3 Smaller-Company Stocks the Best Fund Managers Are Buying

Susan Dziubinski: I’m Susan Dziubinski with Morningstar. Today, we’re diving into the portfolios of some of the best concentrated fund managers who focus on mid- and small-cap companies. We think the companies they’ve been buying lately make great candidates for a watchlist of small- and mid-cap stocks to buy.

3 Smaller-Company Stocks the Best Fund Managers Are Buying

1. CooperCompanies COO
2. Paylocity PCTY
3. Baker Hughes BKR

The first smaller company that top fund managers have been buying is CooperCompanies. The company operates in two segments. The first is CooperVision, which is a pure-play contact lens business that makes up about two thirds of total sales. The second segment is CooperSurgical, which includes a fertility and an office/surgical business. Morningstar assigns this midsize company a narrow economic moat rating, thanks to its strong brand recognition, technically advanced products, and the unwillingness of its patients to move to a different product. We think the company will remain competitive for at least a decade or more. We forecast mid-single-digit long-term growth for CooperVision and high single-digit growth for CooperSurgical. We think shares are worth $88 each.

The second smaller-company stock top fund managers have been buying is Paylocity. Paylocity is a provider of payroll and human capital management solutions servicing small to midsize clients in the United States. Morningstar thinks the company has carved out a narrow economic moat, given the high switching costs if customers wanted to change providers. We expect revenue at this small company to grow at a compound annual growth rate of 15% over the five years, driven by mid-single-digit industry growth, market share gains, and mid-single-digit revenue-per-client growth. We think the stock is worth $205 per share.

The final smaller company the best fund managers on our list have been buying is Baker Hughes. This midsize company qualifies as one of the “Big Three” oilfield services firms. It maintains a sizable share in several end markets and has maintained the lead in specialty chemicals for more than a decade. Although some of Baker Hughes’ businesses have moaty qualities, we don’t think that Baker Hughes as a whole has carved out an economic moat. We expect that demand for industrial asset management will present favorable growth opportunities that will eventually drive margin expansion for the firm; we forecast firmwide operating margins to expand to 15% by 2028. We think the stock is worth $39.

For more stocks that the best managers are buying, be sure to subscribe to Morningstar’s channel and visit Morningstar.com.

Morningstar analysts Keonhee Kim and Emma Williams and associate analyst Katherine Olexa provided the research behind this segment.

Watch 3 Stocks to Buy This Summer While They’re Seriously Undervalued for more from Susan Dziubinski.