Small Growth Stocks Look Cheap

01/14/2008 12:00 am EST

Focus: STOCKS

James Oberweis

President, Oberweis Asset Management, Inc.

James Oberweis, editor of the Oberweis Report, thinks this will be a big year for US growth stocks, and has some other surprising predictions about our markets.

In last year’s outlook, we strongly recommended growth stocks. The results proved this to be a great call: small growth stocks beat the pants off small value stocks in 2007, with the Russell 2000 Growth index returning 7.1% compared to -9.8% for the Russell 2000 Value index.

That brings us to our 2008 outlook. In November, you may remember our very pessimistic outlook, based primarily on above-average stock valuations coupled with uncertain economic fundamentals. Since then, a lot has changed. Stocks got creamed, particularly high-growth, small-cap technology stocks. At today’s prices, we have much less reason to be gloomy. Everyone has their price, and we aren’t too far from ours.

Currently, valuations for small-cap growth stocks are below average. The Oberweis Universe P/E stands at 29x versus a five-year average of about 30x. That compares to 43x at the end of [last] October. The economy will be rocky in early 2008, and stock prices might get worse before they get better. However, we believe that low points in 2008 will prove to be outstanding buying opportunities three years hence.

Technology is our favorite sector for 2008. Technology companies tend to have a globally distributed customer base and will benefit from a weak dollar. Tech stocks [have] corrected severely and are currently attractively priced.

By the end of 2008, subprime worries will be put to rest. We believe new CEOs at major
financial conglomerates (such as Citigroup and Merrill Lynch) will be aggressive with write-downs and are likely to throw the baby out with the bath water.

Thus, our best guess is that big financials will hit new lows in response to write-downs and dividend cuts early in the year, but should rebound to double-digit gains by the end of 2008.

The wild card for 2008 will be Asia. We believe that we are in the early innings of a long-term global capital shift from Europe and America to Asia. We also recognize that some parts of Asia, such as the China A-share market and certain large-cap China issues, carry juicy valuations with high levels of risk. Thus, our Asia forecast is mixed; those looking beyond the obvious large-cap companies will likely be rewarded, as many lesser known small-cap China plays still offer attractive opportunities.

Markets don’t go straight up, not even in Asia. While we can’t predict the yearly fluctuations, we resolutely believe that Asia will be a great place to invest over the next ten years. We would view any correction in Asia in 2008 as a great long-term buying opportunity.

In short, we believe current pessimism is overdone in the US and that any corrections in the first half of 2008 represent good buying opportunities for US equities. After several years of international stock outperformance, we believe the Year of the Rat will point investors back toward American shores.

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