Portfolio Manager Perspectives

Jeff Benjamin

Salopek: Market's ‘like picking buckets of money off the ground’

Small-cap manager says positive company forecasts don’t jibe with investors’ high level of fear

Aug 27, 2010 @ 11:41 am

By Jeff Benjamin

A buildup of free cash flow creates an “extremely compelling” case for small-cap stocks, according to Steve Salopek, manager of the $100 million ING Small Cap Opportunities Fund Ticker:(NSPAX).

Mr. Salopek, who manages a total of $600 million in the small-cap strategy, said what he’s hearing from companies doesn’t sync with the investors’ high level of fear in the market.

“Company outlooks are very good,” he said. “They’re going to start hiring and spending money.”

The bottom-up strategy concentrates on companies with market capitalizations of less than $2 billion, with an emphasis on cash flow as part of a total balance sheet analysis.

“We’re looking at cash flow and return on cash flow,” he said. “Too many growth investors have an income statement obsession, but we’re obsessed with the entire capital structure.”

Mr. Salopek’s research can take him off the beaten path. For example, he was loading up on bank stocks in 2008 “when the entire world was massively underweight banks,” he said. “Our job is to find the best house in a bad neighborhood.”

Mr. Salopek admits the current market is best suited for stock pickers, but said the lack of correlation in the market represents opportunity — not reason for despair.

“I don’t need to be bullish on the economy, because right now it’s like picking buckets of money off the ground,” he said.

Through Thursday, the fund was up 2% from the start of the year, which compares to a 6% decline by the S&P 500 Index over the same period.

Mr. Salopek said he likes the opportunities in small-caps because the market will differentiate between companies that can and cannot grow in this environment.

“This is a market for small-cap growth,” he said. “In a moderate-growth environment, coming out of a recession, the smaller companies with low debt and strong balance sheets are the right size to generate growth.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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