It’s Buying Time for Small Growth Stocks

02/06/2008 12:00 am EST


James Oberweis

President, Oberweis Asset Management, Inc.

James Oberweis, editor of the Oberweis Report, says small-cap growth stocks are dirt cheap and this may be a historic buying opportunity.

About once a decade something bad happens and the ensuing market action presents an unusual opportunity. Historically, bad events have included stock market crashes, recessions, currency crises, foreign government loan defaults, and banking crises. Indeed, these events often coincided with bear markets for stocks. In each case, uncertainty at the time led to a large market decline that resulted in stock valuations substantially below historical averages.

In virtually every period in which average P/Es for high-growth stocks have dropped sharply below the mean, the economic outlook was bleak. It is exactly that pessimism and uncertainty that causes investors to relentlessly sell, creating cheap valuations. Most important, our research indicates that such periods are also opportune times to buy. The most favorable risk/reward opportunity lies at the point where the fewest number of people are willing to exploit it.

Of course, few investors, be they retail or institutional, even want to think about buying more after periods of big declines.

We would therefore encourage you to think outside of the box. Since mid-October 2007, high-growth, small-cap equities have declined some 25%-30%. P/E valuations of our universe of high-growth companies are substantially below average, about two standard deviations below the mean. This doesn’t happen too often, folks, and when it does, our research suggests that those bold enough to buy tend to be rewarded with significantly above-average returns over the subsequent three-year period. Valuations are currently at that point, and we believe the opportunity is there for those willing to exploit it.

ANADIGICS (NASDAQ: ANAD) is a leading provider of semiconductor solutions in the rapidly growing broadband wireless and wireline communications markets. The company’s products include power amplifiers, tuner integrated circuits, active splitters, line amplifiers, and other components, which can be sold individually or packaged as integrated radio frequency and front-end modules. In the company’s latest reported third quarter, sales increased approximately 36% to $59.5 million, [while] ANAD reported earnings per share of 11 cents in the latest third quarter versus two cents in the same quarter of last year. (The stock closed below $9 Tuesday—Editor.)

Guess? (NYSE: GES) designs, markets, distributes, and licenses a lifestyle collection of contemporary apparel, denim, handbags, watches, footwear and other related consumer products. As of November 3, 2007 the company operated 365 retail stores in the United States and Canada and 560 retail stores outside of North America, of which 56 were directly owned. The company also distributes its products through department and specialty stores around the world. In the company’s latest reported third quarter, sales increased approximately 43% to $469.1 million, and Guess? reported earnings per share of 62 cents in the latest reported third quarter versus 48 cents in the same quarter of last year. (It closed at $35 Tuesday—Editor.)

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