A Fistful of Small-Cap Picks

 | Mar 14, 2013 | 2:00 PM EDT
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For the most part, we at Action Alerts PLUS own large-cap, blue-chip stocks. However, I've identified a few smaller-cap stocks that are interesting at current levels.

Allison Transmission (ALSN) is a play on the truck recovery, with strong margins driven by higher content per vehicle. It has strong cash flow, and earnings guide has been set low.

Dollar General (DG) is the premier dollar store and truly a best-of-breed. I like the consumables mix, the balance sheet and the square-footage-growth potential, and the lower oil prices should help the consumer. Shares are up 10% year to date, but they're still down 15% from the highs.

HCA (HCA) has scale advantage in the hospital sector and should benefit from the Affordable Care Act, as bad debt expenses will be reduced while volumes increase.

Hertz (HTZ) is a play on Dollar Thrifty acquisition and synergy benefits, wherein the top three rental-car companies will have 90% market share. Hertz also has exposure to the improving trends in commercial construction in its equipment-rental division (HERC).

Ignite Restaurant (IRG) will benefit from the recent Macaroni Grill acquisition. The takeout will help smooth out its seasonality and lead to better earnings and operating leverage, together with improved messaging and repositioning of its Joe's Crab Shack.

MEG Energy (MEG) is a play on oil sands in Canada with above-average production growth, cash flow and return on capital employed. It's been successful in mitigating heavy differentials in Canada and costs are well-controlled.

Finally, Nuance Communications (NUAN) shares have been hammered year to date, falling 17% after a disappointing quarter and guidance from weakness in its healthcare and mobile segments. Offsetting this were better showings in enterprise and auto, as well as continued strength in its backlogs. Earnings will be back-half weighted and margins will be lower, tied to mix. However, shares trade at half its historical multiple average, and organic growth will still be a solid 8%. Plus, Nuance has still dominated the speech-recognition market and could be a take-out candidate.

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