atlas iron eyes foreign asset, page-11

I voted against the director options...

Today's strong performance might have been due to the below. Atlas is one of the key picks.
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Over the past 12 months the performance of smaller companies has beaten larger companies by around 16 per cent. Historically, small-caps trade at a 5 percent discount to large-caps, but when markets run, small-caps tend to kick up sharply.

The Bull asked three fund managers to come up with a list of their favourite small to mid-cap stocks that should continue to generate strong returns in the market's next recovery phase.

Take a look at their 18 top stock picks.

Atom Small Cap Fund



Daniel J Rolley: Investment Analyst
Core Focus: Stocks outside the S&P/ASX100

Key Picks

1) Atlas Iron (AGO): The WA-based iron ore producer is increasing production from its current 2 million tonnes annually (mtpa) to 6 mtpa by Dec 2010, then towards 12 mtpa in 2012. The stock is on a P/E of 2.5x 2012 earnings, and Rolley expects the stock to double from its present $2:06 towards his $4 target over the next 18 months. Forecast EPS growth for 2010 is 76 percent.

2) McMillan Shakespeare (MMS): The earnings growth of this salary packaging administration and associated services provider is underpinned by new contracts, increased penetration rate of existing customer base and better cross-sell of its broader product suite. Rolley expects the recent acquisition of fleet management company Interleasing Australia to further diversify the earnings base. He expects earnings growth in FY10 and FY11 to be over 13 percent. The stock is currently trading on a 30 percent discount to Rolleys target valuation of $7.50 (P/E 8.5x).

3) IMF Australia (IMF): The litigation funders case portfolio is expected to grow from $1.4 billion to around $2 billion in 2011. At current levels ($1.52), Rolley says insufficient value is being placed on 1) the IMF business franchise and (2) the upside in litigation portfolio growth. IMF is a strong defensive stock with $42 million to continue investing in cases - our target price is $1.85.

4) Oakton Ltd (OKN): Rolley is looking for a turnaround story due to higher resource utilisation rates and lower overheads. Following the overhang created by the costly Tenix dispute, Rolley says Oakton now looks undervalued, and expects the company to report FY10 EBITDA growth of around 30 percent under a rationalised cost structure. The stock trades on sub-10x 2011 P/E, offers around 6 percent in dividend yield, and currently trades on a 25 percent discount to Rolleys $3.50 target price.

5) CBD Energy (CBD): Rolley expects the utility service provider - involved in the design/construction/maintenance of solar, wind and energy storage systems - to deliver $4 million profit in 2010 following the acquisition of the Eco-Kinetics solar energy installation business. He expects full year contribution from Eco-Kinetics, plus the start-up of several renewable energy projects to see the stocks 2011 earnings rise towards $12 million. CBD is attractively priced ($0.13.5) on a 2011 P/E of 4.5x, and our 12 month target would see it trading on double this.

6) Thorn Group (TGA): Provider of electrical and household appliances under the Radio Rentals brand, the companys defensive qualities including a core client-base less exposed to rising interest rates - helped it deliver some strong results during the GFC. The stock is trading on an undemanding P/E multiple of 9x, yield of around 5 percent, and if the management continue to deliver strong results, Rolley says Thorn could very easily re-rate towards a market multiple - currently trading on a 15 percent discount to his price target $1.60.

WAM Capital (WAM)



Chris Stott, Head of Research
Core Focus: Small to medium stocks


Key Picks

1) RHG Ltd (RHG): Formerly Rams Home Loans, RHG has upgraded its profit forecast to between $86 million and $96 million, due to a contingent income tax asset. Stott sees the company is a discount play given the 45 percent difference between its $1 NTA and the current price. We expect the company to benefit from any improvement in the securitisation market or otherwise return surplus funds to shareholders by way of special dividend.

2) Reckon Ltd (RKN): Shares a duopoly (80-90 percent) within the SME financial software space with rival, MYOB. Stott expects the company to participate in future price improvement initiated by MYOB later this year. Based on these rises, Stott is factoring-in 10 percent revenue growth. The stock is currently trading on a 15 percent discount to Stotts target price of $2.40. Hes looking for calendar year EPS growth of 20 percent (13c), and ROE of around 40 percent.

