Economic growth in the United States is expected to be sluggish, but a Brookfield investment manager says he still sees some robust investment opportunities.
Wall Street analysts generally are sour on small company stocks because they have been trading at higher valuations, on average, than big company stocks. But small caps have had stronger growth trends coming out of the recession, said David Stamm, senior vice president and portfolio manager at Dana Investment Advisors.
"You can find small cap companies with exciting earnings and sales growth that still trade at fairly reasonable multiples," he said.
Arctic Cat Inc. (ACAT, $41.61), Thief River Falls, Minn., designs, engineers, manufactures and markets snowmobiles, all-terrain vehicles and recreational off-highway vehicles under the Arctic Cat brand name in the U.S. and internationally. It also sells related parts, clothing and accessories.
Arctic Cat's stock has already risen by about 75% in the last three months, but Stamm says the upward move may not be over.
"We see continued growth in sales and earnings in fiscal 2013, along with margin improvement, and they're doing a very good job of controlling costs," he said.
Arctic Cat has a strong balance sheet and is expected to end its fiscal year on March 31 with about $60 million of cash, he said. The 50-year-old company is continuing to expand market share in the snowmobile and ATV segments. It does not report market share data for its fast-growing ROV segment, Stamm said.
The company introduced 23 snowmobile models in 2011, and has about a 22% share of the North American market in this category, which represents about 39% of sales, Stamm said. There are 230,000 miles of snowmobile trails in North America, he said.
ATVs and ROVs represent another 39% of sales, Stamm said.
Arctic Cat has increased its share of the ATV market to about 8%, from just under 5% in 2000, he said. The company is in the process of launching its new two-seater Wildcat High Performance Side-by-Side ATV. The vehicle has sport suspension, and one of the biggest engines in this category. It is competitively priced at about $16,000, Stamm said.
"They've already shipped about 200 units, and management has indicated this represents a low single-digit percentage of orders received," he said.
The big move in Arctic Cat shares this year resulted from the company's repurchase of 6.1 million shares at a 30% discount to the market price from Suzuki Motors, which had owned 33% of the company. The company also had a better-than-expected financial report in late January.
The biggest risk with buying the company's shares is the possibility that less snowfall this winter has pushed dealer inventories higher, which could pressure preseason snowmobile sales, Stamm said. But that overhang is expected and built into the stock price, he said.
Meanwhile, snowmobile sales are still below pre-recession levels, "so they're working off a low base, with room for growth," Stamm said.
Arctic Cat shares have traded in a 52-week range of $11.55 to $42, and Stamm said they could trade as high as $55 in the next 12 months.