Each week, a professional investor tells MoneyWeek where he'd put hismoney now. This week: Christopher Berrier, Brown Advisory.
One key difference between large-cap stocks in America and their small-cap cousins is the dearth of research coverage small-caps receive. Within the Russell 2000, 781 firms have five or fewer analysts covering them, and 123 have none at all. Here are three such stocks we believe have been overlooked.
Albany International (NYSE: AIN) operates two separate businesses, Machine Clothing and Albany Engineered Composites (AEC). The Machine Clothing business produces highly engineered consumable products used in the manufacturing of different paper grades. Albany is the global leader, with a 30% share of this mature industry. The business requires little incremental capital, and so produces lots of recurring free cash flow. AEC, via its "3D weaving technology", is the sole source supplier of composite fan blades and fan cases for LEAP jet engines.
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These will be on the majority of the next generation of single-aisle aeroplanes. It has a joint venture with Safran (Albany controls 90%) that is valued at roughly $300m. Given the ramp in production for LEAP engines, AEC could generate $250m in revenues by 2020. We believe its 3D technology could develop further applications within aerospace as well as areas such as vehicles and energy. At current prices, the market is either undervaluing the cash-flow stream from the machine clothing unit, or investors are effectively getting the Safran joint venture for free.
Maximus (NYSE: MMS) is a top provider of business process outsourcing services,to local and national government entities across the world. Maximus helps governments provide essential services, typically to underprivileged populations, and looks to engage these people more efficiently to foster economic development at the community level and so enable governments to manage their support programmes better. These contracts are typically long term.
Maximus' processes are scalable across both programmes and regions, resulting in consistency and visibility of revenue, profit and cash flow. There are still plenty of opportunities for Maximus, given the trend toward greater global demand for these services, as well as in areas such as student debt and immigration.
Liberty TripAdvisor (Nasdaq: LTRPA) allows small-cap investors to own TripAdvisor, the leading online travel site (the stock represents the voting control stake of TripAdvisor owned by holding company, Liberty Media).
TripAdvisor is the world's most popular travel website, and has ample room for continued revenue growth and to make money from its visitors. Its global brand means it's typically the first online destination for those planning a trip. This success has meant that TripAdvisor can make money introducing its customers to travel agencies and hotel chains. It has also recently enabled instant bookings, which should allow it to capture a greater chunk of online travel spending.
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