With Small-Caps Back on Track, Here Are Impax Asset’s Favorites for Q3

As a general rule, small-cap stocks tend to outperform large-cap stocks, because smaller companies have greater opportunities to grow compared to their larger counterparts. However, they are also more susceptible to broader market weakness, which we experienced earlier this year. Indeed, many investors jettisoned their holdings in small-cap stocks amid the broader market sell-off, as they were deemed to be extremely vulnerable to worsening economic conditions. However, U.S. small-cap stocks are no longer in a bear market, so retail investors should start thinking about channeling capital into the small-cap space again. In fact, the small-cap Russell 2000 Index has gained 7.7% since the beginning of the year, outperforming the 6.4% return generated by the S&P 500 Index over the same period.

That said, the following article will list five small-cap stocks favored by London-based Impax Asset Management, a leading investment firm that manages roughly $5.6 billion through both listed and private equity strategies. The asset manager, founded by Ian Simm in 1998, predominantly seeks to invest in opportunities created by the scarcity of natural resources and the growing demand for cleaner and more efficient products and services. Put differently, Impax Asset Management seeks out mispriced companies that are anticipated to benefit from the long-term trends of rising global populations and wealth, changing demographics, urbanization, increasing consumption, and the associated increases in resource demand. Without further ado, let’s have a look at the top-five small-cap stocks favored by the London-based asset manager.

At Insider Monkey, we track around 765 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

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#5. Franklin Electric Co. (NASDAQ:FELE)

– Shares Owned by Impax Asset Management (as of June 30): 1.17 Million

– Value of Impax Asset Management’s Holding (as of June 30): $38.50 Million

Impax Asset Management upped its position in Franklin Electric Co. (NASDAQ:FELE) by 4% during the second quarter of 2016 to nearly 1.17 million shares. The increased position was valued at $38.50 million on June 30 and made up 1.9% of the value of the asset manager’s equity portfolio. The producer of systems and components for the movement of water and automotive fuels has seen its market cap increase by 39% since the beginning of the year. Franklin Electric stands to benefit from farmers’ higher incomes, as well as increased spending in the oil and natural gas industry. The company’s net sales for the first half of 2016 fell by 1% year-over-year to $470.5 million, reflecting a $21.3 million impact from foreign currency headwinds. Excluding acquisition and foreign currency translation, Franklin Electric’s top-line grew by 4% year-over-year. The company remains somewhat cautions about its business operations in the Middle East, particularly in Turkey, as recent political disruptions resulted in increased uncertainty. Royce & Associates, founded by Chuck Royce, owns 1.33 million shares of Franklin Electric Co. (NASDAQ:FELE) as of the end of the June quarter.

#4. Mueller Water Products Inc. (NYSE:MWA)

– Shares Owned by Impax Asset Management (as of June 30): 4.08 Million

– Value of Impax Asset Management’s Holding (as of June 30): $46.59 Million

The London-based asset manager cut its stake in Mueller Water Products Inc. (NYSE:MWA) by 4% during the April-to-June period, having ended the second quarter with 4.08 million shares valued at $46.59 million. The shares of the manufacturer of products and services used in the transmission, distribution and measurement of water are 42% in the green thus far in 2016. Mueller Water Products reported net sales of $310.1 million for the quarter ended June 30, up from $301.0 million posted a year earlier. The increase reflected higher shipments at Mueller Co., which manufactures valves for water and gas systems, and Mueller Technologies, which provides metering systems, leak detection, pipe condition assessment, and other related products and services. There were 20 hedge funds followed by Insider Monkey with stakes in the company at the end of March, amassing 12% of its outstanding shares. Claus Moller’s P2 Capital Partners had 2.70 million shares of Mueller Water Products Inc. (NYSE:MWA) in its portfolio at the end of March.

The second page of this article will reveal three other small-cap stocks favored by Impax Asset Management.

#3. Itron Inc. (NASDAQ:ITRI)

– Shares Owned by Impax Asset Management (as of June 30): 1.44 Million

– Value of Impax Asset Management’s Holding (as of June 30): $62.21 Million

Impax Asset Management owned 1.44 million shares of Itron Inc. (NASDAQ:ITRI) at the end of the second quarter, 48,095 shares more than it did at the end of the first quarter. The increased position was worth $62.21 million at the end of June, and constituted 3.1% of the value of the investment firm’s portfolio. In September 2015, two hedge fund vehicles joined forces to launch an activist campaign against the technology and services company, with all parties involved in this play reaching an agreement in December 2015 under which two new Directors were appointed to the company’s Board. The technology company provides end-to-end smart metering solutions to electric, natural gas, and water utilities. Itron has seen its market value gain 20% since the start of 2016. In mid-July, Itron announced that it had reached an agreement to settle patent litigation claims brought against it by TransData Inc. Bernard Lambilliotte’s Ecofin Ltd reported ownership of almost 185,000 shares of Itron Inc. (NASDAQ:ITRI) through the current round of 13F filings.

#2. California Water Service Group (NYSE:CWT)

– Shares Owned by Impax Asset Management (as of June 30): 1.85 Million

– Value of Impax Asset Management’s Holding (as of June 30): $64.64 Million

The London-based asset manager founded by Ian Simm increased its exposure to California Water Service Group (NYSE:CWT) by a mere 2% during the three-month period ended June 30, to 1.85 million shares valued at $64.64 million on June 30. The provider of water utility and other related services in California, Washington, New Mexico, and Hawaii has seen the value of its stock jump by 35% in 2016. Just recently, the company’s Board approved a quarterly dividend of $0.1725 per share, marking the 286^th-consecutive quarter in which it pay out a dividend to shareholders. The freshly-declared quarterly dividend equates to an annual dividend yield of 2.19%. A mere eight hedge fund vehicles in our system were invested in California Water Service at the end of the first quarter, holding 5% of its outstanding common stock. Beech Hill Partners, founded by Paul Cantor, acquired a new stake of 7,151 shares of California Water Service Group (NYSE:CWT) during the June quarter.

#1. Watts Water Technologies Inc. (NYSE:WTS)

– Shares Owned by Impax Asset Management (as of June 30): 1.60 Million

– Value of Impax Asset Management’s Holding (as of June 30): $93.07 Million

Watts Water Technologies Inc. (NYSE:WTS) was the third-largest equity holding in Impax Asset Management’s portfolio at the end of June, accounting for 4.6% of its value. The London-based investment firm boosted its position in Watts Water by 79,740 shares during the second quarter, to 1.60 million shares worth $93.07 million on June 30. For the second quarter, the U.S. manufacturer of a broad line of plumbing, heating and water quality products reported sales of $371.1 million, down by $15.8 million year-over-year. The decrease primarily reflects the exit of non-core products, which impacted the top-line figure by $33.9 million. In 2015, the company’s Board approved a plan to transform its Americas and Asia-Pacific businesses, which involved the exit of low-margin, non-core product lines and global sourcing actions. Watts Water shares have gained 28% this year. Royce & Associates has 89,340 shares of Watts Water Technologies Inc. (NYSE:WTS) among its holdings as of the end of the second quarter.

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