A Small Growth Stock for the Market's Turn

04/06/2009 1:00 pm EST

Focus: STOCKS

James Oberweis

President, Oberweis Asset Management, Inc.

James Oberweis, editor of The Oberweis Report, continues to like small-growth stocks at this stage in the economic cycle, and he names one he particularly favors.

Despite the market’s innumerable risks and plentiful flaws, investors are, well, suddenly smitten. Since the market low (below 667) on March 6th, the Standard & Poor’s 500 index has gained 19% and the Russell 2000 Growth Index 21%, one of the best three-week performance periods on record.

Admittedly, we were overdue for a rally. In early March, stocks were trading at their cheapest valuations in 30 years. Many businesses levered to the economy traded below book value, and a few were even going for less than the value of their cash in the bank.

The degree to which stocks sunk was unprecedented since the Great Depression, yet the economic fundamentals were and are far better than in the 1930s. With that in mind, a rally off the lows following a period of indiscriminate and fear-driven selling was not unreasonable.

Where do we go from here? All told, we are still bullish on stocks, mostly because valuations remain significantly below historical averages and we expect things to slowly get better. Even after the recent run, P/Es are very digestible. However, leadership may be on the cusp of change.

[But although] consumer demand may improve from today’s weak levels, we believe spending will remain far from stellar. Eventual repayment of today’s deficit spending will yield an effective tax on future GDP for years to come. We’d put decent odds on roaring inflation a few years hence.

As the math of quarterly earnings (or lack thereof) approaches, appetite from graveyard diggers for financials and industrials will likely be tempered. However, profitable smaller growth stocks, which also experienced a sharp compression in P/E multiples last year, will be ideally positioned. The environment is right for high-growth small caps to outperform the broader market.

American Science and Engineering (Nasdaq: ASEI) develops, manufactures, markets, and sells X-ray inspection and other inspection solutions for homeland security and other targeted markets. The company manufactures sophisticated X-ray inspection products that can be used to inspect parcels, baggage, vehicles, pallets, cargo containers, and people.

ASEI’s products are used to help combat terrorism, trade fraud, drug trafficking, weapons smuggling, and illegal immigration. They are also used for military force protection and general facility security.

The company’s X-ray imaging products utilize several technologies including traditional transmission X-ray technology, proprietary Z Backscatter technology, Shaped Energy Technology, and Radioactive Threat Detection (RTD).

In the company’s latest reported third quarter, sales increased approximately 53% to $65.3 million, while ASEI reported earnings per share of $1.13 in the latest reported third quarter versus 43 cents in the same quarter of last year. (The stock closed above $56 Friday—Editor.)

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