After a 12% rally to start the year, the Russell 2000 traded sideways throughout most of February, and has faded in March. We continue to be constructive on small caps for 2012. Our year-end 2012 Russell 2000 target, put in place on January 3, remains 850 for a 15% annual return, which is a good year by historical standards for the small-cap benchmark. Investors with money still on the sideline may take on more risk as the economic data continues to improve through 2012. Stock selection in small caps may be more important than sector selection today. Here is a list of small caps ideas for the remainder of 2012.
Targa Resources Partners (NGLS) is a master limited partnership engaged in the gathering, processing, storage, fractionation and transportation of natural gas and natural gas liquids and the storage and terminalling of refined products and crude oil in the United States. Its general partner is Targa Resources Corp (TRGP), a publicly traded general partner, which owns a 14.2% interest in NGLS' limited partner units and 100% of NGLS' incentive distribution rights. We expect NGLS to realize strong distribution growth, driven by strong natural gas processing economics and attractive organic growth projects. Increased drilling activity around liquids-rich shale plays is necessitating the need for additional infrastructure to gather and process natural gas, transport the gas and natural gas liquids and fractionate the NGLs into purity products. NGLS owns and operates assets well-positioned in this midstream value chain, and has currently identified organic growth opportunities. We are confident that the partnership will be able to secure additional projects and consummate accretive acquisitions, which should enhance its distribution growth profile. NGLS is trading at $42.50 with a 12-month price target of $51 by analyst. NGLS has a market cap of $3.9 billion with a dividend yield of 5.67%.
Cytec Industries Inc. (CYT) is a specialty chemicals and materials company focused on developing, manufacturing and selling value-added products. It operates in four business segments: Coating Resins, Additive Technologies, In Process Separation, and Engineered Materials. Management has plans to separate the coating resins business in 2012. In 2Q 2012, CYT will announce what "separation" solution it is choosing. Again, we believe it is a sale but management isn't ruling out the other alternatives such as a spin off. This sale is projected to be around $1.0 billion. Management will use this money for future M&A and return value to shareholders. CYT's moves to divest cyclical commodity businesses will reduce earnings volatility and allow the company to focus on and grow its core specialty chemicals and engineered materials businesses. Projections include double-digit top line growth in the remaining core divisions. CYT is trading at $61.00 with a 12-month price target of $71 by analyst. CYT has a market cap of $2.8 billion with a dividend yield of 0.82%.
IAC/InterActiveCorp. (IACI) is an Internet company with more than 50 brands serving consumer audiences across more than 30 countries. The company operates in four business segments: Search, Match, ServiceMagic, and Media and Other Businesses. IACI trades at about 7x EBITDA on 2012 estimates, we expect revenue and EBITDA growth well over 20%, respectively in 2012 driven by strong operating performance in the Search and Match businesses. IACI also has about $774M in net cash (about 20% of its market cap) ending 2011 and we would expect IACI to continue its shareholder friendly capital allocation stance, including continue its formidable share buyback plan and recently announced dividends, while potentially doing some smaller tuck-in acquisitions around existing business segments. IACI has bought back almost $2B in stock since 2008 and while it will likely do some acquisitions around existing businesses, largely, we see share buybacks at the main use of cash. IACI is trading at $48.65 with a 12-month price target of $56 by analyst. IACI has a market cap of $2.0 billion with a dividend yield of 0.99%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.