Lincoln Electric Holdings, Inc. (NASDAQ:LECO) is the hedge fund manager’s fourth largest small-cap holding, and is a stock that’s already up more than 9% since the start of the New Year. Lincoln Electric is primarily focused on arc welding products, and the 100+ year-old company is also exciting investors in the automated welding space. The company has seen its earnings grow by an average of nearly 5% a year over the past half-decade, but the Street expects this growth to double over the next five years.
Strong positioning in a continually consolidating industry is a key reason behind analysts’ bullishness, and a projected dividend yield of 1.5% isn’t too shabby either. Shares of Lincoln Electric do trade at industry-average valuation metrics no matter how you slice it, but a market-leader with accelerating growth makes the stock a good addition to most investors’ portfolios.
Last but certainly not least, we have Reliance Steel & Aluminum (NYSE:RS), Royce’s fifth largest small-cap stock pick. Reliance has provided investors with a return (16.2%) nearly thrice that of the metal fabrication industry’s average over the past 12 months, and has also performed quite impressively over the shorter term. The company has beaten the sell-side’s earnings consensus in each of the past five quarters, despite a less-than-stellar economic environment for steel-related companies.
In comparison to its peers, Reliance’s main advantage lies in its commitment to consistent dividend payouts, willingness to engage in M&A expansion—particularly in oil and gas—and its below-average cost structure. At a mere 11 times forward earnings and 0.5 times sales, Reliance offers investors a great way to play a steel rebound, which likely explains Royce’s bullishness. Joining the hedge fund manager in this company is Cliff Asness and David Dreman, among others (see David Dreman’s favorite stock picks).
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Disclosure: I hold no positions in any of the stocks mentioned above