Quick Take: When Denis Amato began investing some 45 years ago, he started small, using money he earned from his paper route to buy stock.

Today, Amato, portfolio manager of the Fifth Third Micro Cap Value/Adv (MXSAX), invests in very small companies — those with market caps of $300 million or less — a group that he says includes “an awful lot of pretty significant, and substantive” enterprises. The fund itself is also boutique sized with combined assets of about $87 million.

While returns for the five-year-old fund have not been huge, they have outpaced those of similar offerings. Fifth Third Micro Cap Value lost 0.9% last year, while the average small-cap value fund was off 12.5%. For the five years ended in February, the fund returned an average annualized 6.3%, versus just 0.6% for its peers.

The Full Interview:

Denis Amato says Wall Street tends not to track the companies he buys because they’re so small that selling their shares wouldn’t be profitable for big brokerage houses.

“What we find is that this is the sector of the market that is the least efficiently followed,” Amato says, referring to companies with market caps of $300 million or less, which he hunts for in managing the Fifth Third Micro Cap Value fund.

One advantage of owning tiny stocks is that they have the potential to grow rapidly when mainstream analysts start examining and recommending them, Amato says.

A disadvantage of very small companies is that they may be dependent on a single product, or have difficulty obtaining bank financing, Amato points out. Because of that, he prefers businesses with strong balance sheets.

In picking the 90-100 stocks that go into the fund’s portfolio, he also looks for those that are priced low compared to a company’s earnings, sales and book value. Insider buying is another factor he considers.

Two stocks that entered the portfolio within the last three months are Theragenics Corp (TGX), which makes a tiny implantable device for delivering radiation used in treating prostate cancer; and Nanometrics Inc (NANO), which manufactures equipment used in producing semiconductors. Amato says both appealed to him because they looked cheap, and had little debt.

About the same time Amato bought those stocks he began investing in furniture maker and retailer Bassett Furniture (BSET). The company stood out because it was selling at about half its book value, and had little debt and a well-known brand name, Amato says. In addition, Amato reasons, strong housing sales in recent months stand to benefit Bassett as people look for furniture for their new homes.

Convertible preferred stock of Allen Telecom (ALN) currently constitutes the top holding in the fund. However, the maker of equipment for wireless communications providers has agreed to be acquired by a competitor, Andrew Corp (ANDW). Amato says he will not keep his shares of the combined company because it will be too big for his fund.

The No. 2 stock in the portfolio is Comstock Resources (CRK), which drills for oil and natural gas in the U.S. Amato says he was attracted to the company about a year ago, when its stock was priced below Comstock’s book value. Amato added that he always keeps an eye out for energy stocks because he likes to have exposure to them, and because it is difficult to find small stocks in the sector.

Third place in the fund is held by Symmetricom Inc (SYMM), which produces synchronization and timing products for telecommunications and cable TV companies, as well as for Internet service providers.

The company grew into a major holding when it merged with Datum Inc., a rival that Amato also owned, last year. Separately, the companies controlled large chunks of their market, and “together, they really dominate” it, Amato says. However, the individual stocks were cheaper than you would expect, given the companies’ market shares, he adds.

Amato maintains that some very small companies can be as dominant in a market or niche as giants. Also, many with the market caps he focuses on can generate revenues of up to $500 billion, he says. “To my way of thinking,” he says, “that’s not exactly a tiny company.”