Fund That Prospers From Cheap, Small Companies

Finding undervalued gems among the thousands of publicly traded small-company stocks is the mission of Skyline Special Equities (symbol SKSEX). Over the past year, the fund’s managers have found diamonds in stocks tied to the housing recovery, a boost in consumer spending and an improving industrial sector.

One big winner was Caesarstone (CSTE), an Israeli maker of quartz countertops. Its stock has soared 110% since Skyline bought it in January. Also helping to boost the fund’s results were Winnebago Industries (WGO), a maker of recreational vehicles, and trucking company Swift Transportation (SWFT). Both stocks have doubled over the past year.

William Fiedler, Michael Maloney and Mark Odegard, who have run Special Equities since 2001, seek undervalued companies with market values of $2.5 billion or less. To ensure cheapness, they buy only if a stock’s price-earnings ratio is at least 20% less than the P/E of the small-company Russell 2000 index. Even then, they’ll invest only if they believe a company can deliver earnings growth regardless of the economic environment. “That helps us avoid value traps,” says Maloney. He and his co-managers establish a price target for every stock they buy, and they sell when a stock reaches that level.

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Special Equities holds about six dozen U.S.-traded companies, including a handful based overseas. The fund has a turnover ratio of 47%, suggesting that it holds each stock for an average of two years.

Tan joined Kiplinger in June 2012 from Bloomberg News, where she was a reporting intern covering mergers and acquisitions and IPOs in New York. Prior to that, she worked as a production intern at CNN in Washington, D.C., where she assisted with political research and live broadcasts. She also covered financial regulation, including the Dodd-Frank Act, as a reporter for the Medill News Service. Before that, she wrote about economics and commodities in Chicago. She has written for the New York Times, MarketWatch, Businessweek.com, United Press International and the San Francisco Chronicle. She holds a BBA in finance from the University of Michigan and an MS in journalism from Northwestern University.