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Analyst Watch: Carry Killer Small-Caps

Friday, 6 Aug 2010 | 8:36 AM ET

Stock index futures fell sharply after the jobs report showed more jobs were lost last month than expected.

U.S. employers cut 131,000 jobs from nonfarm payrolls in July. The unemployment rate held steady at 9.5 percent. Economists had expected the see payrolls drop by 65,000.

Here's what analysts and others say they're watching before the bell:

Investors should always have some small-cap exposure in their portfolio according to Les Satlow, senior portfolio manager with Cabot Money Management. And not just domestic small caps, he says, explaining that the benefits to the overall asset allocation of adding small caps are substantial over the long term.

"Technology and Financials are about half of the top-50 performing YTD Russell 2000 members, he says. "Many smaller companies can "march to their own drum beat," he says.

Smaller companies can continue to grow even in the face of a sluggish economy due to their lower revenue base and their ability to bring best-in-class products to market, he explains. They’re also much more focused on secular rather than cyclical growth, and therefore a better area for stock picking, Satlow says.

"For our clients who allocate a portion of their assets in aggressive equities, the small cap area is an excellent pond to fish in: there is lower visibility into company fundamentals and therefore greater inefficiencies to try to exploit," he says. "In addition, the correlation of small caps to large caps remains at very low levels by historical standards, though it is rising: therefore, there is still opportunity to add value through including some small caps in a larger equity portfolio."

So which companies does he like?

Acme Packet

Aruba Networks

OpenTable

Ancestry.com

"We like the first two due to their pure play exposure to mobile data, one of our favorite themes in general and one in which the small cap space is one of the only places to find pure plays," says. "OPEN is a category killer in the nascent online restaurant reservation market, AONE is a leading auto next generation battery maker, which is highly speculative but has the potential for very large gains."

See more of what analysts and money managers have to say, and get the latest financial news. Watch Squawk on the Street every weekday morning starting at 9 a.m. ET.

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  Price   Change %Change
AONEQ
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M5W
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ARUN
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OPEN
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