3) REA group (REA): Commonly known as Realestate.com.au, the stock is a market leader in on-line advertising with 9,500 agents using its website. With an underlying cash balance of $70 million at 30 June 2010, Stott says REA is well positioned to either make another significant offshore acquisition or pay a higher dividend. Pending price rises are expected to buoy solid cash flow from core earnings. The stock trades on a P/E of 20x - has an ROE in excess of 40 percent, and is currently trading at a 5 percent discount to Stotts target of $11.50.

4) Oroton Group Ltd (ORL): Stott expects the retailer of two premium brands - Oroton and Ralph Lauren to be re-rated for delivering on or exceeding its own full year forecasts. First half profit rose 23.5 percent following the opening of three new Oroton stores. The group now has 73 stores, and management expects to open more this year. The stock is currently trading on a 15 percent discount to Stotts target of $8.

5) The Reject Shop (TRS): Stott particularly likes managements proven track-record in consistently delivering the discount variety retailer with an ROE well over 30 percent. He expects the stock to benefit from increased scale there are long-term plans to double store numbers to around 400. The stock is trading at around a 10 percent discount to Stotts $18 target, and he expects it to deliver 15 percent EPS growth in full year 2011.

6) Macquarie Telecom Group (MAQ): Liquidity in the niche telecommunications service provider recently improved following the sale of Telecom NZs stake. With $56 million in cash, Stott says its well positioned to grow its share of business and government contracts. Take out the cash and the telco is trading on 2x EBITDA, and Stott expects it to outperform its guidance with full year 2010 EBITDA of $28/$29 million and 37c EPS. The stock currently trades on a 25 percent discount to Stotts target price of $7.50.

Wilson HTM Priority Growth Fund


Sandy Grant, Fund Manager
Core Focus: Small to mid-cap bias


Key Picks

1) Mastermyne Group (MYE): A mining services provider to the Qld and NSW coal industry, Mastermyne floated at a $1 issue price last May and is currently trading at $1.07 (P/E 8x). Based on strong leverage to the coal sector, Grant has a target price of $1.25 on the stock and is forecasting 21 percent (11.1c) EPS growth in full year 2010, followed by 18 percent (13c) EPS growth in 2011. His forecasted ROE is 23 percent (dividend yield 6 percent).

2) Wide Bay Australia Ltd (WBB): Growth in its loan book and a solid operating margin of 2 percent saw the building society deliver a 31.5 percent increase in post-tax profit for full year 2010. Grant is attracted to the stocks national growth and expansion plans within what is a low-risk pocket of the financial sector. Hes forecasting EPS growth of 7 percent (82c) in 2011, 20 percent-plus ROE, and has a target price on the stock of $12.70.

3) Bow Energy (BOW): While Grant has a $1.80 12 month target price on this coal-seam gas play, he says a discovery of - as yet uncontracted - new assets, plus the take-over factor could see the share price double within two years. Based on existing reserves Grant is looking for EPS growth of 14 percent in 2011.

4) Molopo Energy (MPO): What attracts Grant most to this petroleum producer is exploration activity in mid-west Canada where new (horizontal) drilling techniques to shale oil deposits are improving flow-rates. Based on increased production from its unconventional oil & gas assets in Australia, Canada and South Africa, Grant has a target price of $2.10.

5) Retail Food Group (RFG): Owner of franchise brands like Donut King and Brumbies, the stock has managed to grow earnings through store rollouts. Grant says strong free cash flow generation and 6x interest cover bodes well for future growth by acquisition, and is forecasting 20 percent ROE, 16 percent EPS growth in 2011 and has a target price of $3.60.

6) Slater and Gordon Ltd (SGH): Specialising in personal injury and commercial litigation, the firm wins an estimated 98 percent of all cases. The firm reported an interim 16.4 percent ROE, and Grant has a target price of $1.95.