11/04/2005 12:00 am EST
"We’re starting to feel like value managers," says growth and momentum investor Jim Collins, who brings some four decades of experience to the investment arena. "Our growth stocks are now at the lowest valuations I can recall." Here's his outlook and some favorite picks.
"I’m very bullish. There is a debate going on about whether or not we will go into a recession. I just don’t see it. Housing prices may level off or come down a little bit. But beyond that, the US economy is expected to grow at its long-term trend rate almost through the end of the decade, and particularly through next year. We’ve been managing money in the small cap area for about 10 years and we’ve been compounding at about 21%-22% a year. There is a caveat. If you come into the small or mid cap growth area, you need to stay the course.
"Nobody can tell you exactly what the market will do in the next year. But the Nasdaq, on a trailing 12-month basis, has hit 40 times those earnings every year for the last 10 years, except for this year. Right now, based on next year’s earnings estimates for the Nasdaq, we are looking at a p/e ratio of 22. If the p/e returns to 30 sometime over the next 24 months, that will work out to be compounded rate of return of almost 17% a year. When we boil it all down, small and mid cap stocks probably have three times as much upside potential as downside risk."
"I like what I see going on in the health sector. It’s also a relatively safe place to invest, particularly if you are investing in small and mid caps. We are finding companies with earnings that are growing very rapidly. There is a move in the healthcare field to digitize just about everything. Congress is now actually trying to put together some legislation that will incentivize people in the healthcare field to adopt health care information technology. They are considering loans and grants and potential tax-credits to get this movement going. We need to reduce the cost of medical care in this country.
"There’s two companies in this sector that I really like. Cerner (CERN NASDAQ) is a mid cap stock, with about $3.1 billion in market cap. It offers systems to healthcare providers, giving access to an individual’s electronic medical record at the point of care. A second company in this business is Quality Systems (QSII NASDAQ). It provides all of the software and systems that are needed by doctors or dentists to manage their business. The company also just made a deal with Seimens, and that will open a lot more doors for their markets.
"Another stock that fits in with the culture today is a weight loss firm, Nutri-Systems ( NTRI NASDAQ). This is a small company that is growing very rapidly. It doesn’t charge any fees to join and you get free telephone or online counseling. The company sells prepackaged foods - with reasonable portions - to those in its weight loss programs. In early October, they company guided higher. Revenues this year will be up 384% and up 65% in 2006. We’re looking for earnings in 2006 to be up 100%. And the stock is trading at a low price to earnings growth multiple of 0.85. The long term growth rate on this stock appears to be about 42%."