Small cap Favorites from Oberweis

10/08/2004 12:00 am EST

Focus:

James Oberweis

President, Oberweis Asset Management, Inc.

Jim Oberweis Jr. is the president of Oberweis Asset Management . His micro-cap stock fund was up 110% in 2003. His The Oberweis Report was the #2 newsletter rated by Hulbert for the last 15 years. Here’s a sampling of his latest favorite stock ideas.

"Right now, we see valuations being particularly compelling for small cap growth stock names. Although the area had an exceptional year in 2003, earnings for small cap growth companies also increased at a very rapid rate. This year we have seen earnings continue to increase and the fundamentals of the underlying companies remain relatively strong – although the valuations have compressed. In other words, the stock prices have gone down while earnings have gone up. So when you look at things measured as p/e in relation to growth rates, we are seeing valuations that are quite comparable to the fourth quarter of 2002 and the beginning of 2003, which was an exceptionally good time to be investing in small growth names.

"Valuations also seem to be below the p/e ratios we have seen over longer times in history. It’s amazing how fast things can change. In June of this year, among the universe of companies growing in excess of 30%, we were looking at an average p/e of approximately 35, based on forward 12-month earnings estimates. That level is back down to 27 right now, just above the 24 to 26 range that we saw at the start of 2003. While it is always difficult to forecast short-term market fluctuations, we suspect that the month’s reversal could well be the beginning of better times. Investor expectations are reasonable, company fundamentals are sound, valuations are cheap, and stock prices seem to be moving back upwards again. We think this is an outstanding opportunity right now to be buying small cap high growth stocks.

"Our current favorite stock is Mind CTI (MNDO NASDAQ). The company is a developer of billing solutions for Voice over IP. Basically, they sell software to telecommunications providers. The company came public during the height of the Internet boom. As a result, the original valuation was absurd. It’s come back down some. Currently, half the market valuation is in cash. They are profitable. They are growing in excess of 30%.

"Another favorite is in the housing industry. I think the US housing market is on its last legs, and I think you will see sub-par returns in the US. However, we like Homex Development (HXM NYSE), which is developing low-priced housing in Mexico. We think the fundamentals in that market are a lot more interesting than in the US. The opportunities for growth are significantly higher. The stock is a recent IPO, and we feel the company is well-poised for growth in the coming year."

Meanwhile, we also offer some of his latest featured recommendations from his The Oberweis Report:

"AudioCodes (AUDC NASDAQ) is a leading provider of technology and network products that enable Voice over Internet Protocol. Its media gateway architecture allows for the transmission of packet-based applications in the wireline, wireless, broadband, and enhanced voice services markets. In the latest reported second quarter, revenues increased 82% to $19.1 million. Earnings per share in the second quarter grew to $.02 from a loss of $.06 in the corresponding year-ago second quarter.

"RightNow Technologies (RNOW NASDAQ) provides on-demand application software focusing on the customer relationship management industry. Its products can support customer service communication across multiple mediums including e-mail, phone, fax, web and chat. Revenues in the latest reported second quarter increased 79% to $14.8 million. The company also reported earnings per share of $.02 in the second quarter, which compares to loss in the same period last year. RightNow completed their IPO of 6.3 million shares of common stock at $7 per share on 8/05/04.

"Veeco Instruments (VECO NASDAQ) designs equipment for nanoscale applications in the worldwide semiconductor, wireless, and scientific research markets. Its metrology products are used to measure at the nanoscale. Nanotechnology appears to be an area with significant growth opportunities. Revenues in the latest quarter increased to $9.3 million, up 40% compared to the second quarter of 2003.

"Meridian Resource (TMR NYSE) develops oil and natural gas properties utilizing 3-D seismic technologies to improve its success rate. It focuses on the Gulf Coast and the Gulf of Mexico. In the firm’s latest reported second quarter, revenues increased 69% to $50.1 million. Earnings per share for the second quarter rose to $0.10 a diluted share vs. $0.04 in the same year-ago period. Meridian will increase its capital expenditures budget for the rest of 2004 by as much as 15% to $110 million."

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