Top Small-Cap Funds of 2017 Focus on Healthcare, Tech in Year Ahead

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Some of the benefits of the tax cut are already reflected in stock prices

The iShares Russell 2000 ETF, which tracks the benchmark Russell 2000 index of small-cap shares, is up 14 percent for the year to date, with about half of that gain coming over the last three months as Republicans rolled out their tax plan.

John Slavik, a co-portfolio manager of the $18-million Loomis Sayles Small/Mid Cap Growth fund, the 16th best performing small-cap fund this year, said that industrial machinery companies such as Gardner Denver Holdings Inc should benefit if corporations reinvest part of their tax windfalls into improving their factories.

 

 

The fund’s largest position is in supply chain company XPO Logistics Inc, which Slavik expects to gain from both corporate capital reinvestment and global economic growth. Shares of the company are up 78 percent for the year, and now trade at a trailing price to earnings ratio of 65.9, but Slavik said that he expects its revenues and cash flow to accelerate as the global manufacturing sector continues to expand.

“The valuation of the stock has been more challenging but we still thinks it works into the future,” he said.

He has also been selling his position in clear-braces maker Align Technology Inc, whose shares are up 135 percent this year and now trade at a market value of more than $18 billion, making it too large for his fund.

 

“This is a company that has done very well for us but we are looking to start to redeploy that cash elsewhere,” he said

Stephen DeNichilo, a portfolio manager of the $872 million Federated Kaufmann Small Cap fund, the 9th best small-cap fund this year, said that fund holdings such as plastics molding manufacturer Milacron Holdings Corp will benefit from a pickup in capital spending because its products help improve a factory’s efficiency. “This kind of investment pays for itself very quickly,” he said.

 

 

Yet he has a larger position overall in biotech companies, which have greater growth potential, he said. He has been adding to his position in Nektar Therapeutics, which is developing in abuse-proof opioid medication, and gene-therapy drug maker Spark Therapeutics Inc.

He also added a position in retailer Floor & Decor Holdings Inc shortly after its initial public offering in April as a play on consumer spending on home renovation. Shares of the company, which makes high-end floor tiles, are up 37.8 percent for the year.

“This a traditional brick and mortar retailer that has built a better mouse trap,” he said.

 

(Reporting by David Randall; Editing by Nick Zieminski)

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