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Oct. 5, 2007, 8:09 p.m. EDT

Filling up on small fry

Heartland fund manager taps Intersections, FirstCity Financial, TriQuint

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By Ruth Mantell, MarketWatch

WASHINGTON (MarketWatch) -- Neglected and unappreciated companies have a home at Heartland Value Fund.

The managers follow a contrarian strategy aimed at "under-loved, under-followed companies that trade at significant discount to what we think their intrinsic value is," said Brad Evans, a co-manager of the microcap mutual-fund /zigman2/quotes/204254591/realtime HRTVX -1.51% .

The fund focuses on the market's tiniest value-priced companies; a capitalization range of $1.5 billion and less is its sweet spot. As of June 30, the portfolio's median holding had a market-cap of about $230 million.

Heartland Value has lagged its peers in the 12 months through Oct. 3, up 13.7% versus 17% for the average small-cap core fund, according to fund tracker Lipper Inc. Its three-year annualized 12.8% gain also is below the category's 13.2% average return.

The fund's benchmark Russell Microcap Index has had a tough year so far, and Wall Street seems convinced that small companies aren't the place to be right now, Evans says.

"The market is not in love with small caps today...there is a general disdain," he noted. "We are contrarians here. We are not going to deviate from what we do best. There is a general flight from small micro-caps which we think is creating an opportunity."


One company Evans says has strong potential is Intersections Inc. , which provides identity theft prevention, mitigation and resolution services to consumers with credit cards. The major card issuers, with the exception of American Express, use Intersections.

"Identity theft is a growing trend," Evans said. "We think it's an explosive industry."

The company has been investing in new products and services, depressing short-term profits, but management's efforts will become more apparent over the coming year, Evans says.

"The majority of analysts on the street are not very enthusiastic about Intersections. The company has been losing coverage. We think that the market has given up on the story right at the wrong time," Evans said.

Intersections shares closed at $9.90 on Friday, down a penny.


FirstCity Financial Corp. is another company that many analysts have given up on despite its healthy growth prospects, Evans says.

The asset manager buys nonperforming loans from banks, and has been under a cloud from an internal investigation, Evans says. FirstCity funded the investigation, he adds, and found no improper activity.

Evans said he sees a "tidal wave" of nonperforming assets in the market as a plus for FirstCity and a catalyst for the shares. He also likes that the company recently increased its borrowing capacity.

"The company's business is actually improving," he said. "As the credit cycle deteriorates, FirstCity Financial will have a significant opportunity to buy bad-debt portfolios."

On Friday, shares of FirstCity Financial closed down 17 cents at $9.56.


Evans also favors TriQuint Semiconductor Inc., which supplies components for cell phones. The market has become overly concerned that TriQuint is too exposed to orders from Motorola Inc , which has lost some market share, he says.

"Motorola is in the process of bottoming in terms of their loss of market share in the handset market," Evans said. "And we see them building their business with [other companies]."

Increasingly sophisticated cell phones could boost TriQuint shares as the company's parts become less of a commodity and more difficult to replace, he adds.

"As the handset market gradually grows, the percentage of handsets that are feature-rich is increasing rapidly," Evans said. "That's good for the entire industry."

Shares of TriQuint Semiconductor added 4 cents to $4.81 on Friday.

US : U.S.: Nasdaq
$ 38.39
-0.59 -1.51%
Volume: 0.00
Sept. 29, 2022

Ruth Mantell is a MarketWatch reporter based in Washington.

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