Triple Play on Small Caps

11/19/2004 12:00 am EST

Focus:

Gary Alexander

Senior Writer, Navellier & Associates

"Smaller stocks, by definition, have much more room to move up than other asset classes," says Gary Alexander . "They aren’t followed by as many Wall Street firms, providing us with a ground-floor opportunity." Here, the advisor offers three small-cap favorites.

"It’s unlikely that all three of these small stocks will soar, but owning at least two or three such small stocks gives you a chance to boost overall portfolio performance. The first small stock added to our Core List was Milwaukee-based car lock maker Strattec Security (STRT NASDAQ), which we have owned since August 2003. Last month, Strattec reported another slight increase in sales and operating results for their fiscal first quarter, ending September 26, 2004. Their gross profit margin was a healthy 24.2%, up from 23.5% the prior year quarter. Strattec also bought back 88,000 more of its shares, at a cost of $5.5 million. Strattec remains a solid, low-risk small company. It can grow on its own merits or be taken over by a larger company at a profit to us.

"Blue Coat Systems (BCSI NASDAQ) is helping solve one of my biggest problems, and one of yours, too, I’ll bet. We all unwittingly invite a gang of spies into our computer whenever we surf the Web or open up mail from a stranger. Twice a week, I run Spybot, which flushes 5 to 15 new electronic spies off my laptop. One new Blue Coat customer is the Green Bay Packers, who use the software to protect the online communications between its players, coaches, and staff. Last month, Blue Coat announced a new gateway anti-spyware service, the first to stop this kind of 'drive-by' spyware. It blocks access to known spyware Web sites and scans any Web content for spyware signatures. Blue Coat’s software, in effect, sits in the middle of a Web data stream, seeing all the Web traffic traversing the network perimeter, including spyware. Overall, as spam increases, Blue Coat will prosper.

"In addition, the newest small stock to enter our Core Portfolio is the Portland, Oregon-based home security company Flir Systems (FLIR NASDAQ). Flir makes thermographic (heat-measuring) equipment, which senses body heat and photographic imaging products. This has obvious applications in homeland security—for border patrols, and for monitoring potential terrorist targets. Flir’s third-quarter (and 2004-to-date) revenues rose by 58%. For all of 2004, Flir forecasts a 53% earnings rise. The Seattle Times’ business editors have named Flir Systems the #1 company in the Pacific Northwest for two years running. That’s what first drew my attention to Flir. Now, Value Line also rates the stock highly, and Forbes recently ranked Flir #59 among its Top 200 small companies."

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