2 Small Caps on the Move

06/03/2013 7:45 am EST


James Oberweis

President, Oberweis Asset Management, Inc.

There is still a lot of value to be found in small-cap stocks, says Jim Oberweis of the Oberweis Report. Here, he offers two that are prospering in specialized niches.

Nancy Zambell: My guest today is Jim Oberweis, the editor of the Oberweis Report. Thanks for joining me; I appreciate your time.

Jim Oberweis: Thanks very much. It's a pleasure to be here.

Nancy Zambell: I read with interest your latest newsletter about the so-called Ponzi scheme—how the government is manipulating interest rates. It's kind of interesting in light of what happened last night with Japan.

Jim Oberweis: It is. I think the take-home message is that a good deal of the reason that equities have performed so well lately is that the US government and other governments around the world have artificially suppressed interest rates, encouraging folks to buy risk-oriented assets like stocks over more increasingly conservative assets like bonds.

When that game is over, it could be pretty ugly. I think that's kind of the first sign that you saw in Japan last night.

Nancy Zambell: Plus, we saw Bernanke saying first, that he was going to continue the bond buying. And then he said, "Maybe we'll just start tapering off again," and that seemed to have hurt the market too.

Jim Oberweis: Yes; the interpretation, or the fear, that that will happen. Look, eventually it will happen, so it's literally a game of musical chairs, and no one wants to be the last one left standing.

Nancy Zambell: And then China's Purchasing Managers Index fell to below that 50 number, which supposedly means that they are not really recovering.

Jim Oberweis: You know, I would be less concerned about that than other folks.

There is no question that China is slowing, but valuation is also much cheaper than we've seen in the last decade or so, so I think a lot of that is probably factored into the marketplace right now. The Purchasing Managers Index bounces around quite a bit. It's not a perfect indicator.

I don't think you're actually going to see a contraction in China, if nothing else because the government has some pretty good power levers to accelerate growth if they want to. If you saw continued weakness in China as a result of anticipated slowing, I think I'd be in scooping up shares at those prices.

Nancy Zambell: Plus, their growth rate is what, 6% or 7% right now?

Jim Oberweis: Yes; I think it's probably closer to 7%.

Nancy Zambell: So that's still more than twice as much as anybody else.

Jim Oberweis: I'm going to go with at least three times as much as the US.

Nancy Zambell: There you go! Another report came out yesterday that said Europe was going to continue contracting. There doesn't seem to be any catalyst for anything good in Europe.

Jim Oberweis: Yes, except that nobody is expecting anything good. Sometimes those are the very best catalysts, when exhortations get so ugly that nobody is forecasting something good to happen. When even a little bit of good news comes out, you can see some significant movements in stock prices.

But if I were going to rank them, I think Asia is probably the most exciting growth, relative to the price you have to pay to get that growth—with the US second and Europe still a distant third.

Nancy Zambell: So where are you putting your money now?

Jim Oberweis: I think the opportunities around the world—including Europe, by the way—are niche companies that are growing at rates much faster than GDP. Sometimes they're influenced by cyclical events. But a lot of times, they're influenced by proprietary dislocations within an industry.

So here's an example of each: We own a little company called RigNet (RNET) that provides communications on oil rigs. As they are drilling, they need to have a steady set of communications, and RNET provides that functionality.

It's an outsourcer that is benefiting from the acquisition of their competitor by Harris (HRS), and it will take market share. That's a very tight, small niche where they are doing very nicely. Also, perhaps benefiting by the increased number of rigs.

The other one that I would mention is Envestnet (ENV), which develops and markets computer software for financial advisors. It allows the independent financial advisor to compete at level playing fields with giants like Merrill Lynch. It provides them technology and tools to really ratchet up their research efforts.

That's a dislocation within an industry. They are really changing the market with technology that has historically been afforded to the larger giants of the financial service industry.

Nancy Zambell: I know that you have to follow small-cap stocks. Are you into any large-cap stocks at all right now?

Jim Oberweis: We're specialists, so we focus exclusively on small-cap stocks, because that, historically, has been where the greatest pricing and efficiencies have been found. It's hard to be smarter than 20 analysts who are all following Microsoft (MSFT).

Nancy Zambell: Exactly. What value could you add to that?

Jim Oberweis: That's right.

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