With investors still cautious about the third-quarter rally, small caps have seen mixed results over the past few days. While smaller companies often charge to the head of the pack at the beginning of a recovery, they stalled earlier this week as investors pondered the health of the larger names that drive the market. Still, the Russell 2000, which tracks small caps, is up by 22.4 percent year to date.
To get a sense of what small companies are looking attractive, U.S. News spoke with Sam Dedio, manager of the Artio U.S. Small Cap fund, which has gained 66.5 percent year to date. As small caps bottomed out during the credit crisis, Dedio picked up some debt-ridden companies that later surged when investor confidence began to rebound. Those gains have complemented his traditional strategy, which focuses on solid cash flows and market-changing innovation.
Here are some companies that Dedio says have strong fundamentals and room to run:
Myriad Genetics (MYGN). Dedio sees plenty of room for growth in this company, known for its genetic screening tests. "They have no competition. They have 87 percent gross margins, and they're heading toward 90 percent. The operating margins are [strong] and going higher," he says. "And so that's like a neon light to me that they have no competition."
Weight Watchers (WTW). "The margins are going up there simply because more and more people are going online and using Weight Watchers' program as opposed to going to a meeting room," Dedio says. "That's the old model . . . . The new model is you go online, you give them your credit card, they charge you $16.95 a month, and you use the program."
Mellanox Technologies (MLNX). This connectivity solutions company, which makes specialized chips that are used in the storage industry, just announced that it brought in record revenues in the third quarter. "They're doing something that's different. They have a unique niche product that's gaining share in the marketplace," says Dedio.
Integrated Device Technology (IDTI). This company, which makes semiconductors for PCs and for communications companies, has benefited from recovery in both of those markets. Dedio is also enthusiastic that the company, which has traditionally focused on digital chips, is capitalizing on some of the opportunities in the analog market. "I think that's kind of flying below the radar," he says.