(The following was excerpted from an original CNBC Article…)

A Lot to Like About Small Caps

Small-caps look attractive to both investors and potential acquirers because of their strong balance sheets and good earnings momentum. Unlike large caps, smaller companies have more room to cut costs to boost margins. “Profit margins have exceeded the old highs for the S&P 500 but have yet to exceed the old highs for the Russell 2000,” said Veru of Palisade Capital Management.

Small caps are also attractively valued. While the Russell 2000 is sitting at all-time highs, small caps trade on just 15.4-times expected earnings, according to DeSanctis. At previous peaks, they traded at 17-times — suggesting room for more gains.

After investors flocked to yield and safety amid ongoing global economic uncertainty, small-caps have split into two camps — dividend payers and non-dividend payers, said Seth Reicher, president of Snyder Capital Management.

“Companies that pay out dividends are expensive,” said Reicher, whose firm manages $2 billion. “Companies that have high free-cash-flow yields and don’t pay out dividends are inexpensive. That’s where the opportunity is.”

Reicher, a value investor, said M&A should pick up this year as some of the macro uncertainty starts to dissipate. Companies should start looking longer term instead of worrying about political and macro flare-ups such as federal budget talks in the near term.

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After lagging for years, manufacturing is starting to gain momentum in surprising places

The Dow Jones Industrial Average is knocking on its all-time highs, but is U.S. industry really recovering? As the Dow nears the barrier, traditional manufacturers are lagging. But the year ahead could see industrials catching up.

“The industrial story is a great story, it’s a global story,” says John Fox, manager of FAM Value Fund. “The U.S. industrials hit bottom in 2009 and it’s been a slow recovery, but now these companies are doing well and earning record profits.”

The recovery has indeed been a long time coming. While headlines during the collapse of 2008 mostly belonged to the housing and financial industries, the manufacturing sector fell into its steepest decline since the Great Depression as well. Factory shipments slumped by $1 trillion in a year, showing a 20 percent plunge in output that was far worse than the 5 percent contraction in the overall economy.

What made things worse for the manufacturers was that they were already in a long slide nearly a decade in the making. Indeed, the losses stretched so far back that some economists thought the sector might never recover.

But fund managers are seeing surprising gains as new technology is applied to old industries like energy and car manufacturing. Still, like the gradual decline in the years before the 2008 collapse, the recovery is less obvious.

Value-oriented fund managers are finding areas in which technological innovations are slowly transforming the manufacturing sector, and they often have been overlooked in a market dominated by speed trading and short-term bets. These companies, broadly lumped into the “producer durables” category, are small-to-midsized manufacturers of tools used by other manufacturers. The Russell 3000 Producer Durables index, a kind of business-to-business version of the Dow industrials, lists many of these companies. The index has jumped 20 percent in the past two months as investors have started to notice the sector’s potential.

“These companies are a little confusing and they tend to be ‘cross-industry’ focused and not covered much by analysts,” says Seth Reicher, president of Snyder Capital Management, a private $1.9 billion asset management firm.

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