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Miton’s five small-cap stocks to boost US portfolios

Laura Dew
Written By:
Laura Dew
Posted:
Updated:
10/12/2014

Miton US Opportunities manager Nick Ford shares five companies with attractive valuations following the recent sell-off in the space.

The £78m fund, which Ford manages with Hugh Grieves, has returned 10.4 per cent over the year to 5 November, according to FE, versus a sector average of 13.3 per cent.

Below, Ford shares five of his latest ideas in the US small-cap market.

“The severity of the recent sell-off in the Russell 2000 Index of smaller companies has made valuations of some US small caps very attractive. These are five we currently find attractive,” Ford said.

Corporate Executive Board

“Corporate Executive Board provides subscription-based research for corporate executives including best practices, corporate strategy and operations. We have long been fans of this business given its high profitability, large proportion of recurring revenues and high barriers to entry but have struggled with the stock’s valuation.

“Recently management has had problems integrating a large acquisition that they made in 2012 which has put margins, and consequently the share price, under pressure. We believe that these issues are now largely behind the company and the shares will benefit from a return of investor confidence in the management team.”

Encore Capital Group

“Encore Capital Group purchases charged-off consumer loan portfolios from major financial institutions and collects all or a portion of the outstanding balances on the individual accounts. It does this by using the company’s own proprietary analytics and collection methods.

“The business generates very good returns but the shares have been weak recently as a result of the small cap sell-off and concerns that the prices paid to acquire charged-off loan portfolios are increasing. We expect this trend to reverse as JP Morgan and Bank of America begin to offload written off consumer debt.”

Microsemi Corporation

“Microsemi Corporation is a dominant supplier of high power, high reliability semiconductors and is gaining share in its end-markets, which include defence and aerospace, medical, communications, and industrial.

“The company faces very limited competition because it specialises in components which must be fail safe in nature; this requires five times the amount of testing compared to normal products and limits competition from mainstream semiconductor manufacturers.”

Total System Services
“Total System Services provides electronic payment processing and related services for debit and credit card issuers. The company has built a superior technology platform which it continually upgrades to deter potential competitors.

“The transaction processing business has many characteristics we like such as a high level of recurring revenues, upside to margins as the company leverages its fixed cost infrastructure and significant free cash flow generation which should enable share repurchases and dividend increases. Despite this, the shares are rated at close to a market multiple on earnings, a very attractive valuation in our view.”

Lithia Motors
“Lithia is the fifth largest car dealership in the United States with 128 locations in 14 states. The company’s revenues are rising as the tailwind of a recovering economy boosts both new and used car sales.

“We also find the group attractive as the larger dealerships such as Lithia are slowly beginning to consolidate the sector and gain share at the expense of the smaller players.

“Smaller dealerships can no longer afford to make the large investments in showrooms and servicing capability that is being demanded by the car makers. Nor are they able to negotiate the volume discounts that are won by the larger competitors so struggle to compete on price. This combination makes them willing to sell out at attractive prices to the larger dealers such as Lithia.”