4 Small-Cap Stocks Made for This Economy

NEW YORK (TheStreet) -- At this stage in the economic recovery -- and bull market -- investors should focus on small-cap growth stocks such as American Capital Strategies (ACAS), Jamba Juice (JMBA) and Morton's Restaurant Group (MRT), says Robert Natale, manager of the American Independence Small Cap Growth Fund (AIFSX).

The mutual fund, launched in December, is little changed this year.

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 are small-cap growth stocks the place to be now?

Natale: Typically in a bull market like the one we are in right now, this is the stage where small caps start to take off. As for growth stocks, they are more volatile but they tend to offer good returns during periods like this one. Basically, now is the time to invest in higher-return, higher-beta companies.

Why is private-equity player American Capital Strategies one of your top holdings?

Natale: The stock is trading at just under $10 a share, which is below book value. Typically it should be trading above tangible book. In addition, they are not paying a dividend right now. They are accruing capital and will start paying out a dividend in late 2012. Plus, they have a European subsidiary that also is accreting on the books up to fair value over the next 18 months. In our view, that will get the book value -- and the stock -- over $12 by the end of the year.

Why do you like Jamba Juice as a turnaround story?

Natale: They have new management that has done a very good job of cleaning everything up, from the way they operate to their balance sheet. They have no debt. They are EBITDA-positive. They have plenty of cash. They have also changed the business model. They have gone from being 80% company-owned to 60% franchise-owned by the end of the year. You could easily see earnings at 45 cents in three years' time. If you put a 20 multiple on that, you will have a $9 stock price for a company currently trading around $2 a share.

With all the talk about food inflation, why do you like shares of Morton's?

Natale: You do have food inflation with beef prices headed up. But 80% of their revenues come from business credit cards. Business travel is up and comp store sales are up. The high-end consumer has come back even while the low-end consumer is still struggling. Morton's is perfectly positioned for the high-end consumer. In addition, they have announced that they are looking at strategic alternatives. We think the stock could be taken out in the next year at around $9 within the next few months, and it's trading around $7 right now.

The biotech company Incyte (INCY) has jumped in the past month. Why do you think it can continue to move higher?

Natale: It is just about to get approval for a myelofibrosis drug after a very favorable Phase III trial that will generate revenue of well over $1 billion in the next two to three years. It's also being tested in two other blood diseases. With those put together, their revenues could be approaching $2 billion with earnings of well over $2 in a couple of years. If you put a multiple of 20 on that, you can easily get a $40 stock price for a stock trading right now at $17.

-- Reported by Gregg Greenberg in New York.

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