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Small cap playbook:The cheaper the better

Trader on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters
Trader on the floor of the New York Stock Exchange.

Small caps stocks have been beaten up over the past month, down more than five percent.

Could this be the perfect time for investors to jump in? Some investors believe the current market environment provides a historical chance to scoop up small cap names for a song.

For Bill Hench, portfolio manager of the Royce Opportunity Fund, a rally in small caps is right around the corner.

Monday on CNBC's "Power Lunch," Hench said the best places to take advantage of a strengthening domestic economy are through the "tech, industrial and consumer cyclical sectors," since they are all less macro dependent.

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Provided, of course, the price is right. And for Hench, that means the cheaper the better.

"We try to get the most bang for the buck," said Hench. "A company riddled with cash flow problems is enticing to us. No price is too low. We buy burning stuff where the problems can be reasonably turned around within a year to two-and-a-half year time frame."

Excluding biotech and social media stocks, Hench believes next year will be a turnaround year for small cap names.

"M&A activity has been all about the larger cap names, but the pendulum is swinging and companies flush with cash are going to be on a massive buying spree in 2016 for small cap names. There are opportunities galore out there"

On a name-by-name basis, Hench likes Commerical Metals, General Cable, Microsemi and Interface.

The Royce Opportunity Fund has approximately 279 holdings with an average market cap ranging between $750 million to $3 billion dollars.

Over 92.2 percent of the portfolio is invested in U.S. stocks. The fund has outperformed the Russell 2000 since inception, in November 1996, along with the past 10 and 15 years periods.

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Hench said the only red flag to dampen enthusiasm for small caps would be a recession. "But we don't see that happening at all."

CNBC's Jackie O'Sullivan contributed to this story