Small-Cap Global Guru: Data to Dairy

12/25/2013 8:00 am EST

Focus: STOCKS

James Oberweis

President, Oberweis Asset Management, Inc.

Small-cap expert Jim Oberweis saw his 2013 Top Pick soar over 150%. Here, he explains why he is still bullish on the name. Also a manager of three Asia small-cap funds, Jim offers four current favorites among emerging global growth ideas.

Steve Halpern: We're here today with small-cap and emerging growth stock expert, Jim Oberweis. Editor of the Oberweis Report. How are you doing today, Jim?

Jim Oberweis, Jr.: Very well. Thank you for the opportunity.

Steve Halpern: We're conducting a series of interviews with the top performing advisors from last year's Top Picks Report. This past year, your top stock pick, Datawatch (DWCH) rose more than 150%. Congratulations on that.

Jim Oberweis, Jr.: Thanks. It's been a great year for us.

Steve Halpern: Could you review the original reasoning behind that stock selection and explain to listeners what's happened over the past year to account for the stock's strong performance?

Jim Oberweis, Jr.: Sure. So, Datawatch specializes in data visualizations. It's a hot space right now, but basically, organizations need to be able to take an increasingly crazy amount of data—some of it which is structured, and some of it which is very unstructured—and put it into a form or a picture where they can try to figure out what's going on.

This could be for a variety of applications, anywhere from data crossing a Wall Street trading floor, for example, or for detection of credit card fraud. Those types of applications.

So, Datawatch was a great company, with great technology, lousy management, and very poor front-end interface. In the last couple of years, they've corrected those things.

They went out and bought a company to, kind of, help with the front-end. Then, a relatively new management team came in to try to put the building blocks in place for a really well-run organization. That led to improved financial results, which is then, being manifested in a much higher stock price.

Steve Halpern: What do you foresee for the company over the coming year, and would you still recommend it, for those who followed your initial recommendation and own the shares?

Jim Oberweis, Jr.: I would. It's a little more expensive right now, but it's still fairly undiscovered, relative to some of their other peers, they're still a very small company.

We think that in the next 18 months, they'll go from having re-tuned the company, to having those changes drive bottom line profitability. I do think that there is continued up-side in Datawatch, even from its current levels.

Steve Halpern: I'd like to touch-on one general question. You're a noted expert in the small-cap arena. Small-caps, in general, have been very strong this past year. Would you expect this outperformance to continue in 2014?

Jim Oberweis, Jr.: Yeah, it kind of feels like it to be honest. We watch stock performance in a couple of different ways. First, we'll look at how valuations compare with history. For much of the last two years, valuations were sharply below average. Valuations are now, just slightly, above average.

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The other thing to look at is, where money flows are going, because in some ways, folks tend to chase areas that have been performing well, until they get driven to sharply above-average valuations.

I think the performance chase and the momentum, so to speak, of the market, is still in a relatively early stage. It would not surprise me to see small-cap growth stocks outperform in 2014. What I will say is that the risks are a little higher now than what they seemed to be in the last year.

Steve Halpern: In addition to your expertise in domestic small-caps, you also manage a trio of international funds—Oberweis China Opportunities (OBCHX:US), the Asia Opportunities (OBAOX:US), and the International Opportunities (OBIOX:US) funds. Each of these focus on early stage growth companies. If you'd be kind enough, perhaps you'd share a few names, among Asian stocks, that might stand out as ideas for our readers to consider.

Jim Oberweis, Jr.: Sure. So, one of the things that we focused on in Asia was looking at concepts and ideas that worked well in the US, and they are now being exported to Asia. One such company is Vipshop Holdings (VIPS).

Vipshop offers online discount retailing through flash sales. It's a bit of a combination of Groupon and Amazon. Vipshop is now a 4.5 billion dollar company.

One of the things that is very clear is that, although China's broad GDP growth rate is slowing, growth rate within e-commerce factors are actually accelerating in a big way. We really like e-commerce stocks.

Along those same lines, if you don't want to own the end retailer, you might take a look at 21Vianet (VNET), it's like Equinox in the US. They host the data centers that allow companies to offer e-commerce activity. They're kind of the picks and axes of e-commerce in China.

They're the largest independent datacenter and they compete with the likes of China Mobile, and these state-owned carriers, to offer data services. 21Vianet looks great. In fact, 21Vianet is hosting Microsoft and IBM's cloud solutions in China.

One other one that's, kind of, off-the-beaten-path a little bit, is a recent IPO called 500.com Ltd. (WBAI). 500.com offers online lottery and betting in China. They are only one of two companies that have that license and they are the largest player.

My last Asian pick is China Modern Dairy. Now, folks from Chicago might know that my family is in the dairy business in Chicago, but it's a very difficult business here in the US. In China, it's a bit of a different story.

China Modern Dairy—ticker (HK:1117) on the Hong Kong Exchange—has done a great job, in terms of producing quality raw milk products, and they sell, in fact, to the leading producer of finished milk products in China. In fact, that producer owns 30% of the business.

What's happening is there is a shortage of milk right now in China, and cattle are being slaughtered for beef, because there's a shortage of beef, too. I think that's going to accelerate the shortage of milk and increase margins and make a terrific few years, because of market expansion, for China Modern Dairy.

Steve Halpern: Again, congratulations on being among the best performing stock pickers of 2013 and we're going to look forward to your new ideas for the upcoming report in 2014. Thanks for joining us today.

Jim Oberweis, Jr.: Thank you, very much.

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