A New Pick from Morningstar's Small-Cap Superstars
We highlight one new 5-star stock held by leading small-cap fund managers.
As we discussed in previous articles, one of the best and easiest ways to screen for new investment ideas is by monitoring the activity and holdings of successful fund managers. The aim of Morningstar's Small-Cap Superstars is to combine some of the best ideas from our favorite small-cap fund managers with our fellow analysts here at Morningstar.
Deciding which stocks to highlight is simple: First, the stock must have a Morningstar Rating of 5 stars, and second, it must be held by at least a handful of the 25 small-cap fund managers on our watch list (see below). We also consider the size of the holding in the respective funds as a way to further refine our selection process. After running our screens and analyzing the respective merits of the Superstars' holdings, we'd like to highlight our latest pick, Markel Corporation (MKL) (which is technically a mid-cap company, with a market capitalization of $3.6 billion).
According to Morningstar equities strategist Justin Fuller, Markel's strong underwriting and disciplined investment approach garner this insurer a narrow moat. The firm's underwriters focus on developing expertise in specialty insurance products that are too small or too difficult for larger rivals to underwrite. This helps to avoid fierce pricing competition. Fuller also likes the fact that Markel's underwriters' total compensation is contingent on the product generating underwriting profit, which means underwriters are compelled to refuse business that doesn't meet the firm's rigid pricing criteria. The company generates significant float (temporary cash holdings that accrue because premiums are received well in advance of claim payment), which it invests to boost shareholder returns. The firm has a successful long-term track record in public equity investments and has started making private-equity investments as well, a move that Fuller endorses. Risks for the company include the prospect of management overpaying for a large insurance acquisition, exposure to asbestos claims, and increased competition from Bermuda startups.
We'd note that several of our favorite fund managers hold a position in Markel, including Charles T. Akre Jr. (who has about 10% of his FBR Focus' (FBRVX) assets invested in the company) and G. Staley Cates and O. Mason Hawkins (who have nearly 5% of their Longleaf Partners Small Cap (LLSCX) fund invested in the business). The 5-tar stock also currently trades at about a 37% discount to Fuller's fair value estimate of the company.
Our New Small-Cap Superstars' Blog
If you'd like to learn more about Small-Cap Superstars, we'd encourage you to check out our new blog, which features more discussion on our stock picks. The blog also provides you with a forum to share your thoughts on these stocks as well as to ask questions. Click here for more.
Performance of Previous Small-Cap Superstars' Picks
Overall, we continue to be pleased with the performance of our past picks. Five of our stocks have delivered outstanding returns and handily outperformed the Russell 2000, while three just modestly trailed the benchmark. We remain very bullish on Cimarex Energy (XEC), American Reprographics (ARP), International Speedway (ISCA), and Carter's (CRI), all of which are rated 5 stars and continue to be held by several of our favorite fund managers. (For more on Carter's, see my recent blog post.) We also see further upside for Whiting Petroleum (WLL) and Navigant Consulting (NCI). At the time this article was published, both UCBH (UCBH) and Pinnacle Entertainment (PNK) were under review by our Morningstar analysts, as they reassess their assumptions for these companies. The two stocks, however, continue to be held by many Small-Cap Superstar fund managers.
|Small-Cap Superstar Picks|
|UCBH Holdings (UCBH)||Under Review||Under Review||101.3||98.3|
|Whiting Petroleum (WLL)||0.77||86.8||100.5|
|Cimarex Energy (XEC)||0.65||46.8||60.5|
|Navigant Consulting (NCI)||0.76||34.0||47.7|
|Amer Reprographics (ARP)||0.56||34.0||47.7|
|Pinnacle Entertain (PNK)||Under Review||Under Review||2.3||-0.8|
|Int'l Speedway (ISCA)||0.62||-15.6||-3.5|
|* As of 7/25/2008|
** Total return from eve of article publication date first highlighting the stock pick (10/02/2007 for WLL, XEC, NCI, ARP, and CRI; 10/30/2007 for ISCA; and 6/30/2008 for UCBH and PNK) to 7/25/2008.
|Baron Growth (BGRFX)||Ronald Baron|
|Baron Small Cap (BSCFX)||Clifford Greenberg|
|Century Small Cap Select Inv (CSMVX)||Alexander L. Thorndike|
|Champlain Small Company Adv (CIPSX)||Scott T. Brayman|
|Columbia Acorn USA A (LAUAX)||Robert A. Mohn|
|Diamond Hill Small Cap A (DHSCX)||Ric H. Dillon Jr., Thomas P. Schindler|
|FBR Small Cap (FBRVX)||Charles T. Akre Jr.|
|FPA Capital (FPPTX)||Robert L. Rodriguez|
|Gabelli Small Cap Growth A (GCASX)||Mario J. Gabelli|
|ICM Small Company (ICSCX)||Robert D. McDorman Jr.|
|Janus Venture (JAVTX)||William H. Bales|
|Keeley Small Cap Value (KSCVX)||John L. Keeley Jr.|
|Longleaf Partners Small-Cap (LLSCX)||G. Staley Cates, O. Mason Hawkins|
|Pennsylvania Mutual Inv (PENNX)||Charles M. Royce|
|Presidio (PRSDX)||Kevin C. O'Boyle|
|� Royce Select I Inv (RYSFX)||Charles M. Royce, Lauren Romeo|
|Royce Special Equity Inv (RYSEX)||Charles R. Dreifus|
|Royce Value Service (RYVFX)||W. Whitney George, Jay S. Kaplan|
|Schneider Small Cap Value (SCMVX)||Arnie Schneider III|
|T. Rowe Price New Horizons (PRNHX)||John H. Laporte|
|T. Rowe Price Small-Cap Value (PRSVX)||Preston G. Athey|
|Third Avenue Small-Cap Value (TASCX)||Curtis R. Jensen|
|Wasatch Small Cap Growth (WAAEX)||Jeff Cardon|
|Wasatch Small Cap Value (WMCVX)||Jim Larkins, John Mazanec|
|William Blair Small Cap Growth N (WBSNX)||Karl W. Brewer|
John Owens does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.