Jim's Gems

10/15/2004 12:00 am EST

Focus:

Jim Collins

Chairman and CEO, Insight Capital Research & Management, Inc.

"We focus on small-cap stocks, because that’s where you get the biggest returns," says Jim Collins of Insight Capital Management. Indeed, his small-cap portfolio has risen some 23% annually for the past nine years and was up 135% last year. Here’s some of his favorites.

"Small-cap growth stocks have just started outperforming small-cap value stocks, and we are sitting at valuation levels in our small-cap portfolio today where we were in October of 2002. The way we are looking at the market is that this is a pullback in a bull market that is still going on. I think we are going to see a turn up in the market. Earnings for the NASDAQ Composite this year will be up about 37% and 16% next year. On a forward basis, the p/e ratio on the NASDAQ is at about 16 a very low level. We think the small-cap growth stock area is very much alive and still has a tremendous amount of potential on the upside. I think by June of next year, we could see a 20%-25% increase in the market for small-cap stocks.

"The stocks in our portfolio currently have an average price-to-earnings growth ratio (PEG) of 0.82 and we haven’t seen that level since October of 2002, and yet we are looking at average earnings gains for our small-cap portfolio holdings of over 50% for this year and over 20% next year. So we think valuations are very low at the moment. And once we get through the election, we should see stocks move up across the board, but with small caps doing much better than large caps.

"I have a lot of favorites, but I think one early call is J2 Global (JCOM NASDAQ). The stock appears to just be turning up. We think that the long-term growth rate on the company is about 40%. You make a lot of money in growth stocks by being in information technology and this is where this company is positioned. If you run a company and have thousands of faxes to send out each day, you probably want to outsource this process. In that case, this is the company you want to go to. The interesting this about J2 is that 97% of its revenues comes from subscribers. Earnings and revenues are accelerating and the stock looks very attractive to us.

"Sooner or later, you’ve got to own eBay (EBAY NASDAQ). Revenues have been going straight up almost since day one and I don’t see any end to that. It has been growing earnings steadily at an annualized rate of 113% since 1998. It’s never skipped a year or had a down year. The long-term growth rate is about 38%. It’s a high p/e stock and in this kind of market, you should have some patience and try to buy in the mid-$80s. But there’s no question that this is a stock you should own.

"If there is a hot area out there, and you can find a company providing components to that sector, you can do very well. Anixter (AXE NYSE) provides specialty components and small parts used in e-commerce and electronic data interchange. In the March quarter earnings were up 32%. In the next quarter they were up 56%. Another thing to look for is cash flow. Earnings in 2003 were $1.20 a share. The free cash flow was $1.88 per share. That tells me that earnings are pretty solid. This stock is a really solid performer.

"Qualcomm (QCOM NASDAQ) is in the chip business. They have a proprietary technology called CDMA that is used in cell phones and is being accepted throughout the world. The company spends about $600 million a year on research. This company is likely to stay on top in telecommunications for a long time to come. If you could get this stock on pullbacks to the $36 area, it would be worth buying and holding. This is one of the few stocks I think you could hold on to for a long time.

"Amedicus (AMED NASDAQ) is in the healthcare field. It has a long-term growth rate of about 18%. The company is a provider of home health care services, including nursing, infusion therapy and respiratory therapy, and medical equipment. In America, we are living longer, and that will mean more medical attention at home. This company is very well positioned and has shown steady growth and earnings since 2000. Earnings should be up 78% this year, and next year about 18%. This is one of those companies that you can buy today and hold on to.

"We also follow biotech companies.  Connectics (CNCT NASDAQ) is a small specialty pharmaceutical company focusing on the treatment of dermatological conditions. It is performing very well right now. It’s a very small company with very rapid growth. Sales could rise from $77 million this year to over $140 million next year. Earnings should grow about 70% a year over the next few years.

"In the defense area, we like Ceradyne (CRDN NASDAQ). The company is involved in ceramics, used in making body armor. That part of the business is growing very rapidly. Eight quarters ago, the firm had $14.3 million in sales. In the most recent quarter, it had $39 million. Earnings are coming along. This year we expect earnings to be up 108% and up 34% in 2005. A company in home security is FLIR Systems (FLIR NASDAQ). They haven’t made a lot products for the military yet, but the company makes the equipment that senses body heat and puts the image on a screen for identification. We’re looking at a big jump in revenues going forward. For 2004, they are looking at a 53% gain in earnings.

"Our favorite stock in the consumer discretionary area right now is Urban Outfitters (UBAN Other OTC). The company is very strong; quarterly revenues have been growing at a very high rate. Going back over the past four quarters, growth has been 29%, 50%, 59%, and 54%. Earrings over the past four quarters have risen 80%, 109%, 150%, and in the most recent July quarter, 108%. Looking over the next three years, earnings should grow at about 25% a year. This company is very strongly-positioned in its markets. Management owns 30%. I like that. When you have a large stake in a company, you give it everything you’ve got. The company also has zero debt. This is a real money machine."

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