GENC), which has a market cap of $62 million and average trading volume of just 11,000 shares a day during the past three months. The paving-equipment company could hit it big if Obama's $787 billion economic stimulus plan pays for road construction.
"It's a father-son business and they own 30% of the company with no debt," says Travis. "They also own land free and clear in Orlando, Iowa and the U.K. So they have balance-sheet wherewithal and a stimulus package that will hopefully spur sales." While oil prices have fallen below $40 from last summer's high of $147, Travis says investors should buy commodities like gold and oil as the government keeps printing money. Travis' top oil picks are drilling-services providers Patterson-UTI Energy ( PTEN) and Tidewater ( TDW). "While Tidewater's over-levered competitors are suffering as the cyclical price of oil has dropped from $147 to $35 a barrel, they are able to take advantage of it by expanding their fleet and their business," Travis says. "They will come out even better as the cycle accelerates on the other side." Travis has also plugged into phone-jack maker Communications Systems ( JCS), despite the fact that more people are abandoning landline phones for cell phones. "The company has a wonderful balance sheet where we are able to buy the shares for less than the working capital of the business," says Travis. "If we apply an appropriate discount rate and make some slow assumptions about growth and we still come up with a higher private market value than the current price, then we are going to buy the shares. And I think we'll be rewarded." Travis makes his search for small-cap stars sound so simple. "We are not looking for the next Microsoft ( MSFT), just sustainable, profitable businesses."