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Small-cap growth stocks are the place to be as the economy emerges into recovery. The best growth opportunities are in health care, retailing, and technology, believes James W. Oberweis, president of Oberweis Securities, who manages investments in micro-, small-, and midcap stocks. Oberweis emphasizes that investors need to be selective and pay special attention to a company's profitability and market valuation. He looks for companies with 30% annual growth and notes that, despite the economic downturn, many continue to achieve that figure.
These were among the points Oberweis made in an investing chat presented May 29 by BusinessWeek Online on America Online, in replying to questions from the audience and from Jack Dierdorff of BW Online. Edited excerpts from this chat follow. A full transcript is available on AOL at keyword: BW Talk.
Q: Are you as optimistic about the market as many investors seem to be?
A: Yes, but with a caveat. Investors need to be more selective now than before. You need to watch the sectors and pay attention to valuations. We believe that coming out of the weak economy, our area of core expertise -- mainly small-cap growth stocks -- will be the place to be. And indeed, that has been a very good place to be so far this year.
Q: So you think the smaller-cap stocks will continue to outperform the larger-cap names?
A: I do. These cycles tend to last several years. And remember that in the go-go '90s, it was all about large-cap growth stocks, while small-cap growth stocks -- particularly microcaps -- were widely ignored. During the bear market, however, small-caps lost value along with everything else. That means on a relative basis, small-growth names were very attractive going into 2003. We think the year-to-date results are just the beginning.
Q: In what sectors would you be looking for values?
A: The sectors that look most attractive to us now are those where one can find the highest growth opportunities. Specifically, I'm looking in technology, health care, and retail. Within technology, I think one has to be careful to focus on niche companies that are growing despite lackluster spending on information technology overall.
Q: Do you like UTStarcom (UTSI
) and Omnivision Technologies (OVTI
)?
A: Both of those are owned in our mutual funds, and I'm a strong believer that both have plenty of room to go, particularly Omnivision Technologies. The explosion in new applications that incorporate Omnivision's camera chip is fueling a very strong growth pattern for Omnivision. Both of these two issues continue to be attractive.
Q: Satellite radio gets attention -- what is your opinion on Sirius Satellite Radio (SIRI
)?
A: If I were to invest in a satellite radio company, I strongly believe that XM Satellite Radio (XMSR
) is the way to play this industry. In 2004, XM is expected to have $240 million in sales. Sirius is forecast to have just $90 million. Satellite radio is clearly a game based on economy of scale, and the biggest player will win. The valuation on XM is higher than that of Sirius, but it's worth it.
Q: What do you think about the prospect of networking stocks, such as Foundry Networks (FDRY
), Juniper (JNPR
), and Extreme Networks (EXTR
)?
A: Risky but interesting. We own Foundry in our midcap fund. I do not own Extreme or Juniper at present. This has been a tough sector, but we are confident that corporate IT spending sometime in the next 18 months will begin to pick up, and it will be too late if one waits until one is absolutely sure that the cycle is turning.
Q: What do you like in retail, which you said was a favored sector now?
A: We like Panera Bread (PNRA
), which operates a chain of bakery-cafes featuring fresh, made-to-order sandwiches on outstanding bread. Besides being one of my favorite investments, it's also one of my favorite lunch menus! Chico's FAS (CHS
) is a successful retailer of women's apparel, and most recently we've added a position in Quiksilver (ZQK
).
Quiksilver operates a chain of casual clothing sold to young men and women, mostly teenagers. We have one here in our local mall, and although I'm not sure I would shop there, the kids seem to love it. They earned 77 cents [per share] last year. I think they'll earn more than $1 per share this year, and the stock is only trading at $16.58.
Q: Your microcap fund is up 30% or so, compared to 10% for your midcap fund. Do you expect that trend to continue?
A: Our microcap is up 31%, compared to 18.8% through [May 28], year-to-date, for our midcap fund. I think that because microcaps were so overlooked in the late 1990s, there have been better relative valuations among microcap stocks, vis-a-vis midcap. Obviously, this year has rectified the disparity, at least to some degree.
Q: How have you managed to find companies with 30% growth in the recent economy?
A: There are lots of them! If we run a screen on our database of companies growing at a rate of 30% or greater, we'll pull up some 300 different companies that could be investment candidates. Remember, many of our investments are niche businesses that are able to grow and succeed even if the overall industry isn't. In fact, I get particularly excited if I find a small company growing in an industry with slow growth.
Take Central European Distribution (CEDC
). This was a company that we bought for just under $3 in April, 2001. It's now trading at over $30. The company is in the beer-distribution business in Eastern Europe. They found a new way, through consolidation and technology, to take an old business and operate it much more efficiently.
Q: What do you like in the health-care sector, one of your recommended areas?
A: We like a number of pharmaceutical companies, including Able Laboratories (ABRX
), Bentley Pharmaceuticals (BNT
), Eon Labs (ELAB
), Kos Pharmaceuticals (KOSP
). In other medical areas, we like Martek Biosciences (MATK
), Merge Technology (MRGE
), eResearch Technology (ERES
), and VistaCare (VSTA
).
Q: What is your favorite small-cap stock in the Internet sector?
A: Dreams of 1998 shouldn't be confused with present reality. There aren't that many opportunities that we're excited about right now. We've done very well this quarter with the Chinese Internet portals Netease (NTES
) and Sohu.com (SOHU
). However, my guess is that most of the gains in those two issues have been attained, at least in the short run.
One area that we do still believe looks attractive is security. My two favorites in network security are NetScreen (NSCN
) and SafeNet (SFNT
). Also, take a look at aQuantive (AQNT
), which is an Internet marketing company.
Edited by Jack Dierdorff
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