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Get Four
|  | FEBRUARY 10, 2004
Smaller Stocks, Bigger Gains James Oberweis of Oberweis Securities looks for companies with "explosive growth" -- at least 30% -- and reasonable valuations "The key is to find small companies with the potential to do better than any of the benchmark averages." That sums up the investment strategy of James Oberweis, president of Oberweis Securities, which manages micro-cap, mid-cap, and emerging-growth portfolios. Currently, he expects small caps to perform approximately in tandem with larger-cap stocks. He looks for companies with innovative products and services and growth of at least 30% -- plus reasonable valuations. And he finds an above-average concentration of such stocks in technology and health care. One of Oberweis' choices in health care is HealthExtras (HLEX ), and a medical company he likes is Kensey Nash (KNSY ), which developed the Angio-Seal, used to seal punctures made during cardiovascular procedures. He has a variety of tech favorites, including Carrier Access (CACS ) in telecom switching and aQuantive (AQNT ) and Ask Jeeves (ASKJ ) in online marketing. This is a sampling of the recommendations Oberweis made in an investing chat presented Feb. 5 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. A complete transcript is available from BusinessWeek Online on AOL at keyword: BW Talk. Q: Jim, the broad market has been a bit choppy this week. How do you see the macro prospects? A: I think the fundamentals of the economy are in much better shape than they were any time last year, and they're starting to gain momentum. The caveat, of course, is that stock valuations are also higher than they were at the beginning of last year, so the market is expecting above-average growth. Q: Do you see the smaller-cap stocks continuing to shine, relatively speaking? And any differences in performance, mid vs. small vs. micro? A: That's a great question. We think small-cap stocks are approximately in parity with large- and mid-cap stocks in terms of future outlook. We think the key is to find small companies with the potential to do better than any of the benchmark averages. Q: So what are some of those stocks? And how do you find them at Oberweis? A: We begin by looking for companies that, for one reason or another, are exhibiting explosive growth. Specifically, we look for companies that are growing at a rate of at least 30%. We look for companies that have innovative products or services that will sustain the inevitable onslaught of competitors. Lastly, we try to buy a portfolio of such companies at very reasonable valuations. One such company is California Micro Devices (CAMD ). It closed today [Feb. 5] at $11 and reported very favorable earnings after the close. Revenue for the quarter was up 50% over the same quarter last year. Q: What's your long-term record with this strategy? A: It has been quite favorable. For our Micro-Cap Portfolio mutual fund (OBMCX ) over the last five years, we've averaged about 19% a year, net of all fees and expenses. Don't forget, that includes the difficult period in the market following the 2000 meltdown. We think the key to finding great stocks is to find companies whose customers are demanding an increasing amount of product every year, and those types of companies tend to grow at above-average rates and have above-average returns. For example, another small-cap name that we would be buying now is a company like HealthExtras. Sales in the latest quarter increased about 38%, the company is profitable, and it will likely benefit from an aging baby boomer population and changes due to the Medicare bill. Plus, management owns about a quarter of the company, and the stock is reasonably priced at $10.62. Q: Do you find more companies that fit your specs in any particular industry? A: Sure, readers of our investors' advisory letter (The Oberweis Report) will observe an above-average concentration in tech and health-care stocks. Our process tends to work best in industries where change is occuring and in industries where above-average growth opportunities are available. That said, one of our favorite ideas is neither a tech nor a health-care company, but rather a distributor of alcoholic beverages in Poland. Central European Distribution (CEDC ) is the company. In 2001 we invested at $2 a share, the shares closed today at $34, and we would be a buyer even today. Q: How about the biotech area of health care -- any choices there? A: Yeah, again the difficult part of investing in any biotech company is the valuation. We find that very few biotech companies with proven concepts trade at multiples that we can afford. We do invest in some peripheral biotech companies -- for example, Gen-Probe (GPRO ) manufactures diagnostic products based on nucleic acid technology, and Martek Biosciences (MATK ) develops products using nutritional oils as ingredients in infant nutrition and foods. These two companies both have proven concepts and reasonable valuations relative to their growth rates. Another medical company with new, innovative technology is Kensey Nash, which developed the Angio-Seal, which is used to seal punctures made during cardiovascular procedures. Q: I take it that the promise of growth and profits isn't enough for you -- you want to see the real thing. Does that leave you open to missing out on some big gains? A: Sure, and it also keeps us out of a lot of trouble. For example, during the upswing of the Internet stocks, we still had reasonably good returns, but perhaps not as good as they might have been had we bought money-losing concept stocks. In 1999, the Oberweis Emerging Growth Portfolio (OBEGX ) gained 53%, which is good, but it could have been better. However, in 2000, we were down only 10.7%, and we actually gained a fraction of a percent in 2001. We think that looking for real evidence of customer acceptance is one of the best ways to separate out long-term success stories from those that will falter.
BW MALL
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