Two New Picks from Small-Cap Superstars
We highlight two 5-star stocks held by leading small-cap fund managers.
Investing Specialists
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 those of our fellow analysts here at Morningstar. (Click to subscribe to free Small-Cap Superstars e-mail alerts.)
Our Methodology
As a reminder, deciding which stocks to highlight as picks is pretty 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 well as the funds' recent trading activity as ways to further refine our selection process.
Our Two New Picks
After running our screens and analyzing the respective merits of the Superstars' holdings, two stocks met our criteria. Both stocks trade at substantial discounts to our estimates of their fair value and each is held by five of our favorite small-cap fund managers. In addition, we believe that these companies are in solid financial shape and that they benefit from strong competitive advantages.
Resources Global Professionals (RECN)
Our first pick is narrow-moat rated Resources Global Professionals. The project-based consulting firm provides experienced temporary labor, specializing in complex projects. Backed by a highly competent workforce, Resources has been able to establish and build strong relationships with its clients, including 84 companies in the Fortune 100. Stock analyst Vishnu Lekraj believes the quality of the firm's projects and temporary workforce feed upon each other to form a strong network, making it a preferred provider for both businesses and workers. Also, unlike a typical consultancy, Resources employs its workers on a project basis and pays them an hourly rate instead of an annual salary, which allows for more flexibility in meeting its clients' needs. Lekraj also notes that the firm delivers very high returns on invested capital. Risks include clients putting off projects in these difficult economic times and a shrinking pool of highly experienced and skilled labor as baby boomers approach retirement. For Lekraj's full take on Resources, click here to read his Analyst Report.
Landstar System, Inc. (LSTR)
Our second pick is wide-moat rated Landstar System, which has established a broad asset-light freight shipping network across North America. According to stock analyst Keith Schoonmaker, the cost and time required to replicate Landstar's extensive system (including 1,397 agents, 25,000 truck broker carriers, and 9,000 Landstar-dedicated drivers) serves as a barrier to entry that discourages new entrants to the national truck brokerage market. The company benefits from a strong network effect, whereby Landstar's huge roster of shippers and truckers makes a relationship with Landstar more valuable to both parties. Landstar's low asset intensity enables the firm to deliver very high returns on invested capital and its independent contractor broker model minimizes fixed costs. Risks include exposure to the cyclical trucking market as well as traffic accidents. For Schoonmaker's full take on Landstar, click here to read his Analyst Report.
