Small-Cap Tech Ranks No. 1

Small-cap stocks, which have outperformed large-company shares, are nevertheless cheap, especially in the research industry, says Andrew Morey, manager of the ASTON/Crosswind Small Cap Growth Fund. He favors stocks just as Kelly Services and Knology.

Morey: 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 earnings, expanding their margins, and have the potential to surprise upwards on their estimates. There is as well a valuation component to our process, which helps us determine if the growth potential is in fact unrecognized. We continue to see strong company-specific fundamentals that meet our valuation criteria.

Morey: 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 taking everything into consideration increases earlier permanent staffing. Kelly has a strong management team and has been expanding internationally, during also closing down some remote offices that were not profitable. We believe this could help revenue increase and help margins to continue to expand hereafter. As some additional upside, there is as well a opportunity 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. At this rate, Kelly could see its addressable market share grow significantly.

Morey: As a bottom-up fundamental manager, we do not on purpose overweight or underweight specific sectors. That said, we are currently identifying many individual companies in the innovation sector with sound fundamentals that meet our valuation requirements. The strong fundamentals are being driven by in a class by itself product offerings and solutions that are so then-positioned to benefit from the growth in trends just as e-commerce and cloud computing.

Morey: Knology, which is a regional cable and telecommunications provider in the southeastern United States. It services smaller cities just 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 earnings, their margins intrinsically expand. Knology has been growing revenue with the expansion of high-speed data, VoIP (Voice over Internet Protocol) and cable in bundled offerings. Knology as well has a strong management team and has been making selective acquisitions leading to furthermore growth in their business.

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