It’s not easy picking small-cap stocks. Just ask John W. Rogers Jr., president and founder of Ariel Capital Management in Chicago. He runs the $223 million small-capitalization value fund Ariel Fund (Nasdaq: ARGFX) at a time when the market has showered its affections on fast-growing large-cap growth stocks over the past eight years. At the same time, small caps have languished, as their earnings have failed to grow at the same pace as their larger brethren.
“I think it’s time for caution,” says the easygoing Rogers, who maintains he isn’t waiting in vain. His strategy: buy companies with either a leading position in niche markets or those which have exclusive arrangements with top firms in other industries, figuring such alliances will translate into earnings growth. Rogers typically holds on to stocks for three to five years on average.
Specialty Equipment (NYSE: SEC), an Aurora, Illinois, food service equipment manufacturer, fits the latter profile. The firm’s Taylor division produces soft-serve ice cream and frozen drink equipment used by a number of stores and restaurants, most notably McDonald’s (NYSE: MCD), with which it has a contract. Rogers says he expects Specialty Equipment’s earnings to grow 12% to 15% over the next three to five years.
Rogers also touts Herman Miller (Nasdaq: MLHR), a Zeeland, Michigan, manufacturer of office products and furniture. He sees Herman Miller benefiting from a strong commercial real estate boom in the Midwest, as cities such as Chicago are erecting new office buildings in their down-town business districts. He expects “positive earnings growth” of about 15% a year, he estimates.
He likes Central Newspapers (NYSE: ECP), a Phoenix-based newspaper chain. Rogers says the company’s Phoenix and Indianapolis papers, which essentially have a monopoly in those markets, are experiencing strong growth in both advertising and circulation as the populations of those two areas boom. Also beneficial: cost-cutting measures and stock buybacks.
Rogers’ last two picks are definitely turnaround stories. Pawtucket, Rhode Island-based Hasbro (NYSE: HAS) has languished as some investors have become convinced the toy manufacturer can’t sustain recent earnings growth. And Reno, Nevada-based slot machine manufacturer International Game Technology (NYSE: IGT) is in the process of introducing new machines it hopes will boost sales.