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Investing Specialists

A New Pick from Our Small-Cap Superstars

We highlight a new 5-star stock held by leading small-cap fund managers.

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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  Administaff (ASF) as our latest pick.

Administaff is the largest stand-alone professional employer organization, providing human resource services for small businesses. The narrow-moat company handles common HR functions, like employee benefits, payroll, and workers' compensation, allowing its clients to focus more on their core competencies. By aggregating workforces of multiple clients into a single bargaining entity, Administaff also keeps its insurance and benefit costs below what individual clients could obtain on their own. Hence, the company provides an excellent value proposition for its clients, while still generating very favorable returns on invested capital. Senior stock analyst Joel Bloomer believes Administaff has excellent long-term growth prospects in this underpenetrated market. Risks include adverse regulatory changes, a prolonged downturn in small-business employment, and unanticipated increases in health insurance premiums, workers' compensation costs, and/or unemployment taxes. For Bloomer's full take on Administaff,  click here to read his Analyst Report.

John Owens does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.