Brad Evans' favorite small-cap stocks

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Brad Evans is a portfolio manager of the Heartland Value Plus Fund and the Heartland Value Fund for Heartland Advisors. Evans is a Chartered Financial Analyst and has more than 11 years of investment industry experience. He initially joined Heartland in 1996 as an equity research associate and was later promoted to equity research analyst focusing on, among other sectors, energy and materials. Following a three-year term with High Rock Capital as a vice president and research analyst, he returned to Heartland in 2004 to assume his current position. Evans graduated from the University of Wisconsin – Madison with honors and a B.A. in International Relations, Russian and Political Science.

What qualities do you look for in a small-cap stock? Have your criterion changed given the current macro environment?

“We are extremely valuation disciplined and look for low P/E, low price-to-cash flow, low price-to-book, low price-to-sales, a low multiple of enterprise value-to-EBITDA, discounted cash flow analysis, private market equity value and peer group analysis.

“We like to find companies that are trading at depressed valuations relative to where they traded before in the past. We find assets that are undervalued relative to what buyers are willing to pay for comparable assets based on what we call private market equity value, which is what a strategic buyer would pay for a set of assets. We do an extensive amount of valuation work. We’re bottoms-up stock pickers here at Heartland, so a lot of what we do is bottoms up and then we marry it together with our top-down view of the world. 

“In this environment, you’ve got to be extremely religious in terms of your valuation work and make sure you are tracking a value company that has good growth opportunities. You need strong management teams and we’re focused on companies where insiders are buying stock, not selling it.”

What are your three favorite small-cap stocks with market caps of under $1 billion for the year and why?

“A company called Asset Acceptance (Nasdaq:AACC) is very timely here. Asset Acceptance is a $283 million buyer of charge off consumer receivables, primarily eligible credit card issuers. Asset Acceptance likes to buy bad debt. The underlying thesis is that part of this credit cycle will include delinquency trends . . .

